Federated Equity Funds

497 1 form.htm Federated Equity Funds

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Small Cap Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

November 1, 2005

CLASS K SHARES

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

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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

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? 10

What Do Shares Cost? 12

How is the Fund Sold? 14

Payments to Financial Intermediaries 14

How to Purchase Shares 16

How to Redeem and Exchange Shares 18

Account and Share Information 20

Who Manages the Fund? 23

Legal Proceedings 25

Financial Information 26

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?

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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 $19 million to $3.30 billion as of August 24, 2005) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $49 million to $5.41 billion as of August 24, 2005). 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.

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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.
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.

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 Fund's Class K Shares is a new class of shares and will commence operations on or about November 1, 2005. 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 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, if applicable. This performance information will help you to analyze the Fund's investment risks in the light of the 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 competitive 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, 2005 to September 30, 2005 was 4. 29%.

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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 (5.59)% (quarter ended September 30, 2004).

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 will commence operations on or about November 1, 2005. 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 the Class K Shares, if applicable. In addition, Return After Taxes is shown 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 Fund 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.

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(For the Periods Ended December 31, 2004)

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	1 Year	Start of Performance¹
Class K Shares:
Return Before Taxes	23.11%	48.04%
Return After Taxes on Distributions²	21.08%	46.48%
Return After Taxes on Distributions and Sale of Fund Shares²	15.21%	40.97%
R2000G	14.31%	29.60%
LSCGFA	10.98%	26.76%

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1 The Fund's Class A Shares start of performance date was December 18, 2002.

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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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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 Class K Shares of the Fund.

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

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		None
Other Expenses		0.470%
Total Annual Fund Operating Expenses		2.395%

1 The percentages shown are based on expenses anticipated for the entire fiscal year ending October 31, 2006. 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 expect to waive certain amounts. These are shown below along with the net expenses the Fund expects to pay for the fiscal year ending October 31, 2006.
Total Waivers of Fund Expenses		0.445%
Total Anticipated Annual Fund Operating Expenses (after waivers)		1.950%
2 The adviser expects to voluntarily waive a portion of the management fee. The adviser can terminate this anticipated voluntary waiver at any time. The management fee paid by the Fund (after the anticipated voluntary waiver) is expected to be 1.23% for the fiscal year ending October 31, 2006.
3 The distributor expects to voluntarily waive a portion of its fee. The distributor can terminate this anticipated voluntary waiver at any time. The distribution (12b-1) fee paid by the Fund (after the anticipated voluntary waiver) is expected to be 0.25% for the fiscal year ending October 31, 2006.

EXAMPLE

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.

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 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:

Share Class		1 Year		3 Years
Class K Shares		$243		$747

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.

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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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 $19 million to $3.30 billion as of August 24, 2005) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $49 million to $5.41 billion as of August 24, 2005). 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

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 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.

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.

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 and securities eligible for resale under Rule 144A of the Securities Act of 1933.

FIXED-INCOME SECURITIES

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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.

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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

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). 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 . 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."

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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. If prices are not available from an independent pricing service, securities 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 as provided by an investment dealer or other financial institution that deals in the security.

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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. 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.

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.

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

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An institutional investor's minimum investment is calculated by combining all accounts it maintains with the Fund. Accounts established through financial intermediaries may be subject to a smaller minimum investment amount. Keep in mind that financial intermediaries may charge you fees for their services in connection with your Share transactions.

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How is the Fund Sold?

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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 financial intermediary or call 1-800-341-7400 for more information concerning the other classes.

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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, non- qualified deferred compensation plans and IRA Rollovers from such plans, directly or through financial intermediaries. Class K Shares are generally available only to retirement plans where plan level omnibus accounts are held on the books of the Fund. Under the Distributor's Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. This Distributor is a subsidiary of Federated Investors, Inc. (Federated).

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Payments to Financial Intermediaries

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The Fund and its affiliated service providers may pay fees as described below to financial intermediaries (such as Broker/Dealers, Banks, Investment Advisers or Third-Party Administrators) whose customers are shareholders of the Fund.

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RULE 12B-1 FEES

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The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees of up to 0.50% of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund's Class K Shares. When the Distributor receives Rule 12b-1 Fees, it may pay some or all of them to financial intermediaries whose customers purchase 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.

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RECORDKEEPING FEES

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The Fund may pay Recordkeeping Fees on an average net assets basis or on a per account per year basis to financial intermediaries for providing recordkeeping services to the Funds and shareholders. If a financial intermediary receives Recordkeeping Fees on an account, it is not eligible to also receive Account Administration Fees or Networking Fees on that same account.

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NETWORKING FEES

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The Fund may reimburse Networking Fees on a per account per year basis to financial intermediaries for providing administrative services to the Funds and shareholders on certain non-omnibus accounts. If a financial intermediary receives Networking Fees on an account, it is not eligible to also receive Recordkeeping Fees on that same account.

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ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

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The Distributor may pay out of its own resources amounts (including items of material value) to certain financial intermediaries 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 intermediary 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 and described above because they are not paid by the Fund.

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These payments are negotiated and may be based on such factors as the number or value of Shares that the financial intermediary sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial intermediary. These payments may be in addition to payments made by the Fund to the financial intermediary under a Rule 12b-1 Plan arrangement. In connection with these payments, the financial intermediary may elevate the prominence or profile of the Fund and/or other Federated funds within the financial intermediary's organization by, for example, placement on a list of preferred or recommended funds, and/or granting the Distributor preferential or enhanced opportunities to promote the funds in various ways within the financial intermediary's organization. You can ask your financial intermediary for information about any payments it receives from the Distributor or the Fund and any services provided.

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How to Purchase Shares

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You may purchase Shares through a financial intermediary, 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.

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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.

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THROUGH AN FINANCIAL INTERMEDIARY

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Establish an account with the financial intermediary; and

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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.

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

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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.

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BY SYSTEMATIC INVESTMENT PROGRAM (SIP)

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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 financial intermediary. The minimum investment amount for SIPs is $50.

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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

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You may purchase Shares as retirement investments (such as qualified plans and IRAs or transfer or rollover of assets). Call your financial intermediary 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.

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How to Redeem and Exchange Shares

You should redeem or exchange Shares:

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through a financial intermediary if you purchased Shares through a financial intermediary; or

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

Shares of the Fund may be redeemed for cash or exchanged for shares of the same class of other Federated funds on days on which the Fund computes its NAV. Redemption requests may be made by telephone or in writing.

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THROUGH A FINANCIAL INTERMEDIARY

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Submit your redemption or exchange request to your financial intermediary 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 financial intermediary.

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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.

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Call your financial intermediary or the Fund if you need special instructions.

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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.

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."

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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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 financial intermediary 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.

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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

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.

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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 financial intermediary or the Fund for information concerning when dividends and capital gains will be paid.

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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

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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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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

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 strategies by reducing the potential for these strategies to succeed. See "What Do Shares Cost?" The Fund also monitors trading in Fund Shares in an effort to identify 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 12 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 frequent trading restrictions do not apply to purchases and sales of Fund Shares by other Federated funds. These funds impose the same frequent trading restrictions as the Fund at their shareholder level. In addition, allocation changes of the investing Federated fund are monitored, and the managers of the recipient fund must determine that there is no disruption to their management activity. The intent of this exception is to allow investing fund managers to accommodate cash flows that result from non-abusive trading in the investing fund, without being stopped from such trading because the aggregate of such trades exceeds the monitoring limits. Nonetheless, as with any trading in Fund Shares, purchases and redemptions of Fund Shares by other Federated funds could adversely affect 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.

PORTFOLIO HOLDINGS INFORMATION

Information concerning the Fund's portfolio holdings is available in the "Products" section of Federated's website at 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.

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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.

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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 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 450 Lexington Avenue, Suite 3700, New York, NY 10017-3943.

The Adviser, Sub-Adviser and other subsidiaries of Federated advise approximately 133 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $179 billion in assets as of December 31, 2004. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1,385 employees. Federated provides investment products to more than 5,700 investment professionals and institutions.

PORTFOLIO MANAGEMENT INFORMATION

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. Utrsch 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.

The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund.

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.

A discussion of the Board's review of the Fund's investment advisory contract is available in the Fund's Annual Report dated October 31, 2005.

Legal Proceedings

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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 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.

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.

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Financial Information

FINANCIAL HIGHLIGHTS

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The Fund's fiscal year end is October 31, 2006. As this is the Class's first fiscal year, financial information is not yet available.

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A Statement of Additional Information (SAI) dated November 1, 2005, 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 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 financial intermediary or the Fund at 1-800-341-7400.

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

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 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.

Investment Company Act File No. 811-4017

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Federated
World-Class Investment Manager

Federated Kaufmann Small Cap Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.

Federated Securities Corp., Distributor

Cusip 314172537

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33809 (11/05)

Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.

FEDERATED KAUFMANN SMALL CAP FUND
A Portfolio of Federated Equity Funds

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 31, 2004, REVISED NOVEMBER 1, 2005

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 prospectus for Class A Shares, Class B Shares and
Class C Shares of Federated Kaufmann Small Cap Fund (Fund), dated December
31, 2004 and the prospectus for Class K Shares, dated November 1, 2005.

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
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How is the Fund Organized?.......................1
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Securities in Which the Fund Invests.............1
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What Do Shares Cost?............................12
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How is the Fund Sold?...........................12
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Exchanging Securities for Shares................14
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Subaccounting Services..........................15
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Redemption in Kind..............................15
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Massachusetts Partnership Law...................15
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Account and Share Information...................15
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Tax Information.................................16
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Who Manages and Provides Services to the
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Fund?...........................................17
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How Does the Fund Measure Performance?..........27
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Who is Federated Investors, Inc.?...............29
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Financial Information...........................31
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Investment Ratings..............................32
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Addresses.........................................
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Appendix..........................................
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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 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 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

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.

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.

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.

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.

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.

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 that the fund cannot
dispose of within 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.

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.

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 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 mortgage-backed securities, based on the aggregate investment value
of the projected cash flows to be generated by the security, as furnished
by an independent pricing service;

o for other 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
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%

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.
------------------------------------------------------------------------------

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 (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 intermediaries) and providing incentives to financial
intermediaries 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
financial intermediaries 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 financial
intermediaries.

ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES
The Distributor may pay out of its own resources amounts (including items of
material value) to certain financial intermediaries. 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 intermediary also may receive payments
under the Rule 12b-1 Plan and/or Service Fees. In connection with these
payments, the financial intermediary may elevate the prominence or profile of
the Fund and/or other Federated funds within the financial institution's
organization by, for example, placement on a list of preferred or recommended
funds, and/or granting the Distributor preferential or enhanced opportunities
to promote the funds in various ways within the financial intermediary's
organization. You can ask your financial intermediary 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 intermediaries.

Supplemental Payments
The Distributor may make supplemental payments to certain financial
intermediaries 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 intermediary sells or may sell;
the value of client assets invested; or the type and nature of services or
support furnished by the financial intermediary.

Processing Support Payments
The Distributor may make payments to financial intermediaries 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 intermediary's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial intermediaries who
sell Federated fund shares through retirement plan programs. A financial
intermediary 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 Intermediaries
From time to time, the Distributor, at its expense, may provide additional
compensation to financial intermediaries that sell or arrange for the sale of
Shares. Such compensation may include financial assistance to financial
intermediaries 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 intermediary-sponsored
events.

The Distributor also may hold or sponsor, at its expense, sales events,
conferences and programs for employees or associated persons of financial
intermediaries 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 intermediaries. 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.

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 Shares,
Class B Shares 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 Sales
Sales Amount Retained Charges Amount Retained Total Sales Amount
Charges Charges Retained

Class A Shares $2,367,504 $238,717 $1,026,430 $102,666 $98,191 $9,886

Class B Shares 0 0 0 0 660,669 316,235

Class C Shares 319,468 0 311,784 0 21,983 10,323

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. Financial intermediaries 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 financial
intermediary 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.

All Shares of the Fund have equal voting rights, except that in matters
affecting only a particular class, only Shares of that class are entitled to
vote.

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

As of December 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.

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?

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, 2004, the
Trust comprised seven portfolios, and the Federated Fund Complex consisted of
44 investment companies (comprising 133 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 Compensation
Address ------------------------------------- Compensation From Trust and
Positions Held with Principal Occupation(s) for Past From Fund Federated Fund
Trust Five Years, Other Directorships Held (past fiscal Complex
Date Service Began and Previous Position(s) year) (past calendar
year)
Principal Occupations: Chairman and $0
John F. Donahue* Director or Trustee of the Federated $0
Birth Date: July 28, Fund Complex; Chairman and Director,
1924 Federated Investors, Inc.
CHAIRMAN AND TRUSTEE
Began serving: April Previous Positions: Trustee,
1984 Federated Investment Management
Company and Chairman and Director,
Federated Investment Counseling.

Principal Occupations: Principal $0
J. Christopher Donahue* Executive Officer and President of $0
Birth Date: April 11, the Federated Fund Complex; Director
1949 or Trustee of some of the Funds in
PRESIDENT AND TRUSTEE the Federated Fund Complex;
Began serving: January President, Chief Executive Officer
2000 and Director, Federated Investors,
Inc.; 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 or $255.19
Lawrence D. Ellis, M.D.* Trustee of the Federated Fund $148,500
Birth Date: October 11, Complex; Professor of Medicine,
1932 University of Pittsburgh; Medical
3471 Fifth Avenue Director, University of Pittsburgh
Suite 1111 Medical Center Downtown;
Pittsburgh, PA Hematologist, Oncologist and
TRUSTEE Internist, University of Pittsburgh
Began serving: August Medical Center.
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

Birth Date Aggregate Total Compensation
Address Compensation From Trust and
Positions Held with Principal Occupation(s) for Past From Fund Federated Fund
Trust Five Years, Other Directorships Held (past fiscal Complex
Date Service Began and Previous Position(s) year) (past calendar
year)
Principal Occupation: Director or $280.71 $163,350
Thomas G. Bigley Trustee of the Federated Fund
Birth Date: February 3, Complex.
1934
15 Old Timber Trail Other Directorships Held: Director,
Pittsburgh, PA Member of Executive Committee,
TRUSTEE Children's Hospital of Pittsburgh;
Began serving: October Director, University of Pittsburgh.
1995
Previous Position: Senior Partner,
Ernst & Young LLP.

Principal Occupations: Director or $280.71 $163,350
John T. Conroy, Jr. Trustee of the Federated Fund
Birth Date: June 23, Complex; Chairman of the Board,
1937 Investment Properties Corporation;
Investment Properties Partner or Trustee in private real
Corporation estate ventures in Southwest
3838 North Tamiami Florida.
Trail
Suite 402 Previous Positions: President,
Naples, FL Investment Properties Corporation;
TRUSTEE Senior Vice President, John R. Wood
Began serving: November and Associates, Inc., Realtors;
1991 President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Principal Occupation: Director or $280.71 $163,350
Nicholas P. Constantakis Trustee of the Federated Fund
Birth Date: September Complex.
3, 1939
175 Woodshire Drive Other Directorships Held: Director
Pittsburgh, PA and Member of the Audit Committee,
TRUSTEE Michael Baker Corporation
Began serving: February (engineering and energy services
1998 worldwide).

Previous Position: Partner, Andersen
Worldwide SC.

Principal Occupation: Director or $255.19 $148,500
John F. Cunningham Trustee of the Federated Fund
Birth Date: March 5, Complex.
1943
353 El Brillo Way Other Directorships Held: Chairman,
Palm Beach, FL President and Chief Executive
TRUSTEE Officer, Cunningham & Co., Inc.
Began serving: January (strategic business consulting);
1999 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 or $255.19 $148,500
Peter E. Madden Trustee of the Federated Fund
Birth Date: March 16, Complex; Management Consultant.
1942
One Royal Palm Way Other Directorships Held: Board of
100 Royal Palm Way Overseers, Babson College.
Palm Beach, FL
TRUSTEE Previous Positions: Representative,
Began serving: November Commonwealth of Massachusetts
1991 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 or $280.71 $163,350
Charles F. Mansfield, Trustee of the Federated Fund
Jr. Complex; Management Consultant;
Birth Date: April 10, Executive Vice President, DVC Group,
1945 Inc. (marketing, communications and
80 South Road technology) (prior to 9/1/00).
Westhampton Beach, NY
TRUSTEE Previous Positions: Chief Executive
Began serving: January Officer, PBTC International Bank;
1999 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 or $306.24 $178,200
John E. Murray, Jr., Trustee of the Federated Fund
J.D., S.J.D. Complex; Chancellor and Law
Birth Date: December Professor, Duquesne University;
20, 1932 Partner, Murray, Hogue & Lannis.
Chancellor, Duquesne
University Other Directorships Held: Director,
Pittsburgh, PA Michael Baker Corp. (engineering,
TRUSTEE construction, operations and
Began serving: February technical services).
1995
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 or $255.19 $148,500
Marjorie P. Smuts Trustee of the Federated Fund
Birth Date: June 21, Complex; Public Relations/Marketing
1935 Consultant/Conference Coordinator.
4905 Bayard Street
Pittsburgh, PA Previous Positions: National
TRUSTEE Spokesperson, Aluminum Company of
Began serving: April America; television producer;
1984 President, Marj Palmer Assoc.;
Owner, Scandia Bord.

Principal Occupations: Director or $255.19 $148,500
John S. Walsh Trustee of the Federated Fund
Birth Date: November Complex; President and Director,
28, 1957 Heat Wagon, Inc. (manufacturer of
2604 William Drive construction temporary heaters);
Valparaiso, IN President and Director,
TRUSTEE Manufacturers Products, Inc.
Began serving: January (distributor of portable
1999 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 and
John W. McGonigle Secretary of the Federated Fund Complex; Executive Vice
Birth Date: October 26, 1938 President, Secretary and Director, Federated Investors,
EXECUTIVE VICE PRESIDENT AND 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 Officer and
Richard J. Thomas Treasurer of the Federated Fund Complex; Senior Vice
Birth Date: June 17, 1954 President, Federated Administrative Services.
TREASURER
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 President of
Richard B. Fisher some of the Funds in the Federated Fund Complex; Vice
Birth Date: May 17, 1923 Chairman, Federated Investors, Inc.; Chairman, Federated
VICE PRESIDENT 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 of this
Stephen F. Auth Fund and various other Funds in the Federated Fund
Birth Date: September 3, 1956 Complex; Executive Vice President, Federated Investment
CHIEF INVESTMENT OFFICER Counseling, Federated Global Investment Management Corp.,
Began serving: November 2002 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. Mr.
Lawrence Auriana Auriana joined Federated in April 2001 as Co-Head of
Birth Date: January 8, 1944 Investments/Federated Kaufmann. From August 1984 to April
VICE PRESIDENT 2001, Mr. Auriana was President and Treasurer of Edgemont
Began serving: November 2001 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 Trust. Mr.
James E. Grefenstette Grefenstette joined Federated in 1992 and has been a
Birth Date: November 7, 1962 Portfolio Manager since 1994. Mr. Grefenstette became a
VICE PRESIDENT Senior Vice President of the Fund's Adviser in January
Began serving: November 1998 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. Utsch
Hans P. Utsch joined Federated in April 2001 as Co-Head of
Birth Date: July 3, 1936 Investments/Federated Kaufmann. From August 1984 to April
VICE PRESIDENT 2001, Mr. Utsch was Chairman of the Board and Secretary
Began serving: November 2001 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 John F. Donahue In between meetings of the full Board, the Six
John E. Murray, Jr., Executive Committee generally may exercise
J.D., S.J.D. all the powers of the full Board 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 Thomas G. Bigley The purposes of the Audit Committee are to Six
John T. Conroy, Jr. oversee the accounting and financial
Nicholas P. reporting process of the Fund, the Fund`s
Constantakis internal control over financial reporting,
Charles F. and the quality, integrity and independent
Mansfield, Jr. audit of the Fund`s financial statements.
The Committee also oversees 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 Thomas G. Bigley The Nominating Committee, whose members One
John T. Conroy, Jr. consist of all Independent Trustees selects
Nicholas P. and nominates persons for election to the
Constantakis Fund's Board when vacancies occur. The
John F. Cunningham Committee will consider candidates
Peter E. Madden recommended by shareholders, Independent
Charles F. Trustees, officers or employees of any of
Mansfield, Jr. the Fund`s agents or service providers and
John E. Murray, Jr. counsel to the Fund. Any shareholder who
Marjorie P. Smuts desires to have an individual considered for
John S. Walsh nomination by the Committee must submit a
recommendation in writing to the 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, 2004
------------------------------------------------------------------------------

Aggregate
Dollar Range of Dollar Range of
Shares Owned Shares Owned in
Interested in Federated Federated
Board Member Name Kaufman Small Family of
Cap Fund 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-$50,000 Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, None Over $100,000
Jr.
John E. Murray, Jr., None Over $100,000
J.D., S.J.D.
Marjorie P. Smuts $1-$10,000 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.

Portfolio Manager Information
The following information about the Fund's Portfolio Manager is provided as
of July 31, 2005.

Total Number of Other
Other Accounts Managed by Accounts Managed/
Lawrence Auriana Total Assets*
Registered Investment 3 Funds / $8,562.11 million
Companies
Other Pooled Investment 0
Vehicles
Other Accounts 0
* None of the Accounts has an advisory fee that is based on the performance
of the account.
------------------------------------------------------------------------------
Dollar value range of shares owned in the Fund: None.

Lawrence Auriana is paid a fixed base salary and a variable annual
incentive. Base salary is determined within a market competitive
position-specific salary range, based on the portfolio manager's experience
and performance. The annual incentive amount is determined based on
investment performance, which is measured on a rolling 1, 3, and 5 calendar
year pre-tax gross return basis vs. the Fund's designated peer group of
comparable funds. These performance periods are adjusted if a portfolio
manager has been managing the fund for less than five years; funds with less
than one-year of performance history under a portfolio manager may be
excluded. As noted above, Mr. Auriana is also the portfolio manager for
other accounts in addition to the Fund. Such other accounts may have
different benchmarks. Investment performance is calculated with an equal
weighting of each account managed by the portfolio manager. As a separate
matter, pursuant to the terms of a business acquisition agreement, Mr.
Auriana may receive additional consideration based on the achievement of
specified revenue growth.

As a general matter, certain conflicts of interest may arise in connection
with a portfolio manager's management of a fund's investments, on the one
hand, and the investments of other accounts for which the portfolio manager
is responsible, on the other. For example, it is possible that the various
accounts managed could have different investment strategies that, at times,
might conflict with one another to the possible detriment of the Fund.
Alternatively, to the extent that the same investment opportunities might be
desirable for more than one account, possible conflicts could arise in
determining how to allocate them. Other potential conflicts might include
conflicts created by specific portfolio manager compensation arrangements,
and conflicts relating to selection of brokers or dealers to execute fund
portfolio trades and/or specific uses of commissions from Fund portfolio
trades (for example, research, or "soft dollars"). The Adviser has
structured the portfolio managers' compensation in a manner, and the Fund has
adopted policies and procedures, reasonably designed to safeguard the Fund
from being negatively affected as a result of any such potential conflicts.

The following information about the Fund's Portfolio Manager is provided as
of July 31, 2005.

Total Number of Other
Other Accounts Managed by Accounts Managed/
Hans P. Utsch Total Assets*
Registered Investment 3 Funds / $8,103.18 million
Companies
Other Pooled Investment 0
Vehicles
Other Accounts 0
* None of the Accounts has an advisory fee that is based on the performance
of the account.
------------------------------------------------------------------------------
Dollar value range of shares owned in the Fund: None.

Hans P. Utsch is paid a fixed base salary and a variable annual incentive.
Base salary is determined within a market competitive position-specific
salary range, based on the portfolio manager's experience and performance.
The annual incentive amount is determined based on investment performance,
which is measured on a rolling 1, 3, and 5 calendar year pre-tax gross return
basis vs. the Fund's designated peer group of comparable funds. These
performance periods are adjusted if a portfolio manager has been managing the
fund for less than five years; funds with less than one-year of performance
history under a portfolio manager may be excluded. As noted above, Mr. Utsch
is also the portfolio manager for other accounts in addition to the Fund.
Such other accounts may have different benchmarks. Investment performance is
calculated with an equal weighting of each account managed by the portfolio
manager. As a separate matter, pursuant to the terms of a business
acquisition agreement, Mr. Utsch may receive additional consideration based
on the achievement of specified revenue growth.

The following information about the Fund's Portfolio Manager is provided as
of July 31, 2005.

Total Number of Other
Other Accounts Managed by Accounts Managed/
Aash M. Shah Total Assets*
Registered Investment 2 Funds / $529.46 million
Companies
Other Pooled Investment 0
Vehicles
Other Accounts 0
* None of the Accounts has an advisory fee that is based on the performance
of the account.
------------------------------------------------------------------------------
Dollar value range of shares owned in the Fund: $10,001 - $50,000

Aash M. Shah is paid a fixed base salary and a variable annual incentive.
Base salary is determined within a market competitive position-specific
salary range, based on the portfolio manager's experience and performance.
The annual incentive amount is determined based on investment performance,
which is measured on a rolling 1, 3, and 5 calendar year pre-tax gross return
basis vs. the Fund's designated peer group of comparable funds. These
performance periods are adjusted if a portfolio manager has been managing the
fund for less than five years; funds with less than one-year of performance
history under a portfolio manager may be excluded. As noted above, Mr. Shah
is also the portfolio manager for other accounts in addition to the Fund.
Such other accounts may have different benchmarks. Investment performance is
calculated with an equal weighting of each account managed by the portfolio
manager.

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.

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.

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 FederatedInvestors.com; select "Products;" select the Fund;
then use the link to "Prospectuses and Regulatory Reports" to access the link
to Form N-PX. Form N-PX filings are also available at the SEC's website at
www.sec.gov.

PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund's portfolio holdings is available in the
"Products" section of Federated's website at 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.

BROKERAGE TRANSACTIONS AND INVESTMENT ALLOCATION
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.

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.

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 Share. 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.

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 --
Class K Shares 0 --
Shareholder Services Fee:
Class A Shares $437,426 --
Class B Shares $175,591 --
Class C Shares $204,318 --
Class K Shares 0 --
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, 2005.

Yield is given for the 30-day period ended October 31, 2005.

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 N/A 7.89% 38.58%
Distributions
After Taxes on
Distributions and N/A 5.44% 33.50%
Sale of Shares
Yield 0.00% N/A N/A

------------------------------------------------------------------------------
Start of
Performance on
30-Day Period 1 Year 12/18/2002
Class B Shares:
Total Return
Before Taxes N/A 8.59% 40.77%
After Taxes on N/A 8.02% 40.39%
Distributions
After Taxes on
Distributions and N/A 5.55% 35.09%
Sale of Shares
Yield 0.00% N/A N/A

------------------------------------------------------------------------------
Start of
Performance on
30-Day Period 1 Year 12/18/2002
Class C Shares:
Total Return
Before Taxes N/A 11.97% 41.90%
After Taxes on N/A 11.47% 41.51%
Distributions
After Taxes on
Distributions and N/A 7.79% 36.08%
Sale of Shares
Yield 0.00% N/A N/A

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

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.

When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather
than annualizing the total return.

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 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.

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.

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.

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 and its subsidiaries are dedicated to providing you with
world-class investment management. With offices in Pittsburgh, New York City
and Frankfurt, Federated is a firm with independent research, product breadth
and industry standing.

Federated seeks to achieve superior and sustainable investment performance
for a broad array of global clients through a disciplined investment process
and an information advantage created by proprietary fundamental research.
Federated is distinctive in our disciplined process that integrates
proprietary research with trading and portfolio management.

FEDERATED FUNDS OVERVIEW

Equities
As of December 31, 2004, Federated managed 34 equity funds totaling
approximately $26.0 billion in assets across growth, value, equity income,
international, index and sector allocation styles.

Taxable Fixed Income
As of December 31, 2004, Federated managed 31 taxable bond funds including:
high-yield, multi-sector, mortgage-backed, U.S. government, U.S. corporate
and international, with assets approximating $17.7 billion.

Tax Free Fixed Income
As of December 31, 2004, Federated managed 15 municipal bond funds with
approximately $3.4 billion in assets and 22 municipal money market funds with
approximately $24.4 billion in total assets.

Money Market Funds
As of December 31, 2004, Federated managed $110.6 billion in assets across 53
money market funds, including 19 government, 11 prime, 22 municipal and 1
euro-denominated with assets approximating $43.9 billion, $42.1 billion,
$24.4 billion and $58.9 million.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: Stephen F. Auth, CFA, for Global
Equity; Robert J. Ostrowski, CFA, for Taxable Fixed Income; Mary Jo Ochson,
CFA, for Tax Free Fixed Income; and Deborah A. Cunningham, CFA, for Money
Market Funds.

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

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

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

NR--Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.

NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt
rated AAA by S&P or Aaa by Moody's.

NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt
rated AA by S&P or Aa by Moody's.

NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt
rated A by S&P or Moody's.

FITCH RATINGS 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.

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.

S & P 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.

A.M. BEST LONG-TERM DEBT RATINGS
An A.M. Best Long-Term Debt Rating (issue credit rating) is an opinion as to
the issuer's ability to meet its financial obligations to security holders
when due. These ratings are assigned to debt and preferred stock issues.

aaa--Exceptional. Assigned to issues where the issuer has, in A.M. Best's
opinion, an exceptional ability to meet the terms of the obligation.

aa--Very Strong. Assigned to issues where the issuer has, in A.M. Best's
opinion, a very strong ability to meet the terms of the obligation.

a--Strong. Assigned to issues where the issuer has, in A.M. Best's opinion, a
strong ability to meet the terms of the obligation.

bbb--Adequate. Assigned to issues where the issuer has, in A.M. Best's
opinion, an adequate ability to meet the terms of the obligation; however, is
more susceptible to changes in economic or other conditions.

bb--Speculative. Assigned to issues where the issuer has, in A.M. Best's
opinion, speculative credit characteristics, generally due to a moderate
margin of principal and interest payment protection and vulnerability to
economic changes. .

b--Very Speculative. Assigned to issues where the issuer has, in A.M. Best's
opinion, very speculative credit characteristics, generally due to a modest
margin of principal and interest payment protection and extreme vulnerability
to economic changes. .

ccc, cc, c--Extremely Speculative. Assigned to issues where the issuer has,
in A.M. Best's opinion, extremely speculative credit characteristics,
generally due to a minimal margin of principal and interest payment
protection and/or limited ability to withstand adverse changes in economic or
other conditions.

d--In Default. In default on payment of principal, interest or other terms
and conditions. The rating also is utilized when a bankruptcy petition, or
similar action, has been filed.

Ratings from "aa" to "ccc" may be enhanced with a "+" (plus) or "-" (minus)
to indicate whether credit quality is near the top or bottom of a category.
A company's Long-Term Credit Rating also may be assigned an Under Review
modifier ("u") that generally is event-driven (positive, negative or
developing) and indicates that the company's A.M. Best Rating opinion is
under review and may be subject to near-term change. Ratings prefixed with
an ("i") denote indicative ratings. Ratings may also be assigned a Public
Data modifier ("pd") which indicates that a company does not subscribe to
A.M. Best's interactive rating process.

A.M. BEST SHORT-TERM DEBT RATINGS
An A.M. Best Short-Term Debt Rating (issue credit rating) is an opinion as to
the issuer's ability to meet its obligations having maturities generally less
than one year, such as commercial paper.

AMB-1+ --Strongest. Assigned to issues where the issuer has, in A.M. Best's
opinion, the strongest ability to repay short-term debt obligations.

AMB-1 --Outstanding. Assigned to issues where the issuer has, in A.M. Best's
opinion, an outstanding ability to repay short-term debt obligations.

AMB-2 --Satisfactory. Assigned to issues where the issuer has, in A.M. Best's
opinion, a satisfactory ability to repay short-term debt obligations.

AMB-3 --Adequate. Assigned to issues where the issuer has, in A.M. Best's
opinion, an adequate ability to repay short-term debt obligations; however,
adverse economic conditions will likely lead to a reduced capacity to meet
its financial commitments on short-term debt obligations.

AMB-4 --Speculative. Assigned to issues where the issuer has, in A.M. Best's
opinion, speculative credit characteristics and is vulnerable to economic or
other external changes, which could have a marked impact on the company's
ability to meet its commitments on short-term debt obligations.

d--In Default. In default on payment of principal, interest or other terms
and conditions. The rating also is utilized when a bankruptcy petition, or
similar action, has been filed.

A company's Short-Term Credit Rating also may be assigned an Under Review
modifier ("u") that generally is event-driven (positive, negative or
developing) and indicates that the company's A.M. Best Rating opinion is
under review and may be subject to near-term change. Ratings prefixed with
an ("i") denote indicative ratings.

A.M. BEST RATING OUTLOOK
A.M. Best Credit Ratings (aaa to c) are assigned a Rating Outlook that
indicates the potential direction of a company's rating for an intermediate
period, generally defined as the next 12 to 36 months. Public Data Ratings
are not assigned an Outlook. Ratings Outlooks are as follows:

Positive--Indicates a company's financial/market trends are favorable,
relative to its current rating level, and if continued, the company has a
good possibility of having its rating upgraded.

Negative--Indicates a company is experiencing unfavorable financial/market
trends, relative to its current rating level, and if continued, the company
has a good possibility of having its rating downgraded.

Stable--Indicates a company is experiencing stable financial/market trends and
that there is a low likelihood that its rating will change in the near term.

ADDRESSES

FEDERATED KAUFMANN SMALL CAP 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

Federated Global Investment Management Corp.
450 Lexington Avenue, Suite 3700
New York, NY 10017-3943

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:

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

Federated World-Class Investment Manager

Federated Kaufmann Small Cap Fund

PROSPECTUS

CLASS K SHARES

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

Average Annual Total Return Table

(For the Periods Ended December 31, 2004)

What are the Fund's Fees and Expenses?

FEDERATED KAUFMANN SMALL CAP FUND

FEES AND EXPENSES

EXAMPLE

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

FOREIGN SECURITIES

Foreign Exchange Contracts

ILLIQUID SECURITIES

FIXED-INCOME SECURITIES

Treasury Securities

SPECIAL TRANSACTIONS

Securities Lending

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

RISKS OF FOREIGN INVESTING

CURRENCY RISKS

CREDIT RISKS

LEVERAGE RISKS

INTEREST RATE RISKS

What Do Shares Cost?

How is the Fund Sold?

Payments to Financial Intermediaries

RULE 12B-1 FEES

RECORDKEEPING FEES

NETWORKING FEES

ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

How to Purchase Shares

THROUGH AN FINANCIAL INTERMEDIARY

DIRECTLY FROM THE FUND

By Wire

By Check

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM (SIP)

BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

How to Redeem and Exchange Shares

THROUGH A FINANCIAL INTERMEDIARY

DIRECTLY FROM THE FUND

By Telephone

By Mail

Signature Guarantees

PAYMENT METHODS FOR REDEMPTIONS

Redemption in Kind

LIMITATIONS ON REDEMPTION PROCEEDS

REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

FREQUENT TRADING POLICIES

PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

PORTFOLIO MANAGEMENT INFORMATION

Lawrence Auriana

Federated
World-Class Investment Manager

Federated
World-Class Investment Manager