FEDERATED EQUITY FUNDS

485BPOS 1 fefform.htm FEDERATED EQUITY FUNDS




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

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933             X
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    Pre-Effective Amendment No.      .......................

    Post-Effective Amendment No.  67 .......................        X
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                                     and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940     X
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    Amendment No.  61 ......................................        X
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                             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:

_X_ immediately upon filing pursuant to paragraph (b)
___ on                     pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(i)
    on                      pursuant to paragraph (a)(i).
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

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

                                    Copy to:

                           Matthew G. Maloney, Esquire
                   Dickstein Shapiro Morin & Oshinsky, LLP
                                2101 L Street, NW
                              Washington, DC 20037

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		4
What are the Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Fund Invests?		6
What are the Specific Risks of Investing in the Fund?		9
What Do Shares Cost?		11
How is the Fund Sold?		17
How to Purchase Shares		19
How to Redeem and Exchange Shares		21
Account and Share Information		24
Who Manages the Fund?		26
Legal Proceedings		27
Financial Information		29

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 primarily in common stock of companies with large and medium market capitalizations that offer superior growth prospects or of companies whose stock is undervalued.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.

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Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.

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Risks of Investing in Derivatives. The Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are also subject to a number of other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks. The Fund’s use of derivatives may also increase the taxable distributions to shareholders.

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

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The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The total returns shown in the bar chart do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.

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The Fund’s Class A Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was (1.30)%.

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Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 27.57% (quarter ended December 31, 1999). Its lowest quarterly return was (17.40)% (quarter ended September 30, 2002).

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Average Annual Total Return Table

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The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund’s Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the S&P 500 Index (S&P 500),a broad-based market index, and the Lipper Large Cap Core Funds Average (LLCCFA), an average of funds with similar objectives. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index or an average.

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(For the periods ended December 31, 2003)

	1 Year	5 Years	10 Years	Start of Performance¹

Class A Shares:

Return Before Taxes	16.99%	4.24%	12.08%	--

Return After Taxes on Distributions²	16.80%	3.42%	10.50%	--

Return After Taxes on Distributions and Sale of Fund Shares²	11.04%	3.25%	9.84%	--

Class B Shares:

Return Before Taxes	17.43%	4.29%	--	10.78%

Class C Shares:

Return Before Taxes	20.68%	4.43%	--	10.64%

S&P 500³	28.68%	(0.57)%	11.07%	--

LLCCFA⁴	25.01%	(2.36)%	7.68%	--

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1 The Fund’s Class B and Class C Shares start of performance date was January 4, 1996.

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2 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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3 The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investments cannot be made in an index.

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4 Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper, Inc. as falling into the category indicated. These figures do not reflect sales charges. Investments cannot be made in an average.

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What are the Fund’s Fees and Expenses?

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FEDERATED CAPITAL APPRECIATION FUND

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FEES AND EXPENSES

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%
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 Waiver)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	0.25%²	0.75%	0.75%
Shareholder Services Fee	0.25%	0.25%	0.25%
Other Expenses	0.25%	0.23%	0.27%
Total Annual Fund Operating Expenses	1.50%	1.98%³	2.02%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waiver of Fund Expenses	0.25%	0.00%	0.00%
Total Actual Annual Fund Operating Expenses (after waiver)	1.25%	1.98%	2.02%
2 Class A Shares did not pay or accrue the distribution (12b-1) fee for the fiscal year ended October 31, 2004. Class A Shares have no present intention of paying or accruing the distribution (12b-1) fee for the fiscal year ending October 31, 2005.
3 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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This 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.

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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 waiver as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$694	$998	$1,323	$2,242

Expenses assuming no redemption	$694	$998	$1,323	$2,242

Class B:

Expenses assuming redemption	$751	$1,021	$1,268	$2,183

Expenses assuming no redemption	$201	$621	$1,068	$2,183

Class C:

Expenses assuming redemption	$403	$727	$1,177	$2,425

Expenses assuming no redemption	$303	$727	$1,177	$2,425

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What are the Fund’s Investment Strategies?

The Fund pursues its investment objective by investing primarily in common stock (including American Depositary Receipts) of companies with large and medium market capitalizations that offer superior growth prospects or of companies whose stock is undervalued. This includes companies with market capitalizations 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. A description of the various principal types of securities in which the Fund invests, and their risks, immediately follows this strategy section.

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 its 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 capitalizations. The Adviser may select initial public offerings based on its fundamental analysis of the issuer.

Portfolio Turnover

The Fund actively trades 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 and shorter-term 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?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earning and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. 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 may invest.

Common Stocks

Common stocks are the most prevalent type of equity security. Common stocks receive the issuer’s earnings 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

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American Depositary Receipts, which are traded in the United States markets, represent interests in underlying securities issued by a foreign company and not traded in the United States. ADRs provide a way to buy shares of foreign based companies in the United States rather than in overseas markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign exchange transactions. The Fund may also invest in securities issued directly by foreign companies and traded in U.S. dollars in United States markets.

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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. For example, the Fund may hold fixed-income securities that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock 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. In addition, at the time a convertible security is issued the conversion price exceeds the market value of the underlying equity securities. 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.

DERIVATIVES CONTRACTS

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

Many derivatives contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make 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.

Depending on how the Fund uses derivatives contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument, derivatives contracts may increase or decrease the Fund’s exposure to interest rate, stock market and currency risks, and may also expose the fund to liquidity and leverage risks.

Futures 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 specified price, date and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded over-the-counter (OTC) are frequently referred to as forward contracts. The Fund can buy or sell financial futures and index futures.

Options

Options are rights to buy or sell an underlying asset or instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or 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. A call option gives the holder (buyer) the right to buy 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. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of underlying assets or instruments, including financial indices, individual securities, and other derivative instruments, such as futures contracts.

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Swaps

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Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party’s payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include total return swaps, currency swaps and caps and floors.

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INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

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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. These other investment companies are managed independently of the Fund and incur additional expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the additional expenses.

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What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund’s portfolio will rise and fall. 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.

The Adviser attempts to manage market risk by limiting the amount the Fund invests in each company’s equity securities. However, diversification will not protect the Fund against widespread or prolonged declines in the stock market.

LIQUIDITY RISKS

Trading opportunities are more limited for equity securities that are not widely held. This may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund’s performance. Infrequent trading of securities may also lead to an increase in their 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 its outstanding shares by the current market price per share.

Companies with smaller market capitalizations also tend to have unproven track records, a limited product or service base and limited access to capital. These factors also increase risks and make these companies more likely to fail than companies with larger market capitalizations.

SECTOR RISKS

Companies with similar characteristics may be grouped together in broad categories called sectors. Sector risk is the possibility that a certain sector may underperform other sectors or 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.

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RISKS OF INVESTING IN ADRS AND DOMESTICALLY TRADED SECURITIES OF FOREIGN ISSUERS

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Because the Fund may invest in ADRs and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.

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RISKS OF INVESTING IN DERIVATIVES CONTRACTS

The Fund’s use of derivatives contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivatives contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivatives contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivatives contracts may also involve other risks described in this prospectus or the Fund’s Statement of Additional Information, such as stock market, credit, liquidity and leverage risks.

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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering). From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

The Fund generally values equity securities according to the last sale price reported by the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. If prices are not available from an independent pricing service, securities and derivatives contracts traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund’s Board of Trustees (the “Board”). The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund’s adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

In some cases, events affecting the issuer of a portfolio security may be considered significant events. Announcements concerning earnings, acquisitions, new products, management changes, litigation developments, a strike or natural disaster affecting the company’s operations or regulatory changes or market developments affecting the issuer’s industry occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE are examples of potentially significant events. For securities of foreign issuers, such events could also include political or other developments affecting the economy or markets in which the issuer conducts its operations or its securities are traded.

There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security’s present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued at their last sale price or based on market quotations.

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.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges
Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	5.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	1.00%	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 (SIP) is $50. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $100,000 or more of Class B Shares or $1 million or more of Class C Shares will be invested in Class A Shares instead of Class B Shares or Class C 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. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. 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.”

As shown in the table above, each class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses (“expense ratios”), as well as the compensation payable to investment professionals, also vary among the classes. Before you decide which class to purchase, you should review the different charges and expenses of each class carefully, in light of your personal circumstances, and consult with your investment professional.

Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares. Among other ways, Class A Shares have a series of “breakpoints,” which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under “Sales Charge When You Purchase.”) On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares bear a relatively low front-end sales charge and a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and comparable to those charged to Class B Shares.

You should also consider that the expense ratio for Class A Shares will be lower than that for Class B (or Class C) Shares. Thus, the fact that no front-end charges are ever imposed on purchases of Class B Shares (or that a relatively low front- end charge is imposed on purchases of Class C Shares) does not always make them preferable to Class A Shares.

SALES CHARGE WHEN YOU PURCHASE

Class A Shares:

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

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 greater¹	0.00%	0.00%

Class C Shares:

All Purchases	1.00%	1.01%

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

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the table above. You or your investment professional must notify the Fund’s Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase.

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In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your investment professional or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint (“Qualifying Accounts”). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through an investment professional or a through a single-participant retirement account by you, your spouse, your parents (if you are under age 21) and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs) or (effective March 1, 2005) broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through “Section 529” college savings plans or those accounts which cannot be linked using TINs, SSNs or BINs, are not Qualifying Accounts.

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In order to verify your eligibility for a breakpoint discount, you will be required to provide to your investment professional or the Transfer Agent certain information on your New Account Form and may be required to provide account statements regarding Qualifying Accounts. If you purchase through an investment professional, you may be asked to provide additional information and records as required by the investment professional. Failure to provide proper notification or verification of eligibility for a breakpoint discount may result in your not receiving a breakpoint discount to which you are otherwise entitled. Breakpoint discounts apply only to your current purchase and do not apply retroactively to previous purchases. The sales charges applicable to the Shares offered in this Prospectus, and the breakpoint discounts offered with respect to such Shares, are described in full in this Prospectus. Because the Prospectus is available on Federated’s website free of charge, Federated does not disclose this information separately on the website.

Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

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

Concurrent and Accumulated Purchases (Effective through
February 28, 2005)

combining concurrent purchases of and/or current investments in Class A Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Class A Share purchase will be calculated by multiplying the maximum public offering price times the number of Shares of the same Class of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase;

Concurrent and Accumulated Purchases (Effective March 1, 2005)

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F, and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F, and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

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

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);
as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any investment professional that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or
pursuant to the exchange privilege.

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).

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; and
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).

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

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your investment professional received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase

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 12 months of the purchase date.

If your investment qualifies for a reduction or elimination of the CDSC, you or your investment professional must notify the Transfer Agent at the time of redemption. If the Transfer Agent is not notified, the CDSC will apply.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

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following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);

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representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Trustees and employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of an investment professional that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through an investment professional that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); and
which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program.

How is the Fund Sold?

The Fund offers four Share classes: Class A Shares, Class B Shares, Class C Shares, and Class K Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Class A Shares, Class B Shares, and Class C Shares. All Share classes have different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.

The Fund’s Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals.

When the Distributor receives marketing fees and sales charges, 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, administration and customer servicing of the Fund’s Class A, Class B, 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.

SERVICE FEES

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The Fund may pay fees (Service Fees) to financial institutions or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated, for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial institutions directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial institutions.

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

The Distributor may pay out of its own resources amounts (including items of material value) to certain financial institutions that support the sale of Shares or provide services to Fund shareholders. The amounts of these payments could be significant, and may create an incentive for the financial institution or its employees or associated persons to recommend or sell Shares of the Fund to you. In some cases, such payments may be made by or funded from the resources of companies affiliated with the Distributor (including the Adviser). These payments are not reflected in the fees and expenses listed in the fee table section of the Fund’s prospectus because they are not paid by the Fund.

These payments are negotiated and may be based on such factors as the number or value of Shares that the financial institution sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial institution. These payments may be in addition to payments made by the Fund to the financial institution under the Rule 12b-1 Plan and/or Service Fees arrangement. You can ask your financial institution for information about any payments it receives from the Distributor or the Fund and any services provided.

How to Purchase 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 (e.g., 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 incurred by the Fund or State Street Bank and Trust Company, the Fund’s Transfer Agent.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

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 SIP section of the New Account Form or by contacting the Fund or your investment professional.

BY AUTOMATED CLEARING HOUSE (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 simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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 Medallion signature guarantee is designed to protect your account from fraud. Obtain a Medallion 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 PRIVILEGE

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.

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The Fund may modify or terminate the exchange privilege at any time. In addition, the Fund may terminate your exchange privilege if your exchange activity is found to be excessive under the Fund’s frequent trading policies. See “Account and Share Information--Frequent Trading Policies.”

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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 Class A Shares or Class C 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;
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 monthly, quarterly, or 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.

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 the record date for 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 taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the record date for 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.

FREQUENT TRADING POLICIES

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Frequent or short-term trading into and out of the Fund can have adverse consequences for the Fund and shareholders who use the Fund as a long-term investment vehicle. Such trading in significant amounts can disrupt the Fund’s investment strategies (e.g., by requiring it to sell investments at inopportune times or maintain excessive short-term or cash positions to support redemptions), increase brokerage and administrative costs and affect the timing and amount of taxable gains distributed by the Fund. Investors engaged in such trading may also seek to profit by anticipating changes in the Fund’s NAV in advance of the time as of which NAV is calculated.

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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The Fund’s objective is that its restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

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PORTFOLIO HOLDINGS INFORMATION

Information concerning the Fund’s portfolio holdings is available in the “Products” section of the Federated’s website at www.federatedinvestors.com. A complete listing of the Fund’s portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include identification of the Fund’s top ten holdings, recent purchase and sale transactions and a percentage breakdown of the portfolio by sector.

To access this information from the “Products” section of the website, click on “Portfolio Holdings” and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the “Products” section, and from the Fund’s page click on the “Portfolio Holdings” or “Composition” link. A user is required to register on the website the first time the user accesses this information.

You may also access from the “Products” section of the website portfolio information as of the end of the Fund’s fiscal quarters. The Fund’s annual and semi-annual reports, which contain complete listings of the Fund’s portfolio holdings as of the end of the Fund’s second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on “Prospectuses and Regulatory Reports” and selecting the link to the appropriate PDF. Complete listings of the Fund’s portfolio holdings as of the end of the Fund’s first and third fiscal quarters may be accessed by selecting “Portfolio Holdings” from the “Products” section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC’s website at www.sec.gov.

Who Manages the Fund?

The Board of Trustees governs the Fund. The Board selects and oversees the Adviser, Federated Equity Management Company of Pennsylvania. The Adviser manages the Fund’s assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The Adviser and other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

THE FUND’S PORTFOLIO MANAGERS ARE:

David P. Gilmore

David P. Gilmore has been the Fund’s Portfolio Manager since September 2000. Mr. Gilmore joined Federated in August 1997 as an Investment Analyst. He was promoted to Senior Investment Analyst in July 1999 and became a Vice President of the Fund’s Adviser in July 2001. Mr. Gilmore was a Senior Associate with Coopers & Lybrand from January 1992 to May 1995. Mr. Gilmore is a Chartered Financial Analyst and attended the University of Virginia, where he earned his M.B.A., from September 1995 to May 1997. Mr. Gilmore has a B.S. from Liberty University.

Linda A. Duessel

Linda A. Duessel has been the Fund’s Portfolio Manager since November 2001. Ms. Duessel joined Federated in 1991and has been a Portfolio Manager since 1995. She became a Senior Vice President of the Fund’s Adviser in January 2000 and served as a Vice President of the Fund’s Adviser from 1995 through 1999. Ms. Duessel was a Senior Investment Analyst and an Assistant Vice President of the Fund’s Adviser from 1991 until 1995. Ms. Duessel is a Chartered Financial Analyst and received her M.S. in Industrial Administration from Carnegie Mellon University.

ADVISORY FEES

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.

Legal Proceedings

Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds’ advisers and distributor (collectively, “Federated”), received detailed requests for information on shareholder trading activities in the Federated funds (“Funds”) from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future.

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As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated’s internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds’ closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the “About Us” section of Federated’s website at www.federatedinvestors.com, and any future press releases on this subject will also be posted there.

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Shortly after Federated’s first public announcement concerning the foregoing matters, and notwithstanding Federated’s commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders.

Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and rule 12b-1 fees, and seeking damages of unspecified amounts.

The Board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund Shares, or other adverse consequences for the Funds.

Financial Information

FINANCIAL HIGHLIGHTS

The Financial Highlights will help you understand the Fund’s financial performance for its past five fiscal years. 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 any dividends and capital gains.

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

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Financial Highlights–Class A Shares

(For a Share Outstanding Throughout Each Period)

Year Ended October 31		2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period		$22.58			$19.40			$22.48			$29.05			$25.36

Income From Investment Operations:

Net investment income		0.11	¹		0.09			0.13	²		0.17			0.11

Net realized and unrealized gain (loss) on investments, futures contracts and options		1.46			3.17			(3.04	)²		(4.97	)		4.96

TOTAL FROM INVESTMENT OPERATIONS		1.57			3.26			(2.91	)		(4.80	)		5.07

Less Distributions:

Distributions from net investment income		(0.11	)		(0.08	)		(0.17	)		(0.08	)		(0.07	)

Distributions from net realized gain on investments		--			--			--			(1.69	)		(1.31	)

TOTAL DISTRIBUTIONS		(0.11	)		(0.08	)		(0.17	)		(1.77	)		(1.38	)

Net Asset Value, End of Period		$24.04			$22.58			$19.40			$22.48			$29.05

Total Return³		6.97	%⁴		16.89	%		(13.10	)%		(17.25	)%		20.61	%


Ratios to Average Net Assets:

Expenses		1.25	%⁵		1.27	%⁵		1.23	%⁵		1.23	%		1.24	%

Net investment income		0.46	%		0.62	%		0.76	%²		0.80	%		0.41	%

Expense waiver/reimbursement⁶		0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷

Supplemental Data:

Net assets, end of period (000 omitted)	$2,605,203			$2,179,111			$1,337,564			$699,510			$637,523

Portfolio turnover		45	%		40	%		71	%		61	%		126	%

1 Based on average Shares outstanding.

2 Effective November 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (the “AICPA”) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended October 31, 2002, this change had no effect on the net investment income per share, the net realized and unrealized gain (loss) on investments per share or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

3 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

4 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

5 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The impact to the expense ratios was less than 0.01% for the years ended October 31, 2004, October 31, 2003 and October 31, 2002, respectively, after taking into account these expense reductions.

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

7 Represents less than 0.01%.

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

Financial Highlights–Class B Shares

(For a Share Outstanding Throughout Each Period)

Year Ended October 31	2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period:	$21.98			$18.95			$21.99			$28.58			$25.09

Income From Investment Operations:

Net investment income (loss)	(0.06)	¹		(0.02	)		0.03	²		0.04			0.01

Net realized and unrealized gain (loss) on investments, futures contracts and options	1.42			3.05			(3.05	)²		(4.94	)		4.79

TOTAL FROM INVESTMENT OPERATIONS	1.36			3.03			(3.02	)		(4.90	)		4.80

Less Distributions:

Distributions from net investment income	--			--			(0.02	)		--			--

Distributions from net realized gain on investments	--			--			--			(1.69	)		(1.31	)

TOTAL DISTRIBUTIONS	--			--			(0.02	)		(1.69	)		(1.31	)

Net Asset Value, End of Period	$23.34			$21.98			$18.95			$21.99			$28.58

Total Return³	6.19	%⁴		15.99	%		(13.76	)%		(17.88	)%		19.71	%


Ratios to Average Net Assets:

Expenses	1.98	%⁵		2.02	%⁵		1.98	%⁵		1.98	%		1.99	%

Net investment income (loss)	(0.27	)%		(0.14	)%		0.01	%²		0.06	%		(0.32	)%

Expense waiver/reimbursement⁶	0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷

Supplemental Data:

Net assets, end of period (000 omitted)	$569,518		$528,029			$378,336			$299,814			$266,173

Portfolio turnover	45	%		40	%		71	%		61	%		126	%

1 Based on average Shares outstanding.

2 Effective November 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended October 31, 2002, this change had no effect on the net investment income per share, the net realized and unrealized gain/loss on investments per share or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

4 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

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

7 Represents less than 0.01%.

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

Financial Highlights–Class C Shares

(For a Share Outstanding Throughout Each Period)

Year Ended October 31	2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period	$21.96			$18.94			$21.98			$28.55			$25.07

Income From Investment Operations:

Net investment income (loss)	(0.08)	¹		(0.02	)		0.04	²		0.04			0.03

Net realized and unrealized gain (loss) on investments, futures contracts and options	1.44			3.04			(3.05	)²		(4.92	)		4.76

TOTAL FROM INVESTMENT OPERATIONS	1.36			3.02			(3.01	)		(4.88	)		4.79

Less Distributions:

Distributions from net investment income	--			--			(0.03	)		--			--

Distributions in excess of net realized gain on investments	--			--			--			(1.69	)		(1.31	)

TOTAL DISTRIBUTIONS	--			--			(0.03	)		(1.69	)		(1.31	)

Net Asset Value, End of Period	$23.32			$21.96			$18.94			$21.98			$28.55

Total Return³	6.19	%⁴		15.95	%		(13.73	)%		(17.83	)%		19.68	%


Ratios to Average Net Assets:

Expenses	2.02	%⁵		2.02	%⁵		1.98	%⁵		1.98	%		1.99	%

Net investment income (loss)	(0.31	)%		(0.13	)%		0.01	%¹		0.05	%		(0.31	)%

Expense waiver/reimbursement⁶	0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷		0.00	%⁷

Supplemental Data:

Net assets, end of period (000 omitted)	$215,206		$176,633			$100,576			$51,497			$41,797

Portfolio turnover	45	%		40	%		71	%		61	%		126	%

1 Based on average Shares outstanding.

4 During the period, the Fund was reimbursed by the Adviser, which had an impact of 0.04% on the total return.

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

7 Represents less than 0.01%.

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

A Statement of Additional Information (SAI) dated December 31, 2004, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund’s SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report’s Management’s Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. The SAI contains a description of the Fund’s policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated’s website at www.federatedinvestors.com.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC’s Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC’s website at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC’s Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room’s operations and copying fees.

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Federated
World-Class Investment Manager

Federated Capital Appreciation Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com
Contact us at 1-800-341-7400 or
www.federatedinvestors.com/contact

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 (c)Federated Investors, Inc.

Cusip 314172701
Cusip 314172800
Cusip 314172883

G014989-01 (12/04)

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS K SHARES

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		4
What are the Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Fund Invests?		6
What are the Specific Risks of Investing in the Fund?		9
What Do Shares Cost?		11
How is the Fund Sold?		13
How to Purchase Shares		14
How to Redeem and Exchange Shares		16
Account and Share Information		19
Who Manages the Fund?		21
Legal Proceedings		22
Financial Information		24

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?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.

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Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.

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Risks of Investing in Derivatives. The Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are also subject to a number of other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks. The Fund’s use of derivatives may also increase the taxable distributions to shareholders.

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Risk/Return Bar Chart and Table

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The Fund’s Class K Shares is a new class of Shares, which commenced operations on April 8, 2003. The Fund offers three other classes of Shares: Class A Shares, Class B Shares and Class C Shares. For the period prior to the commencement of operations of the Class K Shares, the performance information shown in the bar chart below is for the Fund’s Class A Shares, adjusted to reflect the expenses of Class K Shares. The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The Fund’s Class K Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

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The Fund’s Class K Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was (1.64)%.

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Within the period shown in the bar chart, the Fund’s Class K Shares highest quarterly return was 27.44% (quarter ended December 31, 1999). Its lowest quarterly return was (17.51)% (quarter ended September 30, 2002).

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Average Annual Total Return Table

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As previously discussed, the Fund’s Class K Shares is a new class of Shares, which had commenced operations on April 8, 2003. Accordingly, for the period prior to the commencement of operations, the performance information shown in the Average Annual Total Return Table is for the Fund’s Class A Shares, adjusted to reflect the expenses of Class K Shares. Return Before Taxes is shown. In addition, Return After Taxes is shown for the Fund’s Class K Shares to illustrate the effect of federal taxes on the Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the S&P 500 Index (S&P 500),a broad-based market index, and the Lipper Large Cap Core Funds Average (LLCCFA), an average of funds with similar objectives. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index or an average.

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(For the periods ended December 31, 2003)

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	1 Year	5 Years	10 Years

Class K Shares:

Return Before Taxes	23.36%	4.95%	12.20%

Return After Taxes on Distributions¹	23.17%	4.41%	10.91%

Return After Taxes on Distributions and Sale of Fund Shares¹	15.19%	4.10%	10.21%

S&P 500²	28.68%	(0.57)%	11.07%

LLCCFA³	25.01%	(2.36)%	7.68%

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1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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2 The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investments cannot be made in an index.

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3 Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper, Inc. as falling into the category indicated. These figures do not reflect sales charges. Investments cannot be made in an average.

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What are the Fund’s Fees and Expenses?

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FEDERATED CAPITAL APPRECIATION FUND

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FEES AND EXPENSES

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This table describes the fees and expenses that you may pay if you buy and hold the Fund’s Class K Shares.

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Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)		None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)		None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)		None
Redemption Fee (as a percentage of amount redeemed, if applicable)		None
Exchange Fee		None

Annual Fund Operating Expenses¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee		0.75%
Distribution (12b-1) Fee		0.50%
Shareholder Services Fee		None
Other Expenses		0.44%
Total Annual Fund Operating Expenses		1.69%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be higher or lower than the stated average percentage.

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EXAMPLE

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This Example is intended to help you compare the cost of investing in the Fund’s Class K Shares with the cost of investing in other mutual funds.

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The Example assumes that you invest $10,000 in the Fund’s Class K Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund’s Class K Shares operating expenses are as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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1 Year		$ 172

3 Years		$ 533

5 Years		$ 918

10 Years		$1,998

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What are the Fund’s Investment Strategies?

Portfolio Turnover

Temporary Defensive Investments

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Common Stocks

American Depositary Receipts

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Convertible Securities

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.

DERIVATIVES CONTRACTS

Futures Contracts

Options

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Swaps

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INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

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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. These other investment companies are managed independently of the Fund and incur additional expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the additional expenses.

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What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

LIQUIDITY RISKS

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

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RISKS OF INVESTING IN ADRS AND DOMESTICALLY TRADED SECURITIES OF FOREIGN ISSUERS

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RISKS OF INVESTING IN DERIVATIVES CONTRACTS

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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV). From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund’s assets may change on days you cannot purchase or redeem Shares. The Fund’s Class K Shares do not charge a front-end sales charge. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

The Fund generally values equity securities according to the last sale price reported by the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. If prices are not available from an independent pricing service, securities and derivatives contracts traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund’s Board (the “Board”). The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund’s adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively.

A retirement plan’s minimum investment is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.

How is the Fund Sold?

The Fund offers four Share classes: Class A Shares, Class B Shares, Class C Shares and Class K Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Class K Shares. All Share classes have different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes.

The Fund’s Distributor, Federated Securities Corp., markets the Shares described in this prospectus generally to 401(k) plans, 457 plans, employer sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non-qualified deferred compensation plans and IRA Rollovers from such plans, directly or through investment professionals. Class K Shares are generally available only to retirement plans where plan level omnibus accounts are held on the books of the Fund.

When the Distributor receives 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, administration and customer servicing of the Fund’s Class K Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different marketing fees.

SERVICE FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

How to Purchase 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 one business day. 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.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH AN EXCHANGE

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 (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50.

BY AUTOMATED CLEARING HOUSE (ACH)

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 simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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

EXCHANGE PRIVILEGE

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.

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SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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.

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

TAX INFORMATION

FREQUENT TRADING POLICIES

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The Fund’s Board of Trustees has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

THE FUND’S PORTFOLIO MANAGERS ARE:

David P. Gilmore

Linda A. Duessel

ADVISORY FEES

Legal Proceedings

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’s Class K Shares 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 any dividends and capital gains.

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

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Financial Highlights

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004		2003	¹

Net Asset Value, Beginning of Period	$22.54		$19.13

Income From Investment Operations:

Net investment income	0.01	²	0.03

Net realized and unrealized gain on investments, futures contracts and options	1.45		3.38

TOTAL FROM INVESTMENT OPERATIONS	1.46		3.41

Less Distributions:

Distributions from net investment income	(0.13	)	--

Net Asset Value, End of Period	$23.87		$22.54

Total Return³	6.49	%⁴	17.83	%


Ratios to Average Net Assets:

Expenses	1.69	%⁶	1.74	%^5,6

Net investment income	0.03	%	0.15	%⁶

Expense waiver/reimbursement⁷	0.00	%⁸	0.00	%^6,8

Supplemental Data:

Net assets, end of period (000 omitted)	$9,345		$15,533

Portfolio turnover	45	%	40	%⁹

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1 Reflects operations for the period from April 8, 2003 (date of initial public investment) to October 31, 2003.

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2 Based on average Shares outstanding.

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4 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

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5 Computed on an annualized basis.

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6 This expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The impact to the expense ratios was less than 0.01% for the year ended October 31, 2004 and the period ended October 31, 2003, respectively, after taking into account these expense reductions.

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

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8 Represents less than 0.01%.

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9 Portfolio turnover is calculated at the Fund level. Percentage indicated was calculated for the twelve-month period ended October 31, 2003.

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Federated
World-Class Investment Manager

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 (c)Federated Investors, Inc.

Cusip 314172594

28202 (12/04)

FEDERATED CAPITAL APPRECIATION FUND
A Portfolio of Federated Equity Funds

Statement of Additional Information

December 31, 2004

Class A Shares
Class B Shares
Class C Shares
Class K Shares

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Class A Shares, Class B Shares,
Class C Shares and Class K Shares of Federated Capital Appreciation Fund (Fund),
dated December 31, 2004.

This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectuses or the Annual Report without charge by calling 1-800-341-7400.

Contents
How is the Fund Organized?...............1
Securities in Which the Fund Invests.....1
What Do Shares Cost?....................10
How is the Fund Sold?...................10
Exchanging Securities for Shares........12
Subaccounting Services..................12
Redemption in Kind......................13
Massachusetts Partnership Law...........13
Account and Share Information...........13
Tax Information.........................13
Who Manages and Provides Services
to the Fund?.........................15
How Does the Fund Measure Performance?..25
Who is Federated Investors, Inc.?.......27
Financial Information...................30
Investment Ratings......................30
Addresses...............................32
Appendix................................33

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 four classes of shares of
the Fund, known as Class A Shares, Class B Shares, Class C Shares and Class K
Shares (Shares). This SAI relates to all classes of Shares. The Fund's
investment adviser is Federated Equity Management Company of Pennsylvania
(Adviser).

Prior to January 1, 2004, Federated Investment Management Company was the
Adviser to the Fund. Both the current Adviser and the former Adviser are wholly
owned subsidiaries of Federated Investors, Inc. (Federated).

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
Equity securities represent a share of an issuer's earnings and assets, after the issuer
pays its liabilities. The Fund cannot predict the income it will receive from equity
securities because issuers generally have discretion as to the payment of any dividends or
distributions. 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
Common stocks are the most prevalent type of equity security. Common stocks receive the
issuer's earnings 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
Preferred stocks have the right to receive specified dividends or distributions before the
issuer makes payments on its 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 also treat such redeemable preferred stock as a
fixed-income security.

Real Estate Investment Trusts (REITs)
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.

Warrants

Warrants give the Fund the option to buy the issuer's equity securities at a specified
price (the exercise price) at a specified future date (the expiration date). The Fund may
buy the designated securities by paying the exercise price before the expiration date.
Warrants may become worthless if the price of the stock does not rise above the exercise
price by the expiration date. This increases the market risks of warrants as compared to
the underlying security. Rights are the same as warrants, except companies typically issue
rights to existing stockholders.

Fixed-Income Securities

Fixed-income securities pay interest, dividends or distributions at a specified rate. The
rate may be a fixed percentage of the principal or adjusted periodically. In addition, the
issuer of a fixed-income security must 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. A security's yield will increase or decrease depending upon whether it costs less (a
discount) or more (a premium) than the principal amount. 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. Securities with
higher risks generally have higher yields.

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

Corporate Debt Securities

Corporate debt securities are fixed-income securities issued by businesses. Notes, bonds,
debentures and commercial paper are the most prevalent types of corporate debt securities.
The Fund may also purchase interests in bank loans to companies. The credit risks of
corporate debt securities vary widely among issuers.

In addition, the credit risk of an issuer's debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority
than lower ranking (subordinated) securities. This means that the issuer might not make
payments on subordinated securities while continuing to make payments on senior securities.
In addition, in the event of bankruptcy, holders of senior securities may receive amounts
otherwise payable to the holders of subordinated securities. Some subordinated securities,
such as trust preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue securities
known as surplus notes that permit the insurance company to defer any payment that would
reduce its capital below regulatory requirements.

Commercial Paper

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

Demand Instruments

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.

Zero Coupon Securities

Zero coupon securities do not pay interest or principal until final maturity unlike debt
securities that provide periodic payments of interest (referred to as a coupon payment).
Investors buy zero coupon securities at a price below the amount payable at maturity. The
difference between the purchase price and the amount paid at maturity represents interest
on the zero coupon security. Investors must wait until maturity to receive interest and
principal, which increases the interest rate and credit risks of a zero coupon security. A
zero coupon step-up security converts to a coupon security before final maturity.

There are many forms of zero coupon securities. Some are issued at a discount and are
referred to as zero coupon or capital appreciation bonds. Others are created from interest
bearing bonds by separating the right to receive the bond's coupon payments from the right
to receive the bond's 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.

Bank Instruments

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

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. For example, the Fund may hold fixed-income securities that are
convertible into shares of common stock at a conversion price of $10 per share. If the
market value of the shares of common stock 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. In
addition, at the time a convertible security is issued the conversion price exceeds the
market value of the underlying equity securities. 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.

Foreign Securities

Foreign securities are securities of issuers based outside the United States. The Fund
considers an issuer to be based outside the United States if:
o it is organized under the laws of, or has a principal office located in, another
country;
o the principal trading market for its securities is in another country; or
o it (or its subsidiaries) derived in its most current fiscal year at least 50% of its
total assets, capitalization, gross revenue or profit from goods produced, services
performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks
normally associated with domestic securities of the same type, foreign securities are
subject to currency risks and risks of foreign investing. Trading in certain foreign
markets is also subject to liquidity risks.

Depositary Receipts

Depositary receipts represent interests in underlying securities issued by a foreign
company. Depositary receipts are not traded in the same market as the underlying security.
The foreign securities underlying American Depositary Receipts (ADRs) are not traded in the
United States. ADRs provide a way to buy shares of foreign-based companies in the United
States 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, Global Depositary Receipts and International Depositary Receipts, are
traded globally or outside the United States. Depositary receipts involve many of the same
risks of investing directly in foreign securities, including currency risks and risks of
foreign investing.

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. In a spot trade, the Fund agrees to exchange
one currency for another at the current exchange rate. The Fund may also enter into
derivatives contracts in which a foreign currency is an underlying asset. The exchange rate
for currency derivatives contracts may be higher or lower than the spot exchange rate. Use
of these derivatives contracts may increase or decrease the Fund's exposure to currency
risks.

Foreign Government Securities

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 that are either issued by entities 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. Further, foreign government securities include
mortgage-related securities issued or guaranteed by national, state or provincial
governmental instrumentalities, including quasi-governmental agencies.

DerivativeS Contracts

Derivatives 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 derivatives contracts (such as futures, forwards and options)
require payments relating to a future trade involving the underlying asset. Other
derivatives 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 derivatives contracts are traded on securities or commodities exchanges. In this case,
the exchange sets all the terms of the contract except for the price. Investors make
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, the Fund could close out an open contract to buy an asset at a future date by
entering into an offsetting contract to sell the same asset on the same date. 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. Exchanges may limit the amount of open contracts
permitted at any one time. Such limits may prevent the Fund from closing out a position. 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). 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.

The Fund may also trade derivatives contracts 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 the Fund uses derivatives contracts and the relationships between the
market value of a derivative contract and the underlying asset, derivatives contracts may
increase or decrease the Fund's exposure to interest rate, stock market, and currency
risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also
expose the Fund to credit risks in the event that a counterparty defaults on the contract.

The Fund may trade in the following types of derivatives contracts:

Futures 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 specified price, date and time. Entering
into a contract to buy an underlying asset is commonly referred to as buying a contract or
holding a long position in the asset. Entering into a contract to sell an underlying asset
is commonly referred to as selling a contract or holding a short position in the asset.
Futures contracts are considered to be commodity contracts. The Fund has claimed an
exclusion from the definition of the term "commodity pool operator" under the Commodity
Exchange Act and, therefore, is not subject to registration or regulation as a commodity
pool operator under that Act. Futures contracts traded OTC are frequently referred to as
forward contracts. The Fund can buy or sell financial futures and index futures.

Options

Options are rights to buy or sell an underlying asset or instrument for a specified price
(the exercise price) during, or at the end of, a specified period. The seller (or 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. Options can trade on
exchanges or in the OTC market and may be bought or sold on a wide variety of underlying
assets or instruments, including financial indices, individual securities, and other
derivative instruments, such as futures contracts. Options that are written on futures
contracts will be subject to margin requirements similar to those applied to futures
contracts.

The Fund may buy/sell the following types of options:

Call Options

A call option gives the holder (buyer) the right to buy the underlying asset from the
seller (writer) of the option. The Fund may use call options in the following ways:

Buy call options on currencies (both foreign and U.S. dollar) in anticipation of an
increase in the value of the underlying asset or instrument; and

Write call options on portfolio securities, index futures and financial 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 the 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.

Put Options

A put option gives the holder the right to sell the underlying asset to the writer of the
option. The Fund may buy put options on individual securities, index futures, currencies
(both foreign and U.S. dollar) and financial futures in anticipation of a decrease in the
value of the underlying asset.

The Fund may also buy or write options, as needed, to close out existing option positions.

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Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived
from underlying assets with differing characteristics. Most swaps do not involve the
delivery of the underlying assets by either party, and the parties might not own the assets
underlying the swap. The payments are usually made on a net basis so that, on any given
day, the Fund would receive (or pay) only the amount by which its payment under the
contract is less than (or exceeds) the amount of the other party's payment. Swap agreements
are sophisticated instruments that can take many different forms, and are known by a
variety of names including caps, floors and collars. Common swap agreements that the Fund
may use include:

Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make payments of the
total return from the underlying asset during the specified period, in return for payments
equal to a fixed or floating rate of interest or the total return from another underlying
asset.

Currency Swaps
Currency swaps are contracts which provide for interest payments in different currencies.
The parties might agree to exchange the notional principal amount as well.

Caps And Floors
Caps and Floors are contracts in which one party agrees to make payments only if an
interest rate or index goes above (Cap) or below (Floor) a certain level in return for a
fee from the other party.

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Special Transactions

Repurchase Agreements

Repurchase agreements are transactions in which the 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 the Fund's return on the transaction.
This return is unrelated to the interest rate on the underlying security. The Fund will
enter into repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the Adviser.

The Fund's custodian or subcustodian will 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 risks.

Delayed Delivery Transactions

Delayed delivery transactions, including when issued transactions, are arrangements in
which the Fund buys securities for a set price, with payment and delivery of the securities
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 buy 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 so that the market values of the securities bought may vary from the purchase
prices. Therefore, delayed delivery transactions create interest rate risks for the Fund.
Delayed delivery transactions also involve credit risks in the event of a counterparty
default. These transactions create leverage risks.

Securities Lending

The Fund may lend portfolio securities to borrowers that the Fund's custodian deems
creditworthy. In return, the Fund receives cash or liquid securities from the borrower as
collateral. The borrower must furnish additional collateral if the market value of the
loaned securities increases. Also, the borrower must pay the Fund the equivalent of any
dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable
investment for the Fund. However, the Fund must pay interest to the borrower for the use of
cash collateral.

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 on loan, but it will terminate a
loan in anticipation of any important vote. The Fund may pay 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 interest rate risks and credit risks. These
transactions may create leverage risks.

Asset Coverage

In order to secure its obligations in connection with derivatives contracts or special
transactions, the Fund will either own the underlying assets, enter into an offsetting
transaction or set aside readily marketable securities with a value that equals or exceeds
the Fund's obligations. Unless the Fund has other readily marketable assets to set aside,
it cannot trade assets used to secure such obligations without entering into an offsetting
derivative contract or terminating a special transaction. This may cause the Fund to miss
favorable trading opportunities or to realize losses on derivatives contracts or special
transactions.

Inter-Fund Borrowing and Lending Arrangements

The Securities and Exchange Commission (SEC) has granted an exemption that permits the Fund
and all other funds advised by subsidiaries of Federated Investors, Inc. (Federated funds)
to lend and borrow money for certain temporary purposes directly to and from other
Federated funds. Participation in this inter-fund lending program is voluntary for both
borrowing and lending funds, and an inter-fund loan is only made if it benefits each
participating fund. Federated Investors, Inc. (Federated) administers the program according
to procedures approved by the Fund's Board, and the Board monitors the operation of the
program. Any inter-fund loan must comply with certain conditions set out in the exemption,
which are designed to assure fairness and protect all participating funds.

For example, inter-fund lending is permitted only (a) to meet shareholder redemption
requests, and (b) to meet commitments arising from "failed" trades. All inter-fund loans
must be repaid in seven days or less. The Fund's participation in this program must be
consistent with its investment policies and limitations, and must meet certain percentage
tests. Inter-fund loans may be made only when the rate of interest to be charged is more
attractive to the lending fund than market-competitive rates on overnight repurchase
agreements (Repo Rate) and more attractive to the borrowing fund than the rate of interest
that would be charged by an unaffiliated bank for short-term borrowings (Bank Loan Rate),
as determined by the Board. The interest rate imposed on inter-fund loans is the average of
the Repo Rate and the Bank Loan Rate.

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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. These other investment companies are
managed independently of the Fund and incur additional expenses. Therefore, any such
investment by the Fund may be subject to duplicate expenses. However, the Adviser believes
that the benefits and efficiencies of this approach should outweigh the additional expenses.

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Investment Ratings for Investment Grade Securities

The Adviser will determine whether a security is investment grade based upon the credit
ratings given by one or more nationally recognized rating services. For example, Standard
& Poor's (S&P), a rating service, assigns ratings to investment grade securities
(AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability
to pay interest or principal (default) when due on each security. Lower credit ratings
correspond to higher credit risk. If a security has not received a rating, the Fund must
rely entirely upon the Adviser's credit assessment that the security is comparable to
investment grade.

INVESTMENT RISKS

There are many factors which may affect an investment in the Fund. The Fund's principal
risks are described in its prospectuses. Additional risk factors are outlined below.

Leverage Risks
o 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.

Interest Rate Risks
o Prices of fixed-income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise, prices
of fixed-income securities fall. However, market factors, such as the demand for
particular fixed-income securities, may cause the price of certain fixed-income
securities to fall while the prices of other securities rise or remain unchanged.
o 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 Risks
o Credit risk is the possibility that an issuer will default on a security by failing
to pay interest or principal when due. If an issuer defaults, the Fund will lose
money.
o Many fixed-income securities receive credit ratings from services such as S&P and
Moody's Investors Service. These services assign ratings to securities by assessing
the likelihood of issuer default. Lower credit ratings correspond to higher credit
risk. If a security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment.
o Fixed-income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and the
yield of a U.S. Treasury security with a comparable maturity (the spread) measures
the additional interest paid for 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.
o 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 prevent the Fund from selling or buying other securities to
implement its investment strategy.

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

Risks Associated With Noninvestment Grade Securities
o Securities rated below investment grade, also known as junk bonds, generally entail
greater market, credit and liquidity risks than investment grade securities. For
example, their prices are more volatile, economic downturns and financial setbacks
may affect their prices more negatively, and their trading market may be more limited.

Currency Risks
o Exchange rates for currencies fluctuate daily. The combination of currency risk and
market risk tends to make securities traded in foreign markets more volatile than
securities traded exclusively in the United States.
o The Adviser attempts to manage currency risk by limiting the amount the Fund invests
in securities denominated in a particular currency. However, diversification will not
protect the Fund against a general increase in the value of the U.S. dollar relative
to other currencies.

Risks of Foreign Investing
o Foreign securities pose additional risks because foreign economic or political
conditions may be less favorable than those of the United States. Securities in
foreign markets may also be subject to taxation policies that reduce returns for U.S.
investors.
o Foreign companies may not provide information (including financial statements) as
frequently or to as great an extent as companies in the United States. Foreign
companies may also receive less coverage than United States companies by market
analysts and the financial press. In addition, foreign countries may lack uniform
accounting, auditing and financial reporting standards or regulatory requirements
comparable to those applicable to U.S. companies. These factors may prevent the Fund
and its Adviser from obtaining information concerning foreign companies that is as
frequent, extensive and reliable as the information available concerning companies in
the United States.
o Foreign countries may have restrictions on foreign ownership of securities or may
impose exchange controls, capital flow restrictions or repatriation restrictions
which could adversely affect the liquidity of the Fund's investments.

Liquidity Risks
o Liquidity risk also refers to the possibility that the Fund may not be able to sell a
security or close out a derivatives 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 derivatives contracts generally carry greater
liquidity risk than exchange-traded contracts.

Fundamental Investment Objective

The Fund's investment objective is to provide capital appreciation. The investment
objective may not be changed by the Fund's Trustees without shareholder approval.

INVESTMENT LIMITATIONS

Diversification

With respect to securities comprising 75% of the value of its total assets, the Fund will
not purchase securities of any one issuer (other than cash; cash items; securities issued
or guaranteed by the government of the United States or its agencies or instrumentalities
and repurchase agreements collateralized by such U.S. government securities; and securities
of other investment companies) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of that issuer, or the Fund would own more than
10% of the outstanding voting securities of that issuer.

Borrowing Money and Issuing Senior Securities

The Fund may borrow money, directly or indirectly, and issue senior securities to the
maximum extent permitted under the Investment Company Act of 1940 (1940 Act).

Investing in Real Estate

The Fund may not purchase or sell real estate, provided that this restriction does not
prevent the Fund from investing in issuers which invest, deal, or otherwise engage in
transactions in real estate or interests therein, or investing in securities that are
secured by real estate or interests therein. The Fund may exercise its rights under
agreements relating to such securities, including the right to enforce security interests
and to hold real estate acquired by reason of such enforcement until that real estate can
be liquidated in an orderly manner.

Underwriting

The Fund may not underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its portfolio
securities, under circumstances where it may be considered to be an underwriter under the
Securities Act of 1933.

Lending

The Fund may not make loans, provided that this restriction does not prevent the Fund from
purchasing debt obligations, entering into repurchase agreements, lending its assets to
broker/dealers or institutional investors and investing in loans, including assignments and
participation interests.

Commodities

The Fund may not purchase or sell physical commodities, provided that the Fund may purchase
securities of companies that deal in commodities.

Concentration

The Fund will not make investments that will result in the concentration of its investments
in the securities of issuers primarily engaged in the same industry. Government securities,
municipal securities and bank instruments will not be deemed to constitute an industry.

The above limitations cannot be changed unless authorized by the Board and by the "vote of
a majority of its outstanding voting securities," as defined by the 1940 Act. The following
limitations, however, may be changed by the Board without shareholder approval.
Shareholders will be notified before any material change in these limitations becomes
effective.

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Illiquid Securities

The Fund will not purchase securities for which there is no readily available market, or
enter into repurchase agreements or purchase time deposits that the Fund cannot dispose of
within seven days, if immediately after and as a result, the value of such securities would
exceed, in the aggregate, 15% of the Fund's net assets.

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Purchases on Margin

The Fund will not purchase securities on margin, provided that the Fund may obtain
short-term credits necessary for the clearance of purchases and sales of securities, and
further provided that the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.

Pledging Assets

The Fund will not mortgage, pledge, or hypothecate any assets, provided that this shall not
apply to the transfer of securities in connection with any permissible borrowings or to
collateral arrangements in connection with permissible activities.

For purposes of the concentration limitation: (a) utility companies will be divided
according to their services (for example, gas, gas transmission, electric and telephone
will be considered a separate industry); (b) financial service companies will be classified
according to the end users of their services (for example, automobile finance, bank finance
and diversified finance will each be considered a separate industry); and (c) asset-backed
securities will be classified according to the underlying assets securing such securities.
To conform to the current view of the SEC that only domestic bank instruments may be
excluded from industry concentration limitations, as a matter of non-fundamental policy,
the Fund will not exclude foreign bank instruments from industry concentration limits as
long as the policy of the SEC remains in effect. In addition, investments in bank
instruments, and investments in certain industrial development bonds funded by activities
in a single industry, will be deemed to constitute investment in an industry, except when
held for temporary defensive purposes. The investment of more than 25% of the value of the
Fund's total assets in any one industry will constitute "concentration."

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
the value or net assets will not result in a violation of such limitation.

DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

o 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;

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

o futures contracts and options are generally valued at the last sale price on the
exchanges on which they are traded or in the over-the-counter market. The Board may
determine in good faith that another method of valuing such investments is necessary to
appraise their fair market value;

o for fixed-income securities, according to the mean between bid and asked prices as
furnished by an independent pricing service, except that fixed-income securities with
remaining maturities of less than 60 days at the time of purchase may be valued at
amortized cost; and

o for all other securities at fair value as determined in accordance with procedures
established by and under the general supervision of 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.

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 net asset value (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 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.

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated Securities
Corp.) 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
pays a portion of this charge to investment professionals that are eligible to receive it
(the "Dealer Reallowance") and retains any remaining portion of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment professional
may receive a Dealer Reallowance as follows:

Class A Shares
Dealer
Reallowance
Purchase Amount as a percentage
of
Public Offering
Price
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.25%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1 million 1.80%
$1 million or greater 0.00%
Class C Shares
--------------------------------------------------------------------------------------------
All Purchase Amounts 1.00%

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

ADVANCE COMMISSIONS
When an investment professional's customer purchases Shares, the investment professional
may receive an advance commission as follows:

Class A Shares (for purchases over $1 million)
Advance Commission
as a Percentage of
Purchase Amount Public Offering
Price
First $1 million - $5 0.75%
million
Next $5 million - $20 0.50%
million
Over $20 million 0.25%
Advance commissions are calculated on a year by year basis based on amounts invested during
that year. Accordingly, with respect to additional purchase amounts, the advance commission
breakpoint 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 commission will be paid only on those purchases
that were not previously subject to a front-end sales charge or dealer advance commission.
Certain retirement accounts may not be eligible for this program.

Advance Commission
as a Percentage of
Class B Shares Public Offering
Price
All Purchase Amounts Up to 5.50%
Class C Shares
All Purchase Amounts 1.00%

RULE 12B-1 PLAN (Class A Shares, Class B Shares, Class C shares and Class K Shares)
--------------------------------------------------------------------------------------------
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor for
activities principally intended to result in the sale of Shares such as advertising and
marketing of Shares (including printing and distributing prospectuses and sales literature
to prospective shareholders and financial institutions) and providing incentives to
investment professionals to sell Shares. The Plan is also designed to cover the cost of
administrative services performed in conjunction with the sale of Shares, including, but
not limited to, shareholder services, recordkeeping services and educational services, as
well as the costs of implementing and operating the Plan. The Rule 12b-1 Plan allows the
Distributor to contract with investment professionals to perform activities covered by the
Plan. The Rule 12b-1 Plan is expected to benefit the Fund in a number of ways. For example,
it is anticipated that the Plan will help the Fund attract and retain assets, thus
providing cash for orderly portfolio management and Share redemptions and possibly helping
to stabilize or reduce other operating expenses. In addition, the Plan is integral to the
multiple class structure of the Fund, which promotes the sale of Shares by providing a
range of options to investors. 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 provided the funds to make
advance commission payments to investment professionals.

Additional Payments to Financial Institutions
The Distributor may pay out of its own resources amounts (including items of material
value) to certain financial institutions. In some cases, such payments may be made by, or
funded from the resources of, companies affiliated with the Distributor (including the
Adviser). While NASD regulations limit the sales charges that you may bear, there are no
limits with regard to the amounts that the Distributor may pay out of its own resources.
In addition to the payments which are generally described herein and in the prospectus, the
financial institution also may receive payments under the Rule 12b-1 Plan and/or Service
Fees.

You can ask your financial institution for information about any payments it receives from
the Distributor or the Federated funds and any services provided.

The following examples illustrate the types of instances in which the Distributor may make
additional payments to financial institutions.

Supplemental Payments
The Distributor may make supplemental payments to certain financial institutions that are
holders or dealers of record for accounts in one or more of the Federated funds. These
payments may be based on such factors as the number or value of Shares the financial
institution sells or may sell; the value of client assets invested; or the type and nature
of services or support furnished by the financial institution.

Processing Support Payments
The Distributor may make payments to financial institutions that sell Federated fund shares
to help offset their costs associated with client account maintenance support, statement
processing and transaction processing. The types of payments that the Distributor may make
under this category include payment of ticket charges on a per transaction basis; payment
of networking fees; and payment for ancillary services such as setting up funds on the
financial institution's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial institutions who sell Federated fund
shares through retirement plan programs. A financial institution may perform retirement
plan program services itself or may arrange with a third party to perform retirement plan
program services. In addition to participant recordkeeping, reporting, or transaction
processing, retirement plan program services may include services rendered to a plan in
connection with fund/investment selection and monitoring; employee enrollment and
education; plan balance rollover or separation, or other similar services.

Other Benefits to Financial Institutions
From time to time, the Distributor, at its expense, may provide additional compensation to
financial institutions that sell or arrange for the sale of Shares. Such compensation may
include financial assistance to financial institutions that enable the Distributor to
participate in or present at conferences or seminars, sales or training programs for
invited employees, client and investor events and other financial institution-sponsored
events.

The Distributor also may hold or sponsor, at its expense, sales events, conferences and
programs for employees or associated persons of financial institutions and may pay the
travel and lodging expenses of attendees. The Distributor also may provide, at its
expense, meals and entertainment in conjunction with meetings with financial institutions.
Other compensation may be offered to the extent not prohibited by applicable laws,
regulations or the rules of any self-regulatory agency, such as the NASD.

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UNDERWRITING COMMISSIONS
The following chart reflects the total front-end sales charges and contingent deferred
sales charges paid in connection with the sale of Class A, Class B and Class C Shares of
the Fund and the amount retained by the Distributor for the last three fiscal years ended
October 31, 2004:

2004 2003 2002
Total Sales Amount Total Sales Amount Total Sales Amount
------------- ---------------- ------------- -------------- ----------- -------------
Charges Retained Charges Retained Charges Retained
Class A Shares $4,399,980 $470,283 $4,308,569 $458,719 $4,353,921 $544,346
Class B Shares 1,586,237 0 1,458,203 0 18,414,924 0
Class C Shares 284,185 29,244 292,631 30,01.3 1,299,371 650,409

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

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EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in 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 1940 Act, 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.

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As of December 2, 2004, the following shareholders owned of record, beneficially, or both,
5% or more of outstanding Class A Shares: Edward Jones & Co., Maryland Heights, MO,
owned approximately 12,089,151 Shares (11.35%); and MLPF&S for the sole benefit of its
customers, Jacksonville, FL, owned approximately 5,369,357 Shares (5.04%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or both,
5% or more of outstanding Class B Shares: Edward Jones & Co., Maryland Heights, MO,
owned approximately 2,341,967 Shares (9.67%); and MLPF&S for the sole benefit of its
customers, Jacksonville, FL, owned approximately 1,412,496 Shares (5.83%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or both,
5% or more of outstanding Class C Shares: MLPF&S for the sole benefit of its customers,
Jacksonville, FL, owned approximately 1,722,552 Shares (18.77%); and Citigroup Global
Markets, Inc., New York, NY, owned approximately 992,544 Shares (10.82%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or both,
5% or more of outstanding Class K Shares: PlanMember Services Corp., Kansas City, MO, owned
approximately 219,233 Shares (23.56%); and Scudder Trust Co., Trustee, Salem, NH, owned
approximately 84,150 Shares (20.56%).

Shareholders owning 25% or more of outstanding Shares may be in control and be able to
affect the outcome of certain matters presented for a vote of shareholders.

Citigroup Global Markets, Inc. is organized in the state of Delaware and is a subsidiary of
Citigroup Group, Inc.; organized in the state of Delaware.

Edward Jones & Co. is organized in the state of Missouri and is a subsidiary of Edward
D. Jones & Co., LP; organized in the state of Missouri.

Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) is organized in the state of
Delaware and is a subsidiary of Merrill Lynch, Inc. Co.; organized in the state of Delaware.

PlanMember Services Corp. is organized in the state of California and is a subsidiary of
Investors Retirement & Management Company, Inc.; organized in the state of California.

Scudder Trust Co. is organized in the state of New Hampshire and is a subsidiary of
Deutsche Bank AG.

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TAX INFORMATION

FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code (Code)
applicable to regulated investment companies. If these requirements are not met, it will
not receive special tax treatment and will be subject to federal corporate 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.

The Fund is entitled to a loss carry-forward, which may reduce the taxable income or gain
that the Fund would realize, and to which the shareholder would be subject, in the future.

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 income generated by the securities in the
portfolio, whereas tax-basis income includes, in addition, 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 will qualify for
certain Code provisions that allow its 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?

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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. The following tables give
information about each Board member and the senior officers of the Fund. Where required,
the tables separately list Board members who are "interested persons" of the Fund (i.e.,
"Interested" Board members) and those who are not (i.e., "Independent" Board members).
Unless otherwise noted, the address of each person listed is Federated Investors Tower,
1001 Liberty Avenue, Pittsburgh, PA. As of December 31, 2003, the Trust comprised seven
portfolios and the Federated Fund Complex consisted of 44 investment companies (comprising
136 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise
noted, each Board member oversees all portfolios in the Federated Fund Complex and serves
for an indefinite term.

As of December 2, 2004, the Fund's Board and Officers as a group owned less than 1% of each
class of the Fund's outstanding Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

Name
Birth Date Aggregate Total
Address Compensation Compensation
Positions Held with Principal Occupation(s) for Past From Fund From Trust and
Trust Five Years, Other Directorships (past Federated Fund
Date Service Began Held and Previous Position(s) fiscal year) Complex
(past calendar
year)
Principal Occupations: Chairman $0 $0
John F. Donahue* and Director or Trustee of the
Birth Date: July Federated Fund Complex; Chairman
28, 1924 and Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.
Began serving:
April 1984 Previous Positions: Trustee,
Federated Investment Management
Company and Chairman and
Director, Federated Investment
Counseling.

Principal Occupations: Principal $0 $0
J. Christopher Executive Officer and President
Donahue* of the Federated Fund Complex;
Birth Date: April Director or Trustee of some of
11, 1949 the Funds in the Federated Fund
PRESIDENT AND Complex; President, Chief
TRUSTEE Executive Officer and Director,
Began serving: Federated Investors, Inc.;
January 2000 Chairman and Trustee, Federated
Investment Management Company;
Trustee, Federated Investment
Counseling; Chairman and
Director, Federated Global
Investment Management Corp.;
Chairman, Federated Equity
Management Company of
Pennsylvania, Passport Research,
Ltd. and Passport Research II,
Ltd.; Trustee, Federated
Shareholder Services Company;
Director, Federated Services
Company.

Previous Positions: President,
Federated Investment Counseling;
President and Chief Executive
Officer, Federated Investment
Management Company, Federated
Global Investment Management
Corp. and Passport Research, Ltd.

Principal Occupations: Director $2,013.25 $148,500
Lawrence D. Ellis, or Trustee of the Federated Fund
M.D.* Complex; Professor of Medicine,
Birth Date: October University of Pittsburgh;
11, 1932 Medical Director, University of
3471 Fifth Avenue Pittsburgh Medical Center
Suite 1111 Downtown; Hematologist,
Pittsburgh, PA Oncologist and Internist,
TRUSTEE University of Pittsburgh Medical
Began serving: Center.
August 1987
Other Directorships Held:
Member, National Board of
Trustees, Leukemia Society of
America.

Previous Positions: Trustee,
University of Pittsburgh;
Director, University of
Pittsburgh Medical Center.

* Family relationships and reasons for "interested" status: John F. Donahue is the father
of J. Christopher Donahue; both are "interested" due to the positions they hold with
Federated and its subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his
son-in-law is employed by the Fund's principal underwriter, Federated Securities Corp.
--------------------------------------------------------------------------------------------

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION

Name
Birth Date Aggregate Total
Address Compensation Compensation
Positions Held with Principal Occupation(s) for Past From Fund From Trust and
Trust Five Years, Other Directorships (past Federated Fund
Date Service Began Held and Previous Position(s) fiscal year) Complex
(past calendar
year)
Principal Occupation: Director $2,214.57 $163,350
Thomas G. Bigley or Trustee of the Federated Fund
Birth Date: Complex.
February 3, 1934
15 Old Timber Trail Other Directorships Held:
Pittsburgh, PA Director, Member of Executive
TRUSTEE Committee, Children's Hospital
Began serving: of Pittsburgh; Director,
October 1995 University of Pittsburgh.

Previous Position: Senior
Partner, Ernst & Young LLP.

Principal Occupations: Director $2,214.57 $163,350
John T. Conroy, Jr. or Trustee of the Federated Fund
Birth Date: June Complex; Chairman of the Board,
23, 1937 Investment Properties
Investment Corporation; Partner or Trustee
Properties in private real estate ventures
Corporation in Southwest Florida.
3838 North Tamiami
Trail Previous Positions: President,
Suite 402 Investment Properties
Naples, FL Corporation; Senior Vice
TRUSTEE President, John R. Wood and
Began serving: Associates, Inc., Realtors;
November 1991 President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Principal Occupation: Director $2,214.57 $163,350
Nicholas P. or Trustee of the Federated Fund
Constantakis Complex.
Birth Date:
September 3, 1939 Other Directorships Held:
175 Woodshire Drive Director and Member of the Audit
Pittsburgh, PA Committee, Michael Baker
TRUSTEE Corporation (engineering and
Began serving: energy services worldwide).
February 1998
Previous Position: Partner,
Anderson Worldwide SC.

Principal Occupation: Director $2,013.25 $148,500
John F. Cunningham or Trustee of the Federated Fund
Birth Date: March Complex.
5, 1943
353 El Brillo Way Other Directorships Held:
Palm Beach, FL Chairman, President and Chief
TRUSTEE Executive Officer, Cunningham
Began serving: & Co., Inc. (strategic
January 1999 business consulting); Trustee
Associate, Boston College.

Previous Positions: Director,
Redgate Communications and EMC
Corporation (computer storage
systems); Chairman of the Board
and Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief Operating
Officer, Wang Laboratories;
Director, First National Bank of
Boston; Director, Apollo
Computer, Inc.

Principal Occupation: Director $2,013.25 $148,500
Peter E. Madden or Trustee of the Federated Fund
Birth Date: March Complex; Management Consultant.
16, 1942
One Royal Palm Way Other Directorships Held: Board
100 Royal Palm Way of Overseers, Babson College.
Palm Beach, FL
TRUSTEE Previous Positions:
Began serving: Representative, Commonwealth of
November 1991 Massachusetts General Court;
President, State Street Bank and
Trust Company and State Street
Corporation (retired); Director,
VISA USA and VISA International;
Chairman and Director,
Massachusetts Bankers
Association; Director,
Depository Trust Corporation;
Director, The Boston Stock
Exchange.

Principal Occupations: Director $2,214.57 $163,350
Charles F. or Trustee of the Federated Fund
Mansfield, Jr. Complex; Management Consultant;
Birth Date: April Executive Vice President, DVC
10, 1945 Group, Inc. (marketing,
80 South Road communications and technology)
Westhampton Beach, (prior to 9/1/00).
NY
TRUSTEE Previous Positions: Chief
Began serving: Executive Officer, PBTC
January 1999 International Bank; Partner,
Arthur Young & Company (now
Ernst & Young LLP); Chief
Financial Officer of Retail
Banking Sector, Chase Manhattan
Bank; Senior Vice President,
HSBC Bank USA (formerly, Marine
Midland Bank); Vice President,
Citibank; Assistant Professor of
Banking and Finance, Frank G.
Zarb School of Business, Hofstra
University.

Principal Occupations: Director $2,415.88 $178,200
John E. Murray, or Trustee of the Federated Fund
Jr., J.D., S.J.D. Complex; Chancellor and Law
Birth Date: Professor, Duquesne University;
December 20, 1932 Partner, Murray, Hogue &
Chancellor, Lannis.
Duquesne University
Pittsburgh, PA Other Directorships Held:
TRUSTEE Director, Michael Baker Corp.
Began serving: (engineering, construction,
February 1995 operations and technical
services).

Previous Positions: President,
Duquesne University; Dean and
Professor of Law, University of
Pittsburgh School of Law; Dean
and Professor of Law, Villanova
University School of Law.

Principal Occupations: Director $2,013.25 $148,500
Marjorie P. Smuts or Trustee of the Federated Fund
Birth Date: June Complex; Public
21, 1935 Relations/Marketing
4905 Bayard Street Consultant/Conference
Pittsburgh, PA Coordinator.
TRUSTEE
Began serving: Previous Positions: National
April 1984 Spokesperson, Aluminum Company
of America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

Principal Occupations: Director $2,013.25 $148,500
John S. Walsh or Trustee of the Federated Fund
Birth Date: Complex; President and Director,
November 28, 1957 Heat Wagon, Inc. (manufacturer
2604 William Drive of construction temporary
Valparaiso, IN heaters); President and
TRUSTEE Director, Manufacturers
Began serving: Products, Inc. (distributor of
January 1999 portable construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products, Inc.

Previous Position: Vice
President, Walsh & Kelly,
Inc.

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

OFFICERS**

Name
Birth Date
Address
Positions Held with Trust
----------------------------- Principal Occupation(s) and Previous
Date Service Began Position(s)
Principal Occupations: Executive Vice
John W. McGonigle President and Secretary of the Federated Fund
Birth Date: October 26, 1938 Complex; Executive Vice President, Secretary
EXECUTIVE VICE PRESIDENT AND and Director, Federated Investors, Inc.
SECRETARY
Began serving: April 1984 Previous Positions: Trustee, Federated
Investment Management Company and Federated
Investment Counseling; Director, Federated
Global Investment Management Corp., Federated
Services Company and Federated Securities Corp.

Principal Occupations: Principal Financial
Richard J. Thomas Officer and Treasurer of the Federated Fund
Birth Date: June 17, 1954 Complex; Senior Vice President, Federated
TREASURER Administrative Services.
Began serving: November 1998
Previous Positions: Vice President, Federated
Administrative Services; held various
management positions within Funds Financial
Services Division of Federated Investors, Inc.

Principal Occupations: Vice Chairman or Vice
Richard B. Fisher President of some of the Funds in the
Birth Date: May 17, 1923 Federated Fund Complex; Vice Chairman,
VICE PRESIDENT Federated Investors, Inc.; Chairman, Federated
Began serving: April 1984 Securities Corp.

Previous Positions: President and Director or
Trustee of some of the Funds in the Federated
Fund Complex; Executive Vice President,
Federated Investors, Inc. and Director and
Chief Executive Officer, Federated Securities
Corp.

Principal Occupations: Chief Investment
Stephen F. Auth Officer of this Fund and various other Funds
Birth Date: September 3, 1956 in the Federated Fund Complex; Executive Vice
CHIEF INVESTMENT OFFICER President, Federated Investment Counseling,
Began serving: November 2002 Federated Global Investment Management Corp.,
Federated Equity Management Company of
Pennsylvania and Passport Research II, Ltd.

Previous Positions: Executive Vice President,
Federated Investment Management Company, and
Passport Research, Ltd.; Senior Vice
President, Global Portfolio Management
Services Division; Senior Vice President,
Federated Investment Management Company and
Passport Research, Ltd.; Senior Managing
Director and Portfolio Manager, Prudential
Investments.

---------------------------------------------------------------------------------------
Lawrence Auriana is Vice President of the
Lawrence Auriana Trust. Mr. Auriana joined Federated in April
Birth Date: January 8, 1944 2001 as Co-Head of Investments/Federated
VICE PRESIDENT Kaufmann. From August 1984 to April 2001, Mr.
Began serving: November 2001 Auriana was President and Treasurer of
Edgemont Asset Management Corp., and Chairman
of the Board and Portfolio Manager to The
Kaufmann Fund, Inc. (predecessor to the
Federated Kaufmann Fund). Mr. Auriana earned a
B.S. in economics from Fordham University and
has been engaged in the securities business
since 1965.
---------------------------------------------------

James E. Grefenstette is Vice President of the
James E. Grefenstette Trust. Mr. Grefenstette joined Federated in
Birth Date: November 7, 1962 1992 and has been a Portfolio Manager since
VICE PRESIDENT 1994. Mr. Grefenstette became a Senior Vice
Began serving: November 1998 President of the Fund's Adviser in January
2000. He served as a Vice President of the
Fund's Adviser from 1996 through 1999 and was
an Assistant Vice President of the Fund's
Adviser from 1994 until 1996. Mr. Grefenstette
is a Chartered Financial Analyst; he received
his M.S. in Industrial Administration from
Carnegie Mellon University.

Hans P. Utsch is Vice President of the Trust.
Hans P. Utsch Mr. Utsch joined Federated in April 2001 as
Birth Date: July 3, 1936 Co-Head of Investments/Federated Kaufmann.
VICE PRESIDENT From August 1984 to April 2001, Mr. Utsch was
Began serving: November 2001 Chairman of the Board and Secretary of
Edgemont Asset Management Corp., and President
and Portfolio Manager to The Kaufmann Fund,
Inc. (predecessor to the Federated Kaufmann
Fund). Mr. Utsch graduated from Amherst
College and holds an M.B.A. from Columbia
University. He has been engaged in the
securities business since 1962.

** Officers do not receive any compensation from the Fund.
--------------------------------------------------------------------------------------------

COMMITTEES OF THE BOARD

Meetings
Board Committee Held
Committee Members Committee Functions During
Last
Fiscal
Year
Executive In between meetings of the full Board, Six
John F. Donahue the Executive Committee generally may
John E. Murray, exercise all the powers of the full Board
Jr., J.D., S.J.D. in the management and direction of the
business and conduct of the affairs of
the Trust in such manner as the Executive
Committee shall deem to be in the best
interests of the Trust. However, the
Executive Committee cannot elect or
remove Board members, increase or
decrease the number of Trustees, elect or
remove any Officer, declare dividends,
issue shares or recommend to shareholders
any action requiring shareholder approval.

Audit The purposes of the Audit Committee are Six
Thomas G. Bigley to oversee the accounting and financial
John T. Conroy, reporting process of the Fund, the Fund`s
Jr. internal control over financial
Nicholas P. reporting, and the quality, integrity and
Constantakis independent audit of the Fund`s financial
Charles F. statements. The Committee also oversees
Mansfield, Jr. or assists the Board with the oversight
of compliance with legal requirements
relating to those matters, approves the
engagement and reviews the
qualifications, independence and
performance of the Fund`s independent
registered public accounting firm, acts
as a liaison between the independent
registered public accounting firm and the
Board and reviews the Fund`s internal
audit function.

Nominating One
Thomas G. Bigley The Nominating Committee, whose members
John T. Conroy, consist of all Independent Trustees,
Jr. selects and nominates persons for
Nicholas P. election to the Fund`s Board when
Constantakis vacancies occur. The Committee will
John F. consider candidates recommended by
Cunningham shareholders, Independent Trustees],
Peter E. Madden officers or employees of any of the
Charles F. Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who
John E. Murray, desires to have an individual considered
Jr. for nomination by the Committee must
Marjorie P. Smuts submit a recommendation in writing to the
John S. Walsh Secretary of the Fund, at the Fund's
address appearing on the back cover of
this Statement of Additional Information.
The recommendation should include the
name and address of both the shareholder
and the candidate and detailed
information concerning the candidate's
qualifications and experience. In
identifying and evaluating candidates for
consideration, the Committee shall
consider such factors as it deems
appropriate. Those factors will
ordinarily include: integrity,
intelligence, collegiality, judgment,
diversity, skill, business and other
experience, qualification as an
"Independent Trustee," the existence of
material relationships which may create
the appearance of a lack of independence,
financial or accounting knowledge and
experience, and dedication and
willingness to devote the time and
attention necessary to fulfill Board
responsibilities.

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

Board ownership of shares in the fund and in the Federated family of Investment companies
AS OF DECEMBER 31, 2003

Aggregate
Dollar Range of
Dollar Range of Shares Owned in
Interested Shares Owned Federated
Board Member Name in Fund Family of
Investment
Companies
John F. Donahue Over $100,000 Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. $1 - $10,000 Over $100,000

Independent
Board Member Name ---------------

Thomas G. Bigley $1 - $10,000 Over $100,000
John T. Conroy, Jr. $1 - $10,000 Over $100,000
Nicholas P. Constantakis None Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden $10,001 - Over $100,000
$50,000
Charles F. Mansfield, Jr. None $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Marjorie P. Smuts $ 50,001 - Over $100,000
$100,000
John S. Walsh $1 - $10,000 Over $100,000

</R>
--------------------------------------------------------------------------------------------

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 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.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment advisory
contract. The Board's decision to approve the contract reflects the exercise of its
business judgment on whether to continue the existing arrangements. During its review of
the contract, the Board considers many factors, among the most material of which are: the
Fund's investment objectives and long term performance; the Adviser's management
philosophy, personnel and processes; the preferences and expectations of Fund shareholders
and their relative sophistication; the continuing state of competition in the mutual fund
industry; comparable fees in the mutual fund industry; the range and quality of services
provided to the Fund and its shareholders by the Federated organization in addition to
investment advisory services; and the Fund's relationship to the Federated funds.

In assessing the Adviser's performance of its obligations, the Board also considers whether
there has occurred a circumstance or event that would constitute a reason for it to not
renew an advisory contract. In this regard, the Board is mindful of the potential
disruptions of the Fund's operations and various risks, uncertainties and other effects
that could occur as a result of a decision to terminate or not renew an advisory contract.
In particular, the Board recognizes that most shareholders have invested in the Fund on the
strength of the Adviser's industry standing and reputation and in the expectation that the
Adviser will have a continuing role in providing advisory services to the Fund.

The Board also considers the compensation and benefits received by the Adviser. This
includes fees received for services provided to the Fund by other entities in the Federated
organization and research services received by the Adviser from brokers that execute fund
trades, as well as advisory fees. In this regard, the Board is aware that various courts
have interpreted provisions of the 1940 Act and have indicated in their decisions that the
following factors may be relevant to an Adviser's compensation: the nature and quality of
the services provided by the Adviser, including the performance of the Fund; the Adviser's
cost of providing the services; the extent to which the Adviser may realize "economies of
scale" as the Fund grows larger; any indirect benefits that may accrue to the Adviser and
its affiliates as a result of the Adviser's relationship with the Fund; performance and
expenses of comparable funds; and the extent to which the independent Board members are
fully informed about all facts bearing on the Adviser's service and fee. The Fund's Board
is aware of these factors and takes them into account in its review of the Fund's advisory
contract.

The Board considers and weighs these circumstances in light of its substantial accumulated
experience in governing the Fund and working with Federated on matters relating to the
Federated funds, and is assisted in its deliberations by the advice of independent legal
counsel. In this regard, the Board requests and receives a significant amount of
information about the Fund and the Federated organization. Federated provides much of this
information at each regular meeting of the Board, and furnishes additional reports in
connection with the particular meeting at which the Board's formal review of the advisory
contracts occurs. In between regularly scheduled meetings, the Board may receive
information on particular matters as the need arises. Thus, the Board's evaluation of an
advisory contract is informed by reports covering such matters as: the Adviser's investment
philosophy, personnel, and processes; the Fund's short- and long-term performance (in
absolute terms as well as in relationship to its particular investment program and certain
competitor or "peer group" funds), and comments on the reasons for performance; the Fund's
expenses (including the advisory fee itself and the overall expense structure of the Fund,
both in absolute terms and relative to similar and/or competing funds, with due regard for
contractual or voluntary expense limitations); the use and allocation of brokerage
commissions derived from trading the Fund's portfolio securities; the nature and extent of
the advisory and other services provided to the Fund by the Adviser and its affiliates;
compliance and audit reports concerning the Federated funds and the Federated companies
that service them; and relevant developments in the mutual fund industry and how the
Federated funds and/or Federated are responding to them.

The Board also receives financial information about Federated, including reports on the
compensation and benefits Federated derives from its relationships with the Federated
funds. These reports cover not only the fees under the advisory contracts, but also fees
received by Federated's subsidiaries for providing other services to the Federated funds
under separate contracts (e.g., for serving as the Federated funds' administrator). The
reports also discuss any indirect benefit Federated may derive from its receipt of research
services from brokers who execute Federated fund trades.

The Board bases its decision to approve an advisory contract on the totality of the
circumstances and relevant factors, and with a view to past and future long-term
considerations. Not all of the factors and considerations identified above are relevant to
every Federated fund, nor does the Board consider any one of them to be determinative.
Because the totality of circumstances includes considering the relationship of each
Federated fund, the Board does not approach consideration of every Federated fund's
advisory contract as if that were the only Federated fund.

Services Agreement
Federated Advisory Services Company, an affiliate of the Adviser, provides research,
quantitative analysis, equity trading and transaction settlement and certain support
services to the Adviser. The fee for these services is paid by the Adviser and not by the
Fund.

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.

<R>

Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted codes of
ethics. These codes govern securities trading activities of investment personnel, Fund
Trustees, and certain other employees. Although they do permit these people to trade in
securities, including those that the Fund could buy, as well as Shares of the Fund, they
also contain significant safeguards designed to protect the Fund and its shareholders from
abuses in this area, such as requirements to obtain prior approval for, and to report,
particular transactions.

</R>

Voting Proxies on Fund Portfolio Securities
The Board has delegated to the Adviser authority to vote proxies on the securities held in
the Fund's portfolio. The Board has also approved the Adviser's policies and procedures
for voting the proxies, which are described below.

Proxy Voting Policies
The Adviser's general policy is to cast proxy votes in favor of proposals that the Adviser
anticipates will enhance the long-term value of the securities being voted. Generally,
this will mean voting for proposals that the Adviser believes will: improve the management
of a company; increase the rights or preferences of the voted securities; and/or increase
the chance that a premium offer would be made for the company or for the voted securities.

The following examples illustrate how these general policies may apply to proposals
submitted by a company's board of directors. However, whether the Adviser supports or
opposes a proposal will always depend on the specific circumstances described in the proxy
statement and other available information.

On matters of corporate governance, generally the Adviser will vote for proposals to:
require independent tabulation of proxies and/or confidential voting by shareholders;
reorganize in another jurisdiction (unless it would reduce the rights or preferences of the
securities being voted); and repeal a shareholder rights plan (also known as a "poison
pill"). The Adviser will generally vote against the adoption of such a plan (unless the
plan is designed to facilitate, rather than prevent, unsolicited offers for the company).

On matters of capital structure, generally the Adviser will vote: against proposals to
authorize or issue shares that are senior in priority or voting rights to the securities
being voted; for proposals to grant preemptive rights to the securities being voted; and
against proposals to eliminate such preemptive rights.

On matters relating to management compensation, generally the Adviser will vote: for stock
incentive plans that align the recipients' interests with the interests of shareholders
without creating undue dilution; and against proposals that would permit the amendment or
replacement of outstanding stock incentives with new stock incentives having more favorable
terms.

On matters relating to corporate transactions, the Adviser will vote proxies relating to
proposed mergers, capital reorganizations, and similar transactions in accordance with the
general policy, based upon its analysis of the proposed transaction. The Adviser will vote
proxies in contested elections of directors in accordance with the general policy, based
upon its analysis of the opposing slates and their respective proposed business
strategies. Some transactions may also involve proposed changes to the company's corporate
governance, capital structure or management compensation. The Adviser will vote on such
changes based on its evaluation of the proposed transaction or contested election. In
these circumstances, the Adviser may vote in a manner contrary to the general practice for
similar proposals made outside the context of such a proposed transaction or change in the
board. For example, if the Adviser decides to vote against a proposed transaction, it may
vote for anti-takeover measures reasonably designed to prevent the transaction, even though
the Adviser typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without the
favorable recommendation of a company's board. The Adviser believes that a company's board
should manage its business and policies, and that shareholders who seek specific changes
should strive to convince the board of their merits or seek direct representation on the
board.

In addition, the Adviser will not vote if it determines that the consequences or costs
outweigh the potential benefit of voting. For example, if a foreign market requires
shareholders casting proxies to retain the voted shares until the meeting date (thereby
rendering the shares "illiquid" for some period of time), the Adviser will not vote proxies
for such shares.

Proxy Voting Procedures
The Adviser has established a Proxy Voting Committee (Proxy Committee), to exercise all
voting discretion granted to the Adviser by the Board in accordance with the proxy voting
policies. The Adviser has hired Investor Responsibility Research Center (IRRC) to obtain,
vote, and record proxies in accordance with the Proxy Committee's directions. The Proxy
Committee directs IRRC by means of Proxy Voting Guidelines, and IRRC may vote any proxy as
directed in the Proxy Voting Guidelines without further direction from the Proxy Committee
(and may make any determinations required to implement the Proxy Voting Guidelines).
However, if the Proxy Voting Guidelines require case-by-case direction for a proposal, IRRC
will provide the Proxy Committee with all information that it has obtained regarding the
proposal and the Proxy Committee will provide specific direction to IRRC. The Adviser's
proxy voting procedures generally permit the Proxy Committee to amend the Proxy Voting
Guidelines, or override the directions provided in such Guidelines, whenever necessary to
comply with the proxy voting policies.

Conflicts of Interest
The Adviser has adopted procedures to address situations where a matter on which a proxy is
sought may present a potential conflict between the interests of the Fund (and its
shareholders) and those of the Adviser or Distributor. This may occur where a significant
business relationship exists between the Adviser (or its affiliates) and a company involved
with a proxy vote. A company that is a proponent, opponent, or the subject of a proxy
vote, and which to the knowledge of the Proxy Committee has this type of significant
business relationship, is referred to as an "Interested Company."

The Adviser has implemented the following procedures in order to avoid concerns that the
conflicting interests of the Adviser have influenced proxy votes. Any employee of the
Adviser who is contacted by an Interested Company regarding proxies to be voted by the
Adviser must refer the Interested Company to a member of the Proxy Committee, and must
inform the Interested Company that the Proxy Committee has exclusive authority to determine
how the Adviser will vote. Any Proxy Committee member contacted by an Interested Company
must report it to the full Proxy Committee and provide a written summary of the
communication. Under no circumstances will the Proxy Committee or any member of the Proxy
Committee make a commitment to an Interested Company regarding the voting of proxies or
disclose to an Interested Company how the Proxy Committee has directed such proxies to be
voted. If the Proxy Voting Guidelines already provide specific direction on the proposal
in question, the Proxy Committee shall not alter or amend such directions. If the Proxy
Voting Guidelines require the Proxy Committee to provide further direction, the Proxy
Committee shall do so in accordance with the proxy voting policies, without regard for the
interests of the Adviser with respect to the Interested Company. If the Proxy Committee
provides any direction as to the voting of proxies relating to a proposal affecting an
Interested Company, it must disclose to the Fund's Board information regarding: the
significant business relationship; any material communication with the Interested Company;
the matter(s) voted on; and how, and why, the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or an
affiliate) acts as an investment adviser, the Proxy Committee will vote the Fund's proxies
in the same proportion as the votes cast by shareholders who are not clients of the Adviser
at any shareholders' meeting called by such investment company, unless otherwise directed
by the Board.

Proxy Voting Report
A report on "Form N-PX" of how the Fund voted any proxies during the most recent 12-month
period ended June 30 is available through Federated's website. Go to
www.federatedinvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX.

PORTFOLIO HOLDINGS DISCLOSURE POLICIES

Information concerning the Fund's portfolio holdings is available in the "Products" section
of the Federated's website at www.federatedinvestors.com. A complete listing of the Fund's
portfolio holdings as of the end of each calendar quarter is posted on the website 30 days
(or the next business day) after the end of the quarter and remains posted until replaced
by the information for the succeeding quarter. Summary portfolio composition information as
of the close of each month (except for recent purchase and sale transaction information,
which is updated quarterly) is posted on the website 15 days (or the next business day)
after month-end and remains until replaced by the information for the succeeding month.
The summary portfolio composition information may include: identification of the Fund's top
ten holdings, recent purchase and sale transactions and a percentage breakdown of the
portfolio by sector. To access this information from the "Products" section of the website,
click on "Portfolio Holdings" and select the appropriate link opposite the name of the
Fund, or select the name of the Fund from the menus on the "Products" section, and from the
Fund's page click on the "Portfolio Holdings" or "Composition" link. A user is required to
register on the website the first time the user accesses this information.

You may also access from the "Products" section of the website portfolio information as of
the end of the Fund's fiscal quarters. The Fund's annual and semi-annual reports, which
contain complete listings of the Fund's portfolio holdings as of the end of the Fund's
second and fourth fiscal quarters, may be accessed by selecting the name of the Fund,
clicking on "Prospectuses and Regulatory Reports" and selecting the link to the appropriate
PDF. Complete listings of the Fund's portfolio holdings as of the end of the Fund's first
and third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the
"Products" section and then selecting the appropriate link opposite the name of the Fund.
Fiscal quarter information is made available on the website within 70 days after the end of
the fiscal quarter. This information is also available in reports filed with the SEC at
the SEC's website at www.sec.gov.

The disclosure policy of the Fund and the Adviser prohibits the disclosure of portfolio
holdings information to any investor or intermediary before the same information is made
available to other investors. Employees of the Adviser or its affiliates who have access
to nonpublic information concerning the Fund's portfolio holdings are prohibited from
trading securities on the basis of this information. Such persons must report all personal
securities trades and obtain pre-clearance for all personal securities trades other than
mutual fund shares.

Firms that provide administrative, custody, financial, accounting, legal or other services
to the Fund may receive nonpublic information about Fund portfolio holdings for purposes
relating to their services. The Fund may also provide portfolio holdings information to
publications that rate, rank or otherwise categorize investment companies. Traders or
portfolio managers may provide "interest" lists to facilitate portfolio trading if the list
reflects only that subset of the portfolio for which the trader or portfolio manager is
seeking market interest. A list of service providers, publications and other third parties
who may receive nonpublic portfolio holdings information appears in the Appendix to this
SAI.

<R>

The furnishing of nonpublic portfolio holdings information to any third party (other than
authorized governmental or regulatory personnel) requires the prior approval of the
President of the Adviser and of the Chief Compliance Officer of the Fund. The President of
the Adviser and the Chief Compliance Officer will approve the furnishing of nonpublic
portfolio holdings information to a third party only if they consider the furnishing of
such information to be in the best interests of the Fund and its shareholders. In that
regard, and to address possible conflicts between the interest of Fund shareholders and
those of the Adviser and its affiliates, the following procedures apply. No consideration
may be received by the Fund, the Adviser, any affiliate of the Adviser or any of their
employees in connection with the disclosure of portfolio holdings information. Before
information is furnished, the third party must sign a written agreement that it will
safeguard the confidentiality of the information, will use it only for the purposes for
which it is furnished and will not use it in connection with the trading of any security.
Persons approved to receive nonpublic portfolio holdings information will receive it as
often as necessary for the purpose for which it is provided. Such information may be
furnished as frequently as daily and often with no time lag between the date of the
information and the date it is furnished. The Board receives and reviews annually a list of
the persons who receive nonpublic portfolio holdings information and the purposes for which
it is furnished.

</R>

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). The Adviser may also direct certain portfolio
trades to a broker that, in turn, pays a portion of the Fund's operating expenses. The
Adviser makes decisions on portfolio transactions and selects brokers and dealers subject
to review by the Fund's Board.

Investment decisions for the Fund are made independently from those of other accounts
managed by the Adviser. Except as noted below, 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. Investments for Federated Kaufmann Fund and other accounts managed by that
fund's portfolio managers in initial public offerings ("IPO") are made independently from
any other accounts, and much of their non-IPO trading may also be conducted independently
from other accounts.

<R>

On October 31, 2004, the Fund owned securities of the following regular broker/dealers:
Citigroup Group, Inc. - $75,500,000; JP Morgan Securities, Inc. - $65,100,000; Goldman
Sachs - $52,500,000; Morgan Stanley & Co., Inc. - $50,800,000; and Lehman Brothers,
Inc. - $27,700,000.

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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.

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For the fiscal year ended, October 31, 2004, the Fund's Adviser directed brokerage
transactions to certain brokers due to research services they provided. The total amount of
these transactions was $1,431,187,875 for which the Fund paid $2,010,071 in brokerage
commissions.

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

Average Aggregate Daily
Maximum Administrative Fee Net Assets of the
Federated Funds
0.150 of 1% on the first $5 billion
0.125 of 1% on the next $5 billion
0.100 of 1% on the next $10 billion
0.075 of 1% on assets over $20 billion
The administrative fee received during any fiscal year shall be at least $150,000 per
portfolio and $40,000 per each additional class of Shares. FAS may voluntarily waive a
portion of its fee and may reimburse the Fund for expenses.
--------------------------------------------------------------------------------------------

FAS 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
State Street Bank and Trust Company, the Fund's registered transfer agent, maintains all
necessary shareholder records.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Deloitte & Touche LLP,
conducts its audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States), which require it to plan and perform its audits to provide
reasonable assurance about whether the Fund's financial statements and financial highlights
are free of material misstatement.

FEES PAID BY THE FUND FOR SERVICES

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For the Year Ended 2004 2003 2002
October 31
Advisory Fee Earned $24,311,507 $17,368,038 $11,863,755
Advisory Fee Reimbursement 14,296 9,017 11,848
Brokerage Commissions 2,854,733 3,246,979 3,040,110
Administrative Fee 2,470,049 1,741,356 1,189,539
12b-1 Fee:
Class A Shares 0 -- --
Class B Shares 4,267,313 -- --
Class C Shares 1,549,603 -- --
Class K Shares 89,076 -- --
Shareholder Services Fee:
Class A Shares 6,120,326 -- --
Class B Shares 1,422,438 -- --
Class C Shares 516,534 -- --

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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.

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits this standard
performance information to be accompanied by non-standard performance information.

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/or the value
of portfolio holdings 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 are given for the one-year, five-year and ten-year or Start of Performance
periods ended October 31, 2004.

Yield is given for the 30-day period ended October 31, 2004.

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30-Day 1 Year 5 Years 10 Years
Period
Class A Shares:
Total Return
Before Taxes N/A 1.10% 0.49% 11.64%
After Taxes on N/A 1.03% (0.27)% 10.13%
Distributions
After Taxes on
Distributions and N/A 0.81% 0.06% 9.49%
Sale of Shares
Yield 0.33% N/A N/A N/A

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Start of
Performance on
30-Day 1 Year 5 Years 1/4/1996
Period
Class B Shares:
Total Return
Before Taxes N/A 0.69% 0.51% 9.80%
After Taxes on N/A 0.69% (0.13)% 8.65%
Distributions
After Taxes on
Distributions and N/A 0.45% 0.16% 8.05%
Sale of Shares
Yield 0.00% N/A N/A N/A
Start of
Performance on
30-Day 1 Year 5 Years 1/4/1996
Period
Class C Shares:
Total Return
Before Taxes N/A 4.15% 0.68% 9.60%
After Taxes on N/A 4.15% 0.05% 8.45%
Distributions
After Taxes on
Distributions and N/A 2.70% 0.30% 7.87%
Sale of Shares
Yield 0.00% N/A N/A N/A
Start of
Performance on
30-Day 1 Year 5 Years 4/8/2003
Period
Class K Shares:
Total Return
Before Taxes N/A 6.49% 1.18% 11.77%
After Taxes on N/A 6.41% 0.67% 10.54%
Distributions
After Taxes on
Distributions and N/A 4.34% 0.86% 9.86%
Sale of Shares
Yield 0.06% N/A N/A N/A

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

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 $10,000 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 $10,000, less any applicable sales charge, adjusted
over the period by any additional Shares, assuming the annual reinvestment of all dividends
and distributions. Total returns after taxes are calculated in a similar manner, but
reflect additional standard assumptions required by the SEC.

YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per Share
earned by the Shares over a 30-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 30-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:

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

o 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;

o 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 Fund; and

o 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:

Value Line Mutual Fund Survey
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
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)
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, Inc.
Lipper, 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.
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)
The S&P 500 is a composite index of common stocks in industry, transportation, and
financial and public utility companies. It 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 500 figures.

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S&P 500/Barra Growth Index

The S&P500/Barra Growth Index is an unmanaged capitalization-weighted index of stocks
in the Standard & Poor's 500 index having the highest price to book ratios. The index
consists of approximately half of the S&P 500 on a market capitalization basis.

S&P 500/Barra Value Index

The S&P 500/Barra Value Index is an unmanaged market capitalization-weighted index of
the stocks in the Standard & Poor's 500 Index having the lowest price to book ratios.
The index consists of approximately half of the S&P 500 on a market capitalization
basis.

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

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

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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 who are 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, 2003, Federated managed 14 bond funds with
approximately $3.8 billion in assets and 22 money market funds with approximately $23.0
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 32 years' experience. As of December 31,
2003, Federated managed 36 equity funds totaling approximately $25.6 billion in assets
across growth, value, equity income, international, index and sector (i.e. utility)
styles. Federated's value-oriented management style combines quantitative and qualitative
analysis and features a structured, computer-assisted composite modeling system that was
developed in the 1970s.

Corporate Bond Funds
In the corporate bond sector, as of December 31, 2003, Federated managed 11 money market
funds and 4 bond funds with assets approximating $61.7 billion and $3.4 billion,
respectively. Federated's corporate bond decision making--based on intensive, diligent
credit analysis--is backed by over 30 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 $209 billion.

Government Funds
In the government sector, as of December 31, 2003, Federated managed 7 mortgage-backed, 3
multi-sector government funds, 4 government/agency and 19 government money market mutual
funds, with assets approximating $4.9 billion, $0.9 billion, $2.9 billion and $56.2
billion, respectively. Federated trades approximately $90.4 billion in U.S. government and
mortgage-backed securities daily and places approximately $35 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 $50
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, 2003, Federated managed $136.2 billion in assets across 52 money market funds,
including 19 government, 10 prime, 22 municipal and 1 euro-denominated with assets
approximating $56.2 billion, $59.4 billion, $20.6 billion and $173.9 million, respectively.

The Chief Investment Officers responsible for oversight of the various investment sectors
within Federated are: Global Equity - Stephen F. Auth is responsible for overseeing the
management of Federated's domestic and international equity products; Global Fixed-Income -
Mary Jo Ochson and Robert J. Ostrowski are responsible for overseeing the management of
Federated's domestic and international fixed-income and high yield products; and Money
Markets - Deborah A. Cunningham is responsible for overseeing the management of Federated's
money market fund products.

Mutual Fund Market
Forty-nine percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted over $6.2
trillion to the approximately 8,300 funds available, according to the Investment Company
Institute.

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

Institutional Clients
Federated meets the needs of approximately 3,035 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.

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.

Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated funds are available to consumers through major brokerage firms
nationwide--Federated has over 2,000 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.

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2004 are
incorporated herein by reference to the Annual Report to Shareholders of Federated Capital
Appreciation Fund dated October 31, 2004.

INVESTMENT RATINGS

Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk.
They are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic conditions than
is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met; however,
capacity for continued payment is contingent upon a sustained, favorable business and
economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears probable. 'C'
ratings signal imminent default.

Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics: leading market positions in well
established industries, high rates of return on funds employed, conservative capitalization
structure with moderate reliance on debt and ample asset protection, broad margins in
earning coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of alternate
liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced by many of
the characteristics cited above, but to a lesser degree. Earnings trends and coverage
ratios, while sound, 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-- A short-term obligation rated 'A-1' is rated in the highest category by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these obligations
is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.

Fitch Ratings Commercial Paper Rating Definitions
F-1--Indicates the strongest capacity for timely payment of financial commitments relative
to other issuers or issues in the same country. Under their national rating scale, this
rating is assigned to the "best" credit risk relative to all others in the same country and
is normally assigned to all financial commitments issued or guaranteed by the sovereign
state. Where the credit risk is particularly strong, a "+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of safety is
not as great as in the case of the higher ratings.

ADDRESSES

Federated Capital Appreciation Fund

Class A Shares
Class B Shares
Class C Shares
Class K Shares

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 Equity Management Company of Pennsylvania
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

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

Independent Registered Public Accounting Firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116

APPENDIX

The following is a list of persons other than the Adviser and its affiliates
that may receive nonpublic portfolio holdings information concerning the Fund:

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Custodian
State Street Bank and Trust Company

Securities Lending Agent
State Street Bank and Trust Company

Independent Registered Public Accounting Firm
Deloitte & Touche LLP

Legal Counsel

Dickstein Shapiro Morin & Oshinsky LLP
Reed Smith LLP

Service Providers
Bloomberg
FactSet
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Vestek
Wilshire Associates, Inc.

Security Pricing Services
FT Interactive Data
Reuters

Ratings Agencies
Standard & Poor's

Performance Reporting/Publications
Evaluation Associates
Fidelity-Strategic Advisors
Lipper, Inc.
Morningstar, Inc.
Morningstar Associates
NASDAQ
Thomson Financial
Value Line
Wiesenberger/Thomson Financial

Other
Investment Company Institute

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Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking to provide capital appreciation by investing principally in common stocks.

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		5
What are the Fund’s Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		10
What Do Shares Cost?		12
How is the Fund Sold?		19
How to Purchase Shares		20
How to Redeem and Exchange Shares		22
Account and Share Information		25
Who Manages the Fund?		27
Legal Proceedings		29
Financial Information		30

Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

To achieve its objective, the Fund invests primarily in the stocks of small and medium-sized companies that are traded on national security exchanges, the NASDAQ stock market and on the over-the-counter market. Up to 25% of the Fund’s net assets may be invested in foreign securities.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments, which affect those sectors emphasized by the Fund.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks of Foreign Investing. Because the Fund invests in securities issued by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than could otherwise be the case.
Currency Risks. Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the value of the Shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.

Risk/Return Bar Chart and Table

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The Fund is the successor to The Kaufmann Fund, Inc. (Kaufmann Fund) pursuant to a reorganization that took place on April 23, 2001. Prior to that date, the Fund had no investment operations. Accordingly, the performance information and financial information provided in this prospectus for periods prior to April 23, 2001, is historical information of the Kaufmann Fund. The Kaufmann Fund was managed by Edgemont Asset Management Corp. and had the same investment objectives and strategies as the Fund and substantially the same investment policies as the Fund. Kaufmann Fund shareholders received Class K Shares of the Fund as a result of the reorganization.

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The Fund’s Class A Shares, B Shares and C Shares commenced operation on April 23, 2003. For the period prior to the commencement of operations of Class A, Class B and Class C Shares, the performance information shown in the bar chart below is for the Fund’s Class K Shares, adjusted to reflect the expenses of Class A Shares. The performance information shown will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The total returns shown in the bar chart for the Fund’s Class A Shares do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.

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The Fund’s Class A Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was (0.20)%.

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Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 35.47% (quarter ended December 31, 1999). Its lowest quarterly return was (18.76)% (quarter ended September 30, 1998).

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Average Annual Total Return Table

The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all Classes. In addition, Return After Taxes is shown for Class A Shares to illustrate the effect of federal taxes on the Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell Midcap Growth Index (RMGI), a broad-based market index, and the Lipper Mid-Cap Growth Index (LMCGI). Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index.

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(For the periods ended December 31, 2003)

	1 Year	5 Years	10 Years

Class A Shares:¹

Return Before Taxes	37.10%	10.04%	12.52%

Return After Taxes on Distributions²	36.91%	7.13%	10.48%

Return After Taxes on Distributions and Sale of Fund Shares²	24.35%	7.43%	10.24%

Class B Shares:¹	38.68%	10.54%	12.72%

Class C Shares:¹	41.74%	10.54%	12.50%

RMGI³	42.71%	2.01%	9.40%

LMCGI⁴	35.42%	2.18%	8.25%

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1 The Fund’s Class A, Class B and Class C Shares total returns for such periods are those of the Kaufmann Fund’s Class K Shares, but adjusted to reflect the sales charge or contingent sales charge (CDSC) and expenses applicable to that Class.

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3 Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The index is unmanaged, and unlike the Fund, is not affected by cashflows. Investments cannot be made in an index.

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4 Lipper Mid-Cap Growth Index is the composite performance of the 30 largest mid-cap growth mutual funds, as categorized by Lipper, Inc. The index is unmanaged, and unlike the Fund, is not affected by cashflows. Investments cannot be made in an index.

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What are the Fund’s Fees and Expenses?

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FEDERATED KAUFMANN FUND

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FEES AND EXPENSES

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)	None	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)
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²	1.425%	1.425%	1.425%
Distribution (12b-1) Fee	0.250%³	0.750%	0.750%
Shareholder Services Fee	0.250%	0.250%	0.250%
Other Expenses⁴	0.230%	0.230%	0.230%
Total Annual Fund Operating Expenses	2.155%	2.655%⁵	2.655%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor, administrator and transfer agent waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waivers of Fund Expenses	0.205%	0.155%	0.155%
Total Actual Annual Fund Operating Expenses (after waivers)	1.950%	2.500%	2.500%
2 The Adviser 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 1.275% for the fiscal year ended October 31, 2004.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund’s Class A Shares (after the voluntary waiver) was 0.200% for the fiscal year ended October 31, 2004.
4 The administrator and transfer agent voluntarily waived a portion of their fees. The administrator and transfer agent can terminate this voluntary waiver at any time. Total other operating expenses paid by the Fund’s Class A, Class B and Class C Shares (after the voluntary waiver) were 0.225%, 0.225% and 0.225% for the fiscal year ended October 31, 2004.
5 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on the 15th of the following month. Class A Shares pay lower expenses than Class B Shares.

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EXAMPLE

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This 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.

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The Example assumes that you invest $10,000 in the Fund’s Class A, B and 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 estimated in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$757	$1,187	$1,643	$2,901

Expenses assuming no redemption	$757	$1,187	$1,643	$2,901

Class B:

Expenses assuming redemption	$819	$1,225	$1,608	$2,867

Expenses assuming no redemption	$269	$825	$1,408	$2,867

Class C:

Expenses assuming redemption	$466	$917	$1,493	$3,058

Expenses assuming no redemption	$366	$917	$1,493	$3,058

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What are the Fund’s Investment Strategies?

In seeking to meet its objective, the Fund invests primarily in the stocks of small and medium-sized companies that are traded on national security exchanges, NASDAQ stock market and on the over-the-counter market. Up to 25% of the Fund’s net assets may be invested in foreign securities. When deciding which securities to buy the Fund considers:

the growth prospects of existing products and new product development;
the economic outlook of the industry;
the price of the security and its estimated fundamental value; and
relevant market, economic and political environments.

The Fund’s Adviser and Sub-Adviser (collectively, “Adviser”) use a bottom-up approach to portfolio management. There is an emphasis on individual stock selection rather than trying to time the highs and lows of the market or concentrating in certain industries or sectors. This hands-on approach means that in addition to sophisticated computer analysis, the Adviser may conduct in-depth meetings with management, industry analysts and consultants. Through this interaction with companies, the Adviser seeks to develop a thorough knowledge of the dynamics of the businesses in which the Fund invests.

The Fund assesses individual companies from the perspective of a long-term investor. It buys stocks of companies that it believes:

are profitable and leaders in the industry;
have distinct products and services which address substantial markets;
can grow annual earnings by at least 20% for the next three to five years; and
have superior proven management and solid balance sheets.

Typically, the Fund sells an individual security when the company fails to meet expectations, there is a deterioration of underlying fundamentals or the intermediate and long-term prospects become poor.

The Fund may loan up to 30% of its total assets in the form of its portfolio securities to unaffiliated broker/dealers, banks or other recognized institutional borrowers to generate additional income. The Fund receives cash, U.S. Treasury obligations, and/or other liquid securities as collateral. The Fund also may invest up to 15% of its net assets in illiquid securities.

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HEDGING

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Hedging transactions are intended to reduce specific risks. For example, to protect the Funds against circumstances that would normally cause the Fund’s portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivative contracts, or derivatives contracts and securities. The Fund’s ability to hedge may be limited by the costs of the derivative contracts. The Fund may attempt to lower the cost of hedging by entering in transactions that provide only limited protection, including transactions that (1) hedge only a portion of the portfolio, (2) use derivatives contracts that cover a narrow range of circumstances or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Funds.

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Additionally, the Fund may buy put options on stock indexes, exchange traded funds or individual stocks (even if the stocks are not held by the Fund) in an attempt to hedge against a decline in stock prices. The Fund may also “sell short against the box,” (i.e. the Fund owns securities identical to those sold short) in an attempt to hedge portfolio positions. A capital gain is recognized immediately upon entering into a short sale against the box with respect to an appreciated security.

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TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. 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 principal types of equity securities in which the Fund may invest:

Common Stocks

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in, another country;
the principal trading market for its securities is in another country; or
it (or its subsidiaries) derived in its most current fiscal year at least 50% of its total assets, capitalization, gross revenue or profit from goods produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.

ILLIQUID SECURITIES

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Illiquid securities are securities for which there is no readily available market or securities with legal or contractual restrictions. These may include private placements, repurchase agreements that the fund cannot dispose of within seven days, and securities eligible for resale under Rule 144A of the Securities Act of 1933.

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FIXED INCOME SECURITIES

Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must 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. A security’s yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.

Treasury Securities

The Fund may receive Treasury securities as collateral on portfolio securities loans and may invest in Treasury securities on a short-term basis. Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.

SPECIAL TRANSACTIONS

Securities Lending

The Fund may lend portfolio securities to borrowers that the Fund’s custodian deems creditworthy. In return, the Fund receives cash, U.S. Treasury obligations or other liquid securities from the borrower as collateral. The borrower must furnish additional collateral if the market value of the loaned securities increases. Also, the borrower must pay the Fund the equivalent of any dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.

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 on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay 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 interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

LIQUIDITY RISKS

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.

Over-the-counter (OTC) derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

RISKS OF FOREIGN INVESTING

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

Foreign companies may not provide information (including financial statements) as frequently or completely as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.

Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund’s investments.

CURRENCY RISKS

Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the value of the shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.

The Adviser attempts to limit currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.

CREDIT RISKS

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 prevent the Fund from selling or buying other securities to implement its investment strategy.

LEVERAGE RISKS

INTEREST RATE RISKS

Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.

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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

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If prices are not available from an independent pricing service, securities and derivatives contracts traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

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The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund’s adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund’s NAV is computed. An event is considered significant if there is both an affirmative expectation that the security’s value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For domestic fixed income securities, such events may occur where the cut-off time for the market information used by the independent pricing service is earlier than the end of regular trading on the NYSE. For securities normally priced at their last sale price in a foreign market, such events can occur between the close of trading in the foreign market and the close of trading on the NYSE. In such cases, use of fair valuation can reduce an investor’s ability to seek to profit by estimating the Fund’s NAV in advance of the time as of which NAV is calculated.

The following table summarizes the minimum requred 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.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges

Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	5.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	1.00%	1.00%

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.”

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Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares and Class F Shares. Among other ways, Class A Shares and Class F Shares have a series of “breakpoints,” which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under “Sales Charge When You Purchase.”) On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares bear a relatively low front-end sales charge and a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and Class F Shares and comparable to those charged to Class B Shares.

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SALES CHARGE WHEN YOU PURCHASE

Class A Shares:

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

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 greater¹	0.00%	0.00%

Class C Shares:

All Purchases	1.00%	1.01%

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the tables above. You or your investment professional must notify the Fund’s Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase.

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In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your investment professional or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint (“Qualifying Accounts”). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through an investment professional or a through a single-participant retirement account by you, your spouse, your parents (if you are under age 21) and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs) or (effective March 1, 2005) broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through “Section 529” college savings plans or those accounts which cannot be linked using TINs, SSNs or BINs, are not Qualifying Accounts.

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Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

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

Concurrent and Accumulated Purchases (Effective through February 28, 2005)

combining concurrent purchases of and/or current investments in Class A Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Class A Share purchase will be calculated by multiplying the maximum public offering price times the number of Shares of the same Class of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase;

Concurrent and Accumulated Purchases (Effective March 1, 2005)

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

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

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only); or
as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any investment professional that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals.

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).

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; and
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).

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

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your investment professional received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.

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 12 months of the purchase date.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

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following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);

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representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Trustees and employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of an investment professional that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through an investment professional that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); and
which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program.

How is the Fund Sold?

The Fund offers four Share classes: Class A Shares, Class B Shares, Class C Shares and Class K Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Class A Shares, Class B Shares and Class C Shares. All Share classes have different sales charges and other expenses which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.

The Fund’s Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions on behalf of their customers or to individuals, directly or through investment professionals.

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, administration 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.

SERVICE FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

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 (e.g., 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.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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

EXCHANGE PRIVILEGE

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.

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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 Class A 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;
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

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.

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund’s fair valuation procedures are intended in part to discourage short-term trading by reducing the potential for such strategies to succeed. See “What do Shares Cost?” The Fund monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection of amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

PORTFOLIO HOLDINGS INFORMATION

You may also access from the “Products” section of the website portfolio information as of the end of the Funds’ fiscal quarters. The Fund’s annual and semiannual reports, which contain complete listings of the Fund’s portfolio holdings as of the end of the Fund’s second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on “Prospectuses and Regulatory Reports” and selecting the link to the appropriate PDF. Complete listings of the Fund’s portfolio holdings as of the end of the Fund’s first and third fiscal quarters may be accessed by selecting “Portfolio Holdings” from the “Products” section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC’s website at www.sec.gov.

Who Manages the Fund?

The Board of Trustees (the “Board”) governs the Fund. The Board selects and oversees the Adviser, Federated Equity Management Company of Pennsylvania. The Adviser manages the Fund’s assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund.

The Adviser has delegated daily management of the Fund to the Sub-Adviser, Federated Global Investment Management Corp., who is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779. Correspondence regarding the Sub-Adviser should be sent in care of the same address.

The Adviser, Sub-Adviser and other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

THE FUND’S PORTFOLIO MANAGERS ARE:

Lawrence Auriana

Lawrence Auriana has been the Fund’s Portfolio Manager since February 1986. He is Vice President of the Trust. Mr. Auriana joined Federated in April 2001 as Co-Head of Investments/Federated Kaufmann. From August 1984 to April 2001, Mr. Auriana was President and Treasurer of Edgemont Asset Management Corp., and Chairman of the Board and Portfolio Manager to The Kaufmann Fund, Inc. (predecessor to the Federated Kaufmann Fund). Mr. Auriana earned a B.S. in Economics from Fordham University and has been engaged in the securities business since 1965.

Hans P. Utsch

Hans P. Utsch has been the Fund’s Portfolio Manager since February 1986. He is Vice President of the Trust. Mr. Utsch joined Federated in April 2001 as Co-Head of Investments/Federated Kaufmann. From August 1984 to April 2001, Mr. Utsch was Chairman of the Board and Secretary of Edgemont Asset Management Corp., and President and Portfolio Manager to The Kaufmann Fund, Inc. (predecessor to the Federated Kaufmann Fund). Mr. Utsch graduated from Amherst College and holds an M.B.A. from Columbia University. He has been engaged in the securities business since 1962.

Jonathan Art

Jonathan Art was named a portfolio manager of the Fund in October 2003. Mr. Art was an investment analyst with Edgemont Asset Management Corp., adviser to the Kaufmann Fund (predecessor to the Federated Kaufmann Fund) from 1995 to 2001. He has been an investment analyst with the Fund’s current adviser since April 2001. Mr. Art earned a B.E.S. in mathematical sciences from The John Hopkins University and an M.S. in Management from the Massachusetts Institute of Technology.

Mark Bauknight

Mark Bauknight was named a portfolio manager of the fund in October 2003. Mr. Bauknight was an investment analyst with Edgemont Asset Management Corp., adviser to the Kaufmann Fund (predecessor to the Federated Kaufmann Fund) from 1997 to 2001. He has been an investment analyst with the Fund’s current adviser since April 2001. Mr. Bauknight earned a B.A. in economics and a B.A. in political science from the University of North Carolina at Chapel Hill and an M.B.A. from the University of Oxford.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 1.425% 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.

Legal Proceedings

Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees, and seeking damages of unspecified amounts.

The Board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

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 any dividends and capital gains.

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.

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Financial Highlights-Class A Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004		2003		2002		Period Ended 10/31/2001	¹

Net Asset Value, Beginning of Period	$4.90		$3.54		$4.23		$4.33

Income From Investment Operations:

Net investment income (loss)	(0.06	)²	(0.06	)²	(0.05	)^2,3	(0.02	)²

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.31		1.42		(0.28	)³	(0.08	)

TOTAL FROM INVESTMENT OPERATIONS	0.25		1.36		(0.33	)	(0.10	)

Less Distributions:

Distributions from net realized gain on investments, options and foreign currency transactions	(0.04	)	--		(0.36	)	--

Net Asset Value, End of Period	$5.11		$4.90		$3.54		$4.23

Total Return⁴	5.24	%⁵	38.42	%	(8.90	)%	(2.31	)%


Ratios to Average Net Assets:

Expenses	1.95	%	1.95	%	1.95	%	1.95	%⁶

Net investment income (loss)	(1.29	)%	(1.45	)%	(1.25	)%³	(0.93	)%⁶

Expense waiver/reimbursement⁷	0.21	%	0.24	%	0.18	%	0.17	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$1,772,380		$1,191,117		$435,500		$85,169

Portfolio turnover	73	%	72	%	65	%	74	%

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1 Reflects operations for the period from April 23, 2001 (date of initial public investment) to October 31, 2001.

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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 results of operations.

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3 Effective November 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended October 31, 2002, this change had no effect on the net investment income (loss) per share, the net realized and unrealized gain (loss) on investments per share, or the ratio of net investment income (loss) to average net assets. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

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4 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

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5 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on total returns (Note 5).

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6 Computed on an annualized basis.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Financial Highlights-Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004		2003		2002		Period Ended 10/31/2001	¹

Net Asset Value, Beginning of Period	$4.84		$3.52		$4.22		$4.33

Income From Investment Operations:

Net investment income (loss)	(0.09	)²	(0.08	)²	(0.07	)^2,3	(0.03	)²

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.31		1.40		(0.27	)³	(0.08	)

TOTAL FROM INVESTMENT OPERATIONS	0.22		1.32		(0.34	)	(0.11	)

Less Distributions:

Distributions from net realized gain on investments, options and foreign currency transactions	(0.04	)	--		(0.36	)	--

Net Asset Value, End of Period	$5.02		$4.84		$3.52		$4.22

Total Return⁴	4.68	%⁵	37.50	%	(9.20	)%	(2.54	)%


Ratios to Average Net Assets:

Expenses	2.50	%	2.50	%	2.47	%	2.47	%⁶

Net investment income (loss)	(1.84	)%	(2.01	)%	(1.77	)%³	(1.45	)%⁶

Expense waiver/reimbursement⁷	0.16	%	0.19	%	0.16	%	0.15	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$993,477		$782,171		$427,175		$68,902

Portfolio turnover	73	%	72	%	65	%	74	%

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1 Reflects operations for the period from April 23, 2001 (date of initial public investment) to October 31, 2001.

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3 Effective November 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended October 31, 2002, this change had no effect on the net investment income (loss) per share, the net realized and unrealized gain (loss) on investments per share, or the ratio of net investment income (loss) to average net assets. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

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5 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on total returns (Note 5).

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6 Computed on an annualized basis.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Financial Highlights-Class C Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004		2003		2002		Period Ended 10/31/2001¹

Net Asset Value, Beginning of Period	$4.84		$3.52		$4.22		$4.33

Income From Investment Operations:
Net investment income (loss)	(0.09	)²	(0.08	)²	(0.07	)^2,3	(0.03	)²
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.31		1.40		(0.27	)³	(0.08	)

TOTAL FROM INVESTMENT OPERATIONS	0.22		1.32		(0.34	)	(0.11	)

Less Distributions:

Distributions from net realized gain on investments, options and foreign currency transactions	(0.04	)	--		(0.36	)	--

Net Asset Value, End of Period	$5.02		$4.84		$3.52		$4.22

Total Return⁴	4.68	%⁵	37.50	%	(9.20	)%	(2.54	)%


Ratios to Average Net Assets:

Expenses	2.50	%	2.50	%	2.47	%	2.47	%⁶

Net investment income (loss)	(1.84	)%	(2.00	)%	(1.77	)%²	(1.45	)%⁶

Expense waiver/reimbursement⁷	0.16	%	0.19	%	0.16	%	0.15	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$554,799		$337,765		$127,714		$16,234

Portfolio turnover	73	%	72	%	65	%	74	%

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1 Reflects operations for the period from April 23, 2001 (date of initial public investment) to October 31, 2001.

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5 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on total returns (Note 5).

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6 Computed on an annualized basis.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC’s Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC’s Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room’s operations and copying fees.

Federated
World-Class Investment Manager

Federated Kaufmann Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com
Contact us at 1-800-341-7400 or
www.federatedinvestors.com/contact

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 (c)Federated Investors, Inc.

Cusip 314172677
Cusip 314172669
Cusip 314172651

26103 (12/04)

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS K SHARES

A mutual fund seeking to provide capital appreciation by investing principally in common stocks.

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		5
What are the Fund’s Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		10
What Do Shares Cost?		12
How is the Fund Sold?		15
How to Purchase Shares		16
How to Redeem and Exchange Shares		18
Account and Share Information		21
Who Manages the Fund?		23
Legal Proceedings		25
Financial Information		26

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?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments, which affect those sectors emphasized by the Fund.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks of Foreign Investing. Because the Fund invests in securities issued by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than could otherwise be the case.
Currency Risks. Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the value of the Shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.

Risk/Return Bar Chart and Table

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The Fund is the successor to The Kaufmann Fund, Inc. (Kaufmann Fund) pursuant to a reorganization that took place effective April 23, 2001. Prior to that date, the Fund had no investment operations. Accordingly, the performance information and financial information provided in this prospectus for periods prior to April 23, 2001, is historical information of the Kaufmann Fund. The Kaufmann Fund was managed by Edgemont Asset Management Corp. and had the same investment objectives and strategies as the Fund and substantially the same investment policies as the Fund. Kaufmann Fund shareholders received Class K Shares of the Fund as a result of the reorganization.

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The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class K Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The Fund’s Class K Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

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The Fund’s Class K Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was (0.20)%.

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Within the period shown in the bar chart, the Fund’s Class K Shares highest quarterly return was 28.22% (quarter ended June 30, 2003). Its lowest quarterly return was (14.04)% (quarter ended September 30, 2002).

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Average Annual Total Return Table

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Return Before Taxes is shown. In addition, Return After Taxes is shown for Class K Shares to illustrate the effect of federal taxes on the Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell Midcap Growth Index (RMGI), a broad-based market index, and the Lipper Mid-Cap Growth Index (LMCGI). Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index.

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(For the periods ended December 31, 2003)

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	1 Year	5 Years	10 Years

Class A Shares:

Return Before Taxes	44.79%	11.38%	13.36%

Return After Taxes on Distributions¹	44.59%	8.45%	11.31%

Return After Taxes on Distributions and Sale of Fund Shares¹	29.36%	8.61%	11.02%

RMGI²	42.71%	2.01%	9.40%

LMCGI³	35.42%	2.18%	8.25%

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1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns are not relevant to investors holding shares through tax-deferred programs, such as IRA or 401(k) plans.

2 Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The index is unmanaged, and unlike the Fund, is not affected by cashflows. Investments cannot be made in an index.

3 Lipper Mid-Cap Growth Index is the composite performance of the 30 largest mid-cap growth mutual funds, as categorized by Lipper, Inc. The index is unmanaged, and unlike the Fund, is not affected by cashflows. Investments cannot be made in an index.

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What are the Fund’s Fees and Expenses?

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FEDERATED KAUFMANN FUND

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FEES AND EXPENSES

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This table describes the fees and expenses that you may pay if you buy and hold Shares of the Class K Shares of the Fund.

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Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)		None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)		None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)		None
Redemption Fee (as a percentage of amount redeemed, if applicable)		0.20%

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		1.425%
Distribution (12b-1) Fee³		0.500%
Shareholder Services Fee		0.250%
Other Expenses⁴		0.247%
Total Annual Fund Operating Expenses		2.422%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor, administrator and transfer agent waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waivers of Fund Expenses		0.472%
Total Actual Annual Fund Operating Expenses (after waivers)		1.950%
2 The adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time, provided it limits the total net expenses of Class K Shares as described above. The management fee paid by the Fund (after the voluntary waiver) was 1.275% for the fiscal year ended October 31, 2004.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund’s Class K Shares (after the voluntary waiver) was 0.183% for the fiscal year ended October 31, 2004.
4 The administrator and transfer agent voluntarily waived a portion of their fees. The administrator and transfer agent can terminate this voluntary waiver at any time. Total other operating expenses paid by the Fund’s Class K Shares (after the voluntary waiver) were 0.242 for the fiscal year ended October 31, 2004.

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EXAMPLE

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This Example is intended to help you compare the cost of investing in the Fund’s Class K Shares with the cost of investing in other mutual funds.

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The Example assumes that you invest $10,000 in the Fund’s Class K 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 K Shares operating expenses are before waivers as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Class K Shares	1 Year	3 Years	5 Years	10 Years

Expenses assuming redemption	$265	$775	$1,312	$2,778

Expenses assuming no redemption	$245	$755	$1,292	$2,758

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What are the Fund’s Investment Strategies?

the growth prospects of existing products and new product development;
the economic outlook of the industry;
the price of the security and its estimated fundamental value; and
relevant market, economic and political environments.

The Fund assesses individual companies from the perspective of a long-term investor. It buys stocks of companies that it believes:

are profitable and leaders in the industry;
have distinct products and services which address substantial markets;
can grow annual earnings by at least 20% for the next three to five years; and
have superior proven management and solid balance sheets.

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HEDGING

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TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Common Stocks

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in, another country;
the principal trading market for its securities is in another country; or
it (or its subsidiaries) derived in its most current fiscal year at least 50% of its total assets, capitalization, gross revenue or profit from goods produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.

ILLIQUID SECURITIES

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FIXED INCOME SECURITIES

Treasury Securities

SPECIAL TRANSACTIONS

Securities Lending

The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.

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 on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay 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 interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

RISKS RELATED TO INVESTING FOR GROWTH

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

LIQUIDITY RISKS

Over-the-counter (OTC) derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

RISKS OF FOREIGN INVESTING

CURRENCY RISKS

CREDIT RISKS

LEVERAGE RISKS

INTEREST RATE RISKS

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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

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	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charge

Shares Offered		Front-End Sales Charge	Contingent Deferred Sales Charge	Redemption/ Exchange Fee

Class K	$1,500/$100	None	None	0.20%

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1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amount for Systematic Investment Programs (SIP) is $50. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund.

FEE WHEN YOU REDEEM OR EXCHANGE

Your redemption or exchange proceeds may be reduced by a redemption/exchange fee. Class K Shares are subject to a 0.20% redemption fee if your Kaufmann Fund (the Fund’s predecessor) Shares were purchased after February 1, 1985 or if you have purchased additional Class K Shares.

The redemption/exchange fee will be waived for shares purchased through employer-sponsored retirement plans, such as 401(k) plans. However, if shares are purchased for a retirement plan account through a broker, financial institution, or other intermediary maintaining an omnibus account for the shares, the waiver may not apply. (Before purchasing shares, please check with your account representative concerning the availability of the fee waiver.) In addition, this waiver does not apply to individual retirement accounts, such as Traditional, Roth and SEP-IRAs.

How is the Fund Sold?

The Fund offers four Share classes: Class A Shares, Class B Shares, Class C Shares and Class K Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Class K Shares. All Share classes have different sales charges and other expenses which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes.

Class K Shares of the Fund are only offered for sale to and may be purchased by former shareholders of the Kaufmann Fund and their immediate family members through the financial intermediary relationships that existed for the Kaufmann Fund and through financial intermediaries investing on behalf of retirement plans where plan level omnibus accounts are held on the books of the Fund. The Kaufmann Fund is the Fund’s predecessor.

When the Fund’s Distributor, Federated Securities Corp., receives marketing fees, it may pay some or all of them to financial intermediaries. 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, administration and customer servicing of the Fund’s Class K 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.

SERVICE FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

How to Purchase Shares

You may purchase Shares directly from the Fund, through certain financial intermediaries or through an exchange from another Federated fund. The Fund reserves the right to reject any request to purchase or exchange Shares.

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 next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH A FINANCIAL INTERMEDIARY

Establish an account with the financial intermediary; and submit your purchase order to the financial intermediary 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 financial intermediary forwards the order to the Fund on the same day and the Fund receives payment within one business day. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Financial intermediaries should send payments according to the instructions in the sections “By Wire” or “By Check”.

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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

EXCHANGE PRIVILEGE

You may exchange Class K Shares into Class A Shares of another Federated fund (subject to the redemption/exchange fee). 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.

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SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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.

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund’s fair valuation procedures are intended in part to discourage short-term trading by reducing the potential for such strategies to succeed. See “What Do Shares Cost?” The Fund monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection of amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

THE FUND’S PORTFOLIO MANAGERS ARE:

Lawrence Auriana

Hans P. Utsch

Jonathan Art

Jonathan Art was named a portfolio manager of the Fund in October 2003.

Mr. Art was an investment analyst with Edgemont Asset Management Corp., adviser to the Kaufmann Fund (predecessor to the Federated Kaufmann Fund) from 1995 to 2001. He has been an investment analyst with the Fund’s current adviser since April 2001. Mr. Art earned a B.E.S. in mathematical sciences from The John Hopkins University and an M.S. in Management from the Massachusetts Institute of Technology.

Mark Bauknight

ADVISORY FEES

Legal Proceedings

The board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

Financial Information

FINANCIAL HIGHLIGHTS

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.

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Financial Highlights–Class K Shares

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(For a Share Outstanding Throughout Each Period)

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	Year Ended 10/31/2004

Net Asset Value, Beginning of Period	$4.90

Income From Investment Operations:

Net investment income (loss)	(0.06	)³

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.31

TOTAL FROM INVESTMENT OPERATIONS	0.25

Less Distributions:

Distributions from net realized gain on investments, options and foreign currency transactions	(0.04	)

Net Asset Value, End of Period	$5.11

Total Return⁵	5.24	%⁶


Ratios to Average Net Assets:

Expenses	1.95	%

Net investment income (loss)	(1.29	)%

Expense waiver/reimbursement⁸	0.47	%

Supplemental Data:

Net assets, end of period (000 omitted)	$3,534,720

Portfolio turnover	73	%

Redemption fees consisted of the following per share amounts⁹	$0.00	¹⁰

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Year Ended October 31,					Period Ended 10/31/2001			Year Ended December 31,

2003			2002			^1,2		2000			1999

$3.54			$4.23		$4.43			$5.95			$5.68


(0.06	)³		(0.05	)^3,4	(0.03	)³		(0.05	)		(0.06	)
1.42			(0.28	)⁴	(0.17	)		0.76			1.32

1.36			(0.33	)	(0.20	)		0.71			1.26


--			(0.36	)	--			(2.23	)		(0.99	)

$4.90			$3.54		$4.23			$4.43			$5.95

38.42	%		(8.92	)%	(4.51	)%		10.86	%		26.01	%




1.95	%		1.95	%	1.95	%⁷		1.89	%		1.95	%

(1.46	)%		(1.25	)%⁴	(0.48	)%⁷		(0.80	)%		(1.19	)%

0.52	%		0.45	%	0.30	%⁷		0.12	%		0.15	%



$3,494,765		$2,603,263			$3,018,540		$3,367,994			$3,475,875

72	%		65	%	74	%		78	%		78	%

$0.00	¹⁰		$0.00	¹⁰	$0.00	¹⁰			--			--

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1 The Fund changed its fiscal year end from December 31 to October 31. Effective January 1, 2004, Federated Equity Management Company of Pennsylvania became the Fund’s investment adviser. Effective April 23, 2001, Federated Investment Management Company served as the Fund’s investment adviser. Prior to April 23, 2001, Edgemont Asset Management Corporation served as the Fund’s investment adviser.

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2 Beginning with the period ended October 31, 2001, the Fund was audited by Ernst & Young LLP. Each of the previous years was audited by other auditors.

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3 Per share numbers have been calculated using 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 results of operations.

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4 Effective November 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended October 31, 2002, this change had no effect on the net investment income (loss) per share, the net realized and unrealized gain (loss) on investments per share, or the ratio of net investment income (loss) to average net assets. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

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5 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

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6 During the period, the Fund was reimbursed by the Adviser, which had an impact of 0.21% on total returns (Note 5).

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7 Computed on an annualized basis.

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

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9 Effective November 1, 2001, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of redemption fees. Periods prior to October 31, 2001 have not been restated to reflect this change.

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10 Represents less than $0.01.

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC’s Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC’s Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room’s operations and copying fees.

Federated
World-Class Investment Manager

Federated Kaufmann Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 ©Federated Investors, Inc.

Cusip 314172644

26104 (12/04)

FEDERATED KAUFMANN FUND
A Portfolio of Federated Equity Funds

Statement of Additional Information

December 31, 2004

Class A Shares
Class B Shares
Class C Shares
Class K Shares

This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in
conjunction with the prospectuses for Class A, Class B, Class C and Class K Shares of
Federated Kaufmann Fund (Fund), dated December 31, 2004.

This SAI incorporates by reference the Fund's Annual Report. Obtain the prospectuses
or the Annual Report without charge by calling 1-800-341-7400.

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Contents
How is the Fund Organized?...............1
Securities in Which the Fund Invests.....1
What Do Shares Cost?.....................9
How is the Fund Sold?...................11
Exchanging Securities for Shares........13
Subaccounting Services..................14
Redemption in Kind......................14
Massachusetts Partnership Law...........14
Account and Share Information...........14
Tax Information.........................15
Who Manages and Provides Services to the
Fund?...................................15
How Does the Fund Measure Performance?..28
Who is Federated Investors, Inc.?.......30
Financial Information...................32
Investment Ratings......................33
Addresses..............................34
Appendix................................36
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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 Fund is the successor to the Kaufmann Fund, Inc. (Kaufmann Fund) pursuant to a
reorganization that took place on or about April 20, 2001. Prior to that date, the
Fund had no investment operations. Accordingly, the performance information and
financial information provided in the prospectus and this SAI for periods prior to
April 20, 2001, is historical information of the Kaufmann Fund. The Kaufmann Fund was
managed by Edgemont Asset Management Corp. (Edgemont) and had the same investment
objectives and strategies as the Fund and substantially the same investment policies
as the Fund. Kaufmann Fund shareholders received Class K Shares of the Fund as a
result of the reorganization.

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The Board of Trustees (the "Board") has established four classes of shares of the
Fund, known as Class A, Class B, Class C and Class K (Shares). This SAI relates to
all classes of Shares. The Fund's investment adviser is Federated Equity Management
Company of Pennsylvania and the Fund's sub-adviser is Federated Global Investment
Management Corp. (collectively, the Adviser). Prior to January 1, 2004, Federated
Investment Management Company was investment adviser to the Fund. Both the current
Adviser and the former Adviser are wholly owned subsidiaries of Federated Investors,
Inc. (Federated).

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:

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SECURITIES DESCRIPTIONS AND TECHNIQUES

Equity Securities
Equity securities represent a share of an issuer's earnings and assets, after the
issuer pays its liabilities. The Fund cannot predict the income it will receive from
equity securities because issuers generally have discretion as to the payment of any
dividends or distributions. 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 may invest.

Common Stocks
Common stocks are the most prevalent type of equity security. Common stocks receive
the issuer's earnings 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
Preferred stocks have the right to receive specified dividends or distributions
before the issuer makes payments on its 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 also treat such redeemable
preferred stock as a fixed income security.

Interests in Other Limited Liability Companies
Entities such as limited partnerships, limited liability companies, business trusts
and companies organized outside the United States may issue securities comparable to
common or preferred stock.

Real Estate Investment Trusts (REITs)
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.

Warrants
Up to 5% of the Fund's assets may be invested in warrants. Warrants give the Fund the
option to buy the issuer's equity securities at a specified price (the exercise
price) at a specified future date (the expiration date). The Fund may buy the
designated securities by paying the exercise price before the expiration date.
Warrants may become worthless if the price of the stock does not rise above the
exercise price by the expiration date. This increases the market risks of warrants as
compared to the underlying security. Rights are the same as warrants, except
companies typically issue rights to existing stockholders.

Convertible Securities
Convertible securities are fixed income securities or preferred stocks 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 that are convertible into shares of common stock at a conversion
price of $10 per share. If the market value of the shares of common stock 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. In
addition, at the time a convertible security is issued the conversion price exceeds
the market value of the underlying equity securities. 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.

Fixed Income Securities
Fixed income securities pay interest, dividends or distributions at a specified rate.
The rate may be a fixed percentage of the principal or adjusted periodically. In
addition, the issuer of a fixed income security must 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. A security's yield will increase or decrease depending upon whether it
costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.

Treasury Securities
Treasury securities are direct obligations of the federal government of the United
States. Treasury securities are generally regarded as having the lowest credit risks.
The Fund may receive Treasury securities as collateral on portfolio securities loans
and may invest in Treasury securities on a short-term basis. The Fund also may invest
in the following types of fixed income securities.

Agency Securities
Agency securities are issued or guaranteed by a federal agency or other government
sponsored entity (GSE) acting under federal authority. Some GSE securities are
supported by the full faith and credit of the United States. These include the
Government National Mortgage Association, Small Business Administration, Farm Credit
System Financial Assistance Corporation, Farmer's Home Administration, Federal
Financing Bank, General Services Administration, Department of Housing and Urban
Development, Export-Import Bank, Overseas Private Investment Corporation, and
Washington Metropolitan Area Transit Authority Bonds.

Other GSE securities receive support through federal subsidies, loans or other
benefits. For example, the U.S. Treasury is authorized to purchase specified amounts
of securities issued by (or otherwise make funds available to) the Federal Home Loan
Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Student Loan Marketing Association, and Tennessee Valley Authority in
support of such obligations.

A few GSE securities have no explicit financial support, but are regarded as having
implied support because the federal government sponsors their activities. These
include the Farm Credit System, Financing Corporation, and Resolution Funding
Corporation.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

A Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency. Although such a guarantee protects against credit
risks, it does not reduce market and prepayment risks.

Corporate Debt Securities
Corporate debt securities are fixed income securities issued by businesses. Notes,
bonds, debentures and commercial paper are the most prevalent types of corporate debt
securities. The Fund may also purchase interests in bank loans to companies. The
credit risks of corporate debt securities vary widely among issuers.

In addition, the credit risk of an issuer's debt security may vary based on its
priority for repayment. For example, higher ranking (senior) debt securities have a
higher priority than lower ranking (subordinated) securities. This means that the
issuer might not make payments on subordinated securities while continuing to make
payments on senior securities. In addition, in the event of bankruptcy, holders of
senior securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust preferred and
capital securities notes, also permit the issuer to defer payments under certain
circumstances. For example, insurance companies issue securities known as surplus
notes that permit the insurance company to defer any payment that would reduce its
capital below regulatory requirements.

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

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

Foreign Securities
Foreign securities are securities of issuers based outside the United States. The
Fund considers an issuer to be based outside the United States if:

o it is organized under the laws of, or has a principal office located in,
another country;

o the principal trading market for its securities is in another country; or

o it (or its subsidiaries) derived in its most current fiscal year at least 50%
of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the
risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing. Trading in
certain foreign markets is also subject to liquidity risks.

Depositary Receipts
Depositary receipts represent interests in underlying securities issued by a foreign
company. Depositary receipts are not traded in the same market as the underlying
security. The foreign securities underlying American Depositary Receipts (ADRs) are
not traded in the United States. ADRs provide a way to buy shares of
foreign-based companies in the United States 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 United States. Depositary receipts involve many of the
same risks of investing directly in foreign securities, including currency risks and
risks of foreign investing.

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. In a spot trade, the Fund
agrees to exchange one currency for another at the current exchange rate. The Fund
may also enter into derivative contracts in which a foreign currency is an underlying
asset. The exchange rate for currency derivative contracts may be higher or lower
than the spot exchange rate. Use of these derivative contracts may increase or
decrease the Fund's exposure to currency risks.

Derivative Contracts
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 the terms of the contract except for the price. Investors
make 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, the Fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same date.
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. Exchanges may limit the
amount of open contracts permitted at any one time. Such limits may prevent the Fund
from closing out a position. 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). 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.

The Fund may also trade derivative contracts 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 the Fund uses derivative contracts 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 interest rate, stock
market, currency and credit risks, and may also expose the Fund to liquidity and
leverage risks. OTC contracts also expose the Fund to credit risks in the event that
a counterparty defaults on the contract.

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

Futures 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 specified price, date, and
time. Entering into a contract to buy an underlying asset is commonly referred to as
buying a contract or holding a long position in the asset. Entering into a contract
to sell an underlying asset is commonly referred to as selling a contract or holding
a short position in the asset. Futures contracts are considered to be commodity
contracts. The Fund has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act and, therefore, is not
subject to registration or regulation as a commodity pool operator under that Act.
Futures contracts traded OTC are frequently referred to as forward contracts. The
Fund can buy or sell financial futures, index futures and foreign currency forward
contracts.

Options
Options are rights to buy or sell an underlying asset or instrument for a specified
price (the exercise price) during, or at the end of, a specified period. The seller
(or 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. Options
can trade on exchanges or in the OTC market and may be bought or sold on a wide
variety of underlying assets or instruments, including financial indices, individual
securities, and other derivative instruments, such as futures contracts. Options that
are written on futures contracts will be subject to margin requirements similar to
those applied to futures contracts.

The Fund may buy/sell the following types of options:

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Call Options
A call option gives the holder (buyer) the right to buy the underlying asset from the
seller (writer) of the option. The Fund may use call options in the following ways:

o Buy call options on indices, individual securities, index futures, currencies
(both foreign and U.S. dollar) and financial futures in anticipation of an
increase in the value of the underlying asset or instrument; and

o Write call options on indices, exchange traded funds, portfolio securities,
index futures, currencies (both foreign and U.S. dollar) and financial 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 the
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.

Put Options
A put option gives the holder the right to sell the underlying asset to the writer of
the option. The Fund may use put options in the following ways:

o Buy put options on indices, individual securities, exchange traded funds, index
futures, currencies (both foreign and U.S. dollar) and financial futures in
anticipation of a decrease in the value of the underlying asset; and

o Write put options on indices, portfolio securities, index futures, currencies
(both foreign and U.S. dollar) and financial 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.

The Fund may also buy or write options, as needed, to close out existing option
positions.

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Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns
derived from underlying assets with differing characteristics. Most swaps do not
involve the delivery of the underlying assets by either party, and the parties might
not own the assets underlying the swap. The payments are usually made on a net basis
so that, on any given day, the Fund would receive (or pay) only the amount by which
its payment under the contract is less than (or exceeds) the amount of the other
party's payment. Swap agreements are sophisticated instruments that can take many
different forms, and are known by a variety of names including caps, floors and
collars. Common swap agreements that the Fund may use include:

Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make regular payments
equal to a fixed or floating interest rate times a stated principal amount of fixed
income securities, in return for payments equal to a different fixed or floating rate
times the same principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange
for the right to receive the equivalent of a stated fixed rate of interest on
$10 million principal amount.

Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make payments
of the total return from the underlying asset during the specified period, in return
for payments equal to a fixed or floating rate of interest or the total return from
another underlying asset.

Credit Default Swaps
A credit default swap is an agreement between two parties (the "Counterparties")
whereby one party (the "Protection Buyer") agrees to make payments over the term of
the CDS to another party (the "Protection Seller"), provided that no designated event
of default (an "Event of Default") occurs on an underlying bond (the "Reference
Bond") has occurred. If an Event of Default occurs, the Protection Seller must pay
the Protection Buyer the full notional value, or "par value," of the Reference Bond
in exchange for the Reference Bond or another similar bond issued by the issuer of
the Reference Bond (the "Deliverable Bond"). The Counterparties agree to the
characteristics of the Deliverable Bond at the time that they enter into the CDS. The
Fund may be either the Protection Buyer or the Protection Seller in a CDS. Under
normal circumstances, the Fund will enter into a CDS for hedging purposes (as
Protection Buyer) or to generate additional income (as Protection Seller). If the
Fund is a Protection Buyer and no Event of Default occurs, the Fund will lose its
entire investment in the CDS (i.e., an amount equal to the payments made to the
Protection Seller). However, if an Event of Default occurs, the Fund (as Protection
Buyer) will deliver the Deliverable Bond and receive a payment equal to the full
notional value of the Reference Bond, even though the Reference Bond may have little
or no value. If the Fund is the Protection Seller and no Event of Default occurs, the
Fund will receive a fixed rate of income throughout the term of the CDS. However, if
an Event of Default occurs, the Fund (as Protection Seller) will pay the Protection
Buyer the full notional value of the Reference Bond and receive the Deliverable Bond
from the Protection Buyer. A CDS may involve greater risks than if the Fund invested
directly in the Reference Bond. For example, a CDS may increase credit risk since the
Fund has exposure to both the issuer of the Reference Bond and the Counterparty to
the CDS.

Currency Swaps
Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amount as well.

Hybrid Instruments
Hybrid instruments combine elements of two different kinds of underlying investments.
Hybrid instruments can take on may forms including, but not limited to, the following
three forms: First, a common form of a hybrid instrument combines elements of
derivative contracts with those of another security (typically a fixed-income
security). In this case all or a portion of the interest or principal payable on a
hybrid security is determined by reference to changes in the price of an underlying
asset or by reference to another benchmark (such as interest rates, currency exchange
rates or indices). Secondly, a hybrid instrument may also combine elements of a
fixed-income security and an equity security. Lastly, hybrid instruments may include
convertible securities with conversion terms related to an underlying asset or
benchmark.

Depending on the type of hybrid instrument the risks of investing in hybrid
instruments may reflect a combination of the risks of investing in securities,
options, futures and currencies. Thus, an investment in a hybrid instrument may
entail significant risks in addition to those associated with traditional
fixed-income, equity or convertible securities. Hybrid instruments are also
potentially more volatile and may carry greater interest rate risks than traditional
instruments. Moreover, depending on the structure of the particular hybrid, it may
expose the Fund to leverage risks or carry liquidity risks.

Special Transactions

Repurchase Agreements
Repurchase agreements are transactions in which the 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 the Fund's return
on the transaction. This return is unrelated to the interest rate on the underlying
security. The Fund will enter into repurchase agreements only with banks and other
recognized financial institutions, such as securities dealers, deemed creditworthy by
the Adviser.

The Fund's custodian or subcustodian will 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 risks.

Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them at an
agreed-upon time and price. A reverse repurchase agreement may be viewed as a type of
borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In
addition, reverse repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the market value
of the security at the time of repurchase.

Delayed Delivery Transactions
Delayed delivery transactions, including when-issued transactions, are arrangements
in which the Fund buys securities for a set price, with payment and delivery of the
securities 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 buy 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 so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed delivery
transactions create interest rate risks for the Fund. Delayed delivery transactions
also involve credit risks in the event of a counterparty default. These transactions
create leverage risks.

Securities Lending
The Fund may lend portfolio securities to borrowers that the Fund's custodian deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the market
value of the loaned securities increases. Also, the borrower must pay the Fund the
equivalent of any dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable
investment for the Fund. However, the Fund must pay interest to the borrower for the
use of cash collateral.

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 on loan, but it will
terminate a loan in anticipation of any important vote. The Fund may pay
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 interest rate risks and credit risks.
These transactions may create leverage risks.

Inter-Fund Borrowing and Lending Arrangements
The Securities and Exchange Commission (SEC) has granted an exemption that permits
the Fund and all other funds advised by subsidiaries of Federated Investors, Inc.
(Federated funds) to lend and borrow money for certain temporary purposes directly to
and from other Federated funds. Participation in this inter-fund lending program is
voluntary for both borrowing and lending funds, and an inter-fund loan is only made
if it benefits each participating fund. Federated Investors, Inc. (Federated)
administers the program according to procedures approved by the Fund's Board, and the
Board monitors the operation of the program. Any inter- fund loan must comply with
certain conditions set out in the exemption, which are designed to assure fairness
and protect all participating funds.

For example, inter-fund lending is permitted only: (a) to meet shareholder redemption
requests; and (b) to meet commitments arising from "failed" trades. All inter-fund
loans must be repaid in seven days or less. The Fund's participation in this program
must be consistent with its investment policies and limitations, and must meet
certain percentage tests. Inter-fund loans may be made only when the rate of interest
to be charged is more attractive to the lending fund than market-competitive rates on
overnight repurchase agreements (Repo Rate) and more attractive to the borrowing fund
than the rate of interest that would be charged by an unaffiliated bank for
short-term borrowings (Bank Loan Rate), as determined by the Board. The interest rate
imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan Rate.

Asset Coverage
In order to secure its obligations in connection with derivatives contracts or
special transactions, the Fund will either own the underlying assets, enter into an
offsetting transaction or set aside readily marketable securities with a value that
equals or exceeds the Fund's obligations. Unless the Fund has other readily
marketable assets to set aside, it cannot trade assets used to secure such
obligations without entering into an offsetting derivative contract or terminating a
special transaction. This may cause the Fund to miss favorable trading opportunities
or to realize losses on derivative contracts or special transactions.

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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. These other investment
companies are managed independently of the Fund and incur additional expenses.
Therefore, any such investment by the Fund may be subject to duplicate expenses.
However, the Adviser believes that the benefits and efficiencies of this approach
should outweigh the additional expenses.

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Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities are securities for which there is no readily available market or
securities with legal or contractual restrictions. These may include private
placements, repurchase agreements maturing in more than seven days, and securities
eligible for resale under Rule 144A of the Securities Act of 1933 ("1933 Act"). Rule
144A allows certain qualified institutional investors to trade privately placed
securities despite the fact that such securities are not registered under the 1933
Act. In deciding whether to purchase such securities, the Fund, acting pursuant to
guidelines approved by the Board, will consider the frequency of such trades and
quotes, the number of dealers and potential purchasers, dealer undertakings to make a
market, the nature of the securities and the marketplace trades.

Borrowing for Leverage
The Fund may borrow from banks for temporary or emergency purposes, clearing
transactions or for other investment purposes. Borrowing to purchase securities is a
speculative practice known as leveraging, which increases stock market risk by
magnifying the effect of any change in the market value of the Fund's portfolio.
Interest paid on any borrowed funds may have the effect of lowering the Fund's
return. In addition, the Fund may have to sell the securities when it would normally
keep them in order to make interest payments.

Short Sales
The Fund may make short sales of securities listed on one or more national exchanges
or on the NASDAQ stock market. A short sale means selling a security the Fund does
not own to take advantage of an anticipated decline in the stock's price. Once the
Fund sells the security short, it has an obligation to replace the borrowed security.
If it can buy the security back at a lower price, a profit results. In no event will
the Fund engage in short sales transactions if it would cause the market value of all
of the Fund's securities sold short to exceed 25% of its net assets. The value of the
securities of any one issuer that may be shorted by the Fund is limited to the lesser
of 2% of the value of the Fund's net assets or 2% of the securities of any class of
the issuer. The Fund may also "sell short against the box," i.e., the Fund owns
securities identical to those sold short. Short sales against the box are not subject
to the 25% limitation. A capital gain is recognized immediately upon entering into a
short sale against the box with respect to an appreciated security. Short sales are
speculative in nature, and may reduce returns or increase volatility.

INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are outlined
below.

Stock Market Risks
o The value of equity securities in the Fund's portfolio will rise and fall.
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.

o The Adviser attempts to manage market risk by limiting the amount the Fund
invests in each company's equity securities. However, diversification will not
protect the Fund against widespread or prolonged declines in the stock market.

Liquidity Risks
o Trading opportunities are more limited for equity securities that are not
widely held. This may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up an
investment opportunity, any of which could have a negative effect on the Fund's
performance. Infrequent trading of securities may also lead to an increase in
their price volatility.

o 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.

o Over-the-counter (OTC) derivative contracts generally carry greater liquidity
risk than exchange-traded contracts.

o Foreign companies may not provide information (including financial statements)
as frequently or to as great an extent as companies in the United States.
Foreign companies may also receive less coverage than U.S. companies by market
analysts and the financial press. In addition, foreign countries may lack
uniform accounting, auditing and financial reporting standards or regulatory
requirements comparable to those applicable to U.S. companies. These factors
may prevent the Fund and its Adviser from obtaining information concerning
foreign companies that is as frequent, extensive and reliable as the
information available concerning companies in the United States.

o Foreign countries may have restrictions on foreign ownership of securities or
may impose exchange controls, capital flow restrictions or repatriation
restrictions which could adversely affect the liquidity of the Fund's
investments.

Currency Risks
o Exchange rates for currencies fluctuate daily. Foreign securities are normally
denominated and traded in foreign currencies. As a result, the value of the
Fund's foreign investments and the value of the shares may be affected
favorably or unfavorably by changes in currency exchange rates relative to the
U.S. dollar.

o The Adviser attempts to limit currency risk by limiting the amount the Fund
invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in the
value of the U.S. dollar relative to other currencies.

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

Credit Risks
o 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 prevent the Fund from selling or buying other
securities to implement its investment strategy.

Interest Rate Risks
o Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.

Risks of Investing in Derivatives Contracts and Hybrid Instruments
o The Fund's use of derivative contracts involves risks different from, or
possibly greater than, the risks associated with investing directly in
securities and other traditional investments. First, changes in the value of
the derivative contracts and hybrid instruments in which the Fund invests may
not be correlated with changes in the value of the underlying asset or if they
are correlated, may move in the opposite direction than originally anticipated.
Second, while some strategies involving derivatives may reduce the risk of
loss, they may also reduce potential gains or, in some cases, result in losses
by offsetting favorable price movements in portfolio holdings. Third, there is
a risk that derivatives contracts and hybrid instruments may be mispriced or
improperly valued and, as a result, the Fund may need to make increased cash
payments to the counterparty. Finally, derivative contracts and hybrid
instruments may cause the Fund to realize increased ordinary income or
short-term capital gains (which are treated as ordinary income for Federal
income tax purposes) and, as a result, may increase taxable distributions to
shareholders. Derivative contracts and hybrid instruments may also involve
other risks described in this prospectus, such as interest rate, credit,
liquidity and leverage risks.

Fundamental Investment Objective
The Fund's investment objective is to provide capital appreciation. The investment
objective may not be changed by the Fund's Board without shareholder approval.

INVESTMENT LIMITATIONS

Diversification
With respect to securities comprising 75% of the value of its total assets, the Fund
will not purchase securities of any one issuer (other than cash; cash items;
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by such
U.S. government securities; and securities of other investment companies) if, as a
result, more than 5% of the value of its total assets would be invested in the
securities of that issuer, or the Fund would own more than 10% of the outstanding
voting securities of that issuer.

Concentration
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry. For
purposes of this restriction, the term concentration has the meaning set forth in the
Investment Company Act of 1940, as amended (1940 Act) any rule or order thereunder,
or any SEC staff interpretation thereof. Government securities and municipal
securities will not be deemed to constitute an industry.

Underwriting
The Fund may not underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the 1933 Act.

Investing in Commodities
The Fund may not purchase or sell physical commodities, provided that the Fund may
purchase securities of companies that deal in commodities. For purposes of this
restriction, investments in transactions involving futures contracts and options,
forward currency contracts, swap transactions and other financial contracts that
settle by payment of cash are not deemed to be investments in commodities.

Investing in Real Estate
The Fund may not purchase or sell real estate, provided that this restriction does
not prevent the Fund from investing in issuers which invest, deal, or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein. The Fund may
exercise its rights under agreements relating to such securities, including the right
to enforce security interests and to hold real estate acquired by reason of such
enforcement until that real estate can be liquidated in an orderly manner.

Borrowing Money and Issuing Senior Securities
The Fund may borrow money, directly or indirectly, and issue senior securities to the
maximum extent permitted under the 1940 Act, any rule or order thereunder, or any SEC
staff interpretation thereof.

Lending
The Fund may not make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, lending its
assets to broker/dealers or institutional investors and investing in loans, including
assignments and participation interests.

The above limitations cannot be changed unless authorized by the Board and by the
"vote of a majority of its outstanding voting securities," as defined by the 1940
Act. The following limitations, however, may be changed by the Board without
shareholder approval. Shareholders will be notified before any material change in
these limitations becomes effective.

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Illiquid Securities
The Fund will not purchase securities for which there is no readily available market,
or enter into repurchase agreements or purchase time deposits that the Fund cannot
dispose of within seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.

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Investing in Other Investment Companies
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and, therefore,
any investment by the Fund in shares of other investment companies may be subject to
such duplicate expenses. At the present time, the Fund expects that its investments
in other investment companies may include shares of money market funds, including
funds affiliated with the Fund's Adviser.

The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.

Purchases on Margin
The Fund will not purchase securities on margin, provided that the Fund may obtain
short-term credits necessary for the clearance of purchases and sales of securities,
and further provided that the Fund may make margin deposits in connection with its
use of financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.

Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided that
this shall not apply to the transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with permissible activities.

For purposes of the above 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 limitation.

DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

o 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;

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

o futures contracts and options are generally valued at 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 generally 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;

o for fixed income securities, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that fixed income
securities with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost; and

o 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.

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 net asset value (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. 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. Such events may affect the value of an
individual portfolio security or in certain cases may affect the values of foreign
securities more broadly. If the Fund determines that such events have significantly
affected the value of portfolio securities, these securities will be valued at their
fair value as determined in accordance with procedures established by and under the
general supervision of the Fund's Board.

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.

Special Redemption and Exchange Information (Class K Shares)
Class K Shares are redeemable at a price equal to 99.8% of the then current NAV per
share. This 0.2% reduction, referred to in the prospectus and this SAI as a
redemption/exchange fee, directly affects the amount a shareholder who is subject to
the reduction receives upon exchange or redemption. It is intended to encourage
long-term investment in the Fund, to offset transaction and other expenses caused by
redemptions, and to facilitate portfolio management. The fee will be applied to
offset expenses incurred or amounts expended in connection with a redemption or
exchange of Class K Shares, with any balance paid over to the Fund; the fee is not a
deferred sales charge, nor is it paid to the Adviser or its affiliates. The Fund
reserves the right to modify the terms of or terminate this fee at any time.

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated Securities
Corp.) 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 pays a portion of this charge to investment professionals that are
eligible to receive it (the "Dealer Reallowance") and retains any remaining portion
of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment
professional may receive a Dealer Reallowance as follows:

Class A Shares
Dealer Reallowance
as a percentage of
Purchase Amount Public Offering Price
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.25%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1 million 1.80%
$1 million or greater 0.00%

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

Class C Shares
Dealer Reallowance
as a Percentage of
Public Offering Price
All Purchase Amounts 1.00%

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

ADVANCE COMMISSIONS
When an investment professional's customer purchases Shares, the investment
professional may receive an advance commission as follows:

Class A Shares (for purchases over $1 million)
Advance Commission
as a Percentage of
Purchase Amount Public Offering Price
First $1 million - $5 0.75%
million
Next $5 million - $20 0.50%
million
Over $20 million 0.25%
Advance commissions are calculated on a year by year basis based on amounts invested
during that year. Accordingly, with respect to additional purchase amounts, the
advance commission breakpoint 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 commission will be paid only on
those purchases that were not previously subject to a front-end sales charge or
dealer advance commission. Certain retirement accounts may not be eligible for this
program.

Advance Commission
as a Percentage of
Class B Shares Public Offering Price
All Purchase Amounts Up to 5.50%
Advance Commission
as a Percentage of
Class C Shares Public Offering Price
All Purchase Amounts 1.00%

RULE 12B-1 PLAN
--------------------------------------------------------------------------------------
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor
for activities principally intended to result in the sale of Shares such as
advertising and marketing of Shares (including printing and distributing prospectuses
and sales literature to prospective shareholders and financial institutions) and
providing incentives to investment professionals to sell Shares. The Plan is also
designed to cover the cost of administrative services performed in conjunction with
the sale of Shares, including, but not limited to, shareholder services,
recordkeeping services and educational services, as well as the costs of implementing
and operating the Plan. The Rule 12b-1 Plan allows the Distributor to contract with
investment professionals to perform activities covered by the Plan. The Rule 12b-1
Plan is expected to benefit the Fund in a number of ways. For example, it is
anticipated that the Plan will help the Fund attract and retain assets, thus
providing cash for orderly portfolio management and Share redemptions and possibly
helping to stabilize or reduce other operating expenses. In addition, the Plan is
integral to the multiple class structure of the Fund, which promotes the sale of
Shares by providing a range of options to investors. 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 provided
the funds to make advance commission payments to investment professionals.

Additional Payments to Financial Institutions
The Distributor may pay out of its own resources amounts (including items of material
value) to certain financial institutions. In some cases, such payments may be made
by, or funded from the resources of, companies affiliated with the Distributor
(including the Adviser). While NASD regulations limit the sales charges that you may
bear, there are no limits with regard to the amounts that the Distributor may pay out
of its own resources. In addition to the payments which are generally described
herein and in the prospectus, the financial institution also may receive payments
under the Rule 12b-1 Plan and/or Service Fees.

You can ask your financial institution for information about any payments it receives
from the Distributor or the Federated funds and any services provided.

The following examples illustrate the types of instances in which the Distributor may
make additional payments to financial institutions.

Supplemental Payments
The Distributor may make supplemental payments to certain financial institutions that
are holders or dealers of record for accounts in one or more of the Federated funds.
These payments may be based on such factors as the number or value of Shares the
financial institution sells or may sell; the value of client assets invested; or the
type and nature of services or support furnished by the financial institution.

Processing Support Payments
The Distributor may make payments to financial institutions that sell Federated fund
shares to help offset their costs associated with client account maintenance support,
statement processing and transaction processing. The types of payments that the
Distributor may make under this category include payment of ticket charges on a per
transaction basis; payment of networking fees; and payment for ancillary services
such as setting up funds on the financial institution's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial institutions who sell
Federated fund shares through retirement plan programs. A financial institution may
perform retirement plan program services itself or may arrange with a third party to
perform retirement plan program services. In addition to participant recordkeeping,
reporting, or transaction processing, retirement plan program services may include
services rendered to a plan in connection with fund/investment selection and
monitoring; employee enrollment and education; plan balance rollover or separation,
or other similar services.

Other Benefits to Financial Institutions
From time to time, the Distributor, at its expense, may provide additional
compensation to financial institutions that sell or arrange for the sale of Shares.
Such compensation may include financial assistance to financial institutions that
enable the Distributor to participate in or present at conferences or seminars, sales
or training programs for invited employees, client and investor events and other
financial institution-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events, conferences
and programs for employees or associated persons of financial institutions and may
pay the travel and lodging expenses of attendees. The Distributor also may provide,
at its expense, meals and entertainment in conjunction with meetings with financial
institutions. Other compensation may be offered to the extent not prohibited by
applicable laws, regulations or the rules of any self-regulatory agency, such as the
NASD.

<R>

UNDERWRITING COMMISSIONS
The following chart reflects the total front-end sales charges and contingent
deferred sales charges paid in connection with the sale of Class A, Class B, Class C
and Class K Shares of the Fund and the amount retained by the Distributor for the
last three fiscal years ended October 31, 2004:

2004 2003 2002
Total Sales Amount Total Sales Amount Total Sales Amount
------------- --------------- ------------- ------------ --------------- -------------
Charges Retained Charges Retained Charges Retained
Class A Shares $1,343,5912.11 $1,344,642.69 $6,218,171.17 $615,193.97 $4,727,128.49 $494,819.82
Class B Shares $2,364,018.67 $0 $1,878,269.52 $0 $28,834,654.07 $0
Class C Shares $1,052,877.21 $84,173.83 $780,793.79 $41,532.16 $1,986,089.52 $996,454.76
Class K Shares $0 $0 $0 $0 $0 $0

</R>
--------------------------------------------------------------------------------------

EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in 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

Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act, 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.

<R>

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class A Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 58,528,313 Shares (15.74%); MLPF&S for the sole
benefit of its customers, Jacksonville, FL, owned approximately 21,222,050 Shares
(5.71%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class B Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 10,968,111 Shares (5.24%); Citigroup Global Markets
Inc., House Account, New York, NY, owned approximately 14,068,626 Shares (6.72%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class C Shares: Citigroup Global Markets Inc., House
Account, New York, NY, owned approximately 16,247,977 Shares (13.63%); Legg Mason
Wood Walker Inc., special custody account for the exclusive benefit of customers,
Baltimore, MD, owned approximately 7.03%); MLPF&S for the sole benefit of its
customers, Jacksonville, FL, owned approximately 27,703,874 Shares (23.24%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class K Shares: Charles Schwab & Co. Inc., San
Francisco, CA, owned approximately 90,793,442 Shares (12.50%); National Financial
Services for the exclusive benefit of our customers, owned approximately 53,476,346
Shares (7.36%).

</R>

TAX INFORMATION

<R>

FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code
(Code) applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will be subject to federal
corporate income tax.

</R>

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 income generated by the securities in the
portfolio, whereas tax-basis income includes, in addition, 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 will qualify for
certain Code provisions that allow its 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. The following
tables give information about each Board member and the senior officers of the
Fund[s]. Where required, the tables separately list Board members who are "interested
persons" of the Fund (i.e., "Interested" Board members) and those who are not (i.e.,
"Independent" Board members). Unless otherwise noted, the address of each person
listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA. The Trust
comprises seven portfolios and the Federated Fund Complex consists of 44 investment
companies (comprising 136 portfolios). Unless otherwise noted, each Officer is
elected annually. Unless otherwise noted, each Board member oversees all portfolios
in the Federated Fund Complex and serves for an indefinite term.

<R>

As of December 2, 2004, the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Class A, B, C and K Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

Name
Birth Date Aggregate Total
Address Principal Occupation(s) for Past Compensation Compensation
Positions Held with Five Years, Other Directorships From Trust From Trust and
Trust Held and Previous Position(s) (past Federated Fund
Date Service Began fiscal year) Complex (past
calendar year)
Principal Occupations: Chairman $0 $0
John F. Donahue* and Director or Trustee of the
Birth Date: July Federated Fund Complex; Chairman
28, 1924 and Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.
Began serving:
April 1984 Previous Positions: Trustee,
Federated Investment Management
Company and Chairman and
Director, Federated Investment
Counseling.

Principal Occupations: Director $3,798.04 $148,500
Lawrence D. Ellis, or Trustee of the Federated Fund
M.D.* Complex; Professor of Medicine,
Birth Date: October University of Pittsburgh;
11, 1932 Medical Director, University of
3471 Fifth Avenue Pittsburgh Medical Center
Suite 1111 Downtown; Hematologist,
Pittsburgh, PA Oncologist and Internist,
TRUSTEE University of Pittsburgh Medical
Began serving: Center.
August 1987
Other Directorships Held:
Member, National Board of
Trustees, Leukemia Society of
America.

Previous Positions: Trustee,
University of Pittsburgh;
Director, University of
Pittsburgh Medical Center.

* Family relationships and reasons for "interested" status: John F. Donahue is the
father of J. Christopher Donahue; both are "interested" due to the positions they
hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is "interested"
because his son-in-law is employed by the Fund's principal underwriter, Federated
Securities Corp.
--------------------------------------------------------------------------------------

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION

Name
Birth Date Aggregate Total
Address Principal Occupation(s) for Past Compensation Compensation
Positions Held with Five Years, Other Directorships From Trust From Trust and
Trust Held and Previous Position(s) (past Federated Fund
Date Service Began fiscal year) Complex (past
calendar year)
Principal Occupation: Director $4,177.84 $163,350
Thomas G. Bigley or Trustee of the Federated Fund
Birth Date: Complex.
February 3, 1934
15 Old Timber Trail Other Directorships Held:
Pittsburgh, PA Director, Member of Executive
TRUSTEE Committee, Children's Hospital
Began serving: of Pittsburgh; Director,
October 1995 University of Pittsburgh.

Previous Position: Senior
Partner, Ernst & Young LLP.

Principal Occupations: Director $4,177.84 $163,350
John T. Conroy, Jr. or Trustee of the Federated Fund
Birth Date: June Complex; Chairman of the Board,
23, 1937 Investment Properties
Investment Corporation; Partner or Trustee
Properties in private real estate ventures
Corporation in Southwest Florida.
3838 North Tamiami
Trail Previous Positions: President,
Suite 402 Investment Properties
Naples, FL Corporation; Senior Vice
TRUSTEE President, John R. Wood and
Began serving: Associates, Inc., Realtors;
November 1991 President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Principal Occupation: Director $4,177.84 $163,350
Nicholas P. or Trustee of the Federated Fund
Constantakis Complex.
Birth Date:
September 3, 1939 Other Directorships Held:
175 Woodshire Drive Director and Member of the Audit
Pittsburgh, PA Committee, Michael Baker
TRUSTEE Corporation (engineering and
Began serving: energy services worldwide).
February 1998
Previous Position: Partner,
Anderson Worldwide SC.

Principal Occupation: Director $3,798.04 $148,500
John F. Cunningham or Trustee of the Federated Fund
Birth Date: March Complex.
5, 1943
353 El Brillo Way Other Directorships Held:
Palm Beach, FL Chairman, President and Chief
TRUSTEE Executive Officer, Cunningham
Began serving: & Co., Inc. (strategic
January 1999 business consulting); Trustee
Associate, Boston College.

Principal Occupation: Director $3,798.04 $148,500
Peter E. Madden or Trustee of the Federated Fund
Birth Date: March Complex; Management Consultant.
16, 1942
One Royal Palm Way Other Directorships Held: Board
100 Royal Palm Way of Overseers, Babson College.
Palm Beach, FL
TRUSTEE Previous Positions:
Began serving: Representative, Commonwealth of
November 1991 Massachusetts General Court;
President, State Street Bank and
Trust Company and State Street
Corporation (retired); Director,
VISA USA and VISA International;
Chairman and Director,
Massachusetts Bankers
Association; Director,
Depository Trust Corporation;
Director, The Boston Stock
Exchange.

Principal Occupations: Director $4,177.84 $163,350
Charles F. or Trustee of the Federated Fund
Mansfield, Jr. Complex; Management Consultant;
Birth Date: April Executive Vice President, DVC
10, 1945 Group, Inc. (marketing,
80 South Road communications and technology)
Westhampton Beach, (prior to 9/1/00).
NY
TRUSTEE Previous Positions: Chief
Began serving: Executive Officer, PBTC
January 1999 International Bank; Partner,
Arthur Young & Company (now
Ernst & Young LLP); Chief
Financial Officer of Retail
Banking Sector, Chase Manhattan
Bank; Senior Vice President,
HSBC Bank USA (formerly, Marine
Midland Bank); Vice President,
Citibank; Assistant Professor of
Banking and Finance, Frank G.
Zarb School of Business, Hofstra
University.

Principal Occupations: Director $4,557.63 $178,200
John E. Murray, or Trustee of the Federated Fund
Jr., J.D., S.J.D. Complex; Chancellor and Law
Birth Date: Professor, Duquesne University;
December 20, 1932 Partner, Murray, Hogue &
Chancellor, Lannis.
Duquesne University
Pittsburgh, PA Other Directorships Held:
TRUSTEE Director, Michael Baker Corp.
Began serving: (engineering, construction,
February 1995 operations and technical
services).

Previous Positions: President,
Duquesne University; Dean and
Professor of Law, University of
Pittsburgh School of Law; Dean
and Professor of Law, Villanova
University School of Law.

Principal Occupations: Director $3,798.04 $148,500
Marjorie P. Smuts or Trustee of the Federated Fund
Birth Date: June Complex; Public
21, 1935 Relations/Marketing
4905 Bayard Street Consultant/Conference
Pittsburgh, PA Coordinator.
TRUSTEE
Began serving: Previous Positions: National
April 1984 Spokesperson, Aluminum Company
of America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

Principal Occupations: Director $3,798.04 $148,500
John S. Walsh or Trustee of the Federated Fund
Birth Date: Complex; President and Director,
November 28, 1957 Heat Wagon, Inc. (manufacturer
2604 William Drive of construction temporary
Valparaiso, IN heaters); President and
TRUSTEE Director, Manufacturers
Began serving: Products, Inc. (distributor of
January 1999 portable construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products, Inc.

Previous Position: Vice
President, Walsh & Kelly,
Inc.

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

OFFICERS**

Name
Birth Date
Address
Positions Held with Trust
----------------------------- Principal Occupation(s) and Previous Position(s)
Date Service Began
Principal Occupations: Executive Vice President
John W. McGonigle and Secretary of the Federated Fund Complex;
Birth Date: October 26, 1938 Executive Vice President, Secretary and Director,
EXECUTIVE VICE PRESIDENT AND Federated Investors, Inc.
SECRETARY
Began serving: April 1984 Previous Positions: Trustee, Federated Investment
Management Company and Federated Investment
Counseling; Director, Federated Global Investment
Management Corp., Federated Services Company and
Federated Securities Corp.

Principal Occupations: Principal Financial
Richard J. Thomas Officer and Treasurer of the Federated Fund
Birth Date: June 17, 1954 Complex; Senior Vice President, Federated
TREASURER Administrative Services.
Began serving: November 1998
Previous Positions: Vice President, Federated
Administrative Services; held various management
positions within Funds Financial Services
Division of Federated Investors, Inc.

Principal Occupations: Vice Chairman or Vice
Richard B. Fisher President of some of the Funds in the Federated
Birth Date: May 17, 1923 Fund Complex; Vice Chairman, Federated Investors,
VICE PRESIDENT Inc.; Chairman, Federated Securities Corp.
Began serving: April 1984
Previous Positions: President and Director or
Trustee of some of the Funds in the Federated
Fund Complex; Executive Vice President, Federated
Investors, Inc. and Director and Chief Executive
Officer, Federated Securities Corp.

Principal Occupations: Chief Investment Officer
Stephen F. Auth of this Fund and various other Funds in the
Birth Date: September 3, 1956 Federated Fund Complex; Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment Counseling, Federated Global
Began serving: November 2002 Investment Management Corp., Federated Equity
Management Company of Pennsylvania and Passport
Research II, Ltd.

Previous Positions: Executive Vice President,
Federated Investment Management Company, and
Passport Research, Ltd.; Senior Vice President,
Global Portfolio Management Services Division;
Senior Vice President, Federated Investment
Management Company and Passport Research, Ltd.;
Senior Managing Director and Portfolio Manager,
Prudential Investments.

Lawrence Auriana has been the Fund's Portfolio
Lawrence Auriana Manager since February 1986. He is Vice
Birth Date: January 8, 1944 President of the Trust. Mr. Auriana joined
VICE PRESIDENT Federated in April 2001 as Co-Head of
Began serving: November 2001 Investments/Federated Kaufmann. From August 1984
to April 2001, Mr. Auriana was President and
Treasurer of Edgemont Asset Management Corp., and
Chairman of the Board and Portfolio Manager to
The Kaufmann Fund, Inc. (predecessor to the
Federated Kaufmann Fund). Mr. Auriana earned a
B.S. in economics from Fordham University and has
been engaged in the securities business since
1965.
-----------------------------------------------------

James E. Grefenstette is Vice President of the
James E. Grefenstette Trust. Mr. Grefenstette joined Federated in 1992
Birth Date: November 7, 1962 and has been a Portfolio Manager since 1994. Mr.
VICE PRESIDENT Grefenstette became a Senior Vice President of
Began serving: November 1998 the Fund's Adviser in January 2000. He served as
a Vice President of the Fund's Adviser from 1996
through 1999 and was an Assistant Vice President
of the Fund's Adviser from 1994 until 1996. Mr.
Grefenstette is a Chartered Financial Analyst; he
received his M.S. in Industrial Administration
from Carnegie Mellon University.

Hans P. Utsch has been the Fund's Portfolio
Hans P. Utsch Manager since February 1986. He is Vice President
Birth Date: July 3, 1936 of the Trust. Mr. Utsch joined Federated in April
VICE PRESIDENT 2001 as Co-Head of Investments/Federated
Began serving: November 2001 Kaufmann. From August 1984 to April 2001, Mr.
Utsch was Chairman of the Board and Secretary of
Edgemont Asset Management Corp., and President
and Portfolio Manager to The Kaufmann Fund, Inc.
(predecessor to the Federated Kaufmann Fund).
Mr. Utsch graduated from Amherst College and
holds an M.B.A. from Columbia University. He has
been engaged in the securities business since
1962.

** Officers do not receive any compensation from the Fund.
--------------------------------------------------------------------------------------

COMMITTEES OF THE BOARD
Meetings
Board Committee Held
Committee Members Committee Functions During
Last
Fiscal
Year
Executive In between meetings of the full Board, Six
John F. Donahue the Executive Committee generally may
John E. Murray, exercise all the powers of the full Board
Jr., J.D., S.J.D. in the management and direction of the
business and conduct of the affairs of
the Trust in such manner as the Executive
Committee shall deem to be in the best
interests of the Trust. However, the
Executive Committee cannot elect or
remove Board members, increase or
decrease the number of Trustees, elect or
remove any Officer, declare dividends,
issue shares or recommend to shareholders
any action requiring shareholder approval.

Audit The purposes of the Audit Committee are Seven
Thomas G. Bigley to oversee the accounting and financial
John T. Conroy, reporting process of the Fund, the Fund`s
Jr. internal control over financial
Nicholas P. reporting, and the quality, integrity and
Constantakis independent audit of the Fund`s financial
Charles F. statements. The Committee also oversees
Mansfield, Jr. or assists the Board with the oversight
of compliance with legal requirements
relating to those matters, approves the
engagement and reviews the
qualifications, independence and
performance of the Fund`s independent
auditors, acts as a liaison between the
independent auditors and the Board and
reviews the Fund`s internal audit
function.

Nominating One
Thomas G. Bigley The Nominating Committee, whose members
John T. Conroy, consist of all Independent Trustees,
Jr. selects and nominates persons for
Nicholas P. election to the Fund`s Board when
Constantakis vacancies occur. The Committee will
John F. consider candidates recommended by
Cunningham shareholders, Independent Trustees,
Peter E. Madden officers or employees of any of the
Charles F. Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who
John E. Murray, desires to have an individual considered
Jr. for nomination by the Committee must
Marjorie P. Smuts submit a recommendation in writing to the
John S. Walsh Secretary of the Fund, at the Fund's
address appearing on the back cover of
this Statement of Additional Information.
The recommendation should include the
name and address of both the shareholder
and the candidate and detailed
information concerning the candidate's
qualifications and experience. In
identifying and evaluating candidates for
consideration, the Committee shall
consider such factors as it deems
appropriate. Those factors will
ordinarily include: integrity,
intelligence, collegiality, judgment,
diversity, skill, business and other
experience, qualification as an
"Independent Trustee," the existence of
material relationships which may create
the appearance of a lack of independence,
financial or accounting knowledge and
experience, and dedication and
willingness to devote the time and
attention necessary to fulfill Board
responsibilities.

</R>
--------------------------------------------------------------------------------------

Board ownership of shares in the fund and in the Federated family of Investment
companies AS OF DECEMBER 31, 2003
Aggregate
Dollar Range of
-------------------------------------------- Dollar Range of Shares Owned in
Shares Owned Federated Family of
Interested in Fund Investment Companies
Board Member Name
John F. Donahue Over $100,000 Over $100,000
J. Christopher Donahue Over $100,000 Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

Independent
Board Member Name
Thomas G. Bigley $10,001-$50,000 Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis $10,001-$50,000 Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, Jr. None $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Marjorie P. Smuts $10,001-$50,000 Over $100,000
John S. Walsh $10,001-$50,000 Over $100,000

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

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 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.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory contract and subadvisory contracts. The Board's decision to approve these
contracts reflects the exercise of its business judgment on whether to continue the
existing arrangements. During its review of these contracts, the Board considers
many factors, among the most material of which are: the Fund's investment objectives
and long term performance; the Adviser's and subadviser's management philosophy,
personnel and processes; the preferences and expectations of Fund shareholders and
their relative sophistication; the continuing state of competition in the mutual fund
industry; comparable fees in the mutual fund industry; the range and quality of
services provided to the Fund and its shareholders by the Federated organization in
addition to investment advisory services; and the Fund's relationship to the
Federated funds.

In assessing the Adviser's and subadviser's performance of its obligations, the Board
also considers whether there has occurred a circumstance or event that would
constitute a reason for it to not renew an advisory contract. In this regard, the
Board is mindful of the potential disruptions of the Fund's operations and various
risks, uncertainties and other effects that could occur as a result of a decision to
terminate or not renew an advisory contract. In particular, the Board recognizes
that most shareholders have invested in the Fund on the strength of the Adviser's
industry standing and reputation and in the expectation that the Adviser will have a
continuing role in providing advisory services to the Fund.

The Board also considers the compensation and benefits received by the Adviser and
subadviser. This includes fees received for services provided to the Fund by other
entities in the Federated organization and research services received by the Adviser
from brokers that execute fund trades, as well as advisory fees. In this regard, the
Board is aware that various courts have interpreted provisions of the 1940 Act and
have indicated in their decisions that the following factors may be relevant to an
Adviser's compensation: the nature and quality of the services provided by the
Adviser, including the performance of the Fund; the Adviser's cost of providing the
services; the extent to which the Adviser may realize "economies of scale" as the
Fund grows larger; any indirect benefits that may accrue to the Adviser and its
affiliates as a result of the Adviser's relationship with the Fund; performance and
expenses of comparable funds; and the extent to which the independent Board members
are fully informed about all facts bearing on the Adviser's service and fee. The
Fund's Board is aware of these factors and takes them into account in its review of
the Fund's advisory contract.

The Board considers and weighs these circumstances in light of its substantial
accumulated experience in governing the Fund and working with Federated on matters
relating to the Federated funds, and is assisted in its deliberations by the advice
of independent legal counsel. In this regard, the Board requests and receives a
significant amount of information about the Fund and the Federated organization.
Federated provides much of this information at each regular meeting of the Board, and
furnishes additional reports in connection with the particular meeting at which the
Board's formal review of the advisory contracts occurs. In between regularly
scheduled meetings, the Board may receive information on particular matters as the
need arises. Thus, the Board's evaluation of an advisory contract is informed by
reports covering such matters as: the Adviser's investment philosophy, personnel, and
processes; the Fund's short- and long-term performance (in absolute terms as well as
in relationship to its particular investment program and certain competitor or "peer
group" funds), and comments on the reasons for performance; the Fund's expenses
(including the advisory fee itself and the overall expense structure of the Fund,
both in absolute terms and relative to similar and/or competing funds, with due
regard for contractual or voluntary expense limitations); the use and allocation of
brokerage commissions derived from trading the Fund's portfolio securities; the
nature and extent of the advisory and other services provided to the Fund by the
Adviser and its affiliates; compliance and audit reports concerning the Federated
funds and the Federated companies that service them; and relevant developments in the
mutual fund industry and how the Federated funds and/or Federated are responding to
them.

The Board also receives financial information about Federated, including reports on
the compensation and benefits Federated derives from its relationships with the
Federated funds. These reports cover not only the fees under the advisory contracts,
but also fees received by Federated's subsidiaries for providing other services to
the Federated funds under separate contracts (e.g., for serving as the Federated
funds' administrator). The reports also discuss any indirect benefit Federated may
derive from its receipt of research services from brokers who execute Federated fund
trades.

The Board bases its decision to approve an advisory contract on the totality of the
circumstances and relevant factors, and with a view to past and future long-term
considerations. Not all of the factors and considerations identified above are
relevant to every Federated fund, nor does the Board consider any one of them to be
determinative. Because the totality of circumstances includes considering the
relationship of each Federated fund, the Board does not approach consideration of
every Federated fund's advisory contract as if that were the only Federated fund.

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.

<R>

Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted
codes of ethics. These codes govern securities trading activities of investment
personnel, Fund Trustees, and certain other employees. Although they do permit these
people to trade in securities, including those that the Fund could buy, as well as
Shares of the Fund, they also contain significant safeguards designed to protect the
Fund and its shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.

</R>

Voting Proxies on Fund Portfolio Securities
The Board has delegated to the Adviser authority to vote proxies on the securities
held in the Fund's portfolio. The Board has also approved the Adviser's policies and
procedures for voting the proxies, which are described below.

Proxy Voting Policies
The Adviser's general policy is to cast proxy votes in favor of proposals that the
Adviser anticipates will enhance the long-term value of the securities being voted.
Generally, this will mean voting for proposals that the Adviser believes will:
improve the management of a company; increase the rights or preferences of the voted
securities; and/or increase the chance that a premium offer would be made for the
company or for the voted securities.

The following examples illustrate how these general policies may apply to proposals
submitted by a company's board of directors. However, whether the Adviser supports
or opposes a proposal will always depend on the specific circumstances described in
the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for proposals to:
require independent tabulation of proxies and/or confidential voting by shareholders;
reorganize in another jurisdiction (unless it would reduce the rights or preferences
of the securities being voted); and repeal a shareholder rights plan (also known as a
"poison pill"). The Adviser will generally vote against the adoption of such a plan
(unless the plan is designed to facilitate, rather than prevent, unsolicited offers
for the company).

On matters of capital structure, generally the Adviser will vote: against proposals
to authorize or issue shares that are senior in priority or voting rights to the
securities being voted; for proposals to grant preemptive rights to the securities
being voted; and against proposals to eliminate such preemptive rights.

On matters relating to management compensation, generally the Adviser will vote: for
stock incentive plans that align the recipients' interests with the interests of
shareholders without creating undue dilution; and against proposals that would permit
the amendment or replacement of outstanding stock incentives with new stock
incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies relating
to proposed mergers, capital reorganizations, and similar transactions in accordance
with the general policy, based upon its analysis of the proposed transaction. The
Adviser will vote proxies in contested elections of directors in accordance with the
general policy, based upon its analysis of the opposing slates and their respective
proposed business strategies. Some transactions may also involve proposed changes to
the company's corporate governance, capital structure or management compensation.
The Adviser will vote on such changes based on its evaluation of the proposed
transaction or contested election. In these circumstances, the Adviser may vote in a
manner contrary to the general practice for similar proposals made outside the
context of such a proposed transaction or change in the board. For example, if the
Adviser decides to vote against a proposed transaction, it may vote for anti-takeover
measures reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without the
favorable recommendation of a company's board. The Adviser believes that a company's
board should manage its business and policies, and that shareholders who seek
specific changes should strive to convince the board of their merits or seek direct
representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting. For example, if a foreign market
requires shareholders casting proxies to retain the voted shares until the meeting
date (thereby rendering the shares "illiquid" for some period of time), the Adviser
will not vote proxies for such shares.

Proxy Voting Procedures
The Adviser has established a Proxy Voting Committee (Proxy Committee), to exercise
all voting discretion granted to the Adviser by the Board in accordance with the
proxy voting policies. The Adviser has hired Investor Responsibility Research Center
(IRRC) to obtain, vote, and record proxies in accordance with the Proxy Committee's
directions. The Proxy Committee directs IRRC by means of Proxy Voting Guidelines,
and IRRC may vote any proxy as directed in the Proxy Voting Guidelines without
further direction from the Proxy Committee (and may make any determinations required
to implement the Proxy Voting Guidelines). However, if the Proxy Voting Guidelines
require case-by-case direction for a proposal, IRRC will provide the Proxy Committee
with all information that it has obtained regarding the proposal and the Proxy
Committee will provide specific direction to IRRC. The Adviser's proxy voting
procedures generally permit the Proxy Committee to amend the Proxy Voting Guidelines,
or override the directions provided in such Guidelines, whenever necessary to comply
with the proxy voting policies.

Conflicts of Interest
The Adviser has adopted procedures to address situations where a matter on which a
proxy is sought may present a potential conflict between the interests of the Fund
(and its shareholders) and those of the Adviser or Distributor. This may occur where
a significant business relationship exists between the Adviser (or its affiliates)
and a company involved with a proxy vote. A company that is a proponent, opponent,
or the subject of a proxy vote, and which to the knowledge of the Proxy Committee has
this type of significant business relationship, is referred to as an "Interested
Company."

The Adviser has implemented the following procedures in order to avoid concerns that
the conflicting interests of the Adviser have influenced proxy votes. Any employee
of the Adviser who is contacted by an Interested Company regarding proxies to be
voted by the Adviser must refer the Interested Company to a member of the Proxy
Committee, and must inform the Interested Company that the Proxy Committee has
exclusive authority to determine how the Adviser will vote. Any Proxy Committee
member contacted by an Interested Company must report it to the full Proxy Committee
and provide a written summary of the communication. Under no circumstances will the
Proxy Committee or any member of the Proxy Committee make a commitment to an
Interested Company regarding the voting of proxies or disclose to an Interested
Company how the Proxy Committee has directed such proxies to be voted. If the Proxy
Voting Guidelines already provide specific direction on the proposal in question, the
Proxy Committee shall not alter or amend such directions. If the Proxy Voting
Guidelines require the Proxy Committee to provide further direction, the Proxy
Committee shall do so in accordance with the proxy voting policies, without regard
for the interests of the Adviser with respect to the Interested Company. If the
Proxy Committee provides any direction as to the voting of proxies relating to a
proposal affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and why,
the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or an
affiliate) acts as an investment adviser, the Proxy Committee will vote the Fund's
proxies in the same proportion as the votes cast by shareholders who are not clients
of the Adviser at any shareholders' meeting called by such investment company, unless
otherwise directed by the Board.

<R>
Proxy Voting Report
A report on "Form N-PX" of how the Fund voted any proxies during the most recent
12-month period ended June 30 is available through Federated's website. Go to
www.federatedinvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX.

PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund's portfolio holdings is available in the "Products"
section of the Federated Investors website at www.federatedinvestors.com. A complete
listing of the Fund's portfolio holdings as of the end of each calendar quarter is
posted on the website 30 days (or the next business day) after the end of the quarter
and remains posted until replaced by the information for the succeeding quarter.
Summary portfolio composition information as of the close of each month (except for
recent purchase and sale transaction information, which is updated quarterly) is
posted on the website 15 days (or the next business day) after month-end and remains
until replaced by the information for the succeeding month. The summary portfolio
composition information may include identification of the Fund's top ten holdings,
recent purchase and sale transactions and a percentage breakdown of the portfolio by
sector. To access this information from the "Products" section of the website, click
on "Portfolio Holdings" and select the appropriate link opposite the name of the
Fund, or select the name of the Fund from the menus on the "Products" section, and
from the Fund's page click on the "Portfolio Holdings" or "Composition" link. A user
is required to register on the website the first time the user accesses this
information.

You may also access from the "Products" section of the website portfolio information
as of the end of the Funds' fiscal quarters. The Fund's annual and semiannual
reports, which contain complete listings of the Fund's portfolio holdings as of the
end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the
name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the
link to the appropriate PDF. Complete listings of the Fund's portfolio holdings as
of the end of the Fund's first and third fiscal quarters may be accessed by selecting
"Portfolio Holdings" from the "Products" section and then selecting the appropriate
link opposite the name of the Fund. Fiscal quarter information is made available on
the website within 70 days after the end of the fiscal quarter. This information is
also available in reports filed with the SEC at the SEC's website at www.sec.gov.

The disclosure policy of the Fund and the Adviser prohibits the disclosure of
portfolio holdings information to any investor or intermediary before the same
information is made available to other investors. Employees of the Adviser or its
affiliates who have access to nonpublic information concerning the Fund's portfolio
holdings are prohibited from trading securities on the basis of this information.
Such persons must report all personal securities trades and obtain pre-clearance for
all personal securities trades other than mutual fund shares.

Firms that provide administrative, custody, financial, accounting, legal or other
services to the Fund may receive nonpublic information about Fund portfolio holdings
for purposes relating to their services. The Fund may also provide portfolio
holdings information to publications that rate, rank or otherwise categorize
investment companies. Traders or portfolio managers may provide "interest" lists to
facilitate portfolio trading if the list reflects only that subset of the portfolio
for which the trader or portfolio manager is seeking market interest. A list of
service providers, publications and other third parties who may receive nonpublic
portfolio holdings information appears in the Appendix to this SAI.

The furnishing of nonpublic portfolio holdings information to any third party (other
than authorized governmental or regulatory personnel) requires the prior approval of
the President of the Adviser and of the Chief Compliance Officer of the Fund. The
President of the Adviser and the Chief Compliance Officer will approve the furnishing
of nonpublic portfolio holdings information to a third party only if they consider
the furnishing of such information to be in the best interests of the Fund and its
shareholders. In that regard, and to address possible conflicts between the interests
of Fund shareholders and those of the Adviser and its affiliates, the following
procedures apply. No consideration may be received by the Fund, the Adviser, any
affiliate of the Adviser or any of their employees in connection with the disclosure
of portfolio holdings information. Before information is furnished, the third party
must sign a written agreement that it will safeguard the confidentiality of the
information, will use it only for the purposes for which it is furnished and will not
use it in connection with the trading of any security. Persons approved to receive
nonpublic portfolio holdings information will receive it as often as necessary for
the purpose for which it is provided. Such information may be furnished as
frequently as daily and often with no time lag between the date of the information
and the date it is furnished. The Board receives and reviews annually a list of the
persons who receive nonpublic portfolio holdings information and the purposes for
which it is furnished.

</R>

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). The Adviser may also direct
certain portfolio trades to a broker that, in turn, pays a portion of the Fund's
operating expenses. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.

Investment decisions for the Fund are made independently from those of other accounts
managed by the Adviser. All of the Fund's trading in initial public offerings
("IPO") will be done independently from any other accounts. Although the Fund also
expects to engage in non-IPO trading independently from any other accounts, when the
Fund and one or more of those accounts do invest in, or dispose of, the same
security, available investments or opportunities for sales may 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. Conversely, it is
possible that independent trading activity by the Fund could adversely impact the
prices paid or received and/or positions obtained or disposed of by the Fund.

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.

In all brokerage orders, the Fund's managers seek the most favorable prices and
executions. Determining what may constitute the most favorable price and execution
in a brokerage order involves a number of factors, including the overall direct net
economic result to the Fund (involving both price paid or received and any
commissions or other costs paid) and the efficiency with which the transaction is
effected. The managers also consider the ongoing brokerage and research services
provided to the Fund. The Fund will pay broker-dealers a commission for executing a
particular transaction for the Fund that may be in excess of the amount of commission
those or other broker-dealers may normally charge other institutional investors if
the managers determine, in good faith, that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker-dealer,
viewed in terms of the particular transaction or of the overall benefits to the Fund.

<R>

For the fiscal year ended, October 31, 2004, the Fund's Adviser directed brokerage
transactions to certain brokers due to research services they provided. The total
amount of these transactions was $7,031,418,153 for which the Fund paid $17,856,180
in brokerage commissions.

</R>

Kaufmann Fund Affiliated Brokerage
As permitted by Section 17(e) of the 1940 Act and Rule 17e-1 there under, Bowling
Green Securities ("Bowling Green") acted as a broker to the Kaufmann Fund (prior to
its reorganization into the Fund) in connection with the sale of various securities
traded on an exchange. Bowling Green was an affiliate of Messrs. Utsch and Auriana;
Hans P. Utsch was the sole shareholder of Bowling Green and Lawrence Auriana was a
registered representative thereof. Pursuant to conditions and procedures adopted by
the Board of Directors of the Kaufmann Fund, in accordance with Rule 17e-1, the
Kaufmann Fund's investment adviser was required to ascertain that any commissions,
fees or other remuneration paid to Bowling Green were reasonable and fair compared to
those of other brokers in connection with transactions involving similar securities
purchased or sold on a securities exchange during a comparable period of time.
Bowling Green does not act as a broker to the Fund.

Bowling Green was required to provide regular brokerage services to the Kaufmann Fund
at competitive rates that are in accordance with Section 11(a) of the Securities
Exchange Act of 1934. The SEC is authorized to regulate or prohibit broker/dealers
such as Bowling Green from effecting transactions in securities owned by an account
such as the Kaufmann Fund, over which the principals of Bowling Green have investment
discretion. Bowling Green could not buy or sell portfolio securities as a principal
from or to the Kaufmann Fund. The Kaufmann Fund was also permitted to purchase
underwritten securities during the existence of an underwriting syndicate of which
Bowling Green was a member, subject to restrictions of applicable law and the
Kaufmann Fund's policies.

The Board of the Kaufmann Fund received quarterly reports, prepared by the Kaufmann
Fund's independent public accountants, to review the exchange trades executed by
Bowling Green at the end of each quarter, and reviewed the appropriateness of the
conditions and procedures on an annual basis.

The affiliations of Hans P. Utsch and Lawrence E. Auriana as: (1) a Director and
Officer of the Kaufmann Fund; (2) a 50% Shareholder and Officer of Edgemont; and (3)
a sole shareholder (Mr. Utsch) and affiliate (Mr. Auriana) of Bowling Green; created,
for each of them, an inherent potential conflict of interest. The Kaufmann Fund's
Directors, who are not interested persons, were aware of these potential conflicts
and did not perceive them as detrimental to the Kaufmann Fund.

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

Average Aggregate Daily
Maximum Net Assets of the
Administrative Fee Federated Funds
0.150 of 1% on the first $5 billion
0.125 of 1% on the next $5 billion
0.100 of 1% on the next $10 billion
0.075 of 1% on assets over $20 billion
The administrative fee received during any fiscal year shall be at least $150,000 per
portfolio and $40,000 per each additional class of Shares. FAS may voluntarily waive
a portion of its fee and may reimburse the Fund for expenses.
--------------------------------------------------------------------------------------

FAS 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
State Street Bank and Trust Company, the Fund's registered transfer agent, maintains
all necessary shareholder records.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Ernst & Young
LLP, conducts its audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require it to plan and perform its
audits to provide reasonable assurance about whether the Fund's financial statements
and financial highlights are free of material misstatement.

<R>

FEES PAID BY THE FUND FOR SERVICES
For the Year Ended
October 31 ------------ ----------- ------------
2004 2003 2002
Advisory Fee Earned $91,637,470 $59,532,296 $51,846,168
Advisory Fee Reduction 9,520,271 6,180,168 5,420,829
Advisory Fee Reimbursement 128,872 86,397 81,479
Sub-Advisory Fee 43,597,007 37,863,240
Sub-Advisory Fee Waiver 0 0
Brokerage Commissions 19,152,301 14,853,758 10,408,687
Administrative Fee 4,900,193 3,141,520 2,736,022
12b-1 Fee:
Class A Shares 2,961,577 -- --
Class B Shares 6,841,676 -- --
Class C Shares 3,431,959 -- --
Class K Shares 6,468,374 -- --
Shareholder Services Fee:
Class A Shares 3,816,357 -- --
Class B Shares 2,251,057 -- --
Class C Shares 1,155,791 -- --
Class K Shares 8,824,042 -- --
</R>
--------------------------------------------------------------------------------------

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 SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits this
standard performance information to be accompanied by non-standard performance
information.

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/or the
value of portfolio holdings 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
The total returns shown for the Fund's Class K Shares are those of the Fund's
predecessor, the Kaufmann Fund. The Fund's Class A Shares, Class B Shares and Class C
Shares are also those of the Kaufmann Fund, but have been adjusted to reflect the
sales charges or CDSC and expenses applicable to that class. Total returns are given
for the one-year, five-year and ten-year periods ended October 31, 2004.

<R>

Yield is given for the 30-day period ended October 31, 2004.

30-Day Period 1 Year 5 Years 10 Years
Class A Shares:
Total Return
Before Taxes N/A (0.55)% 11.42% 11.95%
After Taxes on N/A (0.69)% 8.48% 9.92%
Distributions
After Taxes on N/A (0.19)% 8.61% 9.68%
Distributions and
Sale of Shares
Yield 0.00% N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class B Shares:
Total Return
Before Taxes N/A (0.82)% 11.90% 12.13%
After Taxes on N/A (0.97)% 8.91% 10.10%
Distributions
After Taxes on N/A (0.36)% 9.04% 9.86%
Distributions and
Sale of Shares
Yield 0.00% N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class C Shares:
Total Return
Before Taxes N/A 2.64% 11.90% 11.91%
After Taxes on N/A 2.50% 8.95% 9.88%
Distributions
After Taxes on N/A 1.89% 9.06% 9.67%
Distributions and
Sale of Shares
Yield 0.00% N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class K Shares:
Total Return
Before Taxes N/A 5.03% 12.73% 12.76%
After Taxes on N/A 4.88% 9.76% 10.72%
Distributions
After Taxes on N/A 3.44% 9.76% 10.43%
Distributions and
Sale of Shares
Yield 0.00% N/A N/A N/A

</R>
--------------------------------------------------------------------------------------

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 $10,000 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 $10,000,
less any applicable sales charge, adjusted over the period by any additional Shares,
assuming the annual reinvestment of all dividends and distributions. Total returns
after taxes are calculated in a similar manner, but reflect additional standard
assumptions required by the SEC.

YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-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
30-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:

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

o 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;

o 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 Fund; and

o 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:

Russell Midcap Growth Index measures the performance of those Russell Midcap
companies with higher price-to-book ratios and higher forecasted growth values. The
stocks are also members of the Russell 1000 Growth Index.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the
Russell 3000 Index, which represents approximately 10% of the total market
capitalization of the Russell 3000 Index.

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

Consumer Price Index is a measure of change in consumer prices, as determined by a
monthly survey of the U.S. Bureau of Labor Statistics.

Gross National Product is a measure, based on current market prices, of the total of
all goods and services produced in the United States over a particular period of
time, usually one year, with the amount expressed in dollars.

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 who are 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, 2003, Federated managed 14 bond funds
with approximately $3.8 billion in assets and 22 money market funds with
approximately $23.0 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 32 years' experience. As of December
31, 2003, Federated managed 36 equity funds totaling approximately $25.6 billion in
assets across growth, value, equity income, international, index and sector (i.e.
utility) styles. Federated's value-oriented management style combines quantitative
and qualitative analysis and features a structured, computer-assisted composite
modeling system that was developed in the 1970s.

Corporate Bond Funds
In the corporate bond sector, as of December 31, 2003, Federated managed 11 money
market funds and 4 bond funds with assets approximating $61.7 billion and $3.4
billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 30 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 $209
billion.

Government Funds
In the government sector, as of December 31, 2003, Federated managed 7 mortgage
backed, 3 multi-sector government funds, 4 government/agency and 19 government money
market mutual funds, with assets approximating $4.9 billion, $0.9 billion, $2.9
billion and $56.2 billion, respectively. Federated trades approximately $90.4 billion
in U.S. government and mortgage backed securities daily and places approximately $35
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 $50 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, 2003, Federated managed
$136.2 billion in assets across 52 money market funds, including 19 government, 10
prime, 22 municipal and 1 euro-denominated with assets approximating $56.2 billion,
$59.4 billion, $20.6 billion and $173.9 million, respectively.

The Chief Investment Officers responsible for oversight of the various investment
sectors within Federated are: Global Equity - Stephen F. Auth is responsible for
overseeing the management of Federated's domestic and international equity products;
Global Fixed Income - Mary Jo Ochson and Robert J. Ostrowski are responsible for
overseeing the management of Federated's domestic and international fixed income and
high yield products; and Money Markets - Deborah A. Cunningham is responsible for
overseeing the management of Federated's money market fund products.

Mutual Fund Market
Forty-nine percent of American households are pursuing their financial goals through
mutual funds. These investors, as well as businesses and institutions, have entrusted
over $6.2 trillion to the approximately 8,300 funds available, according to the
Investment Company Institute.

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

Institutional Clients
Federated meets the needs of approximately 3,035 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.

Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated funds are available to consumers through major brokerage firms
nationwide--Federated has over 2,000 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.

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2004 are
incorporated herein by reference to the Annual Report to Shareholders of Federated
Kaufmann Fund dated October 31, 2004.

INVESTMENT RATINGS

Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is present,
but a limited margin of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent upon a sustained,
favourable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favourable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.

Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market positions
in well established industries, high rates of return on funds employed, conservative
capitalization structure with moderate reliance on debt and ample asset protection,
broad margins in earning coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and assured
sources of alternate liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, 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-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.

Fitch Ratings Commercial Paper Rating Definitions
F-1--Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Under their national rating
scale, this rating is assigned to the "best" credit risk relative to all others in
the same country and is normally assigned to all financial commitments issued or
guaranteed by the sovereign state. Where the credit risk is particularly strong, a
"+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.

ADDRESSES

Federated Kaufmann Fund

Class A Shares
Class B Shares
Class C Shares
Class K Shares

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 Equity Management Company of Pennsylvania
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Sub-Adviser
Federated Global Investment Management Corp.
175 Water Street
New York, NY 10038-4965

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

Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

APPENDIX

The following is a list of persons other than the Adviser and its affiliates that may
receive nonpublic portfolio holdings information concerning the Fund:

<R>

Custodian
State Street Bank and Trust Company

Securities Lending Agent
HSBC
State Street Bank and Trust Company

Independent Registered Public Accounting Firm
Ernst & Young LLP

Legal Counsel
Reed Smith LLP
Dickstein Shapiro Morin & Oshinsky, LLP

Service Providers
Bloomberg
Factset
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Wilshire Associates, Inc.

Security Pricing Services
FT Interactive Data
Reuters

Ratings Agencies
S&P

Performance Reporting/Publications
Fidelity-Strategic Advisors
Lipper
Morningstar
NASDAQ
Value Line
Wiesenberger/Thomson Financial

Other
ICI

</R>

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Small Cap Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 11

What Do Shares Cost? 14

How is the Fund Sold? 22

How to Purchase Shares 23

How to Redeem and Exchange Shares 26

Account and Share Information 29

Who Manages the Fund? 32

Legal Proceedings 34

Financial Information 35

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

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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.

</R>

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

<R>

The Fund pursues its investment objective by investing primarily in the stocks of small companies that are traded on national security exchanges, NASDAQ stock market and on the over-the-counter market. Small companies will be defined as companies with market capitalizations similar to companies in the Russell 2000 Index (which had a market capitalization range of $ 400 million to $ 3.12 billion as of November 30, 2004) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $ 63 million to $ 4.41 billion as of November 30, 2004). Up to 25% of the Fund's net assets may be invested in foreign securities. The Adviser's and Sub-Adviser's (collectively, Adviser) process for selecting investments is bottom-up and growth-oriented.

</R>

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:

Stock Market Risks. The value of equity securities in the Fund's portfolio will fluctuate and, as a result, the Fund's Share price may decline suddenly or over a sustained period of time.
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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund's performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks of Foreign Investing. Because the Fund invests in securities issued by foreign companies, the Fund's Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than could otherwise be the case.
Currency Risks. Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund's foreign investments and the value of the shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.

<R>

Credit Risks. 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 prevent the Fund from selling or buying other securities to implement its investment strategy.

</R>
<R>

Leverage Risks. 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.

</R>
<R>

Interest Rate Risks . Prices of fixed-income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally when interest rates rise, prices of fixed-income securities fall.

</R>

Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the Fund's Class A Shares total return on a calendar year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

The total return shown in the bar chart does not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the return shown would have been lower.

The Fund's Class A Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was 3.43%.

Within the period shown in the bar chart, the Fund's Class A Shares highest quarterly return was 39.07% (quarter ended June 30, 2003). Its lowest quarterly return was (2.51)% (quarter ended March 31, 2003).

Average Annual Total Return Table

The Average Annual Total Returns for the Fund's Class A, Class B, and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund's Class A Shares to illustrate the effect of federal taxes on the Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell 2000 Growth Index (R2000G), a broad-based market index, and the Lipper Small Cap Growth Funds Average (LSCGFA), an average of funds with similar objectives. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged and it is not possible to invest directly in an index or an average.

(For the periods ended December 31, 2003)

	1 Year	Start of Performance¹
Class A Shares:
Return Before Taxes	71.61%	67.45%
Return After Taxes on Distributions²	70.74%	66.64%
Return After Taxes on Distributions and Sale of Fund Shares²	46.52%	56.92%
Class B Shares:
Return Before Taxes	75.61%	71.84%
Class C Shares:
Return Before Taxes	78.21%	74.55%
R2000G	48.54%
LSCGFA	39.57%

1 The Fund's Class A, Class B, and Class C Shares start of performance date was December 18, 2002.

2 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns for the Fund's Class B Shares and Class C Shares will differ from those shown above for the Fund's Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

What are the Fund's Fees and Expenses?

FEDERATED KAUFMANN SMALL CAP FUND

FEES AND EXPENSES

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

Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%
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 Fee²	1.425%	1.425%	1.425%
Distribution (12b-1) Fee	0.250%³	0.750%	0.750%
Shareholder Services Fee	0.250%	0.250%	0.250%
Other Expenses	0.330%	0.330%	0.330%
Total Annual Fund Operating Expenses	2.255%	2.755%⁴	2.755%

1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waivers of Fund Expenses	0.305%	0.255%	0.255%
Total Actual Annual Fund Operating Expenses (after waivers)⁵	1.950%	2.500%	2.500%
2 The Adviser voluntarily waived a portion of management fee. The adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 1.170% for the fiscal year ending October 31, 2004.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund's Class A Shares (after the voluntary waiver) was 0.20% for the fiscal year ending October 31, 2004.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

EXAMPLE

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This 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.

</R>
<R>

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 in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

</R>

<R>Share Class</R>	<R>1 Year</R>	<R>3 Years</R>	<R>5 Years</R>	<R>10 Years</R>
<R>Class A:</R>
<R>Expenses assuming redemption</R>	<R>$766</R>	<R>$1,216</R>	<R>$1,691</R>	<R>$2,998</R>
<R>Expenses assuming no redemption</R>	<R>$766</R>	<R>$1,216</R>	<R>$1,691</R>	<R>$2,998</R>
<R>Class B:</R>
<R>Expenses assuming redemption</R>	<R>$829</R>	<R>$1,255</R>	<R>$1,657</R>	<R>$2,966</R>
<R>Expenses assuming no redemption</R>	<R>$279</R>	<R>$ 855</R>	<R>$1,457</R>	<R>$2,966</R>
<R>Class C:</R>
<R>Expenses assuming redemption</R>	<R>$476</R>	<R>$1,046</R>	<R>$1,642</R>	<R>$3,254</R>
<R>Expenses assuming no redemption</R>	<R>$376</R>	<R>$ 946</R>	<R>$1,542</R>	<R>$3,154</R>

What are the Fund's Investment Strategies?

In seeking to meet its investment objective, the Fund invests primarily in the stocks of small companies that are traded on national security exchanges, NASDAQ stock market and on the over-the-counter market. Up to 25% of the Fund's net assets may be invested in foreign securities. The Adviser's process for selecting investments is bottom-up and growth-oriented. When deciding which securities to buy the Fund considers:

the growth prospects of existing products and new product development;
the economic outlook of the industry;
the price of the security and its estimated fundamental value; and
relevant market, economic and political environments.

The Fund's Adviser use a bottom-up approach to portfolio management. There is an emphasis on individual stock selection rather than trying to time the highs and lows of the market or concentrating in certain industries or sectors. This hands-on approach means that in addition to sophisticated computer analysis, the Adviser may conduct in-depth meetings with management, industry analysts and consultants. Through this interaction with companies, the Adviser seeks to develop a thorough knowledge of the dynamics of the businesses in which the Fund invests.

The Fund assesses individual companies from the perspective of a long-term investor. The Adviser seeks to purchase stocks of companies that it believes:

are profitable and leaders in the industry;
have distinct products and services which address substantial markets;

can rapidly grow annual earnings over the next three to five years; or

have superior proven management and solid balance sheets.

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Typically, the Fund sells an individual security when the company fails to meet expectations, there is a deterioration of underlying fundamentals or the intermediate- and long-term prospects become poor.

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The Fund may loan up to 30% of its total assets in the form of its portfolio securities to unaffiliated broker/dealers, banks or other recognized institutional borrowers to generate additional income. The Fund receives cash, U.S . Treasury obligations, and/or other liquid securities as collateral. The Fund also may invest up to 15% of its net assets in illiquid securities.

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Because the Fund refers to small capitalization investments in its name, the Fund will notify shareholders at least 60 days in advance of any change in its investment policies that would permit the fund to normally invest less than 80% of its assets in investments in small companies. For purposes of this limitation, small companies will be defined as companies with market capitalizations similar to companies in the Russell 2000 Index (which had a market capitalization range of $ 400 million to $ 3.12 billion as of November 30, 2004) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $ 63 million to $ 4.41 billion as of November 30, 2004). Such definition will be applied at the time of investment and the Fund will not be required to sell a stock because a company has grown outside the market capitalization range of small capitalization stocks.

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PORTFOLIO TURNOVER

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The Fund actively trades 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

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What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer's earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. 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

Common stocks are the most prevalent type of equity security. Common stocks receive the issuer's earnings 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.

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in, another country;

the principal trading market for its securities is in another country; or

it (or its subsidiaries) derived in its most current fiscal year at least 50% of its total assets, capitalization, gross revenue or profit from goods produced, services performed or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.

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Foreign Exchange Contracts

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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. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.

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ILLIQUID SECURITIES

Illiquid securities are securities for which there is no readily available market or securities with legal or contractual restrictions. These may include private placements, repurchase agreements maturing in more than seven days, and securities eligible for resale under Rule 144A of the Securities Act of 1933.

FIXED-INCOME SECURITIES

Fixed-income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed-income security must 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. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.

Treasury Securities

SPECIAL TRANSACTIONS

Securities Lending

The Fund may lend portfolio securities to borrowers that the Fund's custodian deems creditworthy. In return, the Fund receives cash, U.S. Treasury obligations or other liquid securities from the borrower as collateral. The borrower must furnish additional collateral if the market value of the loaned securities increases. Also, the borrower must pay the Fund the equivalent of any dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.

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 on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay 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 interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund's portfolio will rise and fall. 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.

The Adviser attempts to manage market risk by limiting the amount the Fund invests in each company's equity securities. However, diversification will not protect the Fund against widespread or prolonged declines in the stock market.

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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.

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 its outstanding shares by the current market price per share.

Companies with smaller market capitalizations also tend to have unproven track records, a limited product or service base and limited access to capital. These factors also increase risks and make these companies more likely to fail than companies with larger market capitalizations.

SECTOR RISKS

Companies with similar characteristics may be grouped together in broad categories called sectors. Sector risk is the possibility that a certain sector may underperform other sectors or 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.

LIQUIDITY RISKS

Trading opportunities are more limited for equity securities that are not widely held. This may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their 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. Over-the-counter (OTC) derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

RISKS OF FOREIGN INVESTING

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

Foreign companies may not provide information (including financial statements) as frequently or completely as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.

Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.

CURRENCY RISKS

Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund's foreign investments and the value of the shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.

The Adviser attempts to limit currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.

CREDIT RISKS

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 prevent the Fund from selling or buying other securities to implement its investment strategy.

LEVERAGE RISKS

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.

INTEREST RATE RISKS

Prices of fixed-income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally when interest rates rise, prices of fixed-income securities fall. However, market factors, such as the demand for particular fixed-income securities, may cause the price of certain fixed-income securities to fall while the prices of other securities rise or remain unchanged.

What Do Shares Cost?

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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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund's assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under "Federated."

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Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund's Board of Trustees (the "Board"). The Fund may use the fair value of a security to calculate its NAV when, for example : (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed ; (2 ) trading in a portfolio security is suspended and not resumed prior to the normal market close ; (3) a portfolio security is not traded in significant volume for a substantial period ; or (4) the Fund's adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

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Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund's NAV is computed. An event is considered significant if there is both an affirmative expectation that the security's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For domestic fixed-income securities, such events may occur where the cut-off time for the market information used by the independent pricing service is earlier than the end of regular trading on the NYSE. For securities normally priced at their last sale price in a foreign market, such events can occur between the close of trading in the foreign market and the close of trading on the NYSE. In such cases, use of fair valuation can reduce an investor's ability to seek to profit by estimating the Fund's NAV in advance of the time as of which NAV is calculated.

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In some cases, events affecting the issuer of a portfolio security may be considered significant events. Announcements concerning earnings, acquisitions, new products, management changes, litigation developments, a strike or natural disaster affecting the company's operations or regulatory changes or market developments affecting the issuer's industry occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE are examples of potentially significant events. For securities of foreign issuers, such events could also include political or other developments affecting the economy or markets in which the issuer conducts its operations or its securities are traded.

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There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund's NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security's present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued at their last sale price, by an independent pricing service, or based on market quotations.

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Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges
Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Front-End Sales Charge²	Contingent Deferred Sales Charge³
Class A	$1,500/$100	5.50%	0.00%
Class B	$1,500/$100	None	5.50%
Class C	$1,500/$100	1.00%	1.00%

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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 ( SIPs) is $50. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $100,000 or more of Class B Shares or $ 1 million or more of Class C Shares will be invested in Class A Shares instead of Class B Shares or Class C 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. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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

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3 See "Sales Charge When You Redeem."

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As shown in the table above, each class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses ( "expense ratios "), as well as the compensation payable to investment professionals, also vary among the classes. Before you decide which class to purchase, you should review the different charges and expenses of each class carefully, in light of your personal circumstances, and consult with your investment professional.

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Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares. Among other ways, Class A Shares have a series of "breakpoints," which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under "Sales Charge When You Purchase.") On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares bear a relatively low front-end sales charge and a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and comparable to those charged to Class B Shares.

SALES CHARGE WHEN YOU PURCHASE

<R>Class A Shares:</R>
Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV
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 greater¹	0.00%	0.00%
<R>Class C Shares:</R>
All Purchases	1.00%	1.01%

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REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the table above. You or your investment professional must notify the Fund's Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase.

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In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your investment professional or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint ( Qualifying Accounts ). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through an investment professional or a through a single-participant retirement account by you, your spouse, your parents (if you are under age 21) and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs ), or (effective March 1, 2005) broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through "Section 529" college savings plans or those accounts which cannot be linked using TINs, SSNs, or BINs, are not Qualifying Accounts.

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In order to verify your eligibility for a breakpoint discount, you will be required to provide to your investment professional or the Transfer Agent certain information on your New Account Form and may be required to provide account statements regarding Qualifying Accounts. If you purchase through an investment professional, you may be asked to provide additional information and records as required by the investment professional. Failure to provide proper notification or verification of eligibility for a breakpoint discount may result in your not receiving a breakpoint discount to which you are otherwise entitled. Breakpoint discounts apply only to your current purchase and do not apply retroactively to previous purchases. The sales charges applicable to the Shares offered in this Prospectus, and the breakpoint discounts offered with respect to such Shares, are described in full in this Prospectus. Because the Prospectus is available on Federated's website free of charge, Federated does not disclose this information separately on the website.

Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

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

Concurrent and Accumulated Purchases (Effective through February 28, 2005)

combining concurrent purchases of and/or current investments in Class A Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Class A Share purchase will be calculated by multiplying the maximum public offering price times the number of Shares of the same Class of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase;

Concurrent and Accumulated Purchases (Effective March 1, 2005)

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combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F, and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

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Letter of Intent

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signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months. ( Call your investment professional or the Fund for more information .) 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.

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ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

through a financial intermediary that did not receive a dealer reallowance on the purchase;

with reinvested dividends or capital gains;

as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;

as a Federated Life Member (Federated shareholders who originally were issued shares through the "Liberty Account," which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);

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as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any investment professional that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension, or profit-sharing plan for these individuals; or

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pursuant to the exchange privilege.

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).

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; and

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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.)

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

<R>Class A Shares:</R>
If you make a purchase of Class A Shares in the amount of $1 million or more and your investment professional received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase
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 12 months of the purchase date.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

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following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986. (The beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);

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

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purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;

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purchased by Trustees and employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of an investment professional that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension, or profit-sharing plans for the above persons;

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purchased through an investment professional that did not receive an advance commission on the purchase;

purchased with reinvested dividends or capital gains;

redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;

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purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period. ( The holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange.);

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

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representing a total or partial distribution from a qualified plan, which does not include account transfers, rollovers, or redemptions for the purpose of reinvestment. For these purposes, qualified plan does not include an Individual Retirement Account, Keogh Plan, or custodial account following retirement.

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How is the Fund Sold ?

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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.

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The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals.

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, administration, and customer servicing of the Fund's Class A, Class B 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.

SERVICE FEES

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The Fund may pay fees (Service Fees) to financial institutions or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated , for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial institutions directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial institutions.

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

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The Distributor may pay out of its own resources amounts (including items of material value) to certain financial institutions that support the sale of Shares or provide services to Fund shareholders. The amounts of these payments could be significant, and may create an incentive for the financial institution or its employees or associated persons to recommend or sell Shares of the Fund to you. In some cases, such payments may be made by or funded from the resources of companies affiliated with the Distributor (including the Adviser). These payments are not reflected in the fees and expenses listed in the fee table section of the Fund's prospectus because they are not paid by the Fund.

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How to Purchase 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 (e.g., 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.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds
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, send it to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

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Payment should be made in U.S . dollars and drawn on a U.S . bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

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THROUGH AN EXCHANGE

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BY SYSTEMATIC INVESTMENT PROGRAM (SIP)

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BY AUTOMATED CLEARING HOUSE (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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at
1-800-341-7400.

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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.

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By Mail

You may redeem or exchange Shares by sending 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:

The Federated Funds
P.O. Box 8600
Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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 Medallion signature guarantee is designed to protect your account from fraud. Obtain a Medallion 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

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

EXCHANGE PRIVILEGE

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.

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The Fund may modify or terminate the exchange privilege at any time. In addition, the Fund may terminate your exchange privilege if your exchange activity is found to be excessive under the Fund's frequent trading policies. See "Account and Share Information - Frequent Trading Policies."

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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;

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

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.

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

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ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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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 .

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FREQUENT TRADING POLICIES

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Frequent or short-term trading into and out of the Fund can have adverse consequences for the Fund and shareholders who use the Fund as a long-term investment vehicle. Such trading in significant amounts can disrupt the Fund's investment strategies (e.g., by requiring it to sell investments at inopportune times or maintain excessive short-term or cash positions to support redemptions), increase brokerage and administrative costs and affect the timing and amount of taxable gains distributed by the Fund. Investors engaged in such trading may also seek to profit by anticipating changes in the Fund's NAV in advance of the time as of which NAV is calculated.

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The Fund's Board has approved policies and procedures intended to discourage excessive, frequent, or short-term trading of the Fund's Shares. The Fund's fair valuation procedures are intended in part to discourage short-term trading by reducing the potential for market- trading strategies to succeed. See "What do Shares Cost?" The Fund also monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund's management or the Adviser may determine from the amount, frequency, or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund's portfolio and its performance.

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The Fund's objective is that its restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, particularly where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

PORTFOLIO HOLDINGS INFORMATION

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To access this information from the "Products" section of the website, click on "Portfolio Holdings" and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the "Products" section, and from the Fund's page click on the "Portfolio Holdings" or "Composition" link. A user is required to register on the website the first time the user accesses this information.

You may also access from the "Products" section of the website portfolio information as of the end of the Fund's fiscal quarters. The Fund's annual and semi-annual reports, which contain complete listings of the Fund's portfolio holdings as of the end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the link to the appropriate PDF. Complete listings of the Fund's portfolio holdings as of the end of the Fund's first and third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the "Products" section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC's website at www.sec.gov.

Who Manages the Fund?

The Board of Trustees governs the Fund. The Board selects and oversees the Adviser, Federated Equity Management Company of Pennsylvania. The Adviser manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The Adviser has delegated daily management of all of the Fund assets to the Sub-Adviser, Federated Global Investment Management Corp., who is paid by the Adviser and not by the Fund. The Sub-Adviser's address is 175 Water Street, New York, NY 10038-4965.

THE FUND'S PORTFOLIO MANAGERS ARE:

Lawrence Auriana

Lawrence Auriana has been the Fund's Portfolio Manager since inception. He is Vice President of the Trust. Mr. Auriana joined Federated in April 2001 as Co-Head of Investments/Federated Kaufmann. From August 1984 to April 2001, Mr. Auriana was President and Treasurer of Edgemont Asset Management Corp., and Chairman of the Board and Portfolio Manager to The Kaufmann Fund, Inc. (predecessor to the Federated Kaufmann Fund). Mr. Auriana earned a B.S. in Economics from Fordham University and has been engaged in the securities business since 1965.

Hans P. Utsch

Hans P. Utsch has been the Fund's Portfolio Manager since inception. He is Vice President of the Trust. Mr. Utsch joined Federated in April 2001 as Co-Head of Investments/Federated Kaufmann. From August 1984 to April 2001, Mr. Utsch was Chairman of the Board and Secretary of Edgemont Asset Management Corp., and President and Portfolio Manager to The Kaufmann Fund, Inc. (predecessor to the Federated Kaufmann Fund). Mr. Utsch graduated from Amherst College and holds an M.B.A. from Columbia University. He has been engaged in the securities business since 1962.

Aash M. Shah

Aash M. Shah has been the Fund's Portfolio Manager since inception. Mr. Shah joined Federated in 1993 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since January 1997. Mr. Shah was a Portfolio Manager and served as an Assistant Vice President of the Adviser from 1995 through 1996, and as an Investment Analyst from 1993 to 1995. 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.

John Ettinger

John Ettinger has been the Fund's Portfolio Manager since October 2003. Mr. Ettinger has been an investment analyst with the Fund's Adviser since April 2001. He served as an investment analyst with Edgemont Asset Management Corp. from 1996 to 2001. Mr. Ettinger is a Chartered Financial Analyst. He earned a B.A. in Economics from Duke University.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 1.425% 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.

Legal Proceedings

Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds' advisers and distributor (collectively, "Federated"), received detailed requests for information on shareholder trading activities in the Federated funds ("Funds") from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future.

As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated's internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds' closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the "About Us" section of Federated's website at www.federatedinvestors.com , and any future press releases on this subject will also be posted there.

Shortly after Federated's first public announcement concerning the foregoing matters, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders.

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Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees, and seeking damages of unspecified amounts.

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The Board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

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 any dividends and capital gains.

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)

Year Ended October 31		2004			Period Ended 10/31/2003	¹
Net Asset Value, Beginning of Period		$17.07			$10.00
Income From Investment Operations:
Net investment income (loss)		(0.31	)²		(0.21	)²
Net realized and unrealized gain on investments and foreign currency transactions		2.79			7.28
TOTAL FROM INVESTMENT OPERATIONS		2.48			7.07
Less Distributions:
Distributions from net realized gain on investments		(0.25	)		--
Net Asset Value, End of Period		$19.30			$17.07
Total Return³		14.72	%		70.70	%

Ratios to Average Net Assets:
Expenses		1.95	%		1.95	%⁴
Net investment income (loss)		(1.72	)%		(1.67	)%⁴
Expense waiver/reimbursement⁵		0.31	%		0.85	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$216,310			$121,125
Portfolio turnover		68	%		70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2004, which can be obtained free of charge.

Financial Highlights - Class B Shares

(For a Share Outstanding Throughout Each Period)

Year Ended October 31	2004		Period Ended 10/31/2003	¹
Net Asset Value, Beginning of Period	$17.04		$10.00
Income From Investment Operations:
Net investment income (loss)	(0.41	)²	(0.29	)²
Net realized and unrealized gain on investments and foreign currency transactions	2.78		7.33
TOTAL FROM INVESTMENT OPERATIONS	2.37		7.04
Less Distributions:
Distributions from net realized gain on investments	(0.25	)	--
Net Asset Value, End of Period	$19.16		$17.04
Total Return³	14.09	%	70.40	%

Ratios to Average Net Assets:
Expenses	2.50	%	2.50	%⁴
Net investment income (loss)	(2.27)	%	(2.22	)%⁴
Expense waiver/reimbursement⁵	0.26	%	0.80	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$87,938		$43,390
Portfolio turnover	68	%	70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2004, which can be obtained free of charge.

Financial Highlights - Class C Shares

(For a Share Outstanding Throughout Each Period)

Year Ended October 31	2004		Period Ended 10/31/2003	¹
Net Asset Value, Beginning of Period	$17.04		$10.00
Income From Investment Operations:
Net investment income (loss)	(0.41	)²	(0.29	)²
Net realized and unrealized gain on investments and foreign currency transactions	2.78		7.33
TOTAL FROM INVESTMENT OPERATIONS	2.37		7.04
Less Distributions:
Distributions from net realized gain on investments	(0.25	)	--
Net Asset Value, End of Period	$19.16		$17.04
Total Return³	14.09	%	70.40	%

Ratios to Average Net Assets:
Expenses	2.50	%	2.50	%⁴
Net investment income (loss)	(2.27)	%	(2.22	)%⁴
Expense waiver/reimbursement⁵	0.26	%	0.80	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$100,873		$47,696
Portfolio turnover	68	%	70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2004, which can be obtained free of charge.

A Statement of Additional Information (SAI) dated December 31, 2004, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The SAI contains a description of the Fund's policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated's website at www.federatedinvestors.com.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's website at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.

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Investment Company Act File No. 811-4017

Federated
World-Class Investment Manager

Federated Kaufmann Small Cap Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com
Contact us at 1-800-341-7400 or
www.federatedinvestors.com/contact

Federated Securities Corp., Distributor

Cusip 314172636
Cusip 314172628
Cusip 314172610

28057 (12/04)

Federated is a registered mark of Federated Investors, Inc. 2004 (c)Federated Investors, Inc.









FEDERATED KAUFMANN SMALL CAP FUND
A Portfolio of Federated Equity Funds
Statement of Additional Information

December 31, 2004


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 Kaufmann Small Cap Fund (Fund), dated
December 31, 2004. 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.

                                            Contents
                                            How is the Fund Organized?...............1
                                            Securities in Which the Fund Invests.....1
                                            What Do Shares Cost?....................12
                                            How is the Fund Sold?...................12
                                            Exchanging Securities for Shares........15
                                            Subaccounting Services..................15
                                            Redemption in Kind......................15
                                            Massachusetts Partnership Law...........15
                                            Account and Share Information...........16
                                            Tax Information.........................16
                                            Who Manages and Provides Services to the
                                                Fund?...............................17
                                            How Does the Fund Measure Performance?..28
                                            Who is Federated Investors, Inc.?.......30
                                            Financial Information...................33
                                            Investment Ratings......................33
                                            Addresses...............................34
                                            Appendix................................35





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 Shares. The Fund's investment adviser is Federated Equity
Management Company of Pennsylvania and the Fund's sub-adviser is Federated Global
Investment Management Corp. (collectively, the Adviser).

Prior to January 1, 2004, Federated Investment Management Company was the Adviser to
the Fund. Both the current Adviser and the former Adviser are wholly owned
subsidiaries of Federated Investors, Inc. (Federated).


SECURITIES IN WHICH THE FUND INVESTS

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

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SECURITIES DESCRIPTIONS AND TECHNIQUES

Equity Securities
Equity securities represent a share of an issuer's earnings and assets, after the
issuer pays its liabilities. The Fund cannot predict the income it will receive from
equity securities because issuers generally have discretion as to the payment of any
dividends or distributions. 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.

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Preferred Stocks
Preferred stocks have the right to receive specified dividends or distributions
before the issuer makes payments on its 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 also treat such redeemable
preferred stock as a fixed-income security.

Interests in Other Limited Liability Companies
Entities such as limited partnerships, limited liability companies, business trusts
and companies organized outside the United States may issue securities comparable to
common or preferred stock.

Real Estate Investment Trusts (REITs)
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.

Warrants
Warrants give the Fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). The Fund may buy the designated securities by paying the exercise price before
the expiration date. Warrants may become worthless if the price of the stock does not
rise above the exercise price by the expiration date. This increases the market risks
of warrants as compared to the underlying security. Rights are the same as warrants,
except companies typically issue rights to existing stockholders.


Fixed-Income Securities
Fixed-income securities pay interest, dividends or distributions at a specified rate.
The rate may be a fixed percentage of the principal or adjusted periodically. In
addition, the issuer of a fixed-income security must 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. A security's yield will increase or decrease depending upon whether it
costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.

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

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Agency Securities
Agency securities are issued or guaranteed by a federal agency or other government
sponsored entity (GSE) acting under federal authority. Some GSE securities are
supported by the full faith and credit of the United States. These include the
Government National Mortgage Association, Small Business Administration, Farm Credit
System Financial Assistance Corporation, Farmer's Home Administration, Federal
Financing Bank, General Services Administration, Department of Housing and Urban
Development, Export-Import Bank, Overseas Private Investment Corporation and
Washington Metropolitan Area Transit Authority Bonds.

Other GSE securities receive support through federal subsidies, loans or other
benefits. For example, the U.S. Treasury is authorized to purchase specified amounts
of securities issued by (or otherwise make funds available to) the Federal Home Loan
Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Student Loan Marketing Association and Tennessee Valley Authority in
support of such obligations.

A few GSE securities have no explicit financial support, but are regarded as having
implied support because the federal government sponsors their activities. These
include the Farm Credit System, Financing Corporation and Resolution Funding
Corporation.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

A Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency.

Although such a guarantee protects against credit risks, it does not reduce market
and prepayment risks.

Corporate Debt Securities
Corporate debt securities are fixed-income securities issued by businesses. Notes,
bonds, debentures and commercial paper are the most prevalent types of corporate debt
securities. The Fund may also purchase interests in bank loans to companies. The
credit risks of corporate debt securities vary widely among issuers.

In addition, the credit risk of an issuer's debt security may vary based on its
priority for repayment. For example, higher ranking (senior) debt securities have a
higher priority than lower ranking (subordinated) securities. This means that the
issuer might not make payments on subordinated securities while continuing to make
payments on senior securities. In addition, in the event of bankruptcy, holders of
senior securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust preferred and
capital securities notes, also permit the issuer to defer payments under certain
circumstances. For example, insurance companies issue securities known as surplus
notes that permit the insurance company to defer any payment that would reduce its
capital below regulatory requirements.

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

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

Demand Instruments
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.

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. For example, the Fund may hold fixed-income securities
that are convertible into shares of common stock at a conversion price of $10 per
share. If the market value of the shares of common stock 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. In
addition, at the time a convertible security is issued the conversion price exceeds
the market value of the underlying equity securities. 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.

Foreign Securities
Foreign  securities  are  securities of issuers based outside the United  States.  The
Fund considers an issuer to be based outside the United States if:
o     it is organized under the laws of, or has a principal office located in,
   another country;
o     the principal trading market for its securities is in another country; or
o     it (or its subsidiaries) derived in its most current fiscal year at least 50%
   of its total assets, capitalization, gross revenue or profit from goods produced,
   services performed, or sales made in another country.
Foreign  securities are primarily  denominated in foreign  currencies.  Along with the
risks  normally  associated  with  domestic  securities  of  the  same  type,  foreign
securities  are subject to currency risks and risks of foreign  investing.  Trading in
certain foreign markets is also subject to liquidity risks.


Derivative Contracts
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 the terms of the contract except for the price. Investors
make 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, the Fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same date.
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. Exchanges may limit the
amount of open contracts permitted at any one time. Such limits may prevent the Fund
from closing out a position. 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). 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.

The Fund may also trade derivative contracts 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 the Fund uses derivative contracts 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 interest rate, stock
market, currency and credit risks, and may also expose the Fund to liquidity and
leverage risks. OTC contracts also expose the Fund to credit risks in the event that
a counterparty defaults on the contract.

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

Futures 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 specified price, date and
time. Entering into a contract to buy an underlying asset is commonly referred to as
buying a contract or holding a long position in the asset. Entering into a contract
to sell an underlying asset is commonly referred to as selling a contract or holding
a short position in the asset. Futures contracts are considered to be commodity
contracts. The Fund has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act and, therefore, is not
subject to registration or regulation as a commodity pool operator under that Act.
Futures contracts traded OTC are frequently referred to as forward contracts. The
Fund can buy or sell financial futures, index futures and foreign currency forward
contracts.


Options
Options are rights to buy or sell an underlying asset or instrument for a specified
price (the exercise price) during, or at the end of, a specified period. The seller
(or 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. Options
can trade on exchanges or in the OTC market and may be bought or sold on a wide
variety of underlying assets or instruments, including financial indices, individual
securities, and other derivative instruments, such as futures contracts. Options that
are written on futures contracts will be subject to margin requirements similar to
those applied to futures contracts.

The Fund may buy/sell the following types of options.

Call Options
A call option gives the holder (buyer) the right to buy the underlying asset from the
seller (writer) of the option. The Fund may use call options in the following ways:

o     Buy call options on indices, individual securities, index futures, currencies
      (both foreign and U.S. dollar) and financial futures in anticipation of an
      increase in the value of the underlying asset or instrument; and

o     Write call options on indices, portfolio securities, index futures, currencies
      (both foreign and U.S. dollar) and financial 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 the 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.

Put Options
A put option gives the holder the right to sell the underlying asset to the writer of
the option. The Fund may use put options in the following ways:

o     Buy put options on indices, individual securities, index futures, currencies
      (both foreign and U.S. dollar) and financial futures in anticipation of a
      decrease in the value of the underlying asset; and

o     Write put options on indices, portfolio securities, index futures, currencies
      (both foreign and U.S. dollar) and financial 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.

The Fund may also buy or write options, as needed, to close out existing option
positions.


Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns
derived from underlying assets with differing characteristics. Most swaps do not
involve the delivery of the underlying assets by either party, and the parties might
not own the assets underlying the swap. The payments are usually made on a net basis
so that, on any given day, the Fund would receive (or pay) only the amount by which
its payment under the contract is less than (or exceeds) the amount of the other
party's payment. Swap agreements are sophisticated instruments that can take many
different forms, and are known by a variety of names including caps, floors and
collars. Common swap agreements that the Fund may use include:

Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make regular payments
equal to a fixed or floating interest rate times a stated principal amount of
fixed-income securities, in return for payments equal to a different fixed or
floating rate times the same principal amount, for a specific period. For example, a
$10 million LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount
in exchange for the right to receive the equivalent of a stated fixed rate of
interest on $10 million principal amount.

Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make payments
of the total return from the underlying asset during the specified period, in return
for payments equal to a fixed or floating rate of interest or the total return from
another underlying asset.

Credit Default Swaps
Credit default swaps are agreements between two parties whereby one party (the
"protection buyer") agrees to make regular payments over the term of the agreement to
another party (the "protection seller"), provided that no designated event of default
on an underlying obligation has occurred. If an event of default occurs, the
protection seller must pay the protection buyer the full notional value, or "par
value," of the reference obligation in exchange for the reference obligation. The
Fund may be either the protection buyer or the protection seller in a credit default
swap. If the Fund is a protection buyer and no event of default occurs, the Fund will
lose its entire investment in the swap agreement (i.e., An amount equal to the
payments made to the protection seller). However, if an event of default occurs, the
Fund (as protection buyer) will deliver the underlying obligation and receive a
payment equal to the full notional value of the underlying asset, even though the
underlying asset may have little or no value. If the Fund is the protection seller
and no default occurs, then the Fund will receive a fixed rate of income throughout
the term of the agreement. However, if an event of default occurs, the Fund (as
protection seller) will pay the protection buyer the full notional value of the
reference obligation and receive the underlying obligation. Credit default swaps
involve greater risks than if the Fund invested directly in the underlying obligation.

Currency Swaps
Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amount as well.

Caps And Floors
Caps and Floors are contracts in which one party agrees to make payments only if an
interest rate or index goes above (Cap) or below (Floor) a certain level in return
for a fee from the other party.


Hybrid Instruments
Hybrid instruments combine elements of two different kinds of underlying investments.
Hybrid instruments can take on may forms including, but not limited to, the following
three forms: First, a common form of a hybrid instrument combines elements of
derivative contracts with those of another security (typically a fixed-income
security). In this case all or a portion of the interest or principal payable on a
hybrid security is determined by reference to changes in the price of an underlying
asset or by reference to another benchmark (such as interest rates, currency exchange
rates or indices). Secondly, a hybrid instrument may also combine elements of a
fixed-income security and an equity security. Lastly, hybrid instruments may include
convertible securities with conversion terms related to an underlying asset or
benchmark.

Depending on the type of hybrid instrument the risks of investing in hybrid
instruments may reflect a combination of the risks of investing in securities,
options, futures and currencies, and depend upon the terms of the instrument. Thus,
an investment in a hybrid instrument may entail significant risks in addition to
those associated with traditional fixed-income, equity or convertible securities.
Hybrid instruments are also potentially more volatile and may carry greater interest
rate risks than traditional instruments. Moreover, depending on the structure of the
particular hybrid, it may expose the Fund to leverage risks or carry liquidity risks.


Depositary Receipts
Depositary receipts represent interests in underlying securities issued by a foreign
company. Depositary receipts are not traded in the same market as the underlying
security. The foreign securities underlying American Depositary Receipts (ADRs) are
not traded in the United States. ADRs provide a way to buy shares of foreign-based
companies in the United States 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 United States. Depositary receipts involve many of the same risks of investing
directly in foreign securities, including currency risks and risks of foreign
investing.

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Foreign Government Securities
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 that are either issued by entities 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. 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
Repurchase agreements are transactions in which the 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 the Fund's return
on the transaction. This return is unrelated to the interest rate on the underlying
security. The Fund will enter into repurchase agreements only with banks and other
recognized financial institutions, such as securities dealers, deemed creditworthy by
the Adviser.

The Fund's custodian or subcustodian will 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 risks.


Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them at an
agreed-upon time and price. A reverse repurchase agreement may be viewed as a type of
borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In
addition, reverse repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the market value
of the security at the time of repurchase.


Delayed Delivery Transactions
Delayed delivery transactions, including when issued transactions, are arrangements
in which the Fund buys securities for a set price, with payment and delivery of the
securities 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 buy 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 so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed delivery
transactions create interest rate risks for the Fund. Delayed delivery transactions
also involve credit risks in the event of a counterparty default. These transactions
create leverage risks.


Securities Lending
The Fund may lend portfolio securities to borrowers that the Fund's custodian deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the market
value of the loaned securities increases. Also, the borrower must pay the Fund the
equivalent of any dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable
investment for the Fund. However, the Fund must pay interest to the borrower for the
use of cash collateral.

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 on loan, but it will
terminate a loan in anticipation of any important vote. The Fund may pay
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 interest rate risks and credit risks.
These transactions may create leverage risks.


Inter-Fund Borrowing and Lending Arrangements
The Securities and Exchange Commission (SEC) has granted an exemption that permits
the Fund and all other funds advised by subsidiaries of Federated Investors, Inc.
(Federated funds) to lend and borrow money for certain temporary purposes directly to
and from other Federated funds.  Participation in this inter-fund lending program is
voluntary for both borrowing and lending Federated funds, and an inter-fund loan is
only made if it benefits each participating Federated fund.  Federated Investors,
Inc. (Federated) administers the program according to procedures approved by the
Fund's Board, and the Board monitors the operation of the program.  Any inter-fund
loan must comply with certain conditions set out in the exemption, which are designed
to assure fairness and protect all participating Federated funds.

For example, inter-fund lending is permitted only (a) to meet shareholder redemption
requests, and (b) to meet commitments arising from "failed" trades.  All inter-fund
loans must be repaid in seven days or less.  The Fund's participation in this program
must be consistent with its investment policies and limitations, and must meet
certain percentage tests.  Inter-fund loans may be made only when the rate of
interest to be charged is more attractive to the lending Federated fund than
market-competitive rates on overnight repurchase agreements (Repo Rate) and more
attractive to the borrowing Federated fund than the rate of interest that would be
charged by an unaffiliated bank for short-term borrowings (Bank Loan Rate), as
determined by the Board.  The interest rate imposed on inter-fund loans is the
average of the Repo Rate and the Bank Loan Rate.


Asset Coverage
In order to secure its obligations in connection with derivative contracts or special
transactions, the Fund will either own the underlying assets, enter into an
offsetting transaction or set aside readily marketable securities with a value that
equals or exceeds the Fund's obligations. Unless the Fund has other readily
marketable assets to set aside, it cannot trade assets used to secure such
obligations without entering into an offsetting derivative contract or terminating a
special transaction. This may cause the Fund to miss favorable trading opportunities
or to realize losses on derivative contracts or special transactions.

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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. These other investment
companies are managed independently of the Fund and incur additional expenses.
Therefore, any such investment by the Fund may be subject to duplicate expenses.
However, the Adviser believes that the benefits and efficiencies of this approach
should outweigh the additional expenses.

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Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities are securities for which there is no readily available market or
securities with legal or contractual restrictions. These may include private
placements, repurchase agreements maturing in more than seven days, and securities
eligible for resale under Rule 144A of the Securities Act of 1933 (1933 Act). Rule
144A allows certain qualified institutional investors to trade privately placed
securities despite the fact that such securities are not registered under the 1933
Act. In deciding whether to purchase such securities, the Fund, acting pursuant to
guidelines approved by the Board, will consider the frequency of such trades and
quotes, the number of dealers and potential purchasers, dealer undertakings to make a
market, the nature of the securities and the marketplace trades.


Borrowing for Leverage
The Fund may borrow from banks for temporary or emergency purposes, clearing
transactions or for other investment purposes. Borrowing to purchase securities is a
speculative practice known as leveraging, which increases stock market risk by
magnifying the effect of any change in the market value of the Fund's portfolio.
Interest paid on any borrowed funds may have the effect of lowering the Fund's
return. In addition, the Fund may have to sell the securities when it would normally
keep them in order to make interest payments.


Short Sales
The Fund may make short sales of securities listed on one or more national exchanges
or on the Nasdaq Stock Market. A short sale means selling a security the Fund does
not own to take advantage of an anticipated decline in the stock's price. Once the
Fund sells the security short, it has an obligation to replace the borrowed security.
If it can buy the security back at a lower price, a profit results. In no event will
the Fund engage in short sales transactions if it would cause the market value of all
of the Fund's securities sold short to exceed 25% of its net assets. The value of the
securities of any one issuer that may be shorted by the Fund is limited to the lesser
of 2% of the value of the Fund's net assets or 2% of the securities of any class of
the issuer. The Fund may also "sell short against the box," i.e., the Fund owns
securities identical to those sold short. Short sales against the box are not subject
to the 25% limitation. A capital gain is recognized immediately upon entering into a
short sale against the box with respect to an appreciated security. Short sales are
speculative in nature, and may reduce returns or increase volatility.


Investment Ratings for Investment Grade Securities
The  Adviser  will  determine  whether a security is  investment  grade based upon the
credit  ratings  given  by one or more  nationally  recognized  rating  services.  For
example,  Standard & Poor's, a rating service, assigns ratings to investment grade
securities  (AAA,  AA, A, and BBB) based on their  assessment of the likelihood of the
issuer's  inability to pay interest or principal  (default) when due on each security.
Lower credit ratings  correspond to higher credit risk. If a security has not received
a rating,  the Fund must rely entirely upon the Adviser's  credit  assessment that the
security is comparable to investment grade.

For money market funds,  it is not necessary to disclose how the Adviser will handle a
downgraded  security.  It is  sufficient  to  indicate  that the Fund will comply with
Rule 2a-7 (which sets forth  guidelines  regarding  the  downgrading  of  securities).
This  reference  to Rule 2a-7 is made under  "Regulatory  Compliance"  in the SAI.If a
security is downgraded  below the minimum quality grade discussed  above,  the Adviser
will reevaluate the security, but will not be required to sell it.


INVESTMENT RISKS
There  are many  factors  which may  affect an  investment  in the  Fund.  The  Fund's
principal risks are described in its prospectus.  Additional risk factors are outlined
below.


Stock Market Risks
o     The value of  equity  securities  in the  Fund's  portfolio  will rise and fall.
      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.

o     The  Adviser  attempts to manage  market  risk by  limiting  the amount the Fund
      invests in each company's equity securities.  However,  diversification will not
      protect the Fund against widespread or prolonged declines in the stock market.


Liquidity Risks
o     Trading  opportunities  are more  limited  for  equity  securities  that are not
      widely  held.  This may make it more  difficult  to sell or buy a security  at a
      favorable  price or  time.  Consequently,  the  Fund may have to  accept a lower
      price to sell a  security,  sell  other  securities  to raise cash or give up an
      investment opportunity,  any of which could have a negative effect on the Fund's
      performance.  Infrequent  trading of securities  may also lead to an increase in
      their price volatility.

o     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.

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


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

o     Foreign companies may not provide information  (including financial  statements)
      as  frequently  or to as great an  extent as  companies  in the  United  States.
      Foreign  companies may also receive less coverage than  U.S. companies by market
      analysts and the  financial  press.  In  addition,  foreign  countries  may lack
      uniform  accounting,  auditing and financial  reporting  standards or regulatory
      requirements  comparable to those  applicable to U.S.  companies.  These factors
      may prevent  the Fund and its  Adviser  from  obtaining  information  concerning
      foreign   companies  that  is  as  frequent,   extensive  and  reliable  as  the
      information available concerning companies in the United States.

o     Foreign  countries may have  restrictions on foreign  ownership of securities or
      may  impose  exchange  controls,   capital  flow  restrictions  or  repatriation
      restrictions   which  could  adversely   affect  the  liquidity  of  the  Fund's
      investments.


Leverage Risks
o     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.


Interest Rate Risks
o     Prices of  fixed-income  securities  rise and fall in response to changes in the
      interest rate paid by similar securities.  Generally,  when interest rates rise,
      prices of fixed-income  securities fall.  However,  market factors,  such as the
      demand for particular  fixed-income  securities,  may cause the price of certain
      fixed-income  securities  to fall while the prices of other  securities  rise or
      remain unchanged.

o     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 Risks
o     Credit  risk is the  possibility  that an issuer  will  default on a security by
      failing to pay interest or principal when due. If an issuer  defaults,  the Fund
      will lose money.

o     Many  fixed-income  securities  receive  credit  ratings from  services  such as
      Standard &  Poor's and Moody's  Investors  Service.  These  services  assign
      ratings to  securities  by assessing the  likelihood  of issuer  default.  Lower
      credit ratings  correspond to higher credit risk. If a security has not received
      a rating, the Fund must rely entirely upon the Adviser's credit assessment.

o     Fixed-income  securities  generally compensate for greater credit risk by paying
      interest at a higher rate.  The  difference  between the yield of a security and
      the yield of a  U.S. Treasury  security with a comparable  maturity (the spread)
      measures the additional  interest paid for 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.

o     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 prevent the Fund from selling or buying other
      securities to implement its investment strategy.


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

o     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.


Risks Associated with Noninvestment Grade Securities
o     Securities rated below  investment  grade,  also known as junk bonds,  generally
      entail greater credit and liquidity risks than investment grade securities.  For
      example,  their  prices are more  volatile,  economic  downturns  and  financial
      setbacks may affect their prices more  negatively,  and their trading market may
      be more limited.

Currency Risks
o     Exchange rates for currencies  fluctuate daily.  Foreign securities are normally
      denominated  and traded in  foreign  currencies.  As a result,  the value of the
      Fund's  foreign  investments  and  the  value  of the  shares  may  be  affected
      favorably or unfavorably  by changes in currency  exchange rates relative to the
      U.S. dollar.

o     The Adviser  attempts  to limit  currency  risk by limiting  the amount the Fund
      invests  in  securities   denominated   in  a  particular   currency.   However,
      diversification  will not  protect  the Fund  against a general  increase in the
      value of the U.S. dollar relative to other currencies.


Risks of Investing in Derivative Contracts and Hybrid Instruments
o     The Fund's  use of  derivative  contracts  involves  risks  different  from,  or
      possibly  greater  than,  the  risks  associated  with  investing   directly  in
      securities and other  traditional  investments.  First,  changes in the value of
      the  derivative  contracts and hybrid  instruments in which the Fund invests may
      not be correlated  with changes in the value of the underlying  asset or if they
      are correlated,  may move in the opposite direction than originally anticipated.
      Second,  while  some  strategies  involving  derivatives  may reduce the risk of
      loss, they may also reduce  potential gains or, in some cases,  result in losses
      by offsetting  favorable price movements in portfolio holdings.  Third, there is
      a risk that  derivative  contracts  and hybrid  instruments  may be mispriced or
      improperly  valued and, as a result,  the Fund may need to make  increased  cash
      payments  to  the  counterparty.   Finally,   derivative  contracts  and  hybrid
      instruments  may  cause  the  Fund  to  realize  increased  ordinary  income  or
      short-term  capital  gains  (which are  treated as  ordinary  income for federal
      income tax purposes) and, as a result,  may increase  taxable  distributions  to
      shareholders.  Derivative  contracts  and hybrid  instruments  may also  involve
      other risks described in this SAI, such as interest rate, credit,  liquidity and
      leverage risks.




Fundamental INVESTMENT Objective
The Fund's investment objective is to provide capital appreciation. The investment
objective may not be changed by the Fund's Board without shareholder approval.


INVESTMENT LIMITATIONS

Diversification
With respect to securities comprising 75% of the value of its total assets, the Fund
will not purchase securities of any one issuer (other than cash; cash items;
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by such U.S.
government securities; and securities of other investment companies) if, as a result,
more than 5% of the value of its total assets would be invested in the securities of
that issuer, or the Fund would own more than 10% of the outstanding voting securities
of that issuer.


Borrowing Money and Issuing Senior Securities
The Fund may borrow money, directly or indirectly, and issue senior securities to the
maximum extent permitted under the Investment Company Act of 1940, as amended (1940
Act).


Investing in Real Estate
The Fund may not purchase or sell real estate, provided that this restriction does
not prevent the Fund from investing in issuers which invest, deal, or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein. The Fund may
exercise its rights under agreements relating to such securities, including the right
to enforce security interests and to hold real estate acquired by reason of such
enforcement until that real estate can be liquidated in an orderly manner.


Investing in Commodities
The Fund may not purchase or sell physical commodities, provided that the Fund may
purchase securities of companies that deal in commodities.


Underwriting
The Fund may not underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the 1933 Act.


Lending
The Fund may not make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, lending its
assets to broker/dealers or institutional investors and investing in loans, including
assignments and participation interests.


Concentration
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be deemed
to constitute an industry.

The above limitations cannot be changed unless authorized by the Board and by the
"vote of a majority of its outstanding voting securities," as defined by the 1940
Act. The following limitations, 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 Commodities
For purposes of the commodities limitation, investments in transactions involving
futures contracts and options, forward currency contracts, swap transactions and
other financial contracts that settle by payment of cash are not deemed to be
investments in commodities.


Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets, provided that this
shall not apply to the transfer of securities in connection with any permissible
borrowings or to collateral arrangements in connection with permissible activities.


Purchases on Margin
The Fund will not purchase securities on margin, provided that the Fund may obtain
short-term credits necessary for the clearance of purchases and sales of securities,
and further provided that the Fund may make margin deposits in connection with its
use of financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.

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Illiquid Securities
The Fund will not purchase securities for which there is no readily available market,
or enter into repurchase agreements or purchase time deposits that the Fund cannot
dispose of within seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.

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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" and "bank instruments."

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.

To conform to the current view of the SEC that only domestic bank instruments may be
excluded from industry concentration limitations, as a matter of non-fundamental
policy, the Fund will not exclude foreign bank instruments from industry
concentration limits as long as the policy of the SEC remains in effect. In addition,
investments in bank instruments, and investments in certain industrial development
bonds funded by activities in a single industry will be deemed to constitute
investment in an industry, except when held for temporary defensive purposes. The
investment of more than 25% of the value of the Fund's total assets in any one
industry will constitute "concentration."

In applying the concentration restriction: (1) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (2) financial service
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (3) asset-backed securities will be classified
according to the underlying assets securing such securities.


DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

o     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 OTC
  market), if available;

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

o     futures contracts and options are generally valued at market values established
  by the exchanges on which they are traded at the close of trading on such
  exchanges. Options traded in the OTC are generally 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;

o     for fixed-income securities, according to the mean between bid and asked prices
  as furnished by an independent pricing service, except that fixed-income securities
  with remaining maturities of less than 60 days at the time of purchase may be
  valued at amortized cost; and

o     for all other securities at fair value as determined in accordance with
  procedures established by and under the general supervision of 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.


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 net asset value (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 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.


HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated Securities
Corp.) 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 pays a portion of this charge to investment professionals that are
eligible to receive it (the "Dealer Reallowance") and retains any remaining portion
of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment
professional may receive a Dealer Reallowance as follows:


Class A Shares
                                           Dealer
                                        Reallowance
Purchase Amount                       as a percentage
                                             of
                                      Public Offering
                                           Price
Less than $50,000                          5.00%
$50,000 but less than $100,000             4.00%
$100,000 but less than $250,000            3.25%
$250,000 but less than $500,000            2.25%
$500,000 but less than $1 million          1.80%
$1 million or greater                      0.00%
Class C Shares
--------------------------------------------------------------------------------------
All Purchase Amounts                       1.00%

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

ADVANCE COMMISSIONS
When an investment professional's customer purchases Shares, the investment
professional may receive an advance commission as follows:


Class A Shares (for purchases over $1 million)
                              Advance Commission
                              as a Percentage of
Purchase Amount                Public Offering
                                    Price
First $1 million - $5               0.75%
million
Next $5 million - $20               0.50%
million
Over $20 million                    0.25%
Advance commissions are calculated on a year by year basis based on amounts invested
during that year. Accordingly, with respect to additional purchase amounts, the
advance commission breakpoint 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 commission will be paid only on
those purchases that were not previously subject to a front-end sales charge or
dealer advance commission. Certain retirement accounts may not be eligible for this
program.

                                                  Advance Commission
                                                  as a Percentage of
Class B Shares                                     Public Offering
                                                        Price
All Purchase Amounts                                 Up to 5.50%
Class C Shares
All Purchase Amounts                                    1.00%

RULE 12B-1 PLAN
--------------------------------------------------------------------------------------
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor
for activities principally intended to result in the sale of Shares such as
advertising and marketing of Shares (including printing and distributing prospectuses
and sales literature to prospective shareholders and financial institutions) and
providing incentives to investment professionals to sell Shares. The Plan is also
designed to cover the cost of administrative services performed in conjunction with
the sale of Shares, including, but not limited to, shareholder services,
recordkeeping services and educational services, as well as the costs of implementing
and operating the Plan.  The Rule 12b-1 Plan allows the Distributor to contract with
investment professionals to perform activities covered by the Plan. The Rule 12b-1
Plan is expected to benefit the Fund in a number of ways. For example, it is
anticipated that the Plan will help the Fund attract and retain assets, thus
providing cash for orderly portfolio management and Share redemptions and possibly
helping to stabilize or reduce other operating expenses. In addition, the Plan is
integral to the multiple class structure of the Fund, which promotes the sale of
Shares by providing a range of options to investors. 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 provided
the funds to make advance commission payments to investment professionals.


Additional Payments to Financial Institutions
The Distributor may pay out of its own resources amounts (including items of material
value) to certain financial institutions.  In some cases, such payments may be made
by, or funded from the resources of, companies affiliated with the Distributor
(including the Adviser).  While NASD regulations limit the sales charges that you may
bear, there are no limits with regard to the amounts that the Distributor may pay out
of its own resources.  In addition to the payments which are generally described
herein and in the prospectus, the financial institution also may receive payments
under the Rule 12b-1 Plan and/or Service Fees.

You can ask your financial institution for information about any payments it receives
from the Distributor or the Federated funds and any services provided.

The following examples illustrate the types of instances in which the Distributor may
make additional payments to financial institutions.

Supplemental Payments
The Distributor may make supplemental payments to certain financial institutions that
are holders or dealers of record for accounts in one or more of the Federated funds.
These payments may be based on such factors as the number or value of Shares the
financial institution sells or may sell; the value of client assets invested; or the
type and nature of services or support furnished by the financial institution.

Processing Support Payments
The Distributor may make payments to financial institutions that sell Federated fund
shares to help offset their costs associated with client account maintenance support,
statement processing and transaction processing.  The types of payments that the
Distributor may make under this category include payment of ticket charges on a per
transaction basis; payment of networking fees; and payment for ancillary services
such as setting up funds on the financial institution's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial institutions who sell
Federated fund shares through retirement plan programs.  A financial institution may
perform retirement plan program services itself or may arrange with a third party to
perform retirement plan program services.  In addition to participant recordkeeping,
reporting, or transaction processing, retirement plan program services may include
services rendered to a plan in connection with fund/investment selection and
monitoring; employee enrollment and education; plan balance rollover or separation,
or other similar services.

Other Benefits to Financial Institutions
From time to time, the Distributor, at its expense, may provide additional
compensation to financial institutions that sell or arrange for the sale of Shares.
Such compensation may include financial assistance to financial institutions that
enable the Distributor to participate in or present at conferences or seminars, sales
or training programs for invited employees, client and investor events and other
financial institution-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events, conferences
and programs for employees or associated persons of financial institutions and may
pay the travel and lodging expenses of attendees.  The Distributor also may provide,
at its expense, meals and entertainment in conjunction with meetings with financial
institutions.  Other compensation may be offered to the extent not prohibited by
applicable laws, regulations or the rules of any self-regulatory agency, such as the
NASD.

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UNDERWRITING COMMISSIONS
The following chart reflects the total front-end sales charges and contingent
deferred sales charges paid in connection with the sale of Class A, Class B and Class
C Shares of the Fund and the amount retained by the Distributor for the last three
fiscal years ended October 31, 2004:

                     2004                     2003                      2002

            Total        Amount      Total          Amount       Total
            Sales      -----------   Sales        ----------     Sales       Amount
            Charges     Retained     Charges       Retained     Charges     Retained
Class A     $2,367,504  $238,717     $1,026,430    $102,666     $98,191      $9,886
Shares
Class B        0            0            0            0         660,669      316,235
Shares
Class C     319,468         0         311,784         0          21,983      10,323
Shares


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


EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in 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 1940 Act, 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.


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As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class A Shares: Carey & Co., Columbus, OH, owned
approximately 1,384,656 Shares (9.50%); MLPF&S for the sole benefit of its
customers, Jacksonville, FL, owned approximately 832,067 Shares (5.71%); Citigroup
Global Markets, Inc., New York, NY, owned approximately 823,504 Shares (5.65%); and
Edward Jones & Co., Maryland Heights, MO, owned approximately 760,949 Shares
(5.22%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class B Shares: Citigroup Global Markets, Inc., New
York, NY, owned approximately 412,004 Shares (8.12%); and MLPF&S for the sole
benefit of its customers, Jacksonville, FL, owned approximately 311,419 Shares
(6.13%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class C Shares: Citigroup Global Markets, Inc., New
York, NY, owned approximately 855,267 Shares (14.81%); and MLPF&S for the sole
benefit of its customers, Jacksonville, FL, owned approximately 675,886 Shares
(11.70%).



Shareholders owning 25% or more of outstanding Shares may be in control and be able
to affect the outcome of certain matters presented for a vote of shareholders.


Citigroup Global Markets, Inc. is organized in the state of Delaware and is a
subsidiary of Citigroup Group, Inc.; organized in the state of Delaware.

Edward Jones & Co. is organized in the state of Missouri and is a subsidiary of
Edward D. Jones & Co., LP; organized in the state of Missouri.

Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) is organized in the state of
Delaware and is a subsidiary of Merrill Lynch, Inc. Co.; organized in the state of
Delaware.

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TAX INFORMATION


FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code
(Code) applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will be subject to federal
corporate 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 income generated by the securities in the
portfolio, whereas tax-basis income includes, in addition, 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 will qualify for
certain Code provisions that allow its 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?


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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. The following
tables give information about each Board member and the senior officers of the Fund.
Where required, the tables separately list Board members who are "interested persons"
of the Fund (i.e., "Interested" Board members) and those who are not (i.e.,
"Independent" Board members). Unless otherwise noted, the address of each person
listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA.  As of
December 31, 2003, the Trust comprised seven portfolios and the Federated Fund
Complex consisted of 44 investment companies (comprising 136 portfolios). Unless
otherwise noted, each Officer is elected annually. Unless otherwise noted, each Board
member oversees all portfolios in the Federated Fund Complex and serves for an
indefinite term. Unless otherwise noted, each Officer is elected annually.

As of December 2, 2004, the Fund's Board and Officers as a group owned less than 1%
of each class of the Fund's outstanding Shares.


INTERESTED TRUSTEES BACKGROUND AND COMPENSATION


        Name
     Birth Date                                           Aggregate         Total
      Address                                            Compensation   Compensation
Positions Held with   Principal Occupation(s) for Past    From Fund    From Trust and
       Trust           Five Years, Other Directorships      (past      Federated Fund
 Date Service Began     Held and Previous Position(s)    fiscal year)      Complex
                                                                       (past calendar
                                                                            year)
                      Principal Occupations: Chairman         $0             $0
John F. Donahue*      and Director or Trustee of the
Birth Date: July      Federated Fund Complex; Chairman
28, 1924              and Director, Federated
CHAIRMAN AND TRUSTEE  Investors, Inc.
Began serving:
April 1984            Previous Positions: Trustee,
                      Federated Investment Management
                      Company and Chairman and
                      Director, Federated Investment
                      Counseling.

                      Principal Occupations: Principal        $0             $0
J. Christopher        Executive Officer and President
Donahue*              of the Federated Fund Complex;
Birth Date: April     Director or Trustee of some of
11, 1949              the Funds in the Federated Fund
PRESIDENT AND         Complex; President, Chief
TRUSTEE               Executive Officer and Director,
Began serving:        Federated Investors, Inc.;
January 2000          Chairman and Trustee, Federated
                      Investment Management Company;
                      Trustee, Federated Investment
                      Counseling; Chairman and
                      Director, Federated Global
                      Investment Management Corp.;
                      Chairman, Federated Equity
                      Management Company of
                      Pennsylvania, Passport Research,
                      Ltd. and Passport Research II,
                      Ltd.; Trustee, Federated
                      Shareholder Services Company;
                      Director, Federated Services
                      Company.

                      Previous Positions: President,
                      Federated Investment Counseling;
                      President and Chief Executive
                      Officer, Federated Investment
                      Management Company, Federated
                      Global Investment Management
                      Corp. and Passport Research, Ltd.

                      Principal Occupations: Director      $255.19        $148,500
Lawrence D. Ellis,    or Trustee of the Federated Fund
M.D.*                 Complex; Professor of Medicine,
Birth Date: October   University of Pittsburgh;
11, 1932              Medical Director, University of
3471 Fifth Avenue     Pittsburgh Medical Center
Suite 1111            Downtown; Hematologist,
Pittsburgh, PA        Oncologist and Internist,
TRUSTEE               University of Pittsburgh Medical
Began serving:        Center.
August 1987
                      Other Directorships Held:
                      Member, National Board of
                      Trustees, Leukemia Society of
                      America.

                      Previous Positions: Trustee,
                      University of Pittsburgh;
                      Director, University of
                      Pittsburgh Medical Center.

* Family relationships and reasons for "interested" status: John F. Donahue is the
father of J. Christopher Donahue; both are "interested" due to the positions they
hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is "interested"
because his son-in-law is employed by the Fund's principal underwriter, Federated
Securities Corp.
--------------------------------------------------------------------------------------


INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION


Name
Birth Date                                                Aggregate         Total
Address                                                  Compensation   Compensation
Positions Held with   Principal Occupation(s) for Past    From Fund    From Trust and
Trust                 Five Years, Other Directorships       (past      Federated Fund
Date Service Began    Held and Previous Position(s)      fiscal year)      Complex
                                                                       (past calendar
                                                                            year)
                      Principal Occupation: Director       $280.71        $163,350
Thomas G. Bigley      or Trustee of the Federated Fund
Birth Date:           Complex.
February 3, 1934
15 Old Timber Trail   Other Directorships Held:
Pittsburgh, PA        Director, Member of Executive
TRUSTEE               Committee, Children's Hospital
Began serving:        of Pittsburgh; Director,
October 1995          University of Pittsburgh.

                      Previous Position: Senior
                      Partner, Ernst & Young LLP.

                      Principal Occupations: Director      $280.71        $163,350
John T. Conroy, Jr.   or Trustee of the Federated Fund
Birth Date: June      Complex; Chairman of the Board,
23, 1937              Investment Properties
Investment            Corporation; Partner or Trustee
Properties            in private real estate ventures
Corporation           in Southwest Florida.
3838 North Tamiami
Trail                 Previous Positions: President,
Suite 402             Investment Properties
Naples, FL            Corporation; Senior Vice
TRUSTEE               President, John R. Wood and
Began serving:        Associates, Inc., Realtors;
November 1991         President, Naples Property
                      Management, Inc. and Northgate
                      Village Development Corporation.

                      Principal Occupation: Director       $280.71        $163,350
Nicholas P.           or Trustee of the Federated Fund
Constantakis          Complex.
Birth Date:
September 3, 1939     Other Directorships Held:
175 Woodshire Drive   Director and Member of the Audit
Pittsburgh, PA        Committee, Michael Baker
TRUSTEE               Corporation (engineering and
Began serving:        energy services worldwide).
February 1998
                      Previous Position: Partner,
                      Anderson Worldwide SC.

                      Principal Occupation: Director       $255.19        $148,500
John F. Cunningham    or Trustee of the Federated Fund
Birth Date: March     Complex.
5, 1943
353 El Brillo Way     Other Directorships Held:
Palm Beach, FL        Chairman, President and Chief
TRUSTEE               Executive Officer, Cunningham
Began serving:        & Co., Inc. (strategic
January 1999          business consulting); Trustee
                      Associate, Boston College.

                      Previous Positions: Director,
                      Redgate Communications and EMC
                      Corporation (computer storage
                      systems); Chairman of the Board
                      and Chief Executive Officer,
                      Computer Consoles, Inc.;
                      President and Chief Operating
                      Officer, Wang Laboratories;
                      Director, First National Bank of
                      Boston; Director, Apollo
                      Computer, Inc.

                      Principal Occupation: Director       $255.19        $148,500
Peter E. Madden       or Trustee of the Federated Fund
Birth Date: March     Complex; Management Consultant.
16, 1942
One Royal Palm Way    Other Directorships Held: Board
100 Royal Palm Way    of Overseers, Babson College.
Palm Beach, FL
TRUSTEE               Previous Positions:
Began serving:        Representative, Commonwealth of
November 1991         Massachusetts General Court;
                      President, State Street Bank and
                      Trust Company and State Street
                      Corporation (retired); Director,
                      VISA USA and VISA International;
                      Chairman and Director,
                      Massachusetts Bankers
                      Association; Director,
                      Depository Trust Corporation;
                      Director, The Boston Stock
                      Exchange.

                      Principal Occupations: Director      $280.71        $163,350
Charles F.            or Trustee of the Federated Fund
Mansfield, Jr.        Complex; Management Consultant;
Birth Date: April     Executive Vice President, DVC
10, 1945              Group, Inc. (marketing,
80 South Road         communications and technology)
Westhampton Beach,    (prior to 9/1/00).
NY
TRUSTEE               Previous Positions: Chief
Began serving:        Executive Officer, PBTC
January 1999          International Bank; Partner,
                      Arthur Young & Company (now
                      Ernst & Young LLP); Chief
                      Financial Officer of Retail
                      Banking Sector, Chase Manhattan
                      Bank; Senior Vice President,
                      HSBC Bank USA (formerly, Marine
                      Midland Bank); Vice President,
                      Citibank; Assistant Professor of
                      Banking and Finance, Frank G.
                      Zarb School of Business, Hofstra
                      University.

                      Principal Occupations: Director      $306.24        $178,200
John E. Murray,       or Trustee of the Federated Fund
Jr., J.D., S.J.D.     Complex; Chancellor and Law
Birth Date:           Professor, Duquesne University;
December 20, 1932     Partner, Murray, Hogue &
Chancellor,           Lannis.
Duquesne University
Pittsburgh, PA        Other Directorships Held:
TRUSTEE               Director, Michael Baker Corp.
Began serving:        (engineering, construction,
February 1995         operations and technical
                      services).

                      Previous Positions: President,
                      Duquesne University; Dean and
                      Professor of Law, University of
                      Pittsburgh School of Law; Dean
                      and Professor of Law, Villanova
                      University School of Law.

                      Principal Occupations:  Director     $255.19        $148,500
Marjorie P. Smuts     or Trustee of the Federated Fund
Birth Date: June      Complex; Public
21, 1935              Relations/Marketing
4905 Bayard Street    Consultant/Conference
Pittsburgh, PA        Coordinator.
TRUSTEE
Began serving:        Previous Positions: National
April 1984            Spokesperson, Aluminum Company
                      of America; television producer;
                      President, Marj Palmer Assoc.;
                      Owner, Scandia Bord.

                      Principal Occupations:  Director     $255.19        $148,500
John S. Walsh         or Trustee of the Federated Fund
Birth Date:           Complex; President and Director,
November 28, 1957     Heat Wagon, Inc. (manufacturer
2604 William Drive    of construction temporary
Valparaiso, IN        heaters); President and
TRUSTEE               Director, Manufacturers
Began serving:        Products, Inc. (distributor of
January 1999          portable construction heaters);
                      President, Portable Heater
                      Parts, a division of
                      Manufacturers Products, Inc.

                      Previous Position: Vice
                      President, Walsh & Kelly,
                      Inc.



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


OFFICERS**

Name
Birth Date
Address
Positions Held with Trust
-----------------------------    Principal Occupation(s) and Previous Position(s)
Date Service Began
                                 Principal Occupations: Executive Vice President
John W. McGonigle                and Secretary of the Federated Fund Complex;
Birth Date: October 26, 1938     Executive Vice President, Secretary and Director,
EXECUTIVE VICE PRESIDENT AND     Federated Investors, Inc.
SECRETARY
Began serving: April 1984        Previous Positions: Trustee, Federated Investment
                                 Management Company and Federated Investment
                                 Counseling; Director, Federated Global Investment
                                 Management Corp., Federated Services Company and
                                 Federated Securities Corp.

                                 Principal Occupations: Principal Financial
Richard J. Thomas                Officer and Treasurer of the Federated Fund
Birth Date: June 17, 1954        Complex; Senior Vice President, Federated
TREASURER                        Administrative Services.
Began serving: November 1998
                                 Previous Positions: Vice President, Federated
                                 Administrative Services; held various management
                                 positions within Funds Financial Services
                                 Division of Federated Investors, Inc.

                                 Principal Occupations: Vice Chairman or Vice
Richard B. Fisher                President of some of the Funds in the Federated
Birth Date: May 17, 1923         Fund Complex; Vice Chairman, Federated Investors,
VICE PRESIDENT                   Inc.; Chairman, Federated Securities Corp.
Began serving: April 1984
                                 Previous Positions: President and Director or
                                 Trustee of some of the Funds in the Federated
                                 Fund Complex; Executive Vice President, Federated
                                 Investors, Inc. and Director and Chief Executive
                                 Officer, Federated Securities Corp.

                                 Principal Occupations: Chief Investment Officer
Stephen F. Auth                  of this Fund and various other Funds in the
Birth Date: September 3, 1956    Federated Fund Complex; Executive Vice President,
CHIEF INVESTMENT OFFICER         Federated Investment Counseling, Federated Global
Began serving: November 2002     Investment Management Corp., Federated Equity
                                 Management Company of Pennsylvania and Passport
                                 Research II, Ltd.

                                 Previous Positions: Executive Vice President,
                                 Federated Investment Management Company, and
                                 Passport Research, Ltd.; Senior Vice President,
                                 Global Portfolio Management Services Division;
                                 Senior Vice President, Federated Investment
                                 Management Company and Passport Research, Ltd.;
                                 Senior Managing Director and Portfolio Manager,
                                 Prudential Investments.

---------------------------------------------------------------------------------------
                                 Lawrence Auriana is Vice President of the Trust.
Lawrence Auriana                 Mr. Auriana joined Federated in April 2001 as
Birth Date: January 8, 1944      Co-Head of Investments/Federated Kaufmann. From
VICE PRESIDENT                   August 1984 to April 2001, Mr. Auriana was
Began serving: November 2001     President and Treasurer of Edgemont Asset
                                 Management Corp., and Chairman of the Board and
                                 Portfolio Manager to The Kaufmann Fund, Inc.
                                 (predecessor to the Federated Kaufmann Fund). Mr.
                                 Auriana earned a B.S. in economics from Fordham
                                 University and has been engaged in the securities
                                 business since 1965.
                              -----------------------------------------------------


                                 James E. Grefenstette is Vice President of the
James E. Grefenstette            Trust. Mr. Grefenstette joined Federated in 1992
Birth Date: November 7, 1962     and has been a Portfolio Manager since 1994. Mr.
VICE PRESIDENT                   Grefenstette became a Senior Vice President of
Began serving: November 1998     the Fund's Adviser in January 2000. He served as
                                 a Vice President of the Fund's Adviser from 1996
                                 through 1999 and was an Assistant Vice President
                                 of the Fund's Adviser from 1994 until 1996. Mr.
                                 Grefenstette is a Chartered Financial Analyst; he
                                 received his M.S. in Industrial Administration
                                 from Carnegie Mellon University.

                                 Hans P. Utsch is Vice President of the Trust. Mr.
Hans P. Utsch                    Utsch joined Federated in April 2001 as Co-Head
Birth Date: July 3, 1936         of Investments/Federated Kaufmann. From August
VICE PRESIDENT                   1984 to April 2001, Mr. Utsch was Chairman of the
Began serving: November 2001     Board and Secretary of Edgemont Asset Management
                                 Corp., and President and Portfolio Manager to The
                                 Kaufmann Fund, Inc. (predecessor to the Federated
                                 Kaufmann Fund). Mr. Utsch graduated from Amherst
                                 College and holds an M.B.A. from Columbia
                                 University. He has been engaged in the securities
                                 business since 1962.

**    Officers do not receive any compensation from the Fund.
--------------------------------------------------------------------------------------




COMMITTEES OF THE BOARD


                                                                           Meetings
Board     Committee                                                        Held
Committee Members             Committee Functions                          During
                                                                           Last
                                                                           Fiscal
                                                                           Year

Executive                     In between meetings of the full Board,          Six
          John F. Donahue     the Executive Committee generally may
          John E. Murray,     exercise all the powers of the full Board
          Jr., J.D., S.J.D.   in the management and direction of the
                              business and conduct of the affairs of
                              the Trust/in such manner as the Executive
                              Committee shall deem to be in the best
                              interests of the Trust.  However, the
                              Executive Committee cannot elect or
                              remove Board members, increase or
                              decrease the number of Trustees, elect or
                              remove any Officer, declare dividends,
                              issue shares or recommend to shareholders
                              any action requiring shareholder approval.

Audit                         The purposes of the Audit Committee are         Six
          Thomas G. Bigley    to oversee the accounting and financial
          John T. Conroy,     reporting process of the Fund, the Fund`s
          Jr.                 internal control over financial
          Nicholas P.         reporting, and the quality, integrity and
          Constantakis        independent audit of the Fund`s financial
          Charles F.          statements.  The Committee also oversees
          Mansfield, Jr.      or assists the Board with the oversight
                              of compliance with legal requirements
                              relating to those matters, approves the
                              engagement and reviews the
                              qualifications, independence and
                              performance of the Fund`s independent
                              registered public accounting firm, acts
                              as a liaison between the independent
                              registered public accounting firm and the
                              Board and reviews the Fund`s internal
                              audit function.

Nominating                                                                    One
          Thomas G. Bigley    The Nominating Committee, whose members
          John T. Conroy,     consist of all Independent  Trustees,
          Jr.                 selects and nominates persons for
          Nicholas P.         election to the Fund`s Board when
          Constantakis        vacancies occur. The Committee will
          John F.             consider candidates recommended by
          Cunningham          shareholders, Independent Trustees],
          Peter E. Madden     officers or employees of any of the
          Charles F.          Fund`s agents or service providers and
          Mansfield, Jr.      counsel to the Fund. Any shareholder who
          John E. Murray,     desires to have an individual considered
          Jr.                 for nomination by the Committee must
          Marjorie P. Smuts   submit a recommendation in writing to the
          John S. Walsh       Secretary of the Fund, at the Fund 's
                              address appearing on the back cover of
                              this Statement of Additional Information.
                              The recommendation should include the
                              name and address of both the shareholder
                              and the candidate and detailed
                              information concerning the candidate's
                              qualifications and experience. In
                              identifying and evaluating candidates for
                              consideration, the Committee shall
                              consider such factors as it deems
                              appropriate.  Those factors will
                              ordinarily include:  integrity,
                              intelligence, collegiality, judgment,
                              diversity, skill, business and other
                              experience, qualification as an
                              "Independent Trustee," the existence of
                              material relationships which may create
                              the appearance of a lack of independence,
                              financial or accounting knowledge and
                              experience, and dedication and
                              willingness to devote the time and
                              attention necessary to fulfill Board
                              responsibilities.



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


Board ownership of shares in the fund and in the Federated family of Investment
companies AS OF DECEMBER 31, 2003
                                                                       Aggregate
                                                                 Dollar Range of
                                           Dollar Range of       Shares Owned in
Interested                                    Shares Owned             Federated
Board Member Name                                  in Fund             Family of
                                                                      Investment
                                                                       Companies
John F. Donahue                              Over $100,000         Over $100,000
J. Christopher Donahue                                None         Over $100,000
Lawrence D. Ellis, M.D.                               None         Over $100,000

Independent
Board Member Name

Thomas G. Bigley                                      None         Over $100,000
John T. Conroy, Jr.                                   None         Over $100,000
Nicholas P. Constantakis                         $10,001 -         Over $100,000
                                                   $50,000
John F. Cunningham                                    None         Over $100,000
Peter E. Madden                                       None         Over $100,000
Charles F. Mansfield, Jr.                             None             $50,001 -
                                                                        $100,000
John E. Murray, Jr., J.D., S.J.D.                     None         Over $100,000
Marjorie P. Smuts                             $1 - $10,000         Over $100,000
John S. Walsh                                         None         Over $100,000

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

</R>


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 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.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory contract and sub-advisory contracts.  The Board's decision to approve these
contracts reflects the exercise of its business judgment on whether to continue the
existing arrangements.  During its review of these contracts, the Board considers
many factors, among the most material of which are: the Fund's investment objectives
and long term performance; the Adviser's and sub-adviser's management philosophy,
personnel and processes; the preferences and expectations of Fund shareholders and
their relative sophistication; the continuing state of competition in the mutual fund
industry; comparable fees in the mutual fund industry; the range and quality of
services provided to the Fund and its shareholders by the Federated organization in
addition to investment advisory services; and the Fund's relationship to the
Federated funds.

In assessing the Adviser's and sub-adviser's performance of its obligations, the
Board also considers whether there has occurred a circumstance or event that would
constitute a reason for it to not renew an advisory contract.  In this regard, the
Board is mindful of the potential disruptions of the Fund's operations and various
risks, uncertainties and other effects that could occur as a result of a decision to
terminate or not renew an advisory contract.  In particular, the Board recognizes
that most shareholders have invested in the Fund on the strength of the Adviser's
industry standing and reputation and in the expectation that the Adviser will have a
continuing role in providing advisory services to the Fund.

The Board also considers the compensation and benefits received by the Adviser and
sub-adviser.  This includes fees received for services provided to the Fund by other
entities in the Federated organization and research services received by the Adviser
from brokers that execute fund trades, as well as advisory fees.  In this regard, the
Board is aware that various courts have interpreted provisions of the 1940 Act and
have indicated in their decisions that the following factors may be relevant to an
Adviser's compensation:  the nature and quality of the services provided by the
Adviser, including the performance of the Fund; the Adviser's cost of providing the
services; the extent to which the Adviser may realize "economies of scale" as the
Fund grows larger; any indirect benefits that may accrue to the Adviser and its
affiliates as a result of the Adviser's relationship with the Fund; performance and
expenses of comparable funds; and the extent to which the independent Board members
are fully informed about all facts bearing on the Adviser's service and fee.  The
Fund's Board is aware of these factors and takes them into account in its review of
the Fund's advisory contract.

The Board considers and weighs these circumstances in light of its substantial
accumulated experience in governing the Fund and working with Federated on matters
relating to the Federated funds, and is assisted in its deliberations by the advice
of independent legal counsel.  In this regard, the Board requests and receives a
significant amount of information about the Fund and the Federated organization.
Federated provides much of this information at each regular meeting of the Board, and
furnishes additional reports in connection with the particular meeting at which the
Board's formal review of the advisory contracts occurs.  In between regularly
scheduled meetings, the Board may receive information on particular matters as the
need arises.  Thus, the Board's evaluation of an advisory contract is informed by
reports covering such matters as: the Adviser's investment philosophy, personnel, and
processes; the Fund's short- and long-term performance (in absolute terms as well as
in relationship to its particular investment program and certain competitor or "peer
group" funds), and comments on the reasons for performance; the Fund's expenses
(including the advisory fee itself and the overall expense structure of the Fund,
both in absolute terms and relative to similar and/or competing funds, with due
regard for contractual or voluntary expense limitations); the use and allocation of
brokerage commissions derived from trading the Fund's portfolio securities; the
nature and extent of the advisory and other services provided to the Fund by the
Adviser and its affiliates; compliance and audit reports concerning the Federated
funds and the Federated companies that service them; and relevant developments in the
mutual fund industry and how the Federated funds and/or Federated are responding to
them.

The Board also receives financial information about Federated, including reports on
the compensation and benefits Federated derives from its relationships with the
Federated funds.  These reports cover not only the fees under the advisory contracts,
but also fees received by Federated's subsidiaries for providing other services to
the Federated funds under separate contracts (e.g., for serving as the Federated
funds' administrator).  The reports also discuss any indirect benefit Federated may
derive from its receipt of research services from brokers who execute Federated fund
trades.

The Board bases its decision to approve an advisory contract on the totality of the
circumstances and relevant factors, and with a view to past and future long-term
considerations.  Not all of the factors and considerations identified above are
relevant to every Federated fund, nor does the Board consider any one of them to be
determinative.  Because the totality of circumstances includes considering the
relationship of each Federated fund, the Board does not approach consideration of
every Federated fund's advisory contract as if that were the only Federated fund.


Services Agreement
Federated Advisory Services Company, an affiliate of the Adviser, provides research,
quantitative analysis, equity trading and transaction settlement and certain support
services to the Adviser.  The fee for these services is paid by the Adviser and not
by the Fund.


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.

<R>


Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted
codes of ethics.  These codes govern securities trading activities of investment
personnel, Fund Trustees, and certain other employees.  Although they do permit these
people to trade in securities, including those that the Fund could buy, as well as
Shares of the Fund, they also contain significant safeguards designed to protect the
Fund and its shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.


</R>


Voting Proxies on Fund Portfolio Securities
The Board has delegated to the Adviser authority to vote proxies on the securities
held in the Fund's portfolio.  The Board has also approved the Adviser's policies and
procedures for voting the proxies, which are described below.


Proxy Voting Policies
The Adviser's general policy is to cast proxy votes in favor of proposals that the
Adviser anticipates will enhance the long-term value of the securities being voted.
Generally, this will mean voting for proposals that the Adviser believes will:
improve the management of a company; increase the rights or preferences of the voted
securities; and/or increase the chance that a premium offer would be made for the
company or for the voted securities.

The following examples illustrate how these general policies may apply to proposals
submitted by a company's board of directors.  However, whether the Adviser supports
or opposes a proposal will always depend on the specific circumstances described in
the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for proposals to:
require independent tabulation of proxies and/or confidential voting by shareholders;
reorganize in another jurisdiction (unless it would reduce the rights or preferences
of the securities being voted); and repeal a shareholder rights plan (also known as a
"poison pill").  The Adviser will generally vote against the adoption of such a plan
(unless the plan is designed to facilitate, rather than prevent, unsolicited offers
for the company).

On matters of capital structure, generally the Adviser will vote: against proposals
to authorize or issue shares that are senior in priority or voting rights to the
securities being voted; for proposals to grant preemptive rights to the securities
being voted; and against proposals to eliminate such preemptive rights.

On matters relating to management compensation, generally the Adviser will vote: for
stock incentive plans that align the recipients' interests with the interests of
shareholders without creating undue dilution; and against proposals that would permit
the amendment or replacement of outstanding stock incentives with new stock
incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies relating
to proposed mergers, capital reorganizations, and similar transactions in accordance
with the general policy, based upon its analysis of the proposed transaction.  The
Adviser will vote proxies in contested elections of directors in accordance with the
general policy, based upon its analysis of the opposing slates and their respective
proposed business strategies.  Some transactions may also involve proposed changes to
the company's corporate governance, capital structure or management compensation.
The Adviser will vote on such changes based on its evaluation of the proposed
transaction or contested election.  In these circumstances, the Adviser may vote in a
manner contrary to the general practice for similar proposals made outside the
context of such a proposed transaction or change in the board.  For example, if the
Adviser decides to vote against a proposed transaction, it may vote for anti-takeover
measures reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without the
favorable recommendation of a company's board.  The Adviser believes that a company's
board should manage its business and policies, and that shareholders who seek
specific changes should strive to convince the board of their merits or seek direct
representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting.  For example, if a foreign market
requires shareholders casting proxies to retain the voted shares until the meeting
date (thereby rendering the shares "illiquid" for some period of time), the Adviser
will not vote proxies for such shares.


Proxy Voting Procedures
The Adviser has established a Proxy Voting Committee (Proxy Committee), to exercise
all voting discretion granted to the Adviser by the Board in accordance with the
proxy voting policies.  The Adviser has hired Investor Responsibility Research Center
(IRRC) to obtain, vote, and record proxies in accordance with the Proxy Committee's
directions.  The Proxy Committee directs IRRC by means of Proxy Voting Guidelines,
and IRRC may vote any proxy as directed in the Proxy Voting Guidelines without
further direction from the Proxy Committee (and may make any determinations required
to implement the Proxy Voting Guidelines).  However, if the Proxy Voting Guidelines
require case-by-case direction for a proposal, IRRC will provide the Proxy Committee
with all information that it has obtained regarding the proposal and the Proxy
Committee will provide specific direction to IRRC.  The Adviser's proxy voting
procedures generally permit the Proxy Committee to amend the Proxy Voting Guidelines,
or override the directions provided in such Guidelines, whenever necessary to comply
with the proxy voting policies.


Conflicts of Interest
The Adviser has adopted procedures to address situations where a matter on which a
proxy is sought may present a potential conflict between the interests of the Fund
(and its shareholders) and those of the Adviser or Distributor.  This may occur where
a significant business relationship exists between the Adviser (or its affiliates)
and a company involved with a proxy vote.  A company that is a proponent, opponent,
or the subject of a proxy vote, and which to the knowledge of the Proxy Committee has
this type of significant business relationship, is referred to as an "Interested
Company."

The Adviser has implemented the following procedures in order to avoid concerns that
the conflicting interests of the Adviser have influenced proxy votes.  Any employee
of the Adviser who is contacted by an Interested Company regarding proxies to be
voted by the Adviser must refer the Interested Company to a member of the Proxy
Committee, and must inform the Interested Company that the Proxy Committee has
exclusive authority to determine how the Adviser will vote.  Any Proxy Committee
member contacted by an Interested Company must report it to the full Proxy Committee
and provide a written summary of the communication.  Under no circumstances will the
Proxy Committee or any member of the Proxy Committee make a commitment to an
Interested Company regarding the voting of proxies or disclose to an Interested
Company how the Proxy Committee has directed such proxies to be voted.  If the Proxy
Voting Guidelines already provide specific direction on the proposal in question, the
Proxy Committee shall not alter or amend such directions.  If the Proxy Voting
Guidelines require the Proxy Committee to provide further direction, the Proxy
Committee shall do so in accordance with the proxy voting policies, without regard
for the interests of the Adviser with respect to the Interested Company.  If the
Proxy Committee provides any direction as to the voting of proxies relating to a
proposal affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and why,
the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or an
affiliate) acts as an investment adviser, the Proxy Committee will vote the Fund's
proxies in the same proportion as the votes cast by shareholders who are not clients
of the Adviser at any shareholders' meeting called by such investment company, unless
otherwise directed by the Board.

Proxy Voting Report
A report on "Form N-PX" of how the Fund voted any proxies during the most recent
12-month period ended June 30 is available through Federated's website.  Go to
www.federatedinvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX.


PORTFOLIO HOLDINGS DISCLOSURE POLICIES

<R>

Information concerning the Fund's portfolio holdings is available in the "Products"
section of the Federated's website at www.federatedinvestors.com.  A complete listing
of the Fund's portfolio holdings as of the end of each calendar quarter is posted on
the website 30 days (or the next business day) after the end of the quarter and
remains posted until replaced by the information for the succeeding quarter. Summary
portfolio composition information as of the close of each month (except for recent
purchase and sale transaction information, which is updated quarterly) is posted on
the website 15 days (or the next business day) after month-end and remains until
replaced by the information for the succeeding month.  The summary portfolio
composition information may include identification of the Fund's top ten holdings,
recent purchase and sale transactions and a percentage breakdown of the portfolio by
sector


</R>


To access this information from the "Products" section of the website, click on
"Portfolio Holdings" and select the appropriate link opposite the name of the Fund,
or select the name of the Fund from the menus on the "Products" section, and from the
Fund's page click on the "Portfolio Holdings" or "Composition" link.  A user is
required to register on the website the first time the user accesses this
information.


You may also access from the "Products" section of the website portfolio information
as of the end of the Fund's fiscal quarters.  The Fund's annual and semi-annual
reports, which contain complete listings of the Fund's portfolio holdings as of the
end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the
name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the
link to the appropriate PDF.  Complete listings of the Fund's portfolio holdings as
of the end of the Fund's first and third fiscal quarters may be accessed by selecting
"Portfolio Holdings" from the "Products" section and then selecting the appropriate
link opposite the name of the Fund.  Fiscal quarter information is made available on
the website within 70 days after the end of the fiscal quarter.  This information is
also available in reports filed with the SEC at the SEC's website at www.sec.gov.


The disclosure policy of the Fund and the Adviser prohibits the disclosure of
portfolio holdings information to any investor or intermediary before the same
information is made available to other investors.  Employees of the Adviser or its
affiliates who have access to nonpublic information concerning the Fund's portfolio
holdings are prohibited from trading securities on the basis of this information.
Such persons must report all personal securities trades and obtain pre-clearance for
all personal securities trades other than mutual fund shares.


Firms that provide administrative, custody, financial, accounting, legal or other
services to the Fund may receive nonpublic information about Fund portfolio holdings
for purposes relating to their services.  The Fund may also provide portfolio
holdings information to publications that rate, rank or otherwise categorize
investment companies.  Traders or portfolio managers may provide "interest" lists to
facilitate portfolio trading if the list reflects only that subset of the portfolio
for which the trader or portfolio manager is seeking market interest.  A list of
service providers, publications and other third parties who may receive nonpublic
portfolio holdings information appears in the Appendix to this SAI.


<R>


The furnishing of nonpublic portfolio holdings information to any third party (other
than authorized governmental or regulatory personnel) requires the prior approval of
the President of the Adviser and of the Chief Compliance Officer of the Fund.  The
President of the Adviser and the Chief Compliance Officer will approve the furnishing
of nonpublic portfolio holdings information to a third party only if they consider
the furnishing of such information to be in the best interests of the Fund and its
shareholders.  In that regard, and to address possible conflicts between the
interests of Fund shareholders and those of the Adviser and its affiliates, the
following procedures apply.  No consideration may be received by the Fund, the
Adviser, any affiliate of the Adviser or any of their employees in connection with
the disclosure of portfolio holdings information.  Before information is furnished,
the third party must sign a written agreement that it will safeguard the
confidentiality of the information, will use it only for the purposes for which it is
furnished and will not use it in connection with the trading of any security.
Persons approved to receive nonpublic portfolio holdings information will receive it
as often as necessary for the purpose for which it is provided.  Such information may
be furnished as frequently as daily and often with no time lag between the date of
the information and the date it is furnished.  The Board receives and reviews
annually a list of the persons who receive nonpublic portfolio holdings information
and the purposes for which it is furnished.


</R>


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).  The Adviser may also direct
certain portfolio trades to a broker that, in turn, pays a portion of the Fund's
operating expenses.  The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.

Investment decisions for the Fund are made independently from those of other accounts
managed by the Adviser.  All of the Fund's trading in initial public offerings
("IPO") will be done independently from any other accounts.  Although the Fund also
expects to engage in non-IPO trading independently from any other accounts, when the
Fund and one or more of those accounts do invest in, or dispose of, the same
security, available investments or opportunities for sales may 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.  Conversely, it is
possible that independent trading activity by the Fund could adversely impact the
prices paid or received and/or positions obtained or disposed of by the Fund.


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.

In all brokerage orders, the Fund's managers seek the most favorable prices and
executions.  Determining what may constitute the most favorable price and execution
in a brokerage order involves a number of factors, including the overall direct net
economic result to the Fund (involving both price paid or received and any
commissions or other costs paid) and the efficiency with which the transaction is
effected.  The managers also consider the ongoing brokerage and research services
provided to the Fund.  The Fund will pay broker-dealers a commission for executing a
particular transaction for the Fund that may be in excess of the amount of commission
those or other broker-dealers may normally charge other institutional investors if
the managers determine, in good faith, that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker/dealer,
viewed in terms of the particular transaction or of the overall benefits to the Fund.


<R>

For the fiscal year ended, October 31, 2004, the Fund's Adviser directed brokerage
transactions to certain brokers due to research services they provided. The total
amount of these transactions was $442,283,022 for which the Fund paid $1,571,584 in
brokerage commissions.

</R>


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

                                        Average Aggregate Daily
  Maximum Administrative Fee          Net Assets of the Federated
                                                 Funds
         0.150 of 1%                    on the first $5 billion
         0.125 of 1%                     on the next $5 billion
         0.100 of 1%                    on the next $10 billion
         0.075 of 1%                   on assets over $20 billion
The administrative fee received during any fiscal year shall be at least $150,000 per
portfolio and $40,000 per each additional class of Shares. FAS may voluntarily waive
a portion of its fee and may reimburse the Fund for expenses.
--------------------------------------------------------------------------------------

FAS 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
State Street Bank and Trust Company, the Fund's registered transfer agent, maintains
all necessary shareholder records.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Ernst & Young
LLP, conducts its audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require it to plan and perform its
audits to provide reasonable assurance about whether the Fund's financial statements
and financial highlights are free of material misstatement.

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FEES PAID BY THE FUND FOR SERVICES

--------------------------          2004                2003
For the Year Ended
October 31,
Advisory Fee Earned              $4,658,806           $684,620
Advisory Fee Reduction            821,151              317,694
Advisory Fee Reimbursement          495                  407
Brokerage Commissions            1,703,403             715,999
Administrative Fee                249,124              92,753
12b-1 Fee:
 Class A Shares                   349,941                --
 Class B Shares                   526,772                --
 Class C Shares                   612,954                --
Shareholder Services Fee:
 Class A Shares                   437,426                --
 Class B Shares                   175,591                --
 Class C Shares                   204,318                --

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

</R>

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.



HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits this
standard performance information to be accompanied by non-standard performance
information.

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/or the
value of portfolio holdings 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 are given for the one-year and Start of Performance periods ended
October 31, 2004.

Yield is given for the 30-day period ended October 31, 2004.

<R>

                                                                      Start of
                                                                   Performance on
                                 30-Day Period       1 Year          12/18/2002
Class A Shares:
Total Return
  Before Taxes                        N/A            8.43%             38.95%
  After Taxes on Distributions        N/A            7.89%             38.58%
  After Taxes on
  Distributions and Sale of           N/A            5.44%             33.50%
  Shares
Yield                                0.00%            N/A               N/A
Class B Shares:
Total Return
  Before Taxes                        N/A            8.59%             40.77%
  After Taxes on Distributions        N/A            8.02%             40.39%
  After Taxes on
  Distributions and Sale of           N/A            5.55%             35.09%
  Shares
Yield                                0.00%            N/A               N/A
Class C Shares:
Total Return
  Before Taxes                        N/A            11.97%            41.90%
  After Taxes on Distributions        N/A            11.47%            41.51%
  After Taxes on
  Distributions and Sale of           N/A            7.79%             36.08%
  Shares
Yield                                0.00%            N/A               N/A

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

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 $10,000 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 $10,000,
less any applicable sales charge, adjusted over the period by any additional Shares,
assuming the annual reinvestment of all dividends and distributions.  Total returns
after taxes are calculated in a similar manner, but reflect additional standard
assumptions required by the SEC.


YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-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
30-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:

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

o     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;

o     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 Fund; and

o     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:

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Russell 2000 Index

The Russell 2000 Index measures the performance of the 2,000 smallest companies in
the Russell 3000 Index, which represents approximately 10% of the total market
capitalization of the Russell 3000 Index.

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Russell 2000 Growth Index
The Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.

<R>


Russell 2000 Value Index
The Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and lower forecasted growth values.

Russell Mid Cap Index
The Russell Mid Cap Index is an unmanaged index that measures the performance of the
800 smallest companies in the Russell 1000 Index, which represent approximately 25%
of the total market capitalization of the Russell 1000 Index.

</R>


Standard & Poor's Daily Stock Price Index of 500 Common Stocks
The Standard & Poor's Daily Stock Price Index of 500 Common Stocks (S&P 500).
The S&P 500 is a composite index of common stocks in industry, transportation,
and financial and public utility companies. It 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.


Standard & Poor's 600 Small Capitalization Index
The Standard & Poor's 600 Small Capitalization Index is an unmanaged index of 600
small capitalization common stocks with a market capitalization generally ranging
between $34 million and $3.0 billion. The index, monitored by Standard & Poor's
Corporation, is cited as an indicator of small capitalization stock performance.


Value Line Mutual Fund Survey, published by Value Line Publishing, Inc.,
The 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.


Value Line Composite Index
The 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.


CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.,
The 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.


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, Inc.
Lipper, 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.


Lipper Small Company Growth Funds Average
The Lipper Small Company Growth Funds Average is an average of the total returns for
312 growth funds tracked by Lipper, Inc., an independent mutual fund rating service.


Lipper Small Company Growth Funds Index
The Lipper Small Company Growth Funds Index is an average of the net asset-valuated
total returns for the top 30 small company growth funds tracked by Lipper, Inc., an
independent mutual fund rating service.


Morningstar, Inc.
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.


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


Wilshire 5000 Equity Index
The 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.


Wilshire Small Cap Index
The Wilshire Small Cap Index contains 250 companies screened out of the Wilshire 1750
for their size, sector and trading characteristics. The Index rebalances on a
calendar quarter basis and companies are replaced regularly.


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


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


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 who are  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, 2003,  Federated  managed 14 bond funds
with   approximately   $3.8   billion  in  assets  and  22  money  market  funds  with
approximately $23.0 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 32 years'  experience.  As of December
31, 2003,  Federated managed 36 equity funds totaling  approximately  $25.6 billion in
assets across  growth,  value,  equity income,  international,  index and sector (i.e.
utility) styles.  Federated's  value-oriented  management style combines  quantitative
and  qualitative  analysis  and  features a  structured,  computer-assisted  composite
modeling system that was developed in the 1970s.


Corporate Bond Funds
In the  corporate  bond sector,  as of December 31, 2003,  Federated  managed 11 money
market  funds and 4 bond  funds  with  assets  approximating  $61.7  billion  and $3.4
billion,   respectively.   Federated's   corporate  bond  decision   making--based  on
intensive,  diligent credit  analysis--is backed by over 30 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 $209
billion.


Government Funds
In  the   government   sector,   as  of  December  31,  2003,   Federated   managed  7
mortgage-backed,   3  multi-sector   government  funds,  4  government/agency  and  19
government money market mutual funds,  with assets  approximating  $4.9 billion,  $0.9
billion, $2.9 billion and $56.2 billion, respectively.  Federated trades approximately
$90.4  billion in U.S.  government  and  mortgage-backed  securities  daily and places
approximately $35 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  $50 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, 2003, Federated managed
$136.2 billion in assets across 52 money market funds, including 19 government, 10
prime, 22 municipal and 1 euro-denominated with assets approximating $56.2 billion,
$59.4 billion, $20.6 billion and $173.9 million, respectively.

The Chief Investment Officers responsible for oversight of the various investment
sectors within Federated are: Global Equity - Stephen F. Auth is responsible for
overseeing the management of Federated's domestic and international equity products;
Global Fixed-Income - Mary Jo Ochson and Robert J. Ostrowski are responsible for
overseeing the management of Federated's domestic and international fixed-income and
high yield products; and Money Markets - Deborah A. Cunningham is responsible for
overseeing the management of Federated's money market fund products.


Mutual Fund Market
Forty-nine percent of American households are pursuing their financial goals through
mutual funds. These investors, as well as businesses and institutions, have entrusted
over $6.2 trillion to the approximately 8,300 funds available, according to the
Investment Company Institute.


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


Institutional Clients
Federated meets the needs of approximately 3,035 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.


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.


Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated funds are available to consumers through major brokerage firms
nationwide--Federated has over 2,000 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.


FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2004 are
incorporated herein by reference to the Annual Report to Shareholders of Federated
Kaufmann Small Cap Fund dated October 31, 2004.



INVESTMENT RATINGS


Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is present,
but a limited margin of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.


Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market positions
in well established industries, high rates of return on funds employed, conservative
capitalization structure with moderate reliance on debt and ample asset protection,
broad margins in earning coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and assured
sources of alternate liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, 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-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.


Fitch Ratings Commercial Paper Rating Definitions
F-1--Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Under their national rating
scale, this rating is assigned to the "best" credit risk relative to all others in
the same country and is normally assigned to all financial commitments issued or
guaranteed by the sovereign state. Where the credit risk is particularly strong, a
"+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.


ADDRESSES

Federated Kaufmann Small Cap Fund

Class A Shares
Class B Shares
Class C Shares

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 Equity Management Company of Pennsylvania
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779


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


Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072



APPENDIX

The following is a list of persons other than the Adviser and its affiliates that may
receive nonpublic portfolio holdings information concerning the Fund:

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Custodian
State Street Bank and Trust Company


Securities Lending Agent
State Street Bank and Trust Company


Independent Registered Public Accounting Firm
Ernst & Young LLP


Legal Counsel

Dickstein Shapiro Morin & Oshinsky LLP
Reed Smith LLP


Service Providers
Bloomberg
FactSet
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Wilshire Associates, Inc.


Security Pricing Services
FT Interactive Data
Reuters


Ratings Agencies
Standard & Poor's


Performance Reporting/Publications
Fidelity-Strategic Advisors
Lipper, Inc.
Morningstar, Inc.
Morningstar Associates
NASDAQ
Value Line
Wiesenberger/Thomson Financial


Other
Investment Company Institute

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Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Large Cap Growth Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking capital appreciation by investing primarily in large, well-established companies.

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		4
What are the Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Fund Invests?		7
What are the Specific Risks of Investing in the Fund?		9
What Do Shares Cost?		10
How is the Fund Sold?		17
How to Purchase Shares		18
How to Redeem and Exchange Shares		20
Account and Share Information		23
Who Manages the Fund?		26
Legal Proceedings		27
Financial Information		28

Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

The Fund’s investment objective is 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. This investment objective may be changed by the Fund’s Board of Trustees (the “Board”) without shareholder approval.

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing principally in common stocks of the largest growth companies traded in the U.S. based upon price-to- earnings ratio, price-to-book ratio and estimated earnings growth.

When possible, the Fund will employ tax management techniques which are designed to enhance after-tax returns.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s share price may decline suddenly or over a sustained period of time.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.
Risks Related to Investing for Growth. The growth stocks in which the Fund invests are typically more volatile than value stocks and may depend more on price changes than dividends for returns.

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Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards, than would otherwise be the case.

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Risk/Return Bar Chart and Table

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The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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</R>

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The Fund’s Class A Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was (3.11)%.

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<R>

Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 36.80% (quarter ended December 31, 1999). Its lowest quarterly return was (20.10)% (quarter ended March 31, 2001).

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<R>

Average Annual Total Return Table

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<R>

The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund’s Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell 1000 Growth Index (R1000G), a broad-based market index, and the Lipper Large-Cap Growth Funds Index (LLCGF). It is not possible to invest directly in an index.

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(For the periods ended December 31, 2003)

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<R>

FUND	1 Year	5 Years	Start of Performance¹

Class A Shares:

Return Before Taxes	16.62%	(6.37)%	(6.10)%

Return After Taxes on Distributions²	16.62%	(6.37)%	(6.10)%

Return After Taxes on Distributions and Sale of Fund Shares²	10.80%	(5.30)%	(5.08)%

Class B Shares:

Return Before Taxes	16.80%	(6.33)%	(5.87)%

Class C Shares:

Return Before Taxes	20.11%	(6.14)%	(5.87)%

R1000G³	29.75%	(5.11)%	(5.17)%

LLCGF⁴	26.96%	(5.53)%	(5.55)%

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1 The Fund’s Class A, Class B and Class C Shares start of performance date was December 29, 1998.

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3 The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The index is not adjusted to reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. The index is unmanaged, and unlike the Fund, is not affected by cashflows.

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4 The Lipper Large-Cap Growth Funds Index measures the performance of the 30 largest funds in the large cap growth category as tracked by Lipper, Inc. These figures do not reflect sales charges.

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What are the Fund’s Fees and Expenses?

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FEDERATED LARGE CAP GROWTH FUND

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<R>

FEES AND EXPENSES

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<R>

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%
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	0.25%	0.75%	0.75%
Shareholder Services Fee	0.25%²	0.25%	0.25%
Other Expenses³	0.45%	0.45%	0.45%
Total Annual Fund Operating Expenses	1.70%	2.20%⁴	2.20%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the shareholder services provider and administrator waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waivers of Fund Expenses	0.26%	0.01%	0.01%
Total Actual Annual Fund Operating Expenses (after waivers)	1.44%	2.19%	2.19%
2 Class A Shares did not pay or accrue the shareholder services fee for the fiscal year ended October 31, 2004. Class A Shares have no present intention of paying or accruing the shareholder services fee for the fiscal year ending October 31, 2005.
3 The administrator voluntarily waived a portion of its fee. The administrator can terminate this voluntary waiver at any time. Total other expenses paid by the Fund (after the voluntary waiver) were 0.44% for the fiscal year ended October 31, 2004.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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This 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.

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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 in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$713	$1,056	$1,422	$2,448

Expenses assuming no redemption	$713	$1,056	$1,422	$2,448

Class B:

Expenses assuming redemption	$773	$1,088	$1,380	$2,408

Expenses assuming no redemption	$223	$688	$1,180	$2,408

Class C:

Expenses assuming redemption	$421	$781	$1,268	$2,609

Expenses assuming no redemption	$321	$781	$1,268	$2,609

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What are the Fund’s Investment Strategies?

The Fund pursues its investment objective by investing in equity securities, primarily common stocks, of the largest growth companies traded in the U.S. stock markets. To identify these companies, the Fund’s investment adviser (Adviser) will examine the expected price-to-earnings ratio, price-to-book ratio and estimated earnings growth and categorize each stock as growth or value. The Adviser will then pick the largest growth stocks based on market capitalization. The Adviser will also analyze each company’s financial performance and business fundamentals to determine how much the Fund should invest in each company. A description of the various types of securities in which the Fund invests and their risks immediately follows the strategy discussion.

The Adviser performs traditional fundamental analysis to select securities that exhibit the most promising long-term growth potential for the Fund’s portfolio. In selecting securities, the Adviser focuses primarily on the projected future cash flow of the issuing company, in addition to examining each issuer’s current financial condition, business and product strength, competitive position and management expertise. Stocks in the Fund’s portfolio will be sold if they no longer fall within the category of the largest growth stocks.

Companies with similar characteristics may be grouped together in broad categories called sectors. The Adviser diversifies the Fund’s investments, limiting the Fund’s risk exposure with respect to individual securities and industry sectors.

The Adviser uses the “growth” style of investing, selecting securities of companies which have above average potential for expected growth. Because the Adviser uses a “growth” style of investing, the price of the securities held by the Fund may, under certain market conditions, be more volatile than stocks selected primarily for their value attributes.

The Adviser may invest in ADRs, which represent interests in underlying securities issued by a foreign company, but which are not traded in the United States. The Adviser invests primarily in ADRs of companies with significant operations within the United States. Securities of foreign companies may be more affected by foreign economic and political conditions, taxation policies, and accounting and auditing standards than those of U.S. companies.

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 will employ tax management techniques which are designed to minimize capital gains distributions while maximizing after-tax returns. For example, it will generally buy securities that it intends to hold over the long term, and avoid short-term trading. In deciding which securities to sell, the Fund’s Adviser will consider their capital gain or loss situation, and may attempt to offset capital gains by selling securities that have gone down in value or that have the highest cost basis. Also, the Fund’s Adviser generally will consider selling any security that has not met its expectations for growth, in which case the capital gain would be relatively small. Successful application of this strategy will result in shareholders incurring capital gains when they ultimately sell their shares.

Because the Fund refers to large-capitalization investments in its name, it will notify shareholders in advance of any change in its investment policies that would enable the Fund to normally invest less than 80% of its assets in large-capitalization investments. The Fund will not be required to sell an investment because a company’s market capitalization has reduced outside the market capitalization range of large cap companies.

PORTFOLIO TURNOVER

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. 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

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ADRs and Domestically Traded Securities of Foreign Issuers

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American Depositary Receipts, which are traded in United States markets, represent interests in underlying securities issued by a foreign company and not traded in the United States. ADRs provide a way to buy shares of foreign based companies in the United States rather than in overseas markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign exchange transactions. The Fund may also invest in securities issued directly by foreign companies and traded in U.S. dollars in United States markets.

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DERIVATIVE CONTRACTS

Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, commodities, currencies, financial indices or other assets or instruments. 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 or instrument. 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 the terms of the contract except for the price. Investors make 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.

Depending on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument, derivative contracts may increase or decrease the Fund’s exposure to interest rate, stock market and currency risks, and may also expose the fund to liquidity and leverage risks.

Futures 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 specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures, index futures and foreign currency forward contracts.

Options

Swaps

Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party’s payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include interest rate swaps, total return swaps, currency swaps, and caps and floors.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund’s portfolio will rise and fall. 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.
The Adviser attempts to manage market risk by limiting the amount the Fund invests in each company’s equity securities. However, diversification will not protect the Fund against widespread or prolonged declines in the stock market.

SECTOR RISKS

Companies with similar characteristics may be grouped together in broad categories called sectors. Sector risk is the possibility that a certain sector may underperform other sectors or 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.

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 a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends 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 value stocks that pay higher dividends.

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RISKS OF INVESTING IN ADRS AND DOMESTICALLY TRADED SECURITIES OF FOREIGN ISSUERS

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Because the Fund may invest in ADRs and other domestically traded securities of by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies, and accounting and auditing standards, than would otherwise be the case.

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RISKS OF INVESTING IN DERIVATIVES CONTRACTS

The Fund’s use of derivative contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivative contracts may also involve other risks described in this prospectus or the Fund’s Statement of Additional Information, such as stock market, credit, liquidity and leverage risks.

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 (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

The Fund generally values equity securities according to the last sale price reported by the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. If prices are not available from an independent pricing service, securities and derivatives contracts traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund’s Board. The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund’s adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges

Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	5.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	1.00%	1.00%

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.”

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Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares and Class F Shares. Among other ways, Class A Shares and Class F Shares have a series of “breakpoints,” which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under “Sales Charge When You Purchase.”) On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares bear a relatively low front-end sales charge and a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and Class F Shares and comparable to those charged to Class B Shares.

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SALES CHARGE WHEN YOU PURCHASE

Class A Shares:

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

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 greater¹	0.00%	0.00%

Class C Shares:

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

All Purchases	1.00%	1.01%

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the tables above. You or your investment professional must notify the Fund’s Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase.

In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your investment professional or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint (“Qualifying Accounts”). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through an investment professional or a through a single-participant retirement account by you, your spouse, and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs) or (effective March 1, 2005) broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through “Section 529” college savings plans or those accounts which cannot be linked using TINs, SSNs or BINs, are not Qualifying Accounts.

Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

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

Concurrent and Accumulated Purchases (Effective through February 28, 2005)

combining concurrent purchases of and/or current investments in Class A Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Class A Share purchase will be calculated by multiplying the maximum public offering price times the number of Shares of the same Class of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase;

Concurrent and Accumulated Purchases (Effective March 1, 2005)

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F, and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F, and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

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

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);
as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any investment professional that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or
pursuant to the exchange privilege.

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).

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; and
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).

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

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your investment professional received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.

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 12 months of the purchase date.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

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following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);

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representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Trustees and employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of an investment professional that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through an investment professional that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); and
which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program.

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, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals.

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, administration and customer servicing of the Fund’s 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.

SERVICE FEES

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

How to Purchase 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.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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

EXCHANGE PRIVILEGE

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.

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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 Class A or Class C 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;
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

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.

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

TAX-SENSITIVE APPROACH TO INVESTING

When possible, and when doing so does not jeopardize the primary objective of the Fund, the Fund will be managed in an attempt to keep its distributions of capital gains relatively low. Whenever a mutual fund sells a stock out of its portfolio, it is likely to “realize” either a capital gain (if the stock has risen in value) or a capital loss (if the stock has fallen in value) equal to the difference between the price the fund paid to acquire the stock and the price at which it sells the stock. Each year, mutual funds are required to determine if their capital gains exceed their capital losses, and generally must distribute any such “net capital gains” to their shareholders. Shareholders must then pay capital gains taxes on these distributions. The Fund will try to keep its capital gains distributions relatively low. Successful application of this approach may result in shareholders incurring relatively large amounts of capital gains when they ultimately sell their Shares.

FREQUENT TRADING POLICIES

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The Fund’s objective is that its fees and restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

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PORTFOLIO HOLDINGS INFORMATION

Information concerning the Fund’s portfolio holdings is available in the “Products” section of the Federated Investors website at www.federatedinvestors.com. A complete listing of the Fund’s portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include may include identification of the Fund’s top ten holdings, recent purchase and sale transactions and a percentage breakdown of the portfolio by sector. To access this information from the “Products” section of the website, click on “Portfolio Holdings” and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the “Products” section, and from the Fund’s page click on the “Portfolio Holdings” or “Composition” link. A user is required to register on the website the first time the user accesses this information.

Who Manages the Fund?

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The Board of Trustees (the “Board”) governs the Fund. The Board selects and oversees the Adviser, Federated Global Investment Management Corp. The Adviser manages the Fund’s assets, including buying and selling portfolio securities. The address of the Adviser is 175 Water Street, New York, NY 10038-4965. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

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The Adviser other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

THE FUND’S PORTFOLIO MANAGERS ARE:

Philip J. Orlando

Philip J. Orlando, CFA, has been a portfolio manager of the Fund since May 2003. Mr. Orlando joined Federated in March 2003 as a Senior Portfolio Manager and a Senior Vice President of the Fund’s investment adviser. Mr. Orlando served as both Chief Investment Officer and a Senior Equity Portfolio Manager at Value Line Asset Management from November 1995 to March 2003. A Chartered Financial Analyst, Mr. Orlando attended New York University, from which he received his M.B.A. with a concentration in Economics and his BA in Journalism.

Richard Winkowski

Richard Winkowski has been the Fund’s Portfolio Manager since May 2003. Mr. Winkowski joined Federated as a Senior Investment Analyst in April 1998. He became an Assistant Vice President of the Fund’s Adviser in July 1999 and became a Vice President of the Fund’s Adviser in July 2000. He served as a Senior Research Analyst with Union Bank of Switzerland from October 1997 through March 1998. He was employed with American Express Financial Corp. as a Statistical Analyst from 1994 through January 1995 and then as a Portfolio Manager Assistant until September 1997. Mr. Winkowski earned his B.A. from the University of Wisconsin.

ADVISORY FEES

Legal Proceedings

Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees, and seeking damages of unspecified amounts.

Financial Information

FINANCIAL HIGHLIGHTS

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

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Financial Highlights–Class A Shares

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(For a Share Outstanding Throughout Each Period

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Year Ended October 31	2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period	$7.37			$6.47			$7.95			$13.37			$12.78

Income From Investment Operations:

Net investment income (loss)	(0.02	)¹		(0.03	)¹		(0.04	)¹		(0.06	)		(0.13	)¹

Net realized and unrealized gain (loss) on investments	0.21			0.93			(1.44	)		(5.36	)		0.72

TOTAL FROM INVESTMENT OPERATIONS	0.19			0.90			(1.48	)		(5.42	)		0.59

Net Asset Value, End of Period	$7.56			$7.37			$6.47			$7.95			$13.37

Total Return²	2.58	%		13.91	%		(18.62	)%		(40.54	)%		4.62	%


Ratios to Average Net Assets:

Expenses	1.44	%³		1.56	%³		1.46	%³		1.37	%		1.25	%

Net investment income (loss)	(0.31	)%		(0.44	)%		(0.47	)%		(0.60	)%		(0.84	)%

Expense waiver/reimbursement⁴	0.01	%		0.00	%⁵		0.00	%⁵		0.00	%⁵		0.00	%⁵

Supplemental Data:

Net assets, end of period (000 omitted)	$144,921		$148,090			$144,499			$228,433			$427,514

Portfolio turnover	103	%		126	%		233	%		221	%		173	%

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1 Per share numbers have been calculated using the average shares method.

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2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

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3 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.43%, 1.54% and 1.44% after taking into account these expense reductions for the years ended October 31 2004, 2003 and 2002, respectively.

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

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5 Represents less than 0.01%.

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Financial Highlights–Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period	$7.13			$6.31			$7.82			$13.24			$12.75

Income From Investment Operations:

Net investment income (loss)	(0.08	)¹		(0.08	)¹		(0.09	)¹		(0.16	)		(0.24	)¹

Net realized and unrealized gain (loss) on investments	0.21			0.90			(1.42	)		(5.26	)		0.73

TOTAL FROM INVESTMENT OPERATIONS	0.13			0.82			(1.51	)		(5.42	)		0.49

Net Asset Value, End of Period	$7.26			$7.13			$6.31			$7.82			$13.24

Total Return²	1.82	%		13.00	%		(19.31	)%		(40.94	)%		3.84	%


Ratios to Average Net Assets:

Expenses	2.19	%³		2.31	%³		2.21	%³		2.12	%		2.00	%

Net investment income (loss)	(1.06	)%		(1.19	)%		(1.22	)%		(1.35	)%		(1.59	)%

Expense waiver/reimbursement⁴	0.01	%		0.00	%⁵		0.00	%⁵		0.00	%⁵		0.00	%⁵

Supplemental Data:

Net assets, end of period (000 omitted)	$95,901		$116,166			$121,572			$205,699			$400,171

Portfolio turnover	103	%		126	%		233	%		221	%		173	%

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1 Per share numbers have been calculated using the average shares method.

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3 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 2.18%, 2.29% and 2.19% after taking into account these expense reductions for the years ended October 31, 2004, 2003 and 2002, respectively.

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

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5 Represents less than 0.01%.

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Financial Highlights–Class C Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2004			2003			2002			2001			2000

Net Asset Value, Beginning of Period	$7.13			$6.31			$7.82			$13.23			$12.75

Income From Investment Operations:

Net investment income (loss)	(0.08	)¹		(0.08	)¹		(0.09	)¹		(0.15	)		(0.24	)¹

Net realized and unrealized gain (loss) on investments	0.21			0.90			(1.42	)		(5.26	)		0.72

TOTAL FROM INVESTMENT OPERATIONS	0.13			0.82			(1.51	)		(5.41	)		0.48

Net Asset Value, End of Period	$7.26			$7.13			$6.31			$7.82			$13.23

Total Return²	1.82	%		13.00	%		(19.31	)%		(40.89	)%		3.76	%


Ratios to Average Net Assets:

Expenses	2.19	%³		2.31	%³		2.21	%³		2.12	%		2.00	%

Net investment income (loss)	(1.06	)%		(1.19	)%		(1.22	)%		(1.35	)%		(1.59	)%

Expense waiver/reimbursement⁴	0.01	%		0.00	%⁵		0.00	%⁵		0.00	%⁵		0.00	%⁵

Supplemental Data:

Net assets, end of period (000 omitted)	$13,866		$15,444			$16,067			$30,148			$57,560

Portfolio turnover	103	%		126	%		233	%		221	%		173	%

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1 Per share numbers have been calculated using the average shares method.

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

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5 Represents less than 0.01%.

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

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Federated
World-Class Investment Manager

Federated Large Cap Growth Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 (c)Federated Investors, Inc.

Cusip 314172842
Cusip 314172834
Cusip 314172826

G02515-01 (12/04)






FEDERATED LARGE CAP GROWTH FUND
A Portfolio of Federated Equity Funds


Statement of Additional Information


December 31, 2004

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 Large Cap Growth Fund (Fund), dated
December 31, 2004.

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.

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                                            Contents
                                            How is the Fund Organized?...............1
                                            Securities in Which the Fund Invests.....1
                                            What Do Shares Cost?.....................9
                                            How is the Fund Sold?....................9
                                            Exchanging Securities for Shares........12
                                            Subaccounting Services..................12
                                            Redemption in Kind......................12
                                            Massachusetts Partnership Law...........13
                                            Account and Share Information...........13
                                            Tax Information.........................13
                                            Who Manages and Provides Services to the
                                            Fund?...................................14
                                            How Does the Fund Measure Performance?..25
                                            Who is Federated Investors, Inc.?.......27
                                            Financial Information...................29
                                            Investment Ratings......................29
                                            Addresses..............................31
                                            Appendix..................................
                                            </R>





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 Shares. The Fund's investment adviser is Federated Global Investment
Management Corp. (Adviser). Prior to January 1, 2004, Federated Investment Management
Company was investment adviser to the Fund. Both the current Adviser and the former
Adviser are wholly owned subsidiaries of Federated Investors, Inc. (Federated).


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
Equity securities represent a share of an issuer's earnings and assets, after the
issuer pays its liabilities. The Fund cannot predict the income it will receive from
equity securities because issuers generally have discretion as to the payment of any
dividends or distributions. 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
Common stocks are the most prevalent type of equity security. Common stocks receive
the issuer's earnings 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
Preferred stocks have the right to receive specified dividends or distributions
before the issuer makes payments on its 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 also treat such redeemable
preferred stock as a fixed income security.


Real Estate Investment Trusts (REITs)
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.


Warrants
Warrants give the Fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). The Fund may buy the designated securities by paying the exercise price before
the expiration date. Warrants may become worthless if the price of the stock does not
rise above the exercise price by the expiration date. This increases the market risks
of warrants as compared to the underlying security. Rights are the same as warrants,
except companies typically issue rights to existing stockholders.


Fixed Income Securities
Fixed income securities pay interest, dividends or distributions at a specified rate.
The rate may be a fixed percentage of the principal or adjusted periodically. In
addition, the issuer of a fixed income security must 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. A security's yield will increase or decrease depending upon whether it
costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.

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


Treasury Securities
Treasury securities are direct obligations of the federal government of the United
States. Treasury securities are generally regarded as having the lowest credit risks.


Agency Securities
Agency securities are issued or guaranteed by a federal agency or other government
sponsored entity (GSE) acting under federal authority. Some GSE securities are
supported by the full faith and credit of the United States. These include the
Government National Mortgage Association, Small Business Administration, Farm Credit
System Financial Assistance Corporation, Farmer's Home Administration, Federal
Financing Bank, General Services Administration, Department of Housing and Urban
Development, Export-Import Bank, Overseas Private Investment Corporation, and
Washington Metropolitan Area Transit Authority Bonds.

Other GSE securities receive support through federal subsidies, loans or other
benefits. For example, the U.S. Treasury is authorized to purchase specified amounts
of securities issued by (or otherwise make funds available to) the Federal Home Loan
Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Student Loan Marketing Association, and Tennessee Valley Authority in
support of such obligations.

A few GSE securities have no explicit financial support, but are regarded as having
implied support because the federal government sponsors their activities. These
include the Farm Credit System, Financing Corporation, and Resolution Funding
Corporation.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

The Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency. Although such a guarantee protects against credit
risks, it does not reduce market and prepayment risks.


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


Convertible Securities
Convertible securities are fixed income securities or preferred stocks 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 that are convertible into shares of common stock at a conversion
price of $10 per share. If the market value of the shares of common stock 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. In
addition, at the time a convertible security is issued the conversion price exceeds
the market value of the underlying equity securities. 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.


Foreign Securities
Foreign securities are securities of issuers based outside the United States. The
Fund considers an issuer to be based outside the United States if:

o     it is organized under the laws of, or has a principal office located in,
      another country;

o     the principal trading market for its securities is in another country; or

o     it (or its subsidiaries) derived in its most current fiscal year at least 50%
      of its total assets, capitalization, gross revenue, or profit from goods
      produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the
risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing. Trading in
certain foreign markets is also subject to liquidity risks.


Depositary Receipts
Depositary receipts represent interests in underlying securities issued by a foreign
company. Depositary receipts are not traded in the same market as the underlying
security. The foreign securities underlying American Depositary Receipts (ADRs) are
not traded in the United States. ADRs provide a way to buy shares of foreign-based
companies in the United States 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 United States. Depositary receipts involve many of the same risks of investing
directly in foreign securities, including currency risks and risks of foreign
investing.


Derivative Contracts
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 the terms of the contract except for the price. Investors
make 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, the Fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same date.
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. Exchanges may limit the
amount of open contracts permitted at any one time. Such limits may prevent the Fund
from closing out a position. 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). 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.

The Fund may also trade derivative contracts 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 the Fund uses derivative contracts 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 interest rate, stock market
and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC
contracts also expose the Fund to credit risks in the event that a counterparty
defaults on the contract.

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


Futures 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 specified price, date, and
time. Entering into a contract to buy an underlying asset is commonly referred to as
buying a contract or holding a long position in the asset. Entering into a contract
to sell an underlying asset is commonly referred to as selling a contract or holding
a short position in the asset. Futures contracts are considered to be commodity
contracts. The Fund has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act and, therefore, is not
subject to registration or regulation as a commodity pool operator under that Act.
Futures contracts traded OTC are frequently referred to as forward contracts. The
Fund can buy or sell financial futures, index futures and foreign currency forward
contracts


Options
Options are rights to buy or sell an underlying asset or instrument for a specified
price (the exercise price) during, or at the end of, a specified period. The seller
(or 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. Options
can trade on exchanges or in the OTC market and may be bought or sold on a wide
variety of underlying assets or instruments, including financial indices, individual
securities, and other derivative instruments, such as futures contracts. Options that
are written on futures contracts will be subject to margin requirements similar to
those applied to futures contracts.

The Fund may buy/sell the following types of options:


CALL OPTIONS
A call option gives the holder (buyer) the right to buy the underlying asset from the
seller (writer) of the option. The Fund may use call options in the following ways:

o     Buy call options on indices, individual securities, index futures, currencies
      (both foreign and U.S. dollar) and financial futures in anticipation of an
      increase in the value of the underlying asset or instrument; and

o     Write call options on indices, portfolio securities, index futures, currencies
      (both foreign and U.S. dollar) and financial 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 the 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.


PUT OPTIONS
A put option gives the holder the right to sell the underlying asset to the writer of
the option. The Fund may use put options in the following ways:

o     Buy put options on indices, individual securities, index futures, currencies
      (both foreign and U.S. dollar) and financial futures in anticipation of a
      decrease in the value of the underlying asset; and

o     Write put options on indices, portfolio securities, index futures, currencies
      (both foreign and U.S. dollar) and financial 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.

The Fund may also buy or write options, as needed, to close out existing option
positions.


Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns
derived from underlying assets with differing characteristics. Most swaps do not
involve the delivery of the underlying assets by either party, and the parties might
not own the assets underlying the swap. The payments are usually made on a net basis
so that, on any given day, the Fund would receive (or pay) only the amount by which
its payment under the contract is less than (or exceeds) the amount of the other
party's payment. Swap agreements are sophisticated instruments that can take many
different forms, and are known by a variety of names including caps, floors and
collars. Common swap agreements that the Fund may use include:


Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make regular payments
equal to a fixed or floating interest rate times a stated principal amount of fixed
income securities, in return for payments equal to a different fixed or floating rate
times the same principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange
for the right to receive the equivalent of a stated fixed rate of interest on $10
million principal amount.


Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make payments
of the total return from the underlying asset during the specified period, in return
for payments equal to a fixed or floating rate of interest or the total return from
another underlying asset.


CURRENCY SWAPS
Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amount as well.


CAPS AND FLOORS
Caps and Floors are contracts in which one party agrees to make payments only if an
interest rate or index goes above (Cap) or below (Floor) a certain level in return
for a fee from the other party.


Special Transactions

Repurchase Agreements
Repurchase agreements are transactions in which the 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 the Fund's return
on the transaction. This return is unrelated to the interest rate on the underlying
security. The Fund will enter into repurchase agreements only with banks and other
recognized financial institutions, such as securities dealers, deemed creditworthy by
the Adviser.

The Fund's custodian or subcustodian will 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 risks.


Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them at an
agreed upon time and price. A reverse repurchase agreement may be viewed as a type of
borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In
addition, reverse repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the market value
of the security at the time of repurchase.


Delayed Delivery Transactions
Delayed delivery transactions, including when issued transactions, are arrangements
in which the Fund buys securities for a set price, with payment and delivery of the
securities 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 buy 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 so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed delivery
transactions create interest rate risks for the Fund. Delayed delivery transactions
also involve credit risks in the event of a counterparty default. These transactions
create leverage risks.


To Be Announced Securities (TBAs)
As with other delayed delivery transactions, a seller agrees to issue a TBA security
at a future date. However, the seller does not specify the particular securities to
be delivered. Instead, the Fund agrees to accept any security that meets specified
terms. For example, in a TBA mortgage backed transaction, the Fund and the seller
would agree upon the issuer, interest rate and terms of the underlying mortgages. The
seller would not identify the specific underlying mortgages until it issues the
security. TBA mortgage backed securities increase interest rate risks because the
underlying mortgages may be less favorable than anticipated by the Fund.


Securities Lending
The Fund may lend portfolio securities to borrowers that the Fund's custodian deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the market
value of the loaned securities increases. Also, the borrower must pay the Fund the
equivalent of any dividends or interest received on the loaned securities.

The Fund will reinvest cash collateral in securities that qualify as an acceptable
investment for the Fund. However, the Fund must pay interest to the borrower for the
use of cash collateral.

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 on loan, but it will
terminate a loan in anticipation of any important vote. The Fund may pay
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 interest rate risks and credit risks.
These transactions may create leverage risks.


Asset Coverage
In order to secure its obligations in connection with derivatives contracts or
special transactions, the Fund will either own the underlying assets, enter into an
offsetting transaction or set aside readily marketable securities with a value that
equals or exceeds the Fund's obligations. Unless the Fund has other readily
marketable assets to set aside, it cannot trade assets used to secure such
obligations without entering into an offsetting derivative contract or terminating a
special transaction. This may cause the Fund to miss favorable trading opportunities
or to realize losses on derivative contracts or special transactions.


Inter-Fund Borrowing and Lending Arrangements
The Securities and Exchange Commission (SEC) has granted an exemption that permits
the Fund and all other funds advised by subsidiaries of Federated Investors, Inc.
(Federated funds) to lend and borrow money for certain temporary purposes directly to
and from other Federated funds. Participation in this inter-fund lending program is
voluntary for both borrowing and lending funds, and an inter-fund loan is only made
if it benefits each participating Federated fund. Federated Investors, Inc.
(Federated) administers the program according to procedures approved by the Fund's
Board, and the Board monitors the operation of the program. Any inter-fund loan must
comply with certain conditions set out in the exemption, which are designed to assure
fairness and protect all participating Federated funds.

For example, inter-fund lending is permitted only (a) to meet shareholder redemption
requests, and (b) to meet commitments arising from "failed" trades. All inter-fund
loans must be repaid in seven days or less. The Fund's participation in this program
must be consistent with its investment policies and limitations, and must meet
certain percentage tests. Inter-fund loans may be made only when the rate of interest
to be charged is more attractive to the lending Federated fund than
market-competitive rates on overnight repurchase agreements (Repo Rate) and more
attractive to the borrowing Federated fund than the rate of interest that would be
charged by an unaffiliated bank for short-term borrowings (Bank Loan Rate), as
determined by the Board. The interest rate imposed on inter-fund loans is the average
of the Repo Rate and the Bank Loan Rate.


<R>

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.  These other investment
companies are managed independently of the Fund and incur additional expenses.
Therefore, any such investment by the Fund may be subject to duplicate expenses.
However, the Adviser believes that the benefits and efficiencies of this approach
should outweigh the additional expenses.

</R>


INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are outlined
below.


Stock Market Risks
o     The value of equity securities in the Fund's portfolio will rise and fall.
      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.

o     The Adviser attempts to manage market risk by limiting the amount the Fund
      invests in each company's equity securities. However, diversification will not
      protect the Fund against widespread or prolonged declines in the stock market.


Sector Risks
o     Companies with similar characteristics may be grouped together in broad
      categories called sectors. Sector risk is the possibility that a certain sector
      may underperform other sectors or 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.


Liquidity Risks
o     Trading opportunities are more limited for equity securities that are not
      widely held. This may make it more difficult to sell or buy a security at a
      favorable price or time. Consequently, the Fund may have to accept a lower
      price to sell a security, sell other securities to raise cash or give up an
      investment opportunity, any of which could have a negative effect on the Fund's
      performance. Infrequent trading of securities may also lead to an increase in
      their price volatility.

o     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.

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


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

o     The Adviser attempts to manage currency risk by limiting the amount the Fund
      invests in securities denominated in a particular currency. However,
      diversification will not protect the Fund against a general increase in the
      value of the U.S. dollar relative to other currencies.


Risks of Investing in American Depositary Receipts
o     Because the Fund may invest in ADRs issued by foreign companies, the Fund's
      share price may be more affected by foreign economic and political conditions,
      taxation policies, and accounting and auditing standards, than would otherwise
      be the case.


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

o     Foreign companies may not provide information (including financial statements)
      as frequently or to as great an extent as companies in the United States.
      Foreign companies may also receive less coverage than United States companies
      by market analysts and the financial press. In addition, foreign countries may
      lack uniform accounting, auditing, and financial reporting standards or
      regulatory requirements comparable to those applicable to U.S. companies. These
      factors may prevent the Fund and its Adviser from obtaining information
      concerning foreign companies that is as frequent, extensive and reliable as the
      information available concerning companies in the United States.

o     Foreign countries may have restrictions on foreign ownership of securities or
      may impose exchange controls, capital flow restrictions or repatriation
      restrictions which could adversely affect the liquidity of the Fund's
      investments.


Leverage Risks
o     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.

o     Investments can have these same results if their returns are based on a
      multiple of a specified index, security, or other benchmark.


Interest Rate Risks
o     Prices of fixed income securities rise and fall in response to changes in the
      interest rate paid by similar securities. Generally, when interest rates rise,
      prices of fixed income securities fall. However, market factors, such as the
      demand for particular fixed income securities, may cause the price of certain
      fixed income securities to fall while the prices of other securities rise or
      remain unchanged.

o     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 Risks
o     Credit risk is the possibility that an issuer will default on a security by
      failing to pay interest or principal when due. If an issuer defaults, the Fund
      will lose money.

o     Many fixed income securities receive credit ratings from services such as
      Standard & Poor's and Moody's Investors Service. These services assign
      ratings to securities by assessing the likelihood of issuer default. Lower
      credit ratings correspond to higher credit risk. If a security has not received
      a rating, the Fund must rely entirely upon the Adviser's credit assessment.

o     Fixed income securities generally compensate for greater credit risk by paying
      interest at a higher rate. The difference between the yield of a security and
      the yield of a U.S. Treasury security with a comparable maturity (the spread)
      measures the additional interest paid for 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.

o     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 prevent the Fund from selling or buying other
      securities to implement its investment strategy.


INVESTMENT LIMITATIONS

Diversification
With respect to securities comprising 75% of the value of its total assets, the Fund
will not purchase securities of any one issuer (other than cash; cash items;
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by such U.S.
government securities; and securities of other investment companies) if, as a result,
more than 5% of the value of its total assets would be invested in the securities of
that issuer, or the Fund would own more than 10% of the outstanding voting securities
of that issuer.


Borrowing Money and Issuing Senior Securities
The Fund may borrow money, directly or indirectly, and issue senior securities to the
maximum extent permitted under the Investment Company Act of 1940 (1940 Act), as
amended.


Investing in Real Estate
The Fund may not purchase or sell real estate, provided that this restriction does
not prevent the Fund from investing in issuers which invest, deal, or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein. The Fund may
exercise its rights under agreements relating to such securities, including the right
to enforce security interests and to hold real estate acquired by reason of such
enforcement until that real estate can be liquidated in an orderly manner.


Investing in Commodities
The Fund may not purchase or sell physical commodities, provided that the Fund may
purchase securities of companies that deal in commodities.


Underwriting
The Fund may not underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933.


Lending
The Fund may not make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, lending its
assets to broker/dealers or institutional investors and investing in loans, including
assignments and participation interests.


Concentration
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be deemed
to constitute an industry.

The above limitations cannot be changed unless authorized by the Board and by the
"vote of a majority of its outstanding voting securities," as defined by the 1940
Act. The following limitations, however, may be changed by the Board without
shareholder approval. Shareholders will be notified before any material change in
these limitations becomes effective.


Concentration
In applying the concentration restriction: (a) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (b) financial service
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (c) asset-backed securities will be classified
according to the underlying assets securing such securities.

To conform to the current view of the SEC that only domestic bank instruments may be
excluded from industry concentration limitations, as a matter of non-fundamental
policy, the Fund will not exclude foreign bank instruments from industry
concentration limitation tests so as long as the policy of the SEC remains in effect.
In addition, investments in bank instruments, and investments in certain industrial
development bonds funded by activities in a single industry, will be deemed to
constitute investment in an industry, except when held for temporary defensive
purposes. The investment of more than 25% of the value of the Fund's total assets in
any one industry will constitute "concentration."


Investing in Commodities
For purposes of the commodities restriction, investments in transactions involving
futures contracts and options, forward currency contracts, swap transactions and
other financial contracts that settle by payment of cash are not deemed to be
investments in commodities.


Purchases on Margin
The Fund will not purchase securities on margin, provided that the Fund may obtain
short-term credits necessary for the clearance of purchases and sales of securities,
and further provided that the Fund may make margin deposits in connection with its
use of financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.


Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided that
this shall not apply to the transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with permissible activities.


<R>

Illiquid Securities
The Fund will not purchase securities for which there is no readily available market,
or enter into repurchase agreements or purchase time that the Fund cannot dispose of
within seven days, if immediately after and as a result, the value of such securities
would exceed, in the aggregate, 15% of the Fund's net assets.

</R>

For purposes of the above 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 limitations 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 limitation.


DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

o     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 OTC
      market), if available;

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

o     futures contracts and options are generally valued at the last sale price on
      the exchanges on which they are traded or in the OTC market. The Board may
      determine in good faith that another method of valuing such investments is
      necessary to appraise their fair market value;

o     for fixed income securities, according to the mean between bid and asked prices
      as furnished by an independent pricing service, except that fixed income
      securities with remaining maturities of less than 60 days at the time of
      purchase may be valued at amortized cost; and

o     for all other securities at fair value as determined in accordance with
      procedures established by and under the general supervision of 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.


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 net asset value (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.


HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated Securities
Corp.) 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 pays a portion of this charge to investment professionals that are
eligible to receive it (the "Dealer Reallowance") and retains any remaining portion
of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment
professional may receive a Dealer Reallowance as follows:


Class A Shares
                                           Dealer
                                        Reallowance
Purchase Amount                       as a percentage
                                             of
                                      Public Offering
                                           Price
Less than $50,000                          5.00%
$50,000 but less than $100,000             4.00%
$100,000 but less than $250,000            3.25%
$250,000 but less than $500,000            2.25%
$500,000 but less than $1 million          1.80%
$1 million or greater                      0.00%

Class C Shares
--------------------------------------------------------------------------------------
                                  Dealer Reallowance
                                  as a Percentage of
                                    Public Offering
                                         Price
All Purchase Amounts                     1.00%

ADVANCE COMMISSIONS
--------------------------------------------------------------------------------------
When an investment professional's customer purchases Shares, the investment
professional may receive an advance commission as follows:


Class A Shares (for purchases over $1 million)
                              Advance Commission
                              as a Percentage of
Purchase Amount                Public Offering
                                    Price
First $1 million - $5               0.75%
million
Next $5 million - $20               0.50%
million
Over $20 million                    0.25%
Advance commissions are calculated on a year by year basis based on amounts invested
during that year. Accordingly, with respect to additional purchase amounts, the
advance commission breakpoint 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 commission will be paid only on
those purchases that were not previously subject to a front-end sales charge or
dealer advance commission. Certain retirement accounts may not be eligible for this
program.

                                                  Advance Commission
                                                  as a Percentage of
Class B Shares                                     Public Offering
                                                        Price
All Purchase Amounts                                 Up to 5.50%
                                                  Advance Commission
                                                  as a Percentage of
Class C Shares                                     Public Offering
                                                        Price
All Purchase Amounts                                    1.00%

RULE 12B-1 PLAN
--------------------------------------------------------------------------------------
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor
for activities principally intended to result in the sale of Shares such as
advertising and marketing of Shares (including printing and distributing prospectuses
and sales literature to prospective shareholders and financial institutions) and
providing incentives to investment professionals to sell Shares.  The Plan is also
designed to cover the cost of administrative services performed in conjunction with
the sale of Shares, including, but not limited to, shareholder services,
recordkeeping services and educational services, as well as the costs of implementing
and operating the Plan.  The Rule 12b-1 Plan allows the Distributor to contract with
investment professionals to perform activities covered by the Plan. The Rule 12b-1
Plan is expected to benefit the Fund in a number of ways. For example, it is
anticipated that the Plan will help the Fund attract and retain assets, thus
providing cash for orderly portfolio management and Share redemptions and possibly
helping to stabilize or reduce other operating expenses. In addition, the Plan is
integral to the multiple class structure of the Fund, which promotes the sale of
Shares by providing a range of options to investors. 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 provided
the funds to make advance commission payments to investment professionals.


Additional Payments to Financial Institutions
The Distributor may pay out of its own resources amounts (including items of material
value) to certain financial institutions.  In some cases, such payments may be made
by, or funded from the resources of, companies affiliated with the Distributor
(including the Adviser).  While NASD regulations limit the sales charges that you may
bear, there are no limits with regard to the amounts that the Distributor may pay out
of its own resources.  In addition to the payments which are generally described
herein and in the prospectus, the financial institution also may receive payments
under the Rule 12b-1 Plan and/or Service Fees.

You can ask your financial institution for information about any payments it receives
from the Distributor or the Federated funds and any services provided.

The following examples illustrate the types of instances in which the Distributor may
make additional payments to financial institutions.

Supplemental Payments
The Distributor may make supplemental payments to certain financial institutions that
are holders or dealers of record for accounts in one or more of the Federated funds.
These payments may be based on such factors as the number or value of Shares the
financial institution sells or may sell; the value of client assets invested; or the
type and nature of services or support furnished by the financial institution.

Processing Support Payments
The Distributor may make payments to financial institutions that sell Federated fund
shares to help offset their costs associated with client account maintenance support,
statement processing and transaction processing.  The types of payments that the
Distributor may make under this category include payment of ticket charges on a per
transaction basis; payment of networking fees; and payment for ancillary services
such as setting up funds on the financial institution's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial institutions who sell
Federated fund shares through retirement plan programs.  A financial institution may
perform retirement plan program services itself or may arrange with a third party to
perform retirement plan program services.  In addition to participant recordkeeping,
reporting, or transaction processing, retirement plan program services may include
services rendered to a plan in connection with fund/investment selection and
monitoring; employee enrollment and education; plan balance rollover or separation,
or other similar services.

Other Benefits to Financial Institutions
From time to time, the Distributor, at its expense, may provide additional
compensation to financial institutions that sell or arrange for the sale of Shares.
Such compensation may include financial assistance to financial institutions that
enable the Distributor to participate in or present at conferences or seminars, sales
or training programs for invited employees, client and investor events and other
financial institution-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events, conferences
and programs for employees or associated persons of financial institutions and may
pay the travel and lodging expenses of attendees.  The Distributor also may provide,
at its expense, meals and entertainment in conjunction with meetings with financial
institutions.  Other compensation may be offered to the extent not prohibited by
applicable laws, regulations or the rules of any self-regulatory agency, such as the
NASD.

<R>

UNDERWRITING COMMISSIONS
The following chart reflects the total front-end sales charges and contingent
deferred sales charges paid in connection with the sale of Class A, Class B and Class
C Shares of the Fund and the amount retained by the Distributor for the last three
fiscal years ended October 31, 2004:

                    2004                      2003                     2002
           Total                       Total                  Total Sales
           Sales         Amount        Sales       Amount     -----------  ----------
            Charges     Retained      Charges     Retained      Charges    Amount
                                                                            Retained
Class A    $355,254.18 $37,304.78   $270,574.50  $27,228.55   $383,919.33  $69,408.85
Shares
Class B    $340,587.29     $0       $453,639.83      $0       $1,774,267.56    $0
Shares
Class C    $9,349.21    $892.11      $6,817.90    $1,251.69   $22,667.58   $9,719.21
Shares

</R>
--------------------------------------------------------------------------------------


EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in 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 1940 Act, 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.


<R>

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class A Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 5,373,963 Shares (28.10%); Charles Schwab & Co.
Inc., San Francisco, CA, owned approximately 4,720,109 Shares (24.68%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class B Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 1,300,114 Shares (10.07%).

As of December 2, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class C Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 292,267 Shares (15.27%); MLPF&S for the sole
benefit of its customers, Jacksonville, FL, owned approximately 254,183 Shares
(13.28%).

Shareholders owning 25% or more of outstanding Shares may be in control and be able
to affect the outcome of certain matters presented for a vote of shareholders.

Edward Jones & Co. is organized in the state of Missouri and is a subsidiary of
Jones Financial Companies LLP; organized in the state of Missouri.

Charles Schwab & Co. Inc. is organized in the state of Delaware and is a
subsidiary of Schwab Holdings within The Charles Schwab Corporation; organized in the
state of Delaware.

</R>


TAX INFORMATION


<R>

FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code
(Code) applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will be subject to federal
corporate income tax.

</R>

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.

The Fund is entitled to a loss carry-forward, which may reduce the taxable income or
gain that the Fund would realize, and to which the shareholder would be subject, in
the future.


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 income generated by the securities in the
portfolio, whereas tax-basis income includes, in addition, 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 will qualify for
certain Code provisions that allow its 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. The following
tables give information about each Board member and the senior officers of the Fund.
Where required, the tables separately list Board members who are "interested persons"
of the Fund (i.e., "Interested" Board members) and those who are not (i.e.,
"Independent" Board members). Unless otherwise noted, the address of each person
listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA.  As of
December 31, 2003, the Trust comprised seven portfolios, and the Federated Fund
Complex consisted of 44 investment companies (comprising 136 portfolios). Unless
otherwise noted, each Officer is elected annually. Unless otherwise noted, each Board
member oversees all portfolios in the Federated Fund Complex and serves for an
indefinite term.

<R>

As of December 2, 2004, the Fund's Board and Officers as a group owned approximately
213,333 shares (1.12%) of the Fund's outstanding Class A Shares.


INTERESTED TRUSTEES BACKGROUND AND COMPENSATION



        Name
     Birth Date                                           Aggregate         Total
      Address         Principal Occupation(s) for Past   Compensation   Compensation
Positions Held with    Five Years, Other Directorships    From Fund    From Trust and
       Trust            Held and Previous Position(s)       (past      Federated Fund
 Date Service Began                                      fiscal year)   Complex (past
                                                                       calendar year)
                      Principal Occupations: Chairman         $0             $0
John F. Donahue*      and Director or Trustee of the
Birth Date: July      Federated Fund Complex; Chairman
28, 1924              and Director, Federated
CHAIRMAN AND TRUSTEE  Investors, Inc.
Began serving:
April 1984            Previous Positions: Trustee,
                      Federated Investment Management
                      Company and Chairman and
                      Director, Federated Investment
                      Counseling.

                      Principal Occupations: Principal        $0             $0
J. Christopher        Executive Officer and President
Donahue*              of the Federated Fund Complex;
Birth Date: April     Director or Trustee of some of
11, 1949              the Funds in the Federated Fund
PRESIDENT AND         Complex; President, Chief
TRUSTEE               Executive Officer and Director,
Began serving:        Federated Investors, Inc.;
January 2000          Chairman and Trustee, Federated
                      Investment Management Company;
                      Trustee, Federated Investment
                      Counseling; Chairman and
                      Director, Federated Global
                      Investment Management Corp.;
                      Chairman, Federated Equity
                      Management Company of
                      Pennsylvania, Passport Research,
                      Ltd. and Passport Research II,
                      Ltd.; Trustee, Federated
                      Shareholder Services Company;
                      Director, Federated Services
                      Company.

                      Previous Positions: President,
                      Federated Investment Counseling;
                      President and Chief Executive
                      Officer, Federated Investment
                      Management Company, Federated
                      Global Investment Management
                      Corp. and Passport Research, Ltd.

                      Principal Occupations: Director      $320.78        $148,500
Lawrence D. Ellis,    or Trustee of the Federated Fund
M.D.*                 Complex; Professor of Medicine,
Birth Date: October   University of Pittsburgh;
11, 1932              Medical Director, University of
3471 Fifth Avenue     Pittsburgh Medical Center
Suite 1111            Downtown; Hematologist,
Pittsburgh, PA        Oncologist and Internist,
TRUSTEE               University of Pittsburgh Medical
Began serving:        Center.
August 1987
                      Other Directorships Held:
                      Member, National Board of
                      Trustees, Leukemia Society of
                      America.

                      Previous Positions: Trustee,
                      University of Pittsburgh;
                      Director, University of
                      Pittsburgh Medical Center.

* Family relationships and reasons for "interested" status: John F. Donahue is the
father of J. Christopher Donahue; both are "interested" due to the positions they
hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is "interested"
because his son-in-law is employed by the Fund's principal underwriter, Federated
Securities Corp.
--------------------------------------------------------------------------------------

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION



        Name
     Birth Date                                           Aggregate         Total
      Address         Principal Occupation(s) for Past   Compensation   Compensation
Positions Held with    Five Years, Other Directorships    From Fund    From Trust and
       Trust            Held and Previous Position(s)       (past      Federated Fund
 Date Service Began                                      fiscal year)   Complex (past
                                                                       calendar year)
                      Principal Occupation: Director       $352.87        $163,350
Thomas G. Bigley      or Trustee of the Federated Fund
Birth Date:           Complex.
February 3, 1934
15 Old Timber Trail   Other Directorships Held:
Pittsburgh, PA        Director, Member of Executive
TRUSTEE               Committee, Children's Hospital
Began serving:        of Pittsburgh; Director,
October 1995          University of Pittsburgh.

                      Previous Position: Senior
                      Partner, Ernst & Young LLP.

                      Principal Occupations: Director      $352.87        $163,350
John T. Conroy, Jr.   or Trustee of the Federated Fund
Birth Date: June      Complex; Chairman of the Board,
23, 1937              Investment Properties
Investment            Corporation; Partner or Trustee
Properties            in private real estate ventures
Corporation           in Southwest Florida.
3838 North Tamiami
Trail                 Previous Positions: President,
Suite 402             Investment Properties
Naples, FL            Corporation; Senior Vice
TRUSTEE               President, John R. Wood and
Began serving:        Associates, Inc., Realtors;
November 1991         President, Naples Property
                      Management, Inc. and Northgate
                      Village Development Corporation.

                      Principal Occupation: Director       $352.87        $163,350
Nicholas P.           or Trustee of the Federated Fund
Constantakis          Complex.
Birth Date:
September 3, 1939     Other Directorships Held:
175 Woodshire Drive   Director and Member of the Audit
Pittsburgh, PA        Committee, Michael Baker
TRUSTEE               Corporation (engineering and
Began serving:        energy services worldwide).
February 1998
                      Previous Position: Partner,
                      Anderson Worldwide SC.

                      Principal Occupation: Director       $320.78        $148,500
John F. Cunningham    or Trustee of the Federated Fund
Birth Date: March     Complex.
5, 1943
353 El Brillo Way     Other Directorships Held:
Palm Beach, FL        Chairman, President and Chief
TRUSTEE               Executive Officer, Cunningham
Began serving:        & Co., Inc. (strategic
January 1999          business consulting); Trustee
                      Associate, Boston College.

                      Previous Positions: Director,
                      Redgate Communications and EMC
                      Corporation (computer storage
                      systems); Chairman of the Board
                      and Chief Executive Officer,
                      Computer Consoles, Inc.;
                      President and Chief Operating
                      Officer, Wang Laboratories;
                      Director, First National Bank of
                      Boston; Director, Apollo
                      Computer, Inc.

                      Principal Occupation: Director       $320.78        $148,500
Peter E. Madden       or Trustee of the Federated Fund
Birth Date: March     Complex; Management Consultant.
16, 1942
One Royal Palm Way    Other Directorships Held: Board
100 Royal Palm Way    of Overseers, Babson College.
Palm Beach, FL
TRUSTEE               Previous Positions:
Began serving:        Representative, Commonwealth of
November 1991         Massachusetts General Court;
                      President, State Street Bank and
                      Trust Company and State Street
                      Corporation (retired); Director,
                      VISA USA and VISA International;
                      Chairman and Director,
                      Massachusetts Bankers
                      Association; Director,
                      Depository Trust Corporation;
                      Director, The Boston Stock
                      Exchange.

                      Principal Occupations: Director      $352.87        $163,350
Charles F.            or Trustee of the Federated Fund
Mansfield, Jr.        Complex; Management Consultant;
Birth Date: April     Executive Vice President, DVC
10, 1945              Group, Inc. (marketing,
80 South Road         communications and technology)
Westhampton Beach,    (prior to 9/1/00).
NY
TRUSTEE               Previous Positions: Chief
Began serving:        Executive Officer, PBTC
January 1999          International Bank; Partner,
                      Arthur Young & Company (now
                      Ernst & Young LLP); Chief
                      Financial Officer of Retail
                      Banking Sector, Chase Manhattan
                      Bank; Senior Vice President,
                      HSBC Bank USA (formerly, Marine
                      Midland Bank); Vice President,
                      Citibank; Assistant Professor of
                      Banking and Finance, Frank G.
                      Zarb School of Business, Hofstra
                      University.

                      Principal Occupations: Director      $384.96        $178,200
John E. Murray,       or Trustee of the Federated Fund
Jr., J.D., S.J.D.     Complex; Chancellor and Law
Birth Date:           Professor, Duquesne University;
December 20, 1932     Partner, Murray, Hogue &
Chancellor,           Lannis.
Duquesne University
Pittsburgh, PA        Other Directorships Held:
TRUSTEE               Director, Michael Baker Corp.
Began serving:        (engineering, construction,
February 1995         operations and technical
                      services).

                      Previous Positions: President,
                      Duquesne University; Dean and
                      Professor of Law, University of
                      Pittsburgh School of Law; Dean
                      and Professor of Law, Villanova
                      University School of Law.

                      Principal Occupations:  Director     $320.78        $148,500
Marjorie P. Smuts     or Trustee of the Federated Fund
Birth Date: June      Complex; Public
21, 1935              Relations/Marketing
4905 Bayard Street    Consultant/Conference
Pittsburgh, PA        Coordinator.
TRUSTEE
Began serving:        Previous Positions: National
April 1984            Spokesperson, Aluminum Company
                      of America; television producer;
                      President, Marj Palmer Assoc.;
                      Owner, Scandia Bord.

                      Principal Occupations:  Director     $320.78        $148,500
John S. Walsh         or Trustee of the Federated Fund
Birth Date:           Complex; President and Director,
November 28, 1957     Heat Wagon, Inc. (manufacturer
2604 William Drive    of construction temporary
Valparaiso, IN        heaters); President and
TRUSTEE               Director, Manufacturers
Began serving:        Products, Inc. (distributor of
January 1999          portable construction heaters);
                      President, Portable Heater
                      Parts, a division of
                      Manufacturers Products, Inc.

                      Previous Position: Vice
                      President, Walsh & Kelly,
                      Inc.


OFFICERS**
--------------------------------------------------------------------------------------

Name
Birth Date
Address
Positions Held with Trust
-----------------------------     Principal Occupation(s) and Previous
Date Service Began                Position(s)
                                  Principal Occupations: Executive Vice
John W. McGonigle                 President and Secretary of the Federated Fund
Birth Date: October 26, 1938      Complex; Executive Vice President, Secretary
EXECUTIVE VICE PRESIDENT AND      and Director, Federated Investors, Inc.
SECRETARY
Began serving: April 1984         Previous Positions: Trustee, Federated
                                  Investment Management Company and Federated
                                  Investment Counseling; Director, Federated
                                  Global Investment Management Corp., Federated
                                  Services Company and Federated Securities Corp.

                                  Principal Occupations: Principal Financial
Richard J. Thomas                 Officer and Treasurer of the Federated Fund
Birth Date: June 17, 1954         Complex; Senior Vice President, Federated
TREASURER                         Administrative Services.
Began serving: November 1998
                                  Previous Positions: Vice President, Federated
                                  Administrative Services; held various
                                  management positions within Funds Financial
                                  Services Division of Federated Investors, Inc.

                                  Principal Occupations: Vice Chairman or Vice
Richard B. Fisher                 President of some of the Funds in the
Birth Date: May 17, 1923          Federated Fund Complex; Vice Chairman,
VICE PRESIDENT                    Federated Investors, Inc.; Chairman, Federated
Began serving: April 1984         Securities Corp.

                                  Previous Positions: President and Director or
                                  Trustee of some of the Funds in the Federated
                                  Fund Complex; Executive Vice President,
                                  Federated Investors, Inc. and Director and
                                  Chief Executive Officer, Federated Securities
                                  Corp.

                                  Principal Occupations: Chief Investment
Stephen F. Auth                   Officer of this Fund and various other Funds
Birth Date: September 3, 1956     in the Federated Fund Complex; Executive Vice
CHIEF INVESTMENT OFFICER          President, Federated Investment Counseling,
Began serving: November 2002      Federated Global Investment Management Corp.,
                                  Federated Equity Management Company of
                                  Pennsylvania and Passport Research II, Ltd.

                                  Previous Positions: Executive Vice President,
                                  Federated Investment Management Company, and
                                  Passport Research, Ltd.; Senior Vice
                                  President, Global Portfolio Management
                                  Services Division; Senior Vice President,
                                  Federated Investment Management Company and
                                  Passport Research, Ltd.; Senior Managing
                                  Director and Portfolio Manager, Prudential
                                  Investments.

                                  Lawrence Auriana is Vice President of the
Lawrence Auriana                  Trust. Mr. Auriana joined Federated in April
Birth Date: January 8, 1944       2001 as Co-Head of Investments/Federated
VICE PRESIDENT                    Kaufmann. From August 1984 to April 2001, Mr.
Began serving: November 2001      Auriana was President and Treasurer of
                                  Edgemont Asset Management Corp., and Chairman
                                  of the Board and Portfolio Manager to The
                                  Kaufmann Fund, Inc. (predecessor to the
                                  Federated Kaufmann Fund). Mr. Auriana earned a
                                  B.S. in economics from Fordham University and
                                  has been engaged in the securities business
                                  since 1965.
                              ---------------------------------------------------


                                  James E. Grefenstette is Vice President of the
James E. Grefenstette             Trust. Mr. Grefenstette joined Federated in
Birth Date: November 7, 1962      1992 and has been a Portfolio Manager since
VICE PRESIDENT                    1994. Mr. Grefenstette became a Senior Vice
Began serving: November 1998      President of the Fund's Adviser in January
                                  2000. He served as a Vice President of the
                                  Fund's Adviser from 1996 through 1999 and was
                                  an Assistant Vice President of the Fund's
                                  Adviser from 1994 until 1996. Mr. Grefenstette
                                  is a Chartered Financial Analyst; he received
                                  his M.S. in Industrial Administration from
                                  Carnegie Mellon University.

                                  Hans P. Utsch is Vice President of the Trust.
Hans P. Utsch                     Mr. Utsch joined Federated in April 2001 as
Birth Date: July 3, 1936          Co-Head of Investments/Federated Kaufmann.
VICE PRESIDENT                    From August 1984 to April 2001, Mr. Utsch was
Began serving: November 2001      Chairman of the Board and Secretary of
                                  Edgemont Asset Management Corp., and President
                                  and Portfolio Manager to The Kaufmann Fund,
                                  Inc. (predecessor to the Federated Kaufmann
                                  Fund). Mr. Utsch graduated from Amherst
                                  College and holds an M.B.A. from Columbia
                                  University. He has been engaged in the
                                  securities business since 1962.

 **   Officers do not receive any compensation from the Fund.
--------------------------------------------------------------------------------------

COMMITTEES OF THE BOARD

Board     Committee                                                          Meetings
Committee Members             Committee Functions                            Held
                                                                             During
                                                                             Last
                                                                             Fiscal
                                                                             Year
Executive                     In between meetings of the full Board,          Six
          John F. Donahue     the Executive Committee generally may
          John E. Murray,     exercise all the powers of the full Board
          Jr., J.D., S.J.D.   in the management and direction of the
                              business and conduct of the affairs of
                              the Trust in such manner as the Executive
                              Committee shall deem to be in the best
                              interests of the Trust.  However, the
                              Executive Committee cannot elect or
                              remove Board members, increase or
                              decrease the number of Trustees, elect or
                              remove any Officer, declare dividends,
                              issue shares or recommend to shareholders
                              any action requiring shareholder approval.

Audit                         The purposes of the Audit Committee are        Seven
          Thomas G. Bigley    to oversee the accounting and financial
          John T. Conroy,     reporting process of the Fund, the Fund`s
          Jr.                 internal control over financial
          Nicholas P.         reporting, and the quality, integrity and
          Constantakis        independent audit of the Fund`s financial
          Charles F.          statements.  The Committee also oversees
          Mansfield, Jr.      or assists the Board with the oversight
                              of compliance with legal requirements
                              relating to those matters, approves the
                              engagement and reviews the
                              qualifications, independence and
                              performance of the Fund`s independent
                              auditors, acts as a liaison between the
                              independent auditors and the Board and
                              reviews the Fund`s internal audit
                              function.

Nominating                                                                    One
          Thomas G. Bigley    The Nominating Committee, whose members
          John T. Conroy,     consist of all Independent Trustees,
          Jr.                 selects and nominates persons for
          Nicholas P.         election to the Fund`s Board when
          Constantakis        vacancies occur. The Committee will
          John F.             consider candidates recommended by
          Cunningham          shareholders, Independent Trustees,
          Peter E. Madden     officers or employees of any of the
          Charles F.          Fund`s agents or service providers and
          Mansfield, Jr.      counsel to the Fund. Any shareholder who
          John E. Murray,     desires to have an individual considered
          Jr.                 for nomination by the Committee must
          Marjorie P. Smuts   submit a recommendation in writing to the
          John S. Walsh       Secretary of the Fund, at the Fund's
                              address appearing on the back cover of
                              this Statement of Additional Information.
                              The recommendation should include the
                              name and address of both the shareholder
                              and the candidate and detailed
                              information concerning the candidate's
                              qualifications and experience. In
                              identifying and evaluating candidates for
                              consideration, the Committee shall
                              consider such factors as it deems
                              appropriate.  Those factors will
                              ordinarily include:  integrity,
                              intelligence, collegiality, judgment,
                              diversity, skill, business and other
                              experience, qualification as an
                              "Independent Trustee," the existence of
                              material relationships which may create
                              the appearance of a lack of independence,
                              financial or accounting knowledge and
                              experience, and dedication and
                              willingness to devote the time and
                              attention necessary to fulfill Board
                              responsibilities.


</R>
--------------------------------------------------------------------------------------


Board ownership of shares in the fund and in the federated family of Investment
companies AS OF DECEMBER 31, 2003
                                                                         Aggregate
                                                                   Dollar Range of
                                             Dollar Range of       Shares Owned in
Interested                                      Shares Owned             Federated
Board Member Name                                    in Fund             Family of
                                                                        Investment
                                                                         Companies
John F. Donahue                                         None         Over $100,000
J. Christopher Donahue                       $50,001-$100,000        Over $100,000
Lawrence D. Ellis, M.D.                                 None         Over $100,000

Independent
Board Member Name
Thomas G. Bigley                                        None         Over $100,000
John T. Conroy, Jr.                                     None         Over $100,000
Nicholas P. Constantakis                     $10,001-$50,000         Over $100,000
John F. Cunningham                                      None         Over $100,000
Peter E. Madden                                         None         Over $100,000
Charles F. Mansfield, Jr.                    $10,001-$50,000         $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D.                       None         Over $100,000
Marjorie P. Smuts                                       None         Over $100,000
John S. Walsh                                           None         Over $100,000

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 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.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory contract. The Board's decision to approve the contract reflects the exercise
of its business judgment on whether to continue the existing arrangements.  During
its review of the contract, the Board considers many factors, among the most material
of which are: the Fund's investment objectives and long term performance; the
Adviser's management philosophy, personnel and processes; the preferences and
expectations of Fund shareholders and their relative sophistication; the continuing
state of competition in the mutual fund industry; comparable fees in the mutual fund
industry; the range and quality of services provided to the Fund and its shareholders
by the Federated organization in addition to investment advisory services; and the
Fund's relationship to the Federated funds.

In assessing the Adviser's performance of its obligations, the Board also considers
whether there has occurred a circumstance or event that would constitute a reason for
it to not renew an advisory contract.  In this regard, the Board is mindful of the
potential disruptions of the Fund's operations and various risks, uncertainties and
other effects that could occur as a result of a decision to terminate or not renew an
advisory contract.  In particular, the Board recognizes that most shareholders have
invested in the Fund on the strength of the Adviser's industry standing and
reputation and in the expectation that the Adviser will have a continuing role in
providing advisory services to the Fund.

The Board also considers the compensation and benefits received by the Adviser.  This
includes fees received for services provided to the Fund by other entities in the
Federated organization and research services received by the Adviser from brokers
that execute fund trades, as well as advisory fees.  In this regard, the Board is
aware that various courts have interpreted provisions of the 1940 Act and have
indicated in their decisions that the following factors may be relevant to an
Adviser's compensation:  the nature and quality of the services provided by the
Adviser, including the performance of the Fund; the Adviser's cost of providing the
services; the extent to which the Adviser may realize "economies of scale" as the
Fund grows larger; any indirect benefits that may accrue to the Adviser and its
affiliates as a result of the Adviser's relationship with the Fund; performance and
expenses of comparable funds; and the extent to which the independent Board members
are fully informed about all facts bearing on the Adviser's service and fee.  The
Fund's Board is aware of these factors and takes them into account in its review of
the Fund's advisory contract.

The Board considers and weighs these circumstances in light of its substantial
accumulated experience in governing the Fund and working with Federated on matters
relating to the Federated funds, and is assisted in its deliberations by the advice
of independent legal counsel.  In this regard, the Board requests and receives a
significant amount of information about the Fund and the Federated organization.
Federated provides much of this information at each regular meeting of the Board, and
furnishes additional reports in connection with the particular meeting at which the
Board's formal review of the advisory contracts occurs.  In between regularly
scheduled meetings, the Board may receive information on particular matters as the
need arises.  Thus, the Board's evaluation of an advisory contract is informed by
reports covering such matters as: the Adviser's investment philosophy, personnel, and
processes; the Fund's short- and long-term performance (in absolute terms as well as
in relationship to its particular investment program and certain competitor or "peer
group" funds), and comments on the reasons for performance; the Fund's expenses
(including the advisory fee itself and the overall expense structure of the Fund,
both in absolute terms and relative to similar and/or competing funds, with due
regard for contractual or voluntary expense limitations); the use and allocation of
brokerage commissions derived from trading the Fund's portfolio securities; the
nature and extent of the advisory and other services provided to the Fund by the
Adviser and its affiliates; compliance and audit reports concerning the Federated
funds and the Federated companies that service them; and relevant developments in the
mutual fund industry and how the Federated funds and/or Federated are responding to
them.

The Board also receives financial information about Federated, including reports on
the compensation and benefits Federated derives from its relationships with the
Federated funds.  These reports cover not only the fees under the advisory contracts,
but also fees received by Federated's subsidiaries for providing other services to
the Federated funds under separate contracts (e.g., for serving as the Federated
funds' administrator).  The reports also discuss any indirect benefit Federated may
derive from its receipt of research services from brokers who execute Federated fund
trades.

The Board bases its decision to approve an advisory contract on the totality of the
circumstances and relevant factors, and with a view to past and future long-term
considerations.  Not all of the factors and considerations identified above are
relevant to every Federated fund, nor does the Board consider any one of them to be
determinative.  Because the totality of circumstances includes considering the
relationship of each Federated fund, the Board does not approach consideration of
every Federated fund's advisory contract as if that were the only Federated fund.


Services Agreement
Federated Advisory Services Company, an affiliate of the Adviser, provides research,
quantitative analysis, equity trading and transaction settlement and certain support
services to the Adviser.  The fee for these services is paid by the Adviser and not
by the Fund.


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.


<R>

Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted
codes of ethics.  These codes govern securities trading activities of investment
personnel, Fund Trustees, and certain other employees.  Although they do permit these
people to trade in securities, including those that the Fund could buy, as well as
Shares of the Fund, they also contain significant safeguards designed to protect the
Fund and its shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.


</R>


Voting Proxies on Fund Portfolio Securities
The Board has delegated to the Adviser authority to vote proxies on the securities
held in the Fund's portfolio.  The Board has also approved the Adviser's policies and
procedures for voting the proxies, which are described below.


Proxy Voting Policies
The Adviser's general policy is to cast proxy votes in favor of proposals that the
Adviser anticipates will enhance the long-term value of the securities being voted.
Generally, this will mean voting for proposals that the Adviser believes will:
improve the management of a company; increase the rights or preferences of the voted
securities; and/or increase the chance that a premium offer would be made for the
company or for the voted securities.

The following examples illustrate how these general policies may apply to proposals
submitted by a company's board of directors.  However, whether the Adviser supports
or opposes a proposal will always depend on the specific circumstances described in
the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for proposals to:
require independent tabulation of proxies and/or confidential voting by shareholders;
reorganize in another jurisdiction (unless it would reduce the rights or preferences
of the securities being voted); and repeal a shareholder rights plan (also known as a
"poison pill").  The Adviser will generally vote against the adoption of such a plan
(unless the plan is designed to facilitate, rather than prevent, unsolicited offers
for the company).

On matters of capital structure, generally the Adviser will vote: against proposals
to authorize or issue shares that are senior in priority or voting rights to the
securities being voted; for proposals to grant preemptive rights to the securities
being voted; and against proposals to eliminate such preemptive rights.

On matters relating to management compensation, generally the Adviser will vote: for
stock incentive plans that align the recipients' interests with the interests of
shareholders without creating undue dilution; and against proposals that would permit
the amendment or replacement of outstanding stock incentives with new stock
incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies relating
to proposed mergers, capital reorganizations, and similar transactions in accordance
with the general policy, based upon its analysis of the proposed transaction.  The
Adviser will vote proxies in contested elections of directors in accordance with the
general policy, based upon its analysis of the opposing slates and their respective
proposed business strategies.  Some transactions may also involve proposed changes to
the company's corporate governance, capital structure or management compensation.
The Adviser will vote on such changes based on its evaluation of the proposed
transaction or contested election.  In these circumstances, the Adviser may vote in a
manner contrary to the general practice for similar proposals made outside the
context of such a proposed transaction or change in the board.  For example, if the
Adviser decides to vote against a proposed transaction, it may vote for anti-takeover
measures reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without the
favorable recommendation of a company's board.  The Adviser believes that a company's
board should manage its business and policies, and that shareholders who seek
specific changes should strive to convince the board of their merits or seek direct
representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting.  For example, if a foreign market
requires shareholders casting proxies to retain the voted shares until the meeting
date (thereby rendering the shares "illiquid" for some period of time), the Adviser
will not vote proxies for such shares.


Proxy Voting Procedures
The Adviser has established a Proxy Voting Committee (Proxy Committee), to exercise
all voting discretion granted to the Adviser by the Board in accordance with the
proxy voting policies.  The Adviser has hired Investor Responsibility Research Center
(IRRC) to obtain, vote, and record proxies in accordance with the Proxy Committee's
directions.  The Proxy Committee directs IRRC by means of Proxy Voting Guidelines,
and IRRC may vote any proxy as directed in the Proxy Voting Guidelines without
further direction from the Proxy Committee (and may make any determinations required
to implement the Proxy Voting Guidelines).  However, if the Proxy Voting Guidelines
require case-by-case direction for a proposal, IRRC will provide the Proxy Committee
with all information that it has obtained regarding the proposal and the Proxy
Committee will provide specific direction to IRRC.  The Adviser's proxy voting
procedures generally permit the Proxy Committee to amend the Proxy Voting Guidelines,
or override the directions provided in such Guidelines, whenever necessary to comply
with the proxy voting policies.


Conflicts of Interest
The Adviser has adopted procedures to address situations where a matter on which a
proxy is sought may present a potential conflict between the interests of the Fund
(and its shareholders) and those of the Adviser or Distributor.  This may occur where
a significant business relationship exists between the Adviser (or its affiliates)
and a company involved with a proxy vote.  A company that is a proponent, opponent,
or the subject of a proxy vote, and which to the knowledge of the Proxy Committee has
this type of significant business relationship, is referred to as an "Interested
Company."

The Adviser has implemented the following procedures in order to avoid concerns that
the conflicting interests of the Adviser have influenced proxy votes.  Any employee
of the Adviser who is contacted by an Interested Company regarding proxies to be
voted by the Adviser must refer the Interested Company to a member of the Proxy
Committee, and must inform the Interested Company that the Proxy Committee has
exclusive authority to determine how the Adviser will vote.  Any Proxy Committee
member contacted by an Interested Company must report it to the full Proxy Committee
and provide a written summary of the communication.  Under no circumstances will the
Proxy Committee or any member of the Proxy Committee make a commitment to an
Interested Company regarding the voting of proxies or disclose to an Interested
Company how the Proxy Committee has directed such proxies to be voted.  If the Proxy
Voting Guidelines already provide specific direction on the proposal in question, the
Proxy Committee shall not alter or amend such directions.  If the Proxy Voting
Guidelines require the Proxy Committee to provide further direction, the Proxy
Committee shall do so in accordance with the proxy voting policies, without regard
for the interests of the Adviser with respect to the Interested Company.  If the
Proxy Committee provides any direction as to the voting of proxies relating to a
proposal affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and why,
the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or an
affiliate) acts as an investment adviser, the Proxy Committee will vote the Fund's
proxies in the same proportion as the votes cast by shareholders who are not clients
of the Adviser at any shareholders' meeting called by such investment company, unless
otherwise directed by the Board.

<R>
Proxy Voting Report
A report on "Form N-PX" of how the Fund voted any proxies during the most recent
12-month period ended June 30 is available through Federated's website.  Go to
www.federatedinvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX.


PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund's portfolio holdings is available in the "Products"
section of the Federated Investors website at www.federatedinvestors.com.  A complete
listing of the Fund's portfolio holdings as of the end of each calendar quarter is
posted on the website 30 days (or the next business day) after the end of the quarter
and remains posted until replaced by the information for the succeeding quarter.
Summary portfolio composition information as of the close of each month (except for
recent purchase and sale transaction information, which is updated quarterly) is
posted on the website 15 days (or the next business day) after month-end and remains
until replaced by the information for the succeeding month.  The summary portfolio
composition information may include identification of the Fund's top ten holdings,
recent purchase and sale transactions and a percentage breakdown of the portfolio by
sector. To access this information from the "Products" section of the website, click
on "Portfolio Holdings" and select the appropriate link opposite the name of the
Fund, or select the name of the Fund from the menus on the "Products" section, and
from the Fund's page click on the "Portfolio Holdings" or "Composition" link.  A user
is required to register on the website the first time the user accesses this
information.

You may also access from the "Products" section of the website portfolio information
as of the end of the Funds' fiscal quarters.  The Fund's annual and semiannual
reports, which contain complete listings of the Fund's portfolio holdings as of the
end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the
name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the
link to the appropriate PDF.  Complete listings of the Fund's portfolio holdings as
of the end of the Fund's first and third fiscal quarters may be accessed by selecting
"Portfolio Holdings" from the "Products" section and then selecting the appropriate
link opposite the name of the Fund.  Fiscal quarter information is made available on
the website within 70 days after the end of the fiscal quarter.  This information is
also available in reports filed with the SEC at the SEC's website at www.sec.gov.

The disclosure policy of the Fund and the Adviser prohibits the disclosure of
portfolio holdings information to any investor or intermediary before the same
information is made available to other investors.  Employees of the Adviser or its
affiliates who have access to nonpublic information concerning the Fund's portfolio
holdings are prohibited from trading securities on the basis of this information.
Such persons must report all personal securities trades and obtain pre-clearance for
all personal securities trades other than mutual fund shares.

Firms that provide administrative, custody, financial, accounting, legal or other
services to the Fund may receive nonpublic information about Fund portfolio holdings
for purposes relating to their services.  The Fund may also provide portfolio
holdings information to publications that rate, rank or otherwise categorize
investment companies.  Traders or portfolio managers may provide "interest" lists to
facilitate portfolio trading if the list reflects only that subset of the portfolio
for which the trader or portfolio manager is seeking market interest.  A list of
service providers, publications and other third parties who may receive nonpublic
portfolio holdings information appears in the Appendix to this SAI.

The furnishing of nonpublic portfolio holdings information to any third party (other
than authorized governmental or regulatory personnel) requires the prior approval of
the President of the Adviser and of the Chief Compliance Officer of the Fund.  The
President of the Adviser and the Chief Compliance Officer will approve the furnishing
of nonpublic portfolio holdings information to a third party only if they consider
the furnishing of such information to be in the best interests of the Fund and its
shareholders. In that regard, and to address possible conflicts between the interests
of Fund shareholders and those of the Adviser and its affiliates, the following
procedures apply. No consideration may be received by the Fund, the Adviser, any
affiliate of the Adviser or any of their employees in connection with the disclosure
of portfolio holdings information. Before information is furnished, the third party
must sign a written agreement that it will safeguard the confidentiality of the
information, will use it only for the purposes for which it is furnished and will not
use it in connection with the trading of any security.  Persons approved to receive
nonpublic portfolio holdings information will receive it as often as necessary for
the purpose for which it is provided.  Such information may be furnished as
frequently as daily and often with no time lag between the date of the information
and the date it is furnished. The Board receives and reviews annually a list of the
persons who receive nonpublic portfolio holdings information and the purposes for
which it is furnished.

</R>


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). The Adviser may also direct
certain portfolio trades to a broker that, in turn, pays a portion of the Fund's
operating expenses.  The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.

Investment decisions for the Fund are made independently from those of other accounts
managed by the Adviser. Except as noted below, 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.  Investments for Federated Kaufmann Fund and
other accounts managed by that fund's portfolio managers in initial public offerings
("IPO") are made independently from any other accounts, and much of their non-IPO
trading may also be conducted independently from other accounts.


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.

<R>

For the fiscal year ended, October 31, 2004, the Fund's Adviser directed brokerage
transactions to certain brokers due to research services they provided. The total
amount of these transactions was $ 468,795,106 for which the Fund paid $679,532 in
brokerage commissions.

</R>


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

                                     Average Aggregate Daily
  Maximum Administrative Fee            Net Assets of the
                                         Federated Funds
         0.150 of 1%                 on the first $5 billion
         0.125 of 1%                  on the next $5 billion
         0.100 of 1%                 on the next $10 billion
         0.075 of 1%                on assets over $20 billion
The administrative fee received during any fiscal year shall be at least $150,000 per
portfolio and $40,000 per each additional class of Shares. FAS may voluntarily waive
a portion of its fee and may reimburse the Fund for expenses.
--------------------------------------------------------------------------------------

FAS 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
State Street Bank and Trust Company, the Fund's registered transfer agent, maintains
all necessary shareholder records.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Deloitte & Touche
LLP, conducts its audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require it to plan and perform its
audits to provide reasonable assurance about whether the Fund's financial statements
and financial highlights are free of material misstatement.

<R>


FEES PAID BY THE FUND FOR SERVICES

--------------------------      ------------         -----------    ------------
For the Year Ended                  2004                2003            2002
October 31
Advisory Fee Earned              $2,091,143          $1,986,288      $3,033,372
Advisory Fee Reduction               0                    0              0
Advisory Fee Reimbursement          798                 1,272          3,070
Brokerage Commissions             785,085              902,728       2,417,826
Administrative Fee                212,460              199,158        304,146
12b-1 Fee:
 Class A Shares                   384,267                --              --
 Class B Shares                   826,436                --              --
 Class C Shares                   111,907                --              --
Shareholder Services Fee:
 Class A Shares                      0                   --              --
 Class B Shares                   275,478                --              --
 Class C Shares                    37,302                --              --
</R>
--------------------------------------------------------------------------------------

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.


HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits this
standard performance information to be accompanied by non-standard performance
information.

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/or the
value of portfolio holdings 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 are given for the one-year, five-year and Start of Performance periods
ended October 31, 2004.

Yield is given for the 30-day period ended October 31, 2004.

<R>

                                                              Start of
                                                           Performance on
                          30-Day      1 Year    5 Years      12/29/1998
                          Period
Class A Shares:
Total Return
  Before Taxes             N/A        (3.08)%   (10.98)%      (5.59)%
  After Taxes on           N/A        (3.08)%   (10.98)%      (5.59)%
  Distributions
  After Taxes on           N/A        (2.00)%   (8.96)%       (4.65)%
  Distributions and
  Sale of Shares
Yield                      N/A          N/A       N/A           N/A


--------------------------------------------------------------------------------------
                                                              Start of
                                                           Performance on
                          30-Day      1 Year    5 Years      12/29/1998
                          Period
Class B  Shares:
Total Return
  Before Taxes             N/A        (3.68)%   (11.01)%      (5.50)%
  After Taxes on           N/A        (3.68)%   (11.01)%      (5.50)%
  Distributions
  After Taxes on           N/A        (2.39)%   (8.99)%       (4.57)%
  Distributions and
  Sale of Shares
Yield                      N/A          N/A       N/A           N/A


--------------------------------------------------------------------------------------
                                                              Start of
                                                           Performance on
                          30-Day      1 Year    5 Years      12/29/1998
                          Period
Class C Shares:
Total Return
  Before Taxes             N/A        (0.16)%   (10.83)%      (5.49)%
  After Taxes on           N/A        (0.16)%   (10.83)%      (5.50)%
  Distributions
  After Taxes on           N/A        (0.10)%   (8.85)%       (4.57)%
  Distributions and
  Sale of Shares
Yield                      N/A          N/A       N/A           N/A

</R>
--------------------------------------------------------------------------------------

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 $10,000 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 $10,000,
less any applicable sales charge, adjusted over the period by any additional Shares,
assuming the annual reinvestment of all dividends and distributions. Total returns
after taxes are calculated in a similar manner, but reflect additional standard
assumptions required by the SEC.


YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-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
30-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:

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

o     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;

o     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 Fund; and

o     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:


Dow Jones Industrial Average (DJIA)
Represents share prices of selected blue chip industrial corporations. The DJIA
indicates daily changes in the average price of stocks 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, 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.


Moody's Investors Service, Fitch Ratings and Standard & Poor's
Various publications.


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


Russell 1000 Growth Index
Measures the performance of those Russell 1000 companies with higher price-to-book
ratios and higher forecasted growth values.


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 who are 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, 2003, Federated managed 14 bond funds
with approximately $3.8 billion in assets and 22 money market funds with
approximately $23.0 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 32 years' experience. As of December
31, 2003, Federated managed 36 equity funds totaling approximately $25.6 billion in
assets across growth, value, equity income, international, index and sector (i.e.
utility) styles.  Federated's value-oriented management style combines quantitative
and qualitative analysis and features a structured, computer-assisted composite
modeling system that was developed in the 1970s.


Corporate Bond Funds
In the corporate bond sector, as of December 31, 2003, Federated managed 11 money
market funds and 4 bond funds with assets approximating $61.7 billion and $3.4
billion, respectively.  Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 30 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 $209
billion.


Government Funds
In the government sector, as of December 31, 2003, Federated managed 7 mortgage
backed, 3 multi-sector government funds, 4 government/agency and 19 government money
market mutual funds, with assets approximating $4.9 billion, $0.9 billion, $2.9
billion and $56.2 billion, respectively. Federated trades approximately $90.4 billion
in U.S. government and mortgage backed securities daily and places approximately $35
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 $50 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, 2003, Federated managed
$136.2 billion in assets across 52 money market funds, including 19 government, 10
prime, 22 municipal and 1 euro-denominated with assets approximating $56.2 billion,
$59.4 billion, $20.6 billion and $173.9 million, respectively.

The Chief  Investment  Officers  responsible  for oversight of the various  investment
sectors  within  Federated  are:  Global Equity - Stephen F. Auth is  responsible  for
overseeing the management of Federated's  domestic and international  equity products;
Global  Fixed  Income - Mary Jo Ochson and Robert J.  Ostrowski  are  responsible  for
overseeing the management of Federated's  domestic and international  fixed income and
high yield  products;  and Money Markets - Deborah A.  Cunningham is  responsible  for
overseeing the management of Federated's money market fund products.


Mutual Fund Market
Forty-nine  percent of American  households are pursuing their financial goals through
mutual funds. These investors, as well as businesses and institutions,  have entrusted
over $6.2  trillion to the  approximately  8,300  funds  available,  according  to the
Investment Company Institute.


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


Institutional Clients
Federated meets the needs of approximately 3,035 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.


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.


Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated   funds  are   available  to  consumers   through  major   brokerage   firms
nationwide--Federated   has   over   2,000   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.


FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2004 are
incorporated herein by reference to the Annual Report to Shareholders of Federated
Large Cap Growth Fund dated October 31, 2004.


INVESTMENT RATINGS


Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is present,
but a limited margin of safety remains. Financial commitments are currently being
met; however, capacity for continued payment is contingent upon a sustained,
favourable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favourable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.


Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market positions
in well established industries, high rates of return on funds employed, conservative
capitalization structure with moderate reliance on debt and ample asset protection,
broad margins in earning coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and assured
sources of alternate liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, 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-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.


Fitch Ratings Commercial Paper Rating Definitions
F-1--Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Under their national rating
scale, this rating is assigned to the "best" credit risk relative to all others in
the same country and is normally assigned to all financial commitments issued or
guaranteed by the sovereign state. Where the credit risk is particularly strong, a
"+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.


ADDRESSES

Federated Large Cap Growth Fund

Class A Shares
Class B Shares
Class C Shares

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 Global Investment Management Corp.
175 Water Street
New York, NY 10038-4965


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


Independent Registered Public Accounting Firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116



APPENDIX

The following is a list of persons other than the Adviser and its affiliates that may
receive nonpublic portfolio holdings information concerning the Fund:


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Custodian
State Street Bank and Trust Company


Securities Lending Agent
HSBC
State Street Bank and Trust Company

Independent Registered Public Accounting Firm
Deloitte & Touche LLP


Legal Counsel
Reed Smith LLP
Dickstein Shapiro Morin & Oshinsky, LLP


Service Providers
Bloomberg
Factset
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Wilshire Associates, Inc.
Vestek


Security Pricing Services
FT Interactive Data
Reuters


Ratings Agencies
S&P

Performance Reporting/Publications
Evaluation Associates
Fidelity-Strategic Advisors
Lipper
Morningstar
NASDAQ
Value Line
Thomson Financial
Wiesenberger/Thomson Financial


Other
ICI

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Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Market Opportunity Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

December 31, 2004

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking to provide moderate capital appreciation and high current income by investing, under normal market conditions, in domestic and foreign securities that the Adviser deems to be undervalued or out-of-favor or securities that the Adviser believes are attractive due to their income-producing potential.

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		5
What are the Fund’s Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		10
What are the Specific Risks of Investing in the Fund?		16
What Do Shares Cost?		20
How is the Fund Sold?		27
How to Purchase Shares		28
How to Redeem and Exchange Shares		31
Account and Share Information		34
Who Manages the Fund?		36
Legal Proceedings		37
Financial Information		38

Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

The Fund’s investment objective is to provide moderate capital appreciation and high current income. 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, under normal market conditions, in domestic and foreign securities that the Adviser deems to be undervalued or out-of-favor or securities that the Adviser believes are attractive due to their income-producing potential. As more fully described in this prospectus, the Fund’s investments may include, but are not limited to, the following: equity securities of domestic and foreign issuers, fixed-income securities of both domestic or foreign corporations or sovereign governmental entities, real estate investment trusts (REITS), securities of precious metal companies and derivative and hybrid instruments. This investment strategy is designed to enable the Fund to pursue its investment objective (to provide moderate capital appreciation and high current income) while attempting to limit volatility.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund’s returns include:

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Risks Relating to Investing for Value. The Fund uses a “value” style of investing and, as a result, the Fund’s share price may lag that of other funds using a different investment style.

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Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.

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Risks of Foreign Investing. Because the Fund invests in securities issued by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than could otherwise be the case.
Currency Risks. Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the value of the Shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.
Emerging Market Risks. Securities issued or traded in emerging markets generally entail greater risks than securities issued or traded in developed markets. Emerging market economies may also experience more actual or perceived severe downturns (with corresponding currency devaluation) than developed economies.
Risks of Investing in Derivatives. The Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are also subject to a number of other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks. The Fund’s use of derivatives may also increase the taxable distributions to shareholders.
Interest Rate Risks. Prices of fixed-income securities generally fall when interest rates rise. 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 Risks. Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
Risks Associated with Non-Investment Grade Securities. Securities rated below investment grade, also known as junk bonds, generally entail greater market, credit and liquidity risks than investment grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities. Trading opportunities are more limited for fixed-income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. 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.
Leverage Risks. 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.

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Risk/Return Bar Chart and Table

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The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The Fund’s Class A Shares total return for the nine-month period from January 1, 2004 to September 30, 2004 was 4.18%.

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Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 10.60% (quarter ended June 30, 2003). Its lowest quarterly return was (8.50)% (quarter ended September 30, 2002).

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Average Annual Total Return Table

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The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell Mid Cap Value Index (RMCV),a broad-based market index and an index consisting of 70% Russell Mid Cap Value Index/30% Merrill Lynch 91 Day Treasury Bill Index (70% RMCV/30% ML91DTB). Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

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(For the periods ended December 31, 2003)

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	1 Year	Start of Performance¹

Class A Shares:

Return Before Taxes	13.48%	11.26%

Return After Taxes on Distributions²	12.07%	9.54%

Return After Taxes on Distributions and Sale of Fund Shares²	8.69%	8.58%

Class B Shares:

Return Before Taxes	13.74%	11.74%

Class C Shares:

Return Before Taxes	17.06%	12.11%

RMCV	38.07%	10.70%

70% RMCV/30% ML91DTB	26.99%	8.25%

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1 The Fund’s Class A, Class B and Class C Shares start of performance date was December 4, 2000.

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What are the Fund’s Fees and Expenses?

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FEDERATED MARKET OPPORTUNITY FUND

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FEES AND EXPENSES

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%
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	0.25%²	0.75%	0.75%
Shareholder Services Fee	0.25%	0.25%	0.25%
Other Expenses³	0.24%	0.24%	0.24%
Total Annual Fund Operating Expenses	1.49%	1.99%⁴	1.99%


1 The percentages shown are based on expenses for the fiscal year ended October 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the administrator and distributor has waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2004.
Total Waiver of Fund Expenses	0.26%	0.01%	0.01%
Total Actual Annual Fund Operating Expenses (after waivers)	1.23%	1.98%	1.98%
2 Class A Shares did not pay or accrue the distribution (12b-1) fee for the fiscal year ended October 31, 2004. Class A Shares have no present intention of paying or accruing the distribution (12b-1) fee for the fiscal year ending October 31, 2005.
3 The administrator voluntarily waived a portion of its fee. The administrator can terminated this voluntary waiver at any time. Total other expenses paid by the Fund (after the voluntary waiver) were 0.23% for the fiscal year ended October 31, 2004.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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This 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.

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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 in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$693	$995	$1,318	$2,232

Expenses assuming no redemption	$693	$995	$1,318	$2,232

Class B:

Expenses assuming redemption	$752	$1,024	$1,273	$2,188

Expenses assuming no redemption	$202	$624	$1,073	$2,188

Class C:

Expenses assuming redemption	$400	$718	$1,162	$2,394

Expenses assuming no redemption	$300	$718	$1,162	$2,394

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What are the Fund’s Investment Strategies?

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The Fund pursues its investment objective by investing, under normal market conditions, in domestic and foreign securities that the Adviser deems to be undervalued or out-of-favor or securities that the Adviser believes are attractive due to their income-producing potential. As more fully described below, the Fund’s investments may include, but are not limited to, the following: equity securities of domestic and foreign issuers, fixed-income securities of both domestic and foreign corporations or sovereign governmental entities, REITS, securities of precious metal companies and derivative and hybrid instruments. This investment strategy is designed to enable the Fund to pursue its investment objective (to provide moderate capital appreciation and high current income) while attempting to limit volatility.

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With regard to equity securities, the Adviser primarily uses the “value” style of investing and selects securities primarily utilizing a bottom up approach to security anaylsis but also secondarily considers top down anaylsis and sector allocation. The Adviser’s use of the “value” style of investing seeks to identify and select securities that, in the Adviser’s opinion, are trading at a lower valuation relative to one of the following two measurements: (i) the historic valuation of the securities; or (ii) valuations of the issuer’s industry peers. Historically, undervalued securities have generally had lower share price volatility, and a higher yield, when compared with other equity securities.

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Primarily using the bottom-up approach to security analysis, the Adviser searches for equity securities that appear to be undervalued or out-of-favor with share prices that have lagged the market and demonstrated an ability to maintain their value when the broad equity market is weak. Additionally, the Adviser seeks to invest in companies that have skilled management with a shareholder orientation and that appear to be financially strong.

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As a secondary matter, using top-down analysis, the Adviser considers current economic, financial market, and industry factors and societal trends that may affect the issuing company. Lastly, the Adviser assembles a portfolio of securities by considering sector allocations. Sectors are broad categories of companies with similar characteristics. The Adviser determines the sector allocation of the Fund’s portfolio primarily based upon its opinion as to which sectors are, as a whole, priced at a low market valuation when compared with other sectors. The Adviser also considers such factors as the dividend-paying potential of the companies in each sector.

The Adviser uses technical analysis of the market as an aid in timing purchases and sales. The Adviser sells a portfolio security if it determines that the issuer does not continue to meet its stock selection criteria.

The Adviser may increase the Fund’s cash position if the Adviser is unable to find a sufficient number of securities that the Adviser deems to be undervalued or out-of-favor or if the Adviser believes that overall equity market valuations (and risks) are at high levels. Additionally, the Adviser anticipates normally keeping a portion of the Fund’s portfolio in cash in order to readily take advantage of buying opportunities, to increase current income or in an effort to preserve capital. The Fund’s cash position will normally be invested in traditional cash investments such as money market funds, U.S. Treasury Bills or repurchase agreements.

When investing in fixed-income securities the Adviser invests in asset classes within the fixed-income market that it believes offers the best relative value. When searching for asset classes within the fixed-income market, the Adviser places an emphasis on historical yield spreads and investing contrary to prevailing market sentiment with regard to an asset class. With regard to non-dollar denominated fixed-income securities the Adviser also considers the currency appreciation potential of a given market. Such asset classes may include non-investment-grade fixed-income securities, emerging market debt and foreign non-dollar denominated fixed-income securities issued by foreign governmental entities or corporations, as well as U.S. Treasury securities and other investment-grade securities.

The Adviser’s investment management approach may be described as contrarian in nature because the Adviser anticipates that it will invest in out-of-favor securities or deviate from the consensus view on a security, sector, or with regard to markets in general.

In addition to investing in equity and fixed-income securities, the Adviser may invest in the following in attempting to achieve its investment objective:

derivative contracts or hybrid instruments,
convertible bonds,
REITS, and
securities of companies engaged in the exploration, mining and distribution of gold, silver and other precious metals.

The Fund may also purchase shares of exchange-traded funds (ETFs) in order to achieve exposure to a specific region, country, or market sector, or for other reasons consistent with its investment strategy.

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The Fund may invest in derivative contracts, such as swaps, options and futures contracts, to efficiently implement its overall investment strategies. The following examples illustrate some, but not all, of the specific ways in which the Fund may use derivatives or hybrid instruments. First, the Fund may invest in a hybrid instrument which is structured as a note that pays a fixed dividend and at maturity either converts into shares of an equity security or returns a payment to the Fund based on the change in value of an underlying equity security. Second, the Fund may buy or sell derivative contracts (such as call or put options), in anticipation of an increase or decrease in the market value of individual securities, currencies or indices (including both securities and volatility indices). Finally, the Fund may invest in derivatives contracts as part of its hedging strategies.

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HEDGING

Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund’s portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivative contracts, or derivative contracts and securities. The Fund’s ability to hedge may be limited by the costs of the derivative contracts. The Fund may attempt to lower the cost of hedging by entering in transactions that provide only limited protection, including transactions that (1) hedge only a portion of the portfolio, (2) use derivatives contracts that cover a narrow range of circumstances or (3) involve the sale of derivative contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Funds.

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Additionally, the Fund may buy put options on stock indices or individual stocks (even if the stocks are not held by the Fund) in an attempt to hedge against a decline in stock prices.

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PORTFOLIO TURNOVER

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. 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

Real Estate Investment Trusts (REITs)

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.

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in, another country;
the principal trading market for its securities is in another country; or
it (or its subsidiaries) derived in its most current fiscal year at least 50% of its total assets, capitalization, gross revenue or profit from goods produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.

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. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund’s exposure to currency risk.

Foreign Government Securities

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 that are either issued by entities 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. Further, foreign government securities include mortgage-related securities issued or guaranteed by national, state or provincial governmental instrumentalities, including quasi-governmental agencies.

Foreign Corporate Debt Securities

The Fund may also invest in investment grade and high yield debt securities of foreign corporations. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies.

The credit risks of corporate debt securities vary widely among issuers. The credit risk of an issuer’s debt security may also vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities.

AMERICAN DEPOSITORY RECEIPTS

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American Depositary Receipts, which are traded in the United States markets, represent interests in underlying securities issued by a foreign company which are not traded in the United States. ADRs provide a way to buy shares of foreign based companies in the United States rather than in overseas markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign exchange transactions. The Fund may also invest in securities issued directly by foreign companies and traded in U.S. dollars in United States markets.

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DERIVATIVE CONTRACTS

Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make 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.

The Fund may also trade derivative contracts 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 on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument, derivative contracts may increase or decrease the Fund’s exposure to interest rate, stock market, currency and credit risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.

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

Futures 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 specified price, date and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures, index futures and foreign currency forward contracts.

Options

Options are rights to buy or sell an underlying asset or instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or 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. A call option gives the holder (buyer) the right to buy 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. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of underlying assets or instruments, including financial indices, individual securities, currencies (both U.S. and foreign) and other derivative instruments, such as futures contracts.

Swaps

Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party’s payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include interest rate swaps, total return swaps, credit default swaps, currency swaps, and caps and floors.

Hybrid Instruments

Hybrid instruments combine elements of derivative contracts with those of another security (typically a fixed-income security). All or a portion of the interest or principal payable on a hybrid security is determined by reference to changes in the price of an underlying asset or by reference to another benchmark (such as interest rates, currency exchange rates or indices). Hybrid instruments also include convertible securities with conversion terms related to an underlying asset or benchmark.

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The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, options, futures and currencies. Thus, an investment in a hybrid instrument may entail significant risks in addition to those associated with traditional fixed-income or convertible securities. Hybrid instruments are also potentially more volatile and may carry greater interest rate risks than traditional instruments. Moreover, depending on the structure of the particular hybrid, it may expose the Fund to leverage risks or carry liquidity risks.

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FIXED-INCOME SECURITIES

Fixed-income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed-income security must 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.

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

Treasury Securities

Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.

Corporate Debt Securities

Corporate debt securities are fixed-income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Funds may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.

The Fund may invest in both investment grade and non-investment grade corporate debt securities. Lower-rated fixed-income securities are securities rated below investment grade (i.e., BB or lower) by a nationally recognized statistical rating organization (NRSRO). There is no minimal acceptable rating for a security to be purchased or held by the Fund and the Fund may purchase or hold unrated securities and securities whose issuers are in default.

Convertible Securities

Convertible securities are fixed-income securities that the Fund has the option to exchange for equity securities at a specified conversion price, or which are automatically exchanged for equity securities after a specified conversion period. 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 that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock reached $12, the Fund could realize an additional $2 per share by converting its fixed-income securities.

Convertible securities generally have lower yields than comparable fixed-income securities. In addition, at the time a convertible security is issued the conversion price exceeds the market value of the underlying equity securities. 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.

ASSET COVERAGE

In order to secure its obligations in connection with derivative contracts, the Fund will either own the underlying assets or set aside readily marketable securities with a value that equals or exceeds the Fund’s obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets to secure such obligations without terminating the derivative contracts.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

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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. The Fund may also invest in high yield and emerging markets securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. The Fund may also invest in such securities directly. These other investment companies are managed independently of the Fund and incur additional expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the additional expenses.

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As with traditional mutual funds, ETFs charge asset-based fees, although these fees tend to be relatively low. ETFs do not charge initial sales charges or redemption fees and investors pay only customary brokerage fees to buy and sell ETF shares.

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more NRSROs. For example, Standard and Poor’s, a rating service, assigns ratings to investment grade securities (AAA, AA, A and BBB) based on their assessment of the likelihood of the issuer’s inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser’s credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

RISKS RELATED TO INVESTING FOR VALUE

Due to their relatively low valuations, value stocks are typically less volatile than growth stocks. For instance, the price of a value stock may experience a smaller increase on a forecast of higher earnings, a positive fundamental development, or positive market development. Further, value stocks tend to have higher dividends than growth stocks. This means they depend less on price changes for returns and may lag behind growth stocks in an up market.

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RISKS OF INVESTING IN ADRS AND DOMESTICALLY TRADED SECURITIES OF FOREIGN ISSUERS

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RISKS OF FOREIGN INVESTING

Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack financial controls and reporting standards, or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.

CURRENCY RISKS

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

The Fund may make significant investments in securities denominated in the Euro, the single currency of the European Monetary Union (EMU). Therefore, the exchange rate between the Euro and the U.S. dollar will have a significant impact on the value of the Fund’s investments.

DERIVATIVES RISKS

The Fund’s use of derivative contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivative contracts may also involve other risks described in this prospectus, such as stock market, interest rate, credit, liquidity and leverage risks.

INTEREST RATE RISKS

Prices of fixed-income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed-income securities fall. However, market factors, such as the demand for particular fixed-income securities, may cause the price of certain fixed-income securities to fall while the prices of other securities rise or remain unchanged.

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 RISKS

Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

Fixed-income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for 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.

LIQUIDITY RISKS

Trading opportunities are more limited for fixed-income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held.

LEVERAGE RISKS

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.

RISKS ASSOCIATED WITH NON-INVESTMENT GRADE SECURITIES

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

EMERGING MARKET RISKS

Securities issued or traded in emerging markets generally entail greater risks than securities issued or traded in developed markets. For example, their creditworthiness and consequently their prices can be significantly more volatile than prices in developed countries. Emerging market economies may also experience more actual or perceived severe downturns (with corresponding currency devaluation) than developed economies.

Emerging market countries may have relatively unstable governments and may present the risk of nationalization of businesses, expropriation, confiscatory taxation or, in certain instances, reversion to closed market, centrally planned economies.

EXCHANGE-TRADED FUNDS

An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange-traded) that has the same investment objectives, strategies and policies. The price of an ETF can fluctuate up or down, and the Fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (i) the market price of an ETF’s shares may trade above or below their net asset value; (ii) an active trading market for an ETF’s shares may not develop or be maintained; or (iii) trading of an ETF’s shares may be halted if the listing exchange’s officials deem such action appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.

What Do Shares Cost?

When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (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 funds section of certain local newspapers under “Federated.”

The Fund generally values equity securities according to the last sale price reported by the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). The Fund generally values fixed-income securities according to prices furnished by an independent pricing service, except that fixed-income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost. Prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities. Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. If prices are not available from an independent pricing service, securities and derivatives contracts traded in the OTC market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund’s NAV is computed. An event is considered significant if there is both an affirmative expectation that the security’s value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For domestic fixed-income securities, such events may occur where the cut-off time for the market information used by the independent pricing service is earlier than the end of regular trading on the NYSE. For securities normally priced at their last sale price in a foreign market, such events can occur between the close of trading in the foreign market and the close of trading on the NYSE. In such cases, use of fair valuation can reduce an investor’s ability to seek to profit by estimating the Fund’s NAV in advance of the time as of which NAV is calculated.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges

Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	5.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	1.00%	1.00%

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.”

As shown in the table above, each class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses (‘‘expense ratios”), as well as the compensation payable to investment professionals, also vary among the classes. Before you decide which class to purchase, you should review the different charges and expenses of each class carefully, in light of your personal circumstances, and consult with your investment professional.

SALES CHARGE WHEN YOU PURCHASE

The following tables list the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the tables and described below.

Class A Shares:

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

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 greater¹	0.00%	0.00%

Class C Shares:

All Purchases	1.00%	1.01%

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

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Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

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

Concurrent and Accumulated Purchases (Effective through February 28, 2005)

combining concurrent purchases of and/or current investments in Class A Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Class A Share purchase will be calculated by multiplying the maximum public offering price times the number of Shares of the same Class of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase;

Concurrent and Accumulated Purchases (Effective March 1, 2005)

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

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

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);

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as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any investment professional that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or

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pursuant to the exchange privilege.

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).

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; and
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).
The CDSC is then calculated using the Share price at the time of purchase or redemption, whichever is lower.

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your investment professional received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.

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 12 months of the purchase date.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);
representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Trustees and employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of an investment professional that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through an investment professional that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange);
which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program (Class B Shares only).

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, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals.

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, administration and customer servicing of the Fund’s 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.

SERVICE FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

How to Purchase 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.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after 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 send it to:

The Federated Funds 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, send it to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

BY AUTOMATIC INVESTMENTS

You may establish an account with your financial institution to automatically purchase Shares on predetermined dates or when your bank account reaches a certain level. Under this program, participating financial institutions are responsible for prompt transmission of orders and may charge you for this service. You should read this prospectus along with your financial institution’s agreement or materials describing this service.

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BY DIRECT DEPOSIT

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You may complete an application with State Street Bank and Trust Company to have your Social Security, Railroad Retirement, VA Compensation or Pension, Civil Service Retirement and certain other retirement payments invested directly into the Fund. The application must be filed with State Street Bank and Trust Company before direct deposit may begin. Allow 60 to 90 days for the application to be processed.

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

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 sending 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:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

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 by a financial institution which is a participant in a Medallion signature guarantee program 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 30 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

EXCHANGE PRIVILEGE

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.

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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 Class A or Class C 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;
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

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.

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays any dividends quarterly 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.

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund’s fair valuation procedures are intended in part to discourage short-term trading by reducing the potential for market-trading strategies to succeed. See “What do Shares Cost?” The Fund also monitors trading in Fund Shares in an effort to identify potential disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

The Adviser has delegated daily management of some Fund assets to the Sub-Adviser, Federated Investment Management Company, who is paid by the Adviser and not by the Fund, based on the portion of securities the Sub-Adviser manages. The Sub-Adviser’s address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

THE FUND’S PORTFOLIO MANAGERS ARE:

Steven J. Lehman

Steven J. Lehman has been the Fund’s Portfolio Manager since inception. Mr. Lehman joined the Fund’s Adviser in May 1997 as a Portfolio Manager and Vice President. He has been a Senior Portfolio Manager since 1998. From 1986 to May 1997, Mr. Lehman served as a Portfolio Manager, then Vice President/Senior Portfolio Manager, at First Chicago NBD. Mr. Lehman is a Chartered Financial Analyst; he received his M.A. from the University of Chicago.

John L. Nichol

John L. Nichol has been the Fund’s Portfolio Manager since November 2001. Mr. Nichol joined Federated in September 2000 as an Assistant Vice President/Senior Investment Analyst. He has been a Portfolio Manager since December 2000 and was named a Vice President of the Fund’s Adviser in July 2001. Mr. Nichol served as a portfolio manager and analyst for the Public Employees Retirement System of Ohio from 1992 through August 2000. Mr. Nichol is a Chartered Financial Analyst. He received has M.B.A. with an emphasis in Finance and Management and Information Science from the Ohio State University.

ADVISORY FEES

Legal Proceedings

Financial Information

FINANCIAL HIGHLIGHTS

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

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Financial Highlights–Class A Shares

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(For a Share Outstanding Throughout Each Period)

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	Year Ended October 31,						Period Ended
							Period Ended
	2004		2003		2002		10/31/2001	¹

Net Asset Value, Beginning of Period	$12.32		$10.77		$11.14		$10.00

Income From Investment Operations:

Net investment income	0.24	²	0.44		0.39	³	0.42

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	1.26		1.57		(0.30	)³	1.13

TOTAL FROM INVESTMENT OPERATIONS	1.50		2.01		0.09		1.55

Less Distributions:

Distributions from net investment income	(0.34	)	(0.40	)	(0.42	)	(0.41	)

Distributions from net realized gain on investments and foreign currency transactions	--		(0.06	)	(0.04	)	--

TOTAL DISTRIBUTIONS	(0.34	)	(0.46	)	(0.46	)	(0.41	)

Net Asset Value, End of Period	$13.48		$12.32		$10.77		$11.14

Total Return⁴	12.29	%	19.09	%	0.56	%	15.67	%


Ratios to Average Net Assets:

Expenses	1.23	%⁵	1.29	%⁵	1.31	%⁵	1.28	%⁶

Net investment income	1.83	%	3.90	%	3.90	%³	4.63	%⁶

Expense waiver/reimbursement⁷	0.01	%	0.00	%⁸	0.00	%⁸	0.99	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$997,231		$480,376		$189,611		$36,774

Portfolio turnover	85	%	115	%	105	%	60	%

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1 Reflects operations for the period from December 4, 2000 (start of performance) to October 31, 2001.

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2 Based on average shares outstanding.

</R>

<R>

3 Effective November 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. The effect of this change for the year ended October 31, 2002 was to increase net investment income per share by $0.01, decrease net realized and unrealized gain/loss per share by $0.01, and increase the ratio of net investment income to average net assets from 3.75% to 3.90%. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

</R>

<R>

</R>

<R>

5 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.23%, 1.28% and 1.31% after taking into account these expense reductions for the years ended October 31, 2004, 2003 and 2002, respectively.

</R>

<R>

6 Computed on an annualized basis.

</R>

<R>

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

</R>

<R>

8 Represents less than 0.01%.

</R>

<R>

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

</R>

<R>

Financial Highlights–Class B Shares

</R>

<R>

(For a Share Outstanding Throughout Each Period)

</R>

<R>

	Year Ended October 31,						Period Ended
							Period Ended
	2004		2003		2002		10/31/2001	¹

Net Asset Value, Beginning of Period	$12.27		$10.74		$11.12		$10.00

Income From Investment Operations:

Net investment income	0.14	²	0.34		0.35	³	0.38

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	1.26		1.57		(0.35	)³	1.10

TOTAL FROM INVESTMENT OPERATIONS	1.39		1.91		0.00		1.48

Less Distributions:

Distributions from net investment income	(0.24	)	(0.32	)	(0.34	)	(0.36	)

Distributions from net realized gain on investments and foreign currency transactions	--		(0.06	)	(0.04	)	--

TOTAL DISTRIBUTIONS	(0.24	)	(0.38	)	(0.38	)	(0.36	)

Net Asset Value, End of Period	$13.42		$12.27		$10.74		$11.12

Total Return⁴	11.46	%	18.16	%	(0.19	)%	15.00	%


Ratios to Average Net Assets:

Expenses	1.98	%⁵	2.04	%⁵	2.06	%⁵	2.03	%⁶

Net investment income	1.08	%	3.14	%	3.30	%³	3.81	%⁶

Expense waiver/reimbursement⁷	0.01	%	0.00	%⁸	0.00	%⁸	0.99	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$391,890		$248,695		$115,531		$33,481

Portfolio turnover	85	%	115	%	105	%	60	%

</R>

<R>

1 Reflects operations for the period from December 4, 2000 (start of performance) to October 31, 2001.

</R>

<R>

2 Based on average shares outstanding.

</R>

<R>

3 Effective November 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. The effect of this change for the year ended October 31, 2002 was to increase net investment income per share by $0.01, decrease net realized and unrealized gain/loss per share by $0.01, and increase the ratio of net investment income to average net assets from 3.16% to 3.30%. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

</R>

<R>

</R>

<R>

5 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.98%, 2.03% and 2.06% after taking into account these expense reductions for the years ended October 31, 2004, 2003 and 2002, respectively.

</R>

<R>

6 Computed on an annualized basis.

</R>

<R>

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

</R>

<R>

8 Represents less than 0.01%.

</R>

<R>

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

</R>

<R>

Financial Highlights–Class C Shares

</R>

<R>

(For a Share Outstanding Throughout Each Period)

</R>

<R>

	Year Ended October 31,						Period Ended
							Period Ended
	2004		2003		2002		10/31/2001	¹

Net Asset Value, Beginning of Period	$12.25		$10.73		$11.11		$10.00

Income From Investment Operations:

Net investment income	0.14	²	0.32		0.36	³	0.37

Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	1.26		1.58		(0.36	)³	1.10

TOTAL FROM INVESTMENT OPERATIONS	1.40		1.90		0.00		1.47

Less Distributions:

Distributions from net investment income	(0.25	)	(0.32	)	(0.34	)	(0.36	)

Distributions from net realized gain on investments and foreign currency transactions	--		(0.06	)	(0.04	)	--

TOTAL DISTRIBUTIONS	(0.25	)	(0.38	)	(0.38	)	(0.36	)

Net Asset Value, End of Period	$13.40		$12.25		$10.73		$11.11

Total Return⁴	11.54	%	18.11	%	(0.20	)%	14.90	%


Ratios to Average Net Assets:

Expenses	1.98	%⁵	2.04	%⁵	2.06	%⁵	2.03	%⁶

Net investment income	1.07	%	3.04	%	3.29	%³	3.80	%⁶

Expense waiver/reimbursement⁷	0.01	%	0.00	%⁸	0.00	%⁸	0.99	%⁶

Supplemental Data:

Net assets, end of period (000 omitted)	$554,661		$189,539		$56,586		$17,845

Portfolio turnover	85	%	115	%	105	%	60	%

</R>

<R>

1 Reflects operations for the period from December 4, 2000 (start of performance) to October 31, 2001.

</R>

<R>

2 Based on average shares outstanding.

</R>

<R>

3 Effective November 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. The effect of this change for the year ended October 31, 2002 was to increase net investment income per share by $0.01, decrease net realized and unrealized gain/loss per share by $0.01, and increase the ratio of net investment income to average net assets from 3.15% to 3.29%. Per share, ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

</R>

<R>

</R>

<R>

5 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.99%, 2.03% and 2.06% after taking into account these expense reductions for the years ended October 31, 2004, 2003 and 2002, respectively.

</R>

<R>

6 Computed on an annualized basis.

</R>

<R>

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

</R>

<R>

8 Represents less than 0.01%.

</R>

<R>

Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated October 31, 2004, which can be obtained free of charge.

</R>

<R>

</R>

Federated
World-Class Investment Manager

Federated Market Opportunity Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2004 (c)Federated Investors, Inc.

Cusip 314172743
Cusip 314172735
Cusip 314172727

25839 (12/04)

FEDERATED MARKET OPPORTUNITY FUND
A Portfolio of Federated Equity Funds
Statement of Additional Information

December 31, 2004

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 Market Opportunity Fund (Fund), dated
December 31, 2004. 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.

Contents
How is the Fund Organized?...............1
Securities in Which the Fund Invests.....1
What Do Shares Cost?....................13
How is the Fund Sold?...................13
Exchanging Securities for Shares........14
Subaccounting Services..................15
Redemption in Kind......................16
Massachusetts Partnership Law...........16
Account and Share Information...........16
Tax Information.........................17
Who Manages and Provides Services to the
Fund?..............................17
How Does the Fund Measure Performance?..28
Who is Federated Investors, Inc.?.......31
Financial Information...................32
Investment Ratings......................32
Addresses...............................34
Appendix................................35

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.

Prior to January 1, 2004, Federated Investment Management Company was the Adviser to
the Fund. Both the current Adviser and the former Adviser are wholly owned
subsidiaries of Federated Investors, Inc. (Federated).

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
Equity securities represent a share of an issuer's earnings and assets, after the
issuer pays its liabilities. The Fund cannot predict the income it will receive from
equity securities because issuers generally have discretion as to the payment of any
dividends or distributions. 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
Common stocks are the most prevalent type of equity security. Common stocks receive
the issuer's earnings 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
Preferred stocks have the right to receive specified dividends or distributions
before the issuer makes payments on its 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 also treat such redeemable
preferred stock as a fixed-income security.

Warrants
Warrants give the Fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). The Fund may buy the designated securities by paying the exercise price before
the expiration date. Warrants may become worthless if the price of the stock does not
rise above the exercise price by the expiration date. This increases the market risks
of warrants as compared to the underlying security. Rights are the same as warrants,
except companies typically issue rights to existing stockholders.

Real Estate Investment Trusts (REITs)
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.

FIXED-iNCOME SECURITIES
Fixed-income securities pay interest, dividends or distributions at a specified rate.
The rate may be a fixed percentage of the principal or adjusted periodically. In
addition, the issuer of a fixed-income security must 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. A security's yield will increase or decrease depending upon whether it
costs less (a discount) or more (a premium) than the principal amount. 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. Securities with higher risks generally have higher yields.
The following describes the types of fixed-income securities in which the Fund
invests:

Treasury Securities
Treasury securities are direct obligations of the federal government of the United
States. Treasury securities are generally regarded as having the lowest credit risks.

Agency Securities
Agency securities are issued or guaranteed by a federal agency or other government
sponsored entity (GSE) acting under federal authority. Some GSE securities are
supported by the full faith and credit of the United States. These include the
Government National Mortgage Association, Small Business Administration, Farm Credit
System Financial Assistance Corporation, Farmer's Home Administration, Federal
Financing Bank, General Services Administration, Department of Housing and Urban
Development, Export-Import Bank, Overseas Private Investment Corporation and
Washington Metropolitan Area Transit Authority Bonds.

Other GSE securities receive support through federal subsidies, loans or other
benefits. For example, the U.S. Treasury is authorized to purchase specified amounts
of securities issued by (or otherwise make funds available to) the Federal Home Loan
Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Student Loan Marketing Association and Tennessee Valley Authority in
support of such obligations.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

A Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency.

Although such a guarantee protects against credit risks, it does not reduce market
and prepayment risks.

Corporate Debt Securities
Corporate debt securities are fixed-income securities issued by businesses. Notes,
bonds, debentures and commercial paper are the most prevalent types of corporate debt
securities. The Fund may also purchase interests in bank loans to companies. The
credit risks of corporate debt securities vary widely among issuers.

In addition, the credit risk of an issuer's debt security may vary based on its
priority for repayment. For example, higher ranking (senior) debt securities have a
higher priority than lower ranking (subordinated) securities. This means that the
issuer might not make payments on subordinated securities while continuing to make
payments on senior securities. In addition, in the event of bankruptcy, holders of
senior securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust preferred and
capital securities notes, also permit the issuer to defer payments under certain
circumstances. For example, insurance companies issue securities known as surplus
notes that permit the insurance company to defer any payment that would reduce its
capital below regulatory requirements.

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

DEMAND INSTRUMENTS
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.

CONVERTIBLE SECURITIES
Convertible securities are fixed-income securities that the Fund has the option to
exchange for equity securities at a specified conversion price, or which are
automatically exchanged for equity securities after a specified conversion period.
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 that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common stock
reached $12, the Fund could realize an additional $2 per share by converting its
fixed-income securities.

Convertible securities generally have lower yields than comparable fixed-income
securities. In addition, at the time a convertible security is issued the conversion
price exceeds the market value of the underlying equity securities. 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 equity securities for purposes of its
investment policies and limitations, because of their unique characteristics.

FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States. The
Fund considers an issuer to be based outside the United States if:

o it is organized under the laws of, or has a principal office located in,
another country;

o the principal trading market for its securities is in another country; or

o it (or its subsidiaries) derived in its most current fiscal year at least 50%
of its total assets, capitalization, gross revenue or profit from goods produced,
services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the
risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing. Trading in
certain foreign markets is also subject to liquidity risks.

Depositary Receipts
Depositary receipts represent interests in underlying securities issued by a foreign
company. Depositary receipts are not traded in the same market as the underlying
security. The foreign securities underlying American Depositary Receipts (ADRs) are
traded in the United States. ADRs provide a way to buy shares of foreign-based
companies in the United States 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 United States. Depositary receipts involve many of the same risks of investing
directly in foreign securities, including currency risks and risks of foreign
investing.

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. In a spot trade, the Fund
agrees to exchange one currency for another at the current exchange rate. The Fund
may also enter into derivative contracts in which a foreign currency is an underlying
asset. The exchange rate for currency derivative contracts may be higher or lower
than the spot exchange rate. Use of these derivative contracts may increase or
decrease the Fund's exposure to currency risks.

DERIVATIVE CONTRACTS
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 the terms of the contract except for the price.
Investors make 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, the Fund could close out an open contract to buy an asset at a future
date by entering into an offsetting contract to sell the same asset on the same
date. 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. Exchanges may limit
the amount of open contracts permitted at any one time. Such limits may prevent the
Fund from closing out a position. 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). 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.

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

Futures 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 specified price, date and
time. Entering into a contract to buy an underlying asset is commonly referred to as
buying a contract or holding a long position in the asset. Entering into a contract
to sell an underlying asset is commonly referred to as selling a contract or holding
a short position in the asset. Futures contracts are considered to be commodity
contracts. The Fund has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act and, therefore, is not
subject to registration or regulation as a commodity pool operator under that Act.
Futures contracts traded OTC are frequently referred to as forward contracts. The
Fund can buy or sell financial futures, index futures and foreign currency forward
contracts.

Options
Options are rights to buy or sell an underlying asset or instrument for a specified
price (the exercise price) during, or at the end of, a specified period. The seller
(or 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. Options
can trade on exchanges or in the OTC market and may be bought or sold on a wide
variety of underlying assets or instruments, including financial indices, individual
securities, and other derivative instruments, such as futures contracts. Options
that are written on futures contracts will be subject to margin requirements similar
to those applied to futures contracts.

The Fund may buy and sell the following typess of options: indices, individual
securities, futures (including financial and index futures) and currencies (both
foreign and U.S. dollar).

Call Options
A call option gives the holder (buyer) the right to buy the underlying asset from the
seller (writer) of the option. The Fund may use call options in the following ways:

o Write call options on indices, portfolio securities, index futures, currencies
(both foreign and U.S. dollar) and financial 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 the 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.

Put Options
A put option gives the holder the right to sell the underlying asset to the writer of
the option. The Fund may use put options in the following ways:

o Buy put options on indices, individual securities, index futures, currencies
(both foreign and U.S. dollar) and financial futures in anticipation of a decrease
in the value of the underlying asset; and

o Write put options on indices, portfolio securities, index futures, currencies
(both foreign and U.S. dollar) and financial 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.

The Fund may also buy or write options, as needed, to close out existing option
positions.

Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns
derived from underlying assets with differing characteristics. Most swaps do not
involve the delivery of the underlying assets by either party, and the parties might
not own the assets underlying the swap. The payments are usually made on a net basis
so that, on any given day, the Fund would receive (or pay) only the amount by which
its payment under the contract is less than (or exceeds) the amount of the other
party's payment. Swap agreements are sophisticated instruments that can take many
different forms, and are known by a variety of names including caps, floors and
collars. Common swap agreements that the Fund may use include:

Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make regular payments
equal to a fixed or floating interest rate times a stated principal amount of
fixed-income securities, in return for payments equal to a different fixed or
floating rate times the same principal amount, for a specific period. For example, a
$10 million LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount
in exchange for the right to receive the equivalent of a stated fixed rate of
interest on $10 million principal amount.

Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make payments
of the total return from the underlying asset during the specified period, in return
for payments equal to a fixed or floating rate of interest or the total return from
another underlying asset.

Credit Default Swaps
Credit default swaps are agreements between two parties whereby one party (the
"protection buyer") agrees to make regular payments over the term of the agreement to
another party (the "protection seller"), provided that no designated event of default
on an underlying obligation has occurred. If an event of default occurs, the
protection seller must pay the protection buyer the full notional value, or "par
value," of the reference obligation in exchange for the reference obligation. The
Fund may be either the protection buyer or the protection seller in a credit default
swap. If the Fund is a protection buyer and no event of default occurs, the Fund
will lose its entire investment in the swap agreement (i.e., an amount equal to the
payments made to the protection seller). However, if an event of default occurs, the
Fund (as protection buyer) will deliver the underlying obligation and receive a
payment equal to the full notional value of the underlying asset, even though the
underlying asset may have little or no value. If the Fund is the protection seller
and no default occurs, then the Fund will receive a fixed rate of income throughout
the term of the agreement. However, if an event of default occurs, the Fund (as
protection seller) will pay the protection buyer the full notional value of the
reference obligation and receive the underlying obligation. Credit default swaps may
involve greater risks than if the Fund invested directly in the underlying obligation.

Currency Swaps
Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amount as well.

SPECIAL TRANSACTIONS

Repurchase Agreements
Repurchase agreements are transactions in which the 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 the Fund's return
on the transaction. This return is unrelated to the interest rate on the underlying
security. The Fund will enter into repurchase agreements only with banks and other
recognized financial institutions, such as securities dealers, deemed creditworthy by
the Adviser.

The Fund's custodian or subcustodian will 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 risks.

Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them at an
agreed upon time and price. A reverse repurchase agreement may be viewed as a type of
borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In
addition, reverse repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the market value
of the security at the time of repurchase.

Delayed Delivery Transactions
Delayed delivery transactions, including when-issued transactions, are arrangements
in which the Fund buys securities for a set price, with payment and delivery of the
securities 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 buy 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 so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed delivery
transactions create interest rate risks for the Fund. Delayed delivery transactions
also involve credit risks in the event of a counterparty default.

The Fund will reinvest cash collateral in securities that qualify as an acceptable
investment for the Fund. However, the Fund must pay interest to the borrower for the
use of cash collateral.
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 on loan, but it will
terminate a loan in anticipation of any important vote. The Fund may pay
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 interest rate risks and credit risks.

Inter-Fund Borrowing and Lending Arrangements
The Securities and Exchange Commission (SEC) has granted an exemption that permits
the Fund and all other funds advised by subsidiaries of Federated Investors, Inc.
(Federated funds) to lend and borrow money for certain temporary purposes directly to
and from other Federated funds. Participation in this inter-fund lending program is
voluntary for both borrowing and lending Federated funds, and an inter-fund loan is
only made if it benefits each participating Federated fund. Federated Investors,
Inc. (Federated) administers the program according to procedures approved by the
Fund's Board, and the Board monitors the operation of the program. Any inter-fund
loan must comply with certain conditions set out in the exemption, which are designed
to assure fairness and protect all participating Federated funds.

For example, inter-fund lending is permitted only (a) to meet shareholder redemption
requests, and (b) to meet commitments arising from "failed" trades. All inter-fund
loans must be repaid in seven days or less. The Fund's participation in this program
must be consistent with its investment policies and limitations, and must meet
certain percentage tests. Inter-fund loans may be made only when the rate of
interest to be charged is more attractive to the lending Federated fund than
market-competitive rates on overnight repurchase agreements (Repo Rate) and more
attractive to the borrowing Federated fund than the rate of interest that would be
charged by an unaffiliated bank for short-term borrowings (Bank Loan Rate), as
determined by the Board. The interest rate imposed on inter-fund loans is the
average of the Repo Rate and the Bank Loan Rate.

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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. The Fund may also
invest in high yield and emerging markets securities primarily by investing in
another investment company (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of the
Adviser. The Fund may also invest in such securities directly. These other investment
companies are managed independently of the Fund and incur additional expenses.
Therefore, any such investment by the Fund may be subject to duplicate expenses.
However, the Adviser believes that the benefits and efficiencies of this approach
should outweigh the additional expenses.

The Fund may also purchase shares of exchange-traded funds (ETFs) in order to achieve
exposure to a specific region, country, or market sector, or for reasons consistent
with its investment strategy. As with traditional mutual funds, ETFs charge
asset-based fees, although these fees tend to be relatively low. ETFs do not charge
initial sales charges or redemption fees and investors pay only customary brokerage
fees to buy and sell ETF shares.

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INVESTMENT RATINGS

Investment Ratings for Investment Grade Securities
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized statistical rating
organizations. For example, Standard & Poor's, a rating service, assigns ratings
to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when due
on each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the Adviser's
credit assessment that the security is comparable to investment grade.

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are outlined
below.

EQUITY SECURITIES INVESTMENT RISKS

Stock Market Risks
o The value of equity securities in the Fund's portfolio will rise and fall.
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.

o The Adviser attempts to manage market risk by limiting the amount the Fund
invests in each company's equity securities. However, diversification will
not protect the Fund against widespread or prolonged declines in the stock
market.

Risks Related to Investing for Value
o Due to their relatively low valuations, value stocks are typically less
volatile than growth stocks. For instance, the price of a value stock may
experience a smaller increase on a forecast of higher earnings, a positive
fundamental development, or positive market development. Further, value
stocks tend to have higher dividends than growth stocks. This means they
depend less on price changes for returns and may lag behind growth stocks in
an up market.

Risks of Investing in ADRs
o Because the Fund may invest in ADRs issued by foreign companies, the Fund's
Share price may be more affected by foreign economic and political
conditions, taxation policies, and accounting and auditing standards, than
would otherwise be the case. Foreign companies may not provide information as
frequently or to as great an extent as companies in the United States.
Foreign companies may also receive less coverage than U.S. companies by
market analysts and the financial press. In addition, foreign countries may
lack uniform accounting, auditing, and financial reporting standards or
regulatory requirements comparable to those applicable to U.S. companies.
These factors may prevent the Fund and its Adviser from obtaining information
concerning foreign companies that is as frequent, extensive and reliable as
the information available concerning companies in the United States.

Liquidity Risks
o Trading opportunities are more limited for equity securities that are not
widely held. This may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up an
investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.

o 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.

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

Risks Related to Company Size
o 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 its outstanding shares by the current market price per share.

o Companies with smaller market capitalizations also tend to have unproven track
records, a limited product or service base and limited access to capital.
These factors also increase risks and make these companies more likely to
fail than companies with larger market capitalizations.

o Foreign companies may not provide information (including financial statements)
as frequently or to as great an extent as companies in the United States.
Foreign companies may also receive less coverage than United States companies
by market analysts and the financial press. In addition, foreign countries
may lack uniform accounting, auditing, and financial reporting standards or
regulatory requirements comparable to those applicable to U.S. companies.
These factors may prevent the Fund and its Adviser from obtaining information
concerning foreign companies that is as frequent, extensive and reliable as
the information available concerning companies in the United States.

o The Adviser attempts to manage currency risk by limiting the amount the Fund
invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in the
value of the U.S. dollar relative to other currencies.

Euro Risks
o The Fund may make significant investments in securities denominated in the
Euro, the single currency of the European Monetary Union (EMU). Therefore,
the exchange rate between the Euro and the U.S. dollar will have a
significant impact on the value of the Fund's investments.

o With the advent of the Euro, the participating countries in the EMU can no
longer follow independent monetary policies. This may limit these countries'
ability to respond to economic downturns or political upheavals, and
consequently reduce the value of their foreign government securities.

Leverage Risks
o 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.

o Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

Credit Risks
o 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 prevent the Fund from selling or buying
other securities to implement its investment strategy.

Risks of Investing in Derivative Contracts
o The Fund's use of derivative contracts involves risks different from, or
possibly greater than, the risks associated with investing directly in
securities and other traditional investments. First, changes in the value of
the derivative contracts in which the Fund invests may not be correlated with
changes in the value of the underlying asset or if they are correlated, may
move in the opposite direction than originally anticipated. Second, while
some strategies involving derivatives may reduce the risk of loss, they may
also reduce potential gains or, in some cases, result in losses by offsetting
favorable price movements in portfolio holdings. Third, there is a risk that
derivatives contracts may be mispriced or improperly valued and, as a result,
the Fund may need to make increased cash payments to the counterparty.
Finally, derivative contracts may cause the Fund to realize increased
ordinary income or short-term capital gains (which are treated as ordinary
income for federal income tax purposes) and, as a result, may increase
taxable distributions to shareholders. Derivative contracts may also involve
other risks described in the prospectus or this SAI, such as stock market,
credit, liquidity and leverage risks.

FIXED-INCOME SECURITIES INVESTMENT RISKS

o 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 Risks
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.

o Many fixed-income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.

o Fixed-income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a U.S. Treasury security with a comparable maturity (the spread)
measures the additional interest paid for 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.

o 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 prevent the Fund from selling or buying
other securities to implement its investment strategy.

o 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
o Trading opportunities are more limited for fixed-income securities that have
not received any credit ratings, have received ratings below investment
grade, or are not widely held.

o Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security when it wants to. If this happens, the Fund will be required
to continue to hold the security and the Fund could incur losses.

Sector Risks
o A substantial part of the Fund's portfolio may be comprised of securities
issued or credit enhanced by companies in similar businesses, or with other
similar characteristics. As a result, the Fund will be more susceptible to
any economic, business, political, or other developments which generally
affect these issuers.

Risks Associated with Noninvestment Grade Securities
o Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns
and financial setbacks may affect their prices more negatively, and their
trading market may be more limited.

Fundamental INVESTMENT Objective
The Fund's investment objective is to provide moderate capital appreciation and high
current income. The investment objective may not be changed by the Fund's Board
without shareholder approval.

INVESTMENT LIMITATIONS

Diversification
With respect to securities comprising 75% of the value of its total assets, the Fund
will not purchase securities of any one issuer (other than cash; cash items;
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by such U.S.
government securities; and securities of other investment companies) if, as a result,
more than 5% of the value of its total assets would be invested in the securities of
that issuer, or the Fund would own more than 10% of the outstanding voting securities
of that issuer.

Concentration
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry. For
purposes of this restriction, the term concentration has the meaning set forth in the
Investment Company Act of 1940 (1940 Act), as amended, any rule or order thereunder,
or any SEC staff interpretation thereof. Government securities and municipal
securities will not be deemed to constitute an industry.

The above limitations cannot be changed unless authorized by the Board and by the
"vote of a majority of its outstanding voting securities," as defined by the 1940
Act. The following limitations, however, may be changed by the Board without
shareholder approval. Shareholders will be notified before any material change in
these limitations becomes effective.

Concentration
In applying the concentration restriction, investments in certain industrial
development bonds funded by activities in a single industry will be deemed to
constitute investment in an industry. In addition, (a) utility companies will be
divided according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (b) financial service
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (c) asset-backed securities will be classified
according to the underlying assets securing such securities.

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The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.

Pledging Assets
The Fund will not mortgage, pledge or hypothecate any of its assets, provided that
this shall not apply to the transfer of securities in connection with any permissible
borrowing or to collateral arrangements in connection with permissible activities.

For purposes of the above 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 limitations 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 limitation.

DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

o 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 OTC
market), if available;

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

o futures contracts and options are generally valued at 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 generally 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;

o for fixed-income securities, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that fixed-income securities
with remaining maturities of less than 60 days at the time of purchase may be
valued at amortized cost; and

o for all other securities at fair value as determined in accordance with
procedures established by and under the general supervision of 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.

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

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated Securities
Corp.) 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 pays a portion of this charge to investment professionals that are
eligible to receive it (the "Dealer Reallowance") and retains any remaining portion
of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment
professional may receive a Dealer Reallowance as follows:

Class A Shares
Dealer
Reallowance
Purchase Amount as a percentage
of
Public Offering
Price
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than 3.25%
$250,000
$250,000 but less than 2.25%
$500,000
$500,000 but less than $1 1.80%
million
$1 million or greater 0.00%
Class C Shares
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All Purchase Amounts 1.00%

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ADVANCE COMMISSIONS
When an investment professional's customer purchases Shares, the investment
professional may receive an advance commission as follows:

Class A Shares (for purchases over $1 million)
Advance Commission
as a Percentage of
Purchase Amount Public Offering
Price
First $1 million - $5 million 0.75%
Next $5 million - $20 million 0.50%
Over $20 million 0.25%
Advance commissions are calculated on a year-by-year basis based on amounts invested
during that year. Accordingly, with respect to additional purchase amounts, the
advance commission breakpoint resets annually to the first breakpoint on the
anniversary of the first purchase.
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