485BPOS 1 fefform.htm


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

                   SECURITIES AND EXCHANGE COMMISSION
                          Washington, DC 20549

                                Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933             X
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    Pre-Effective Amendment No.      .......................
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    Post-Effective Amendment No.  76_.......................        X
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                                 and/or

       REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X


    Amendment No.  70 ......................................        X
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                         FEDERATED EQUITY FUNDS

           (Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

_x__ immediately upon filing pursuant to paragraph (b)
__ on ________________ pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(i)
_ on _______________ pursuant to paragraph (a)(i).
 _ _ 75 days after filing pursuant to paragraph (a)(ii)
___ on _________________ pursuant to paragraph(a)(ii) of Rule 485.

If appropriate, check the following box:

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

                                Copy to:

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

Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

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December 31, 2005

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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

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

**Not FDIC Insured * May Lose Value * No Bank Guarantee**

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Risk/Return Summary		1
What are Fund’s Fees and Expenses?		4
What are Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Funds Invest?		6
What are the Specific Risks of Investing in the Funds?		9
What Do Shares Cost?		10
How are the Funds Sold?		17
Payments to Financial Intermediaries		18
How to Purchase Shares		20
How to Redeem and Exchange Shares		23
Account and Share Information		26
Who Manages the Funds?		29
Legal Proceedings		30
Financial Information		31

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Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

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

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing primarily in common stock of companies with large and medium market capitalizations that offer superior growth prospects or of companies whose stock is undervalued.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.
Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.
Risks of Investing in Derivatives. The Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are also subject to a number of other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks. The Fund’s use of derivatives may also increase the taxable distributions to shareholders.

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

Risk/Return Bar Chart and Table

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

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

The Fund’s Class A Shares total return for the nine-month period from January 1, 2005 to September 30, 2005 was 0.12%.

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

Average Annual Total Return Table

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

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(For the periods ended December 31, 2004)

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	1 Year	5 Years	10 Years	Start of Performance¹

Class A Shares:

Return Before Taxes	1.29%	(1.65)%	12.88%	--

Return After Taxes on Distributions²	0.98%	(2.10)%	11.40%	--

Return After Taxes on Distributions and Sale of Fund Shares²	0.86%	(1.58)%	10.66%	--

Class B Shares:

Return Before Taxes	0.90%	(1.66)%	--	10.37%

Class C Shares:

Return Before Taxes	4.30%	(1.48)%	--	10.16%

S&P 500³	10.88%	(2.30)%	12.07%	--

LLCCFA⁴	8.07%	(2.98)%	10.19%	--

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

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

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

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

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What are the Fund’s Fees and Expenses?

FEDERATED CAPITAL APPRECIATION FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers and Reimbursement)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee	0.75%	0.75%	0.75%
Distribution (12b-1) Fee	0.25%²	0.75%	0.75%
Other Expenses³	0.49%	0.51%	0.52%
Total Annual Fund Operating Expenses	1.49%	2.01%⁴	2.02%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2005. However, the rate which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the distributor waived certain amounts. Additionally, the shareholder services provider reimbursed certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2005.
Total Waivers and Reimbursement of Fund Expenses	0.27%	0.00%	0.00%
Total Actual Annual Fund Operating Expenses (after waivers and reimbursement)	1.22%	2.01%	2.02%
2 Class A Shares did not pay or accrue the distribution (12b-1) fee for the fiscal year ended October 31, 2005. There is no present intention of paying or accruing the distribution (12b-1) fee for the Class A Shares for the fiscal year ending October 31, 2006.
3 Includes a shareholder services/account administration fee which is used to compensate intermediaries for shareholder services or account administration services. Also includes a record keeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein. The shareholder services provider reimbursed 0.02% of the shareholder services fee for the Class A Shares. See "Notes to Financial Statements" accompanying the Fund's Annual Report dated October 31, 2005 for a description of this reimbursement. The shareholder services fee paid by the Fund's Class A Shares (after the reimbursement) was 0.23% for the fiscal year ended October 31, 2005. The maximum shareholder services fee the Fund will pay is 0.25%. Total other operating expenses paid by the Fund’s Class A Shares (after the reimbursement) were 0.47% for the fiscal year ended October 31, 2005.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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

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

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$693	$995	$1,318	$2,232

Expenses assuming no redemption	$693	$995	$1,318	$2,232

Class B:

Expenses assuming redemption	$754	$1,030	$1,283	$2,204

Expenses assuming no redemption	$204	$630	$1,083	$2,204

Class C:

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

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

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What are the Fund’s Investment Strategies?

The Fund pursues its investment objective by investing primarily in common stock (including American Depositary Receipts) of companies with large and medium market capitalizations that offer superior growth prospects or of companies whose stock is undervalued. This includes companies with market capitalizations in excess of $500 million. Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. The Fund also invests in convertible securities issued by these companies. A description of the various principal types of securities in which the Fund invests, and their risks, immediately follows this strategy section.

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The Fund invests primarily in stocks of companies that the Adviser expects to have better future prospects than are reflected in the prices of those stocks. In its stock selection process, the Fund uses quantitative, fundamental, and valuation analysis. Using its own quantitative process, the Adviser rates the future performance potential of companies. The Adviser evaluates each company’s earnings quality in light of its current valuation to provide a list of companies judged to be attractive. Stocks of companies subjected to traditional fundamental and valuation analysis include, but are not limited to, the stocks deemed attractive by the quantitative process. The fundamental research is conducted by the Adviser’s staff. Fundamental analysis includes, but is not limited to, examination of a company’s product positioning, management quality and sustainability of current growth trends. Valuation analysis frequently includes, but is not limited to, examining traditional valuation metrics, such as price-earnings, price-to-cashflow and price-to-sales ratios, on both an absolute and relative basis.

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

PORTFOLIO TURNOVER

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

TEMPORARY DEFENSIVE INVESTMENTS

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

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earning and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. However, equity securities offer greater potential for appreciation than many other types of securities, because their value increases directly with the value of the issuer’s business. The following describes the types of equity securities in which the Fund may invest.

Common Stocks

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

American Depositary Receipts

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

CONVERTIBLE SECURITIES

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

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

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

DERIVATIVES CONTRACTS

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

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

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

Futures Contracts

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

Options

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

Swaps

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

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.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund’s portfolio will rise and fall. These fluctuations could be a sustained trend or a drastic movement. The Fund’s portfolio will reflect changes in prices of individual portfolio stocks or general changes in stock valuations. Consequently, the Fund’s Share price may decline.

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

LIQUIDITY RISKS

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

RISKS RELATED TO COMPANY SIZE

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

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

SECTOR RISKS

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

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

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

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

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

What Do Shares Cost?

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You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund’s current NAV and public offering price may be found in the mutual funds section of certain local newspapers under “Federated.”

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

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

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

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

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

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

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

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

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

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1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amounts for Systematic Investment Programs (SIP) is $50. Financial intermediaries may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $100,000 or more of Class B Shares or $1 million or more of Class C Shares will be invested in Class A Shares instead of Class B Shares or Class C Shares to maximize your return and minimize the sales charges and marketing fees. Accounts held in the name of a financial intermediary may be treated differently. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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

3 See “Sales Charge When You Redeem.”

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

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

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

SALES CHARGE WHEN YOU PURCHASE

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The following tables list the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the tables and described below.

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Class A Shares:

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

Less than $50,000	5.50%	5.82%

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

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

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

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

$1 million or greater¹	0.00%	0.00%

Class C Shares:

All Purchases	1.00%	1.01%

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

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REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

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

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

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

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

Larger Purchases

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

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Concurrent and Accumulated Purchases

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

Letter of Intent

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signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months (call your financial intermediary or the Fund for more information). The Fund’s custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases.

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ELIMINATING THE SALES CHARGE

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

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within 120 days of redeeming Shares of an equal or greater amount;

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through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);

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as a Trustee, employee or former employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or

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pursuant to the exchange privilege.

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The sales charge will not be eliminated if you purchase Shares of the Fund through an exchange of shares of Liberty U.S. Government Money Market Trust unless your Liberty shares were acquired through an exchange of shares on which the sales charge had previously been paid.

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SALES CHARGE WHEN YOU REDEEM

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

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

Shares that are not subject to a CDSC; and
Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund).

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

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Class A Shares:

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

Class B Shares:

Shares Held Up To:		CDSC

1 Year		5.50%

2 Years		4.75%

3 Years		4.00%

4 Years		3.00%

5 Years		2.00%

6 Years		1.00%

7 Years or More		0.00%

Class C Shares:

You will pay a 1% CDSC if you redeem Shares within 12 months of the purchase date.

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

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

following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);
representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;

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purchased by Trustees, employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;

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purchased through a financial intermediary that did not receive an advance commission on the purchase;

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purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;

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purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange);

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

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 A Shares, Class B Shares and Class C Shares. All Share classes have different sales charges and other expenses which affect their performance. Contact your financial intermediary or call 1-800-341-7400 for more information concerning the other class.

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The Fund’s Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through financial intermediaries. Under the Distributor’s Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. The 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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FRONT-END SALES CHARGE REALLOWANCES

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The Distributor receives a front-end sales charge on certain Share sales. The Distributor pays a portion of this charge to financial intermediaries that are eligible to receive it (the “Dealer Reallowance”) and retains any remaining portion of the front-end sales charge.

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When a financial intermediary’s customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows:

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Class A Shares:

Purchase Amount		Dealer Reallowance as a Percentage of Public Offering Price

Less than $50,000		5.00%

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

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

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

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

$1 million or greater		0.00%

Class C Shares:

All Purchase Amounts		1.00%

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ADVANCE COMMISSIONS

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When a financial intermediary’s customer purchases Shares, the financial intermediary may receive an advance commission as follows:

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Class A Shares (for purchases over $1 million):

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

First $1 million - $5 million		0.75%

Next $5 million - $20 million		0.50%

Over $20 million		0.25%

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Advance commissions are calculated on a year by year basis based on amounts invested during that year. Accordingly, with respect to additional purchase amounts, the advance commission breakpoint resets annually to the first breakpoint on the anniversary of the first purchase.

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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.

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Class B Shares:

		Advance Commission as a Percentage of Public Offering Price

All Purchase Amounts		Up to 5.50%

Class C Shares:

All Purchase Amounts		1.00%

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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 0.25% for Class A Shares, 0.75% for Class B Shares and 0.75% for Class C Shares of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund’s 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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SERVICE FEES

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The Fund may pay Service Fees of up to 0.25% of average net assets to financial intermediaries or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated, for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial intermediaries directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial intermediaries. If a financial intermediary receives Service Fees on an account, it is not eligible to also receive Account Administration Fees on that same account.

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ACCOUNT ADMINISTRATION FEES

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The Fund may pay Account Administration Fees of up to 0.25% of average net assets to financial intermediaries that are unregistered banks for providing administrative services to the Funds and shareholders. If a financial intermediary receives Account Administration Fees on an account, it is not eligible to also receive Service Fees or Recordkeeping Fees on that same account.

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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 and/or Service Fees 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 A 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 three business days. 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.

BY SYSTEMATIC INVESTMENT PROGRAM

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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.

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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.

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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.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

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

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

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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.

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

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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. Generally, it is not advisable to continue to purchase Class A Shares or Class C Shares subject to a sales charge while redeeming Shares using this program.

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Systematic Withdrawal Program (SWP) On Class B Shares

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

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

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

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

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

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

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If you have elected to receive dividends and/or capital gain distributions in cash, and your check is returned by the postal or other delivery service as “undeliverable,” or you do not respond to mailings from Federated with regard to uncashed distribution checks, your distribution option will automatically be converted to having all dividends and capital gains reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution checks.

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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

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

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

FREQUENT TRADING POLICIES

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

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

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The Fund’s 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

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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.

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

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

Who Manages the Fund?

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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.

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The 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.

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PORTFOLIO MANAGEMENT INFORMATION

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David P. Gilmore

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

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Carol R. Miller

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Carol R. Miller has been the Fund’s Portfolio Manager since November 2005. Ms. Miller joined Federated as a Senior Vice President and Senior Portfolio Manager in November 2005. Ms. Miller was an Adjunct Professor of the Portfolio Management Course at Ohio State University from March 2005 until June 2005. From April 2003 until September 2004, Ms. Miller served as Managing Director, Growth Team Leader at Banc One Investment Advisors and from December 1999 until April 2003, she served as Director of Equity Securities at Nationwide Insurance. Ms. Miller is a Chartered Financial Analyst. She earned her B.S. in Finance and Accounting from Ohio State University and her MBA in Finance from Ohio State University.

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

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ADVISORY FEES

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

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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.

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Legal Proceedings

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Since October 2003, Federated and related entities (collectively, “Federated”), and various Federated funds (“Funds”), have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. 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. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (“NYAG”), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless (i) at least 75% of the fund’s directors are independent of Federated, (ii) the chairman of each such fund is independent of Federated, (iii) no action may be taken by the fund’s board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively, and (iv) the fund appoints a “senior officer” who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated’s announcement which, along with previous press releases and related communications on those matters, is available in the “About Us” section of Federated’s website at FederatedInvestors.com.

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

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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 intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, 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, 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

The Financial Highlights will help you understand the Fund’s financial performance for its past five fiscal years. Some of the information is presented on a per Share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.

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

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Financial Highlights–Class A Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2005			2004			2003			2002			2001

Net Asset Value, Beginning of Period	$24.04			$22.58			$19.40			$22.48			$29.05
Income From Investment Operations:
Net investment income	0.26			0.11	¹		0.09			0.13	²		0.17
Net realized and unrealized gain (loss) on investments, futures contracts and options	0.99			1.46			3.17			(3.04	)²		(4.97	)

TOTAL FROM INVESTMENT OPERATIONS	1.25			1.57			3.26			(2.91	)		(4.80	)

Less Distributions:
Distributions from net investment income	(0.21	)		(0.11	)		(0.08	)		(0.17	)		(0.08	)
Distributions from net realized gain on investments	(0.02	)		--			--			--			(1.69	)

TOTAL DISTRIBUTIONS	(0.23	)		(0.11	)		(0.08	)		(0.17	)		(1.77	)

Net Asset Value, End of Period	$25.06			$24.04			$22.58			$19.40			$22.48

Total Return³	5.22	%^4,5		6.97	%⁴		16.89	%		(13.10	)%		(17.25	)%


Ratios to Average Net Assets:

Net expenses	1.22	%⁶		1.25	%⁶		1.27	%⁶		1.23	%⁶		1.23	%

Net investment income	0.98	%		0.46	%		0.62	%		0.76	%²		0.80	%

Expense waiver/reimbursement⁷	0.02	%		0.00	%⁸		0.00	%⁸		0.00	%⁸		0.00	%⁸

Supplemental Data:

Net assets, end of period (000 omitted)	$2,225,781		$2,605,203			$2,179,111			$1,337,564			$699,510

Portfolio turnover	43	%		45	%		40	%		71	%		61	%

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1 Based on average shares outstanding.

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

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

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4 During the year ended October 31, 2005 and the year ended October 31, 2004, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

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5 During the year ended October 31, 2005, the Fund's Class A Shares were reimbursed by the shareholder services provider, which had an impact of less than 0.01% on the total return.

6 The net expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The impact to the net expense ratio was 0.01% for the year ended October 31, 2005, and less than 0.01% for the years ended October 31, 2004, October 31, 2003, and October 31, 2002, respectively, after taking into account these expense reductions.

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

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8 Represents less than 0.01%.

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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Financial Highlights–Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2005			2004			2003			2002			2001

Net Asset Value, Beginning of Period	$23.34			$21.98			$18.95			$21.99			$28.58
Income From Investment Operations:
Net investment income (loss)	0.02			(0.06	)¹		(0.02	)		0.03	²		0.04
Net realized and unrealized gain (loss) on investments, futures contracts and options	1.00			1.42			3.05			(3.05	)²		(4.94	)

TOTAL FROM INVESTMENT OPERATIONS	1.02			1.36			3.03			(3.02	)		(4.90	)

Less Distributions:
Distributions from net investment income	(0.04	)		--			--			(0.02	)		--
Distributions from net realized gain on investments	(0.02	)		--			--			--			(1.69	)

TOTAL DISTRIBUTIONS	(0.06	)		--			--			(0.02	)		(1.69	)

Net Asset Value, End of Period	$24.30			$23.34			$21.98			$18.95			$21.99

Total Return³	4.37	%		6.19	%⁴		15.99	%		(13.76	)%		(17.88	)%


Ratios to Average Net Assets:

Net expenses	2.01	%⁵		1.98	%⁵		2.02	%⁵		1.98	%⁵		1.98	%

Net investment income (loss)	0.19	%		(0.27	)%		(0.14	)%		0.01	%²		0.06	%

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

Supplemental Data:

Net assets, end of period (000 omitted)	$507,271		$569,518			$528,029			$378,336			$299,814

Portfolio turnover	43	%		45	%		40	%		71	%		61	%

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1 Based on average shares outstanding.

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

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4 During the year ended October 31, 2004, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

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5 The net expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The impact to the net expense ratio was 0.01% for the year ended October 31, 2005, and less than 0.01% for the years ended October 31, 2004, October 31, 2003, and October 31, 2002, respectively, after taking into account these expense reductions.

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

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7 Represents less than 0.01%.

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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Financial Highlights–Class C Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2005			2004			2003			2002			2001

Net Asset Value, Beginning of Period	$23.32			$21.96			$18.94			$21.98			$28.55
Income From Investment Operations:
Net investment income (loss)	0.02			(0.08	)¹		(0.02	)		0.04	²		0.04
Net realized and unrealized gain (loss) on investments, futures contracts and options	0.99			1.44			3.04			(3.05	)²		(4.92	)

TOTAL FROM INVESTMENT OPERATIONS	1.01			1.36			3.02			(3.01	)		(4.88	)

Less Distributions:
Distributions from net investment income	(0.03	)		--			--			(0.03	)		--
Distributions from net realized gain on investments	(0.02	)		--			--			--			(1.69	)

TOTAL DISTRIBUTIONS	(0.05	)		--			--			(0.03	)		(1.69	)

Net Asset Value, End of Period	$24.28			$23.32			$21.96			$18.94			$21.98

Total Return³	4.35	%		6.19	%⁴		15.95	%		(13.73	)%		(17.83	)%


Ratios to Average Net Assets:

Net expenses	2.02	%⁵		2.02	%⁵		2.02	%⁵		1.98	%⁵		1.98	%

Net investment income (loss)	0.18	%		(0.31	)%		(0.13	)%		0.01	%²		0.05	%

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

Supplemental Data:

Net assets, end of period (000 omitted)	$185,175		$215,206			$176,633			$100,576			$51,497

Portfolio turnover	43	%		45	%		40	%		71	%		61	%

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1 Based on average shares outstanding.

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4 During the year ended October 31, 2004, the Fund was reimbursed by the Adviser, which had an impact of 0.04% on the total return.

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

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7 Represents less than 0.01%.

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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A Statement of Additional Information (SAI) dated December 31, 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 Annual Report’s Management’s Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. The SAI contains a description of the Fund’s policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your 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.

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

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Federated Investors
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2005 © Federated Investors, Inc.

Cusip 314172701
Cusip 314172800
Cusip 314172883

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G01489-01 (12/05)

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Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

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December 31, 2005

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CLASS K SHARES

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

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Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		4
What are the Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Fund Invests?		6
What are the Specific Risks of Investing in the Fund?		9
What Do Shares Cost?		11
How is the Fund Sold?		12
Payments to Financial Intermediaries		13
How to Purchase Shares		14
How to Redeem and Exchange Shares		16
Account and Share Information		19
Who Manages the Fund?		22
Legal Proceedings		24
Financial Information		25

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Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Liquidity Risks. The equity securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities.
Risks Related to Company Size. Because the smaller companies in which the Fund may invest may have unproven track records, a limited product or service base and limited access to capital, they may be more likely to fail than larger companies.
Sector Risks. Because the Fund may allocate relatively more assets to certain industry sectors than others, the Fund’s performance may be more susceptible to any developments which affect those sectors emphasized by the Fund.
Risks of Investing in ADRs and Domestically Traded Securities of Foreign Issuers. Because the Fund may invest in American Depositary Receipts (ADRs) and other domestically traded securities of foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.
Risks of Investing in Derivatives. The Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are also subject to a number of other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks. The Fund’s use of derivatives may also increase the taxable distributions to shareholders.

Risk/Return Bar Chart and Table

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

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

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The Fund’s Class K Shares total return for the nine-month period from January 1, 2005 to September 30, 2005 was (0.24)%.

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

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 commenced operations on April 8, 2003. Accordingly, for the period prior to the commencement of operations, the performance information shown in the Average Annual Total Return Table is for the Fund’s Class A Shares, adjusted to reflect the expenses of Class K Shares. Return Before Taxes is shown. In addition, Return After Taxes is shown for the Fund’s Class K Shares to illustrate the effect of federal taxes on the Fund’s 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 Standard & Poor’s 500 Index (S&P 500),a broad-based market index, and the Lipper Large Cap Core Funds Average (LLCCFA), an average of funds with similar objectives. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index or average.

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(For the periods ended December 31, 2004)

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	1 Year	5 Years	10 Years

Class K Shares:

Return Before Taxes	6.73%	(0.98)%	13.01%

Return After Taxes on Distributions¹	6.66%	(1.27)%	11.83%

Return After Taxes on Distributions and Sale of Fund Shares¹	4.39%	(0.91)%	11.05%

S&P 500²	10.88%	(2.30)%	12.07%

LLCCFA³	8.07%	(2.98)%	10.19%

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

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

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

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What are the Fund’s Fees and Expenses?

FEDERATED CAPITAL APPRECIATION FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee		0.75%
Distribution (12b-1) Fee		0.50%
Other Expenses²		0.42%
Total Annual Fund Operating Expenses		1.67%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be higher or lower than the stated average percentage.
2 Includes a shareholder services/account administrative fee which is used to compensate intermediaries for shareholder services or account administrative services. Also includes a record keeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein.

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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.

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

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1 Year		$170

3 Years		$526

5 Years		$907

10 Years		$1,976

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What are the Fund’s Investment Strategies?

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PORTFOLIO TURNOVER

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Common Stocks

American Depositary Receipts

CONVERTIBLE SECURITIES

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

DERIVATIVES CONTRACTS

Futures Contracts

Options

Swaps

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.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

LIQUIDITY RISKS

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

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

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV). From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund’s assets may change on days you cannot purchase or redeem Shares. The Fund’s Class K Shares do not charge a front-end sales charge. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund’s current NAV and public offering price may be found in the mutual funds section of certain local newspapers under “Federated.”

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

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

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

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

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Payments to Financial Intermediaries

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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 marketing fees.

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SERVICE FEES

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ACCOUNT ADMINISTRATION FEES

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RECORDKEEPING FEES

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NETWORKING FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

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How to Purchase Shares

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THROUGH A 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.

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

By Wire

Send your wire to:

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

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

By Check

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

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

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

The Federated Funds 66 Brooks Drive Braintree, MA 02184

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

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BY AUTOMATED CLEARING HOUSE (ACH)

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RETIREMENT INVESTMENTS

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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.

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THROUGH A 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.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

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

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

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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.

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder’s trade activity or amount adversely impacts the Fund’s ability to manage its assets.

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

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REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

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

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

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

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

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ACCOUNTS WITH LOW BALANCES

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Due to the high cost of maintaining accounts with low balances, 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.

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TAX INFORMATION

FREQUENT TRADING POLICIES

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PORTFOLIO HOLDINGS INFORMATION

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Who Manages the Fund?

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PORTFOLIO MANAGEMENT INFORMATION

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David P. Gilmore

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Carol R. Miller

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

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ADVISORY FEES

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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.

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Legal Proceedings

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Since October 2003, Federated and related entities (collectively, “Federated”), and various Federated funds (Funds), have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. 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. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (NYAG), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless: (i) at least 75% of the fund’s directors are independent of Federated; (ii) the chairman of each such fund is independent of Federated; (iii) no action may be taken by the fund’s board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively; and (iv) the fund appoints a “senior officer” who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated’s announcement which, along with previous press releases and related communications on those matters, is available in the “About Us” section of Federated’s website at FederatedInvestors.com.

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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 intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, 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, 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

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

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

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Financial Highlights–Class K Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2005		2004			2003	¹

Net Asset Value, Beginning of Period	$23.87		$22.54			$19.13
Income From Investment Operations:
Net investment income	0.09		0.01	²		0.03
Net realized and unrealized gain on investments, futures contracts and options	1.04		1.45			3.38

Total from investment operations	1.13		1.46			3.41

Less Distributions:
Distributions from net investment income	(0.04	)	(0.13	)		--
Distributions from net realized gain on investments	(0.02	)	--			--

Total distributions	(0.06	)	(0.13	)		--

Net Asset Value, End of Period	$24.94		$23.87			$22.54

Total Return³	4.73	%	6.49	%⁴		17.83	%


Ratios to Average Net Assets:

Net expenses	1.67	%⁵	1.69	%⁵		1.74	%^5,6

Net investment income	0.46	%	0.03	%		0.15	%⁶

Expense waiver/reimbursement⁷	0.01	%	0.00	%⁸		0.00	%^6,8

Supplemental Data:

Net assets, end of period (000 omitted)	$7,389		$9,345		$15,533

Portfolio turnover	43	%	45	%		40	%⁹

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

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2 Based on average shares outstanding.

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

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4 During the year ended October 31, 2004, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return.

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5 The net expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The impact to the net expense ratio was 0.01% for the year ended October 31, 2005, and less than 0.01% for the year ended October 31, 2004 and the period ended October 31, 2003, respectively, after taking into account these expense reductions.

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6 Computed on an annualized basis.

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

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8 Represents less than 0.01%.

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

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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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.

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Federated Investors
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Federated is a registered mark of Federated Investors, Inc.
2005 © Federated Investors, Inc.

Investment Company Act File No. 811-4017

Cusip 314172594

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28202 (12/05)

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FEDERATED CAPITAL APPRECIATION FUND
A Portfolio of Federated Equity Funds

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 31, 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 prospectuses for Class A Shares, Class B Shares,
Class C Shares and Class K Shares of Federated Capital Appreciation Fund (Fund),
dated December 31, 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.

[GRAPHIC OMITTED][GRAPHIC OMICONTENTS

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?............................10
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How is the Fund Sold?...........................10
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Exchanging Securities for Shares................11
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Subaccounting Services..........................12
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Redemption in Kind [GRAPHIC OMITTED][GRAPHIC OMITTED]12
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Massachusetts Partnership Law...................12
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Account and Share Information...................12
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Tax Information.................................13
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Who Manages and Provides Services to
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the Fund?.......................................13
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How Does the Fund Measure
Performance?....................................24
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Who is Federated Investors, Inc.?...............26
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Financial Information...........................27
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Investment Ratings..............................28
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Addresses.........................................
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Appendix..........................................
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[GRAPHIC OMITTED][GRAPHIC OMITTED]

HOW IS THE FUND ORGANIZED?

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

SECURITIES IN WHICH THE FUND INVESTS

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

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SECURITIES DESCRIPTIONS AND TECHNIQUES

EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets, after
the issuer pays its liabilities. The Fund cannot predict the income it will
receive from equity securities because issuers generally have discretion as to
the payment of any dividends or distributions. However, equity securities offer
greater potential for appreciation than many other types of securities, because
their value increases directly with the value of the issuer's business.

The following describes the types of equity securities in which the Fund
invests:

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

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

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

Warrants

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

FIXED-INCOME SECURITIES

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

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

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

Corporate Debt Securities

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

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

COMMERCIAL PAPER

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

DEMAND INSTRUMENTS

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

ZERO COUPON SECURITIES

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

There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's coupon payments from the right to receive the bond's principal due at
maturity, a process known as coupon stripping. Treasury STRIPs, IOs and POs are
the most common forms of stripped zero coupon securities. In addition, some
securities give the issuer the option to deliver additional securities in place
of cash interest payments, thereby increasing the amount payable at maturity.
These are referred to as pay-in-kind or PIK securities.

Bank Instruments

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

CONVERTIBLE SECURITIES

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

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

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

FOREIGN SECURITIES

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

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

Depositary Receipts

Depositary receipts represent interests in underlying securities issued by a
foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are not traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts, Global Depositary Receipts and International Depositary Receipts, are
traded globally or outside the United States. Depositary receipts involve many
of the same risks of investing directly in foreign securities, including
currency risks and risks of foreign investing.

Foreign Exchange Contracts

In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivatives contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivatives contracts may be higher or lower than the spot exchange rate. Use of
these derivatives contracts may increase or decrease the Fund's exposure to
currency risks.

Foreign Government Securities

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

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

DERIVATIVES CONTRACTS

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

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

For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.

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

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

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

Futures Contracts

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

Options

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

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

CALL OPTIONS

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

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

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

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

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

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

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

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

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

SPECIAL TRANSACTIONS

Repurchase Agreements

Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed-upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

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

Repurchase agreements are subject to credit risks.

Delayed Delivery Transactions

Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default. These transactions create leverage
risks.

Securities Lending

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

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

Loans are subject to termination at the option of the Fund or the borrower. The
Fund will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.

Securities lending activities are subject to interest rate risks and credit
risks. These transactions may create leverage risks.

Asset Coverage

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

Inter-Fund Borrowing and Lending Arrangements
The Securities and Exchange Commission (SEC) has granted an exemption that
permits the Fund and all other funds advised by subsidiaries of Federated
Investors, Inc. (Federated funds) to lend and borrow money for certain temporary
purposes directly to and from other Federated funds. Participation in this
inter-fund lending program is voluntary for both borrowing and lending 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.

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. The Fund is prohibited from
investing in other registered investment companies in reliance on Section
12(d)(1)(F) or (G) of the 1940 Act.

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.

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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.

Interest Rate Risks
o Prices of fixed-income securities rise and fall in response to changes in
the interest rate paid by similar securities. Generally, when interest
rates rise, prices of fixed-income securities fall. However, market
factors, such as the demand for particular fixed-income securities, may
cause the price of certain fixed-income securities to fall while the
prices of other securities rise or remain unchanged.
o Interest rate changes have a greater effect on the price of fixed-income
securities with longer durations. Duration measures the price sensitivity
of a fixed-income security to changes in interest rates.

Credit Risks
o Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.
o Many fixed-income securities receive credit ratings from services such as
S&P and Moody's Investors Service. These services assign ratings to
securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
o Fixed-income securities generally compensate for greater credit
risk by paying interest at a higher rate. The difference between
the yield of a security and the yield of a U.S. Treasury security
with a comparable maturity (the spread) measures the additional
interest paid for risk. Spreads may increase generally in
response to adverse economic or market conditions. A security's
spread may also increase if the security's rating is lowered, or
the security is perceived to have an increased credit risk. An
increase in the spread will cause the price of the security to
decline.
o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.

Call Risks
o Call risk is the possibility that an issuer may redeem a fixed-income
security before maturity (a call) at a price below its current market
price. An increase in the likelihood of a call may reduce the security's
price.
o If a fixed-income security is called, the Fund may have to reinvest the
proceeds in other fixed-income securities with lower interest rates,
higher credit risks, or other less favorable characteristics.

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

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

Liquidity Risks
o Liquidity risk also refers to the possibility that the Fund may not be
able to sell a security or close out a derivatives contract when it wants
to. If this happens, the Fund will be required to continue to hold the
security or keep the position open, and the Fund could incur losses. OTC
derivatives contracts generally carry greater liquidity risk than
exchange-traded contracts.

FUNDAMENTAL INVESTMENT OBJECTIVE

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

INVESTMENT LIMITATIONS

Diversification

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

Borrowing Money and Issuing Senior Securities

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

Investing in Real Estate

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

Underwriting

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

Lending

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

Commodities

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

Concentration

The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
The above limitations cannot be changed unless authorized by the Board and by
the "vote of a majority of its outstanding voting securities," as defined by the
1940 Act. The following limitations, however, may be changed by the Board
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.

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.

Purchases on Margin

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

Pledging Assets

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

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

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

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

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

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

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

o for all other securities at fair value as determined in 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.

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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.

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 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 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:

2005 2004 2003
Total Total
Sales Amount Sales Amount ----------- ----------
Charges Retained Charges Retained Total Amount
Sales Retained
Charges
Class A $2,834,226 $312,809 $4,399,980 $470,283 $4,308,569 $458,719
Shares
Class B 1,053,858 0 1,586,237 0 1,458,203 0
Shares
Class C 70,371 13,572 284,185 29,244 292,631 30,013
Shares

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EXCHANGING SECURITIES FOR SHARES

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

SUBACCOUNTING SERVICES

Certain financial intermediaries 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.

<R>

ACCOUNT AND SHARE INFORMATION

VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote.

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

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

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class B Shares: Perishing LLC,
Jersey City, NJ owned approximately 2,937,193 Shares (14.11%), Edward Jones
& Co., Maryland Heights, MO owned approximately 1,969,588 Shares (9.46%) and
Citigroup Global Markets Inc., New York, NY owned approximately 1,171,369 Shares
(5.63%).

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class C Shares: MLPF&S for
the sole benefit of its customers, Jacksonville, FL owned approximately
1,226,660 Shares (16.35%) and Citigroup Global Markets Inc., New York, NY owned
approximately 804,630 Shares (10.73%).

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class K Shares: Scudder Trust
Co., Salem, NH owned approximately 82,130 Shares (22.12%), Hartford Life
Insurance Co., Hartford, CT owned approximately 65,575 Shares (17.67%) and Carey
& Co., Columbus, OH owned approximately 37,000 Shares (9.97%).

<R>;

TAX INFORMATION

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

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

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

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

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

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

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

<R>

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

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 eight
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 5, 2005, the Fund's Board and Officers as a group owned
approximately 194,522 Shares (1.54%) of the Fund's outstanding Class A Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

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

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

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

J. Christopher Principal Occupations: $0 $0
Donahue* Principal Executive Officer
Birth Date: April and President of the Federated
11, 1949 Fund Complex; Director or
PRESIDENT AND Trustee of some of the Funds
TRUSTEE in the Federated Fund Complex;
Began serving: President, Chief Executive
January 2000 Officer 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.

Lawrence D. Principal Occupations: $2,546.30 $148,500
Ellis, M.D.* Director or Trustee of the
Birth Date: Federated Fund Complex;
October 11, 1932 Professor of Medicine,
3471 Fifth Avenue University of Pittsburgh;
Suite 1111 Medical Director, University
Pittsburgh, PA of Pittsburgh Medical Center
TRUSTEE Downtown; Hematologist,
Began serving: Oncologist and Internist,
August 1987 University of Pittsburgh
Medical Center.

Other Directorships Held:
Member, National Board of
Trustees, Leukemia Society of
America.

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

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

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION

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

Name Aggregate
Birth Date Compensation Total
Address Principal Occupation(s) for From Fund Compensation
Positions Held Past Five Years, (past From Trust and
with Trust Other Directorships Held and fiscal year) Federated Fund
Date Service Began Previous Position(s) Complex
(past calendar
year)
Thomas G. Bigley Principal Occupation: Director $2,800.92 $163,350
Birth Date: or Trustee of the Federated
February 3, 1934 Fund Complex.
15 Old Timber
Trail Other Directorships Held:
Pittsburgh, PA Director, Member of Executive
TRUSTEE Committee, Children's Hospital
Began serving: of Pittsburgh; Director,
October 1995 University of Pittsburgh.

Previous Position: Senior
Partner, Ernst & Young LLP.

John T. Conroy, Principal Occupations: $2,800.92 $163,350
Jr. Director or Trustee of the
Birth Date: June Federated Fund Complex;
23, 1937 Chairman of the Board,
Investment Investment Properties
Properties Corporation; Partner or
Corporation Trustee in private real estate
3838 North ventures in Southwest Florida.
Tamiami Trail
Suite 402 Previous Positions: President,
-------------------- Investment Properties
Naples, FL Corporation; Senior Vice
TRUSTEE President, John R. Wood and
Began serving: Associates, Inc., Realtors;
November 1991 President, Naples Property
Management, Inc. and Northgate
Village Development
Corporation.

Nicholas P. Principal Occupation: Director $2,800.92 $163,350
Constantakis or Trustee of the Federated
Birth Date: Fund Complex.
September 3, 1939
175 Woodshire Other Directorships Held:
Drive Director and Member of the
Pittsburgh, PA Audit Committee, Michael Baker
TRUSTEE Corporation (engineering and
Began serving: energy services worldwide).
February 1998
Previous Position: Partner,
Andersen Worldwide SC.

John F. Cunningham Principal Occupation: Director $2,546.30 $148,500
Birth Date: March or Trustee of the Federated
5, 1943 Fund Complex.
353 El Brillo Way
Palm Beach, FL Other Directorships Held:
TRUSTEE Chairman, President and Chief
Began serving: Executive Officer, Cunningham
January 1999 & Co., Inc. (strategic
business consulting); Trustee
Associate, Boston College.

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

Peter E. Madden Principal Occupation: Director $2,546.30 $148,500
Birth Date: March or Trustee of the Federated
16, 1942 Fund Complex.
One Royal Palm Way
100 Royal Palm Way Other Directorships Held:
Palm Beach, FL Board of Overseers, Babson
TRUSTEE College.
Began serving:
November 1991 Previous Positions:
Representative, Commonwealth
of Massachusetts General
Court; President, State Street
Bank and Trust Company and
State Street Corporation
(retired); Director, VISA USA
and VISA International;
Chairman and Director,
Massachusetts Bankers
Association; Director,
Depository Trust Corporation;
Director, The Boston Stock
Exchange.

Charles F. Principal Occupations: $2,800.92 $163,350
Mansfield, Jr. Director or Trustee of the
Birth Date: April Federated Fund Complex;
10, 1945 Management Consultant;
80 South Road Executive Vice President, DVC
Westhampton Group, Inc. (marketing,
Beach, NY communications and technology)
TRUSTEE (prior to 9/1/00).
Began serving:
January 1999 Previous Positions: Chief
Executive Officer, PBTC
International Bank; Partner,
Arthur Young & Company
(now Ernst & Young LLP);
Chief Financial Officer of
Retail Banking Sector, Chase
Manhattan Bank; Senior Vice
President, HSBC Bank USA
(formerly, Marine Midland
Bank); Vice President,
Citibank; Assistant Professor
of Banking and Finance, Frank
G. Zarb School of Business,
Hofstra University.

John E. Murray, Principal Occupations: $3,055.57 $178,200
Jr., J.D., S.J.D. Director or Trustee of the
Birth Date: Federated Fund Complex;
December 20, 1932 Chancellor and Law Professor,
Chancellor, Duquesne University; Partner,
Duquesne Murray, Hogue & Lannis.
University
Pittsburgh, PA Other Directorships Held:
TRUSTEE Director, Michael Baker Corp.
Began serving: (engineering, construction,
February 1995 operations and technical
services).

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

Marjorie P. Smuts Principal Occupations: $2,546.30 $148,500
Birth Date: June Director or Trustee of the
21, 1935 Federated Fund Complex; Public
4905 Bayard Street Relations/Marketing
Pittsburgh, PA Consultant/Conference
TRUSTEE Coordinator.
Began serving:
April 1984 Previous Positions: National
Spokesperson, Aluminum Company
of America; television
producer; President, Marj
Palmer Assoc.; Owner, Scandia
Bord.

John S. Walsh Principal Occupations: $2,546.30 $148,500
Birth Date: Director or Trustee of the
November 28, 1957 Federated Fund Complex;
2604 William Drive President and Director, Heat
Valparaiso, IN Wagon, Inc. (manufacturer of
TRUSTEE construction temporary
Began serving: heaters); President and
January 1999 Director, Manufacturers
Products, Inc. (distributor of
portable construction
heaters); President, Portable
Heater Parts, a division of
Manufacturers Products, Inc.

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

OFFICERS**
-------------------------------------------------------------------------

Name
Birth Date
Address
Positions Held with Trust
----------------------------- Principal Occupation(s) and Previous Position(s)
Date Service Began
John W. McGonigle Principal Occupations: Executive Vice President and
Birth Date: October 26, Secretary of the Federated Fund Complex; Vice
1938 Chairman, Executive Vice President, Secretary and
EXECUTIVE VICE PRESIDENT Director, Federated Investors, Inc.
AND 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.

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

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

Stephen F. Auth Principal Occupations: Chief Investment Officer of
Birth Date: September 3, this Fund and various other Funds in the Federated
1956 Fund Complex; Executive Vice President, Federated
CHIEF INVESTMENT OFFICER Investment Counseling, Federated Global Investment
Began serving: November Management Corp., Federated Equity Management
2002 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 Lawrence Auriana is Vice President of the Trust. Mr.
Birth Date: January 8, 1944 Auriana joined Federated in April 2001 as Co-Head of
VICE PRESIDENT Investments/Federated Kaufmann. From August 1984 to
Began serving: November April 2001, Mr. Auriana was President and Treasurer
2001 of Edgemont Asset Management Corp., and Chairman of
the Board and Portfolio Manager to The Kaufmann
Fund, Inc. (predecessor to the Federated Kaufmann
Fund). Mr. Auriana earned a B.S. in economics from
Fordham University and has been engaged in the
securities business since 1965.

James E. Grefenstette James E. Grefenstette is Vice President of the
Birth Date: November 7, Trust. Mr. Grefenstette joined Federated in 1992 and
1962 has been a Portfolio Manager since 1994. Mr.
VICE PRESIDENT Grefenstette became a Senior Vice President of the
Began serving: November Fund's Adviser in January 2000. He served as a Vice
1998 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 Hans P. Utsch is Vice President of the Trust. Mr.
Birth Date: July 3, 1936 Utsch joined Federated in April 2001 as Co-Head of
VICE PRESIDENT Investments/Federated Kaufmann. From August 1984 to
Began serving: November April 2001, Mr. Utsch was Chairman of the Board and
2001 Secretary of Edgemont Asset Management Corp., and
President and Portfolio Manager to The Kaufmann
Fund, Inc. (predecessor to the Federated Kaufmann
Fund). Mr. Utsch graduated from Amherst College and
holds an M.B.A. from Columbia University. He has
been engaged in the securities business since 1962.

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

COMMITTEES OF THE BOARD
Meetings
Board Committee Held
Committee Members Committee Functions During
Last
Fiscal
Year
John F. Donahue In between meetings of the full Board, Six
Executive John E. Murray, the Executive Committee generally may
Jr., J.D., exercise all the powers of the full
S.J.D. 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 Nine
John T. Conroy, to oversee the accounting and financial
Jr. reporting process of the Fund, the
Nicholas P. Fund`s internal control over financial
Constantakis reporting, and the quality, integrity
Charles F. and independent audit of the Fund`s
Mansfield, Jr. 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.

Thomas G. Bigley The Nominating Committee, whose members One
NominatingJohn T. Conroy, consist of all Independent Trustees,
Jr. selects and nominates persons for
Nicholas P. election to the Fund`s Board when
Constantakis vacancies occur. The Committee will
John F. consider candidates recommended by
Cunningham shareholders, Independent Trustees,
Peter E. Madden officers or employees of any of the
Charles F. Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who
John E. Murray, desires to have an individual considered
Jr. for nomination by the Committee must
Marjorie P. submit a recommendation in writing to
Smuts the Secretary of the Fund, at the Fund's
John S. Walsh 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 Capital Federated Family of
Board Member Name Appreciation Fund Investment Companies
John F. Donahue None Over $100,000
J. Christopher Donahue Over $100,000 Over $100,000
Lawrence D. Ellis, M.D. $1 - $10,000 Over $100,000

Independent
Board Member Name
Thomas G. Bigley $1 - $10,000 Over $100,000
John T. Conroy, Jr. $1 - $10,000 Over $100,000
Nicholas P. Constantakis None Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden 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 $50,001 - $100,000 Over $100,000
John S. Walsh $1 - $10,000 Over $100,000

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

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

The Adviser is a wholly owned subsidiary of Federated.

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

Portfolio Manager Information
The following information about the Fund's Portfolio Managers is provided as of
the end of the Fund's most recently completed fiscal year.

Total Number of Other
Other Accounts Managed by Accounts Managed/
David Gilmore Total Assets*
Registered Investment Companies 3 funds / $356.29 million
Other Pooled Investment Vehicles 0
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: $100,001-$500,000

David Gilmore 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 multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction
and Service, and Financial Success. The total Balanced Scorecard "score" is
applied against an annual incentive opportunity that is competitive in the
market for this portfolio manager role to determine the annual incentive
payment.

IPP is measured on a rolling 1, 3, and 5 calendar year pre-tax total return
basis versus the Fund's benchmark (i.e. S&P 500 Index), and on a rolling 3
and 5 calendar year pre-tax gross return basis versus the Fund's designated peer
group of comparable funds. These performance periods are adjusted if the
portfolio manager has been managing the fund for less than five years. As noted
above, Mr. Gilmore is also the portfolio manager for other accounts in addition
to the Fund. Such other accounts may have different benchmarks. The performance
of certain of these accounts is excluded when calculating IPP; IPP is calculated
with an equal weighting of each included account managed by the portfolio
manager. The IPP score can be reduced based on management's assessment of the
Fund's comparative risk profile.

Leadership/Teamwork/Communication is assessed by the Chief Investment Officer in
charge of the portfolio manager's group, with input from the portfolio manager's
co-workers.

Client Satisfaction and Service is assessed by Federated's senior management
considering the quality, amount, and effectiveness of client support activities,
with input from sales management.

Financial success is assessed to tie the portfolio manager's bonus, in part, to
Federated's overall financial health. In making this assessment, Federated's
senior management considers the following factors: growth of the portfolio
manager's funds (assets under management and revenues), net fund flows relative
to industry trends for the product category, supporting the appropriate number
of funds to improve efficiency and enhance strong fund performance, growth in
assets under management and revenues attributable to the portfolio manager's
Department, and Departmental expense management. Although a number of these
factors are quantitative in nature, the overall assessment for this category is
based on management's judgment. The financial success score is lowered if
Federated's overall financial targets are not achieved.

In addition, David Gilmore was awarded a grant of restricted Federated stock.
Awards of restricted stock are discretionary and are made in variable amounts
based on the subjective judgment of Federated's senior management.

Total Number of Other
Other Accounts Managed by Accounts Managed/
Carol Miller Total Assets*
Registered Investment Companies 3 funds / $356.29 million
Other Pooled Investment Vehicles 0
Other Accounts 0
Dollar value range of shares owned in the Fund: $100,001-$500,000
-------------------------------------------------------------------------

Carol Miller 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 multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction
and Service, and Financial Success. The total Balanced Scorecard "score" is
applied against an annual incentive opportunity that is competitive in the
market for this portfolio manager role to determine the annual incentive
payment.

IPP is measured on a rolling 1, 3, and 5 calendar year pre-tax total return
basis versus the Fund's benchmark (i.e. S&P 500 Index), and on a rolling 3
and 5 calendar year pre-tax gross return basis versus the Fund's designated peer
group of comparable funds. These performance periods are adjusted if the
portfolio manager has been managing the fund for less than five years. As noted
above, Carol Miller is also the portfolio manager for other accounts in addition
to the Fund. Such other accounts may have different benchmarks. The performance
of certain of these accounts is excluded when calculating IPP; IPP is calculated
with an equal weighting of each included account managed by the portfolio
manager. The IPP score can be reduced based on management's assessment of the
Fund's comparative risk profile.

Leadership/Teamwork/Communication is assessed by the Chief Investment Officer in
charge of the portfolio manager's group, with input from the portfolio manager's
co-workers.

Client Satisfaction and Service is assessed by Federated's senior management
considering the quality, amount, and effectiveness of client support activities,
with input from sales management.

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.

</R>

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.

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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 Fund's 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.

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<R>

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. Except as noted below, when the Fund and one or
more of those accounts invests in, or disposes of, the same security, available
investments or opportunities for sales will be allocated among the Fund and the
account(s) in a manner believed by the Adviser to be equitable. While the
coordination and ability to participate in volume transactions may benefit the
Fund, it is possible that this procedure could adversely impact the price paid
or received and/or the position obtained or disposed of by the Fund. Investments
for Federated Kaufmann Fund and other accounts managed by that fund's portfolio
managers in initial public offerings ("IPO") are made independently from any
other accounts, and much of their non-IPO trading may also be conducted
independently from other accounts.

On October 31, 2005, the Fund owned securities of the following regular
broker/dealers:

Broker Value of Securities

Bank of America Common Stock 43.0 million
Morgan Stanley Common Stock 65.4 million
JP Morgan Common Stock 37.1 million
Goldman Sachs Common Stock 32.4 million
Citigroup Common Stock 64.6 million
Merrill Lynch Common Stock 71.3 million
Wells Fargo Common Stock 59.0 million

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.
For the fiscal year ended, October 31, 2005, the Fund's Adviser directed
brokerage transactions to certain brokers due to research services they
provided. The total amount of these transactions was $2,651,811,399 for which
the Fund paid $3,565,783 in brokerage commissions.

</R>

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

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

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

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, the Fund's registered transfer agent,
maintains all necessary shareholder records.

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

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FEES PAID BY THE FUND FOR SERVICES

-------------------------- 2005 2004 2003
For the Year Ended
October 31
Advisory Fee Earned $24,763,953 $24,311,507 $17,368,038
Advisory Fee Reimbursement $357 $14,296 $9,017
Brokerage Commissions $4,089,189 $2,854,733 $3,246,979
Administrative Fee $2,516,017 $2,470,049 $1,741,356
12b-1 Fee:
Class A Shares $-- -- --
Class B Shares $4,193,491 -- --
Class C Shares $1,575,263 -- --
Class K Shares $58,501 -- --
Shareholder Services Fee:
Class A Shares $5,773,774 -- --
Class B Shares $1,397,830 -- --
Class C Shares $523,882 -- --
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.
-------------------------------------------------------------------------

</R>

<R>

HOW DOES THE FUND MEASURE PERFORMANCE?

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

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

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

AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year, ten-year or Start of
Performance periods ended October 31, 2005.

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

30-Day 1 Year 5 Years 10 Years
Period
Class A Shares:
Total Return
Before Taxes N/A (0.57)% (2.22)% 9.89%
After Taxes on N/A (0.71)% (2.62)% 8.51%
Distributions
After Taxes on
Distributions and N/A (0.19)% (2.01)% 7.96%
Sale of Shares
Yield 0.70% N/A N/A N/A

-------------------------------------------------------------------------
Start of
30-Day 1 Year 5 Years Performance on
Period 1/4/1996
Class B Shares:
Total Return
Before Taxes N/A (1.13)% (2.23)% 9.32%
After Taxes on N/A (1.17%) (2.50)% 8.28%
Distributions
After Taxes on
Distributions and N/A (0.68)% (1.95)% 7.70%
Sale of Shares
Yield 0.00% N/A N/A N/A

-------------------------------------------------------------------------
Start of
Performance on
30-Day 1 Year 5 Years 1/4/1996
Period
Class C Shares:
Total Return
Before Taxes N/A 2.29% (2.05%) 9.05%
After Taxes on N/A 2.26% (2.32%) 8.02%
Distributions
After Taxes on
Distributions and N/A 1.54% (1.80%) 7.46%
Sale of Shares
Yield 0.00% N/A N/A

-------------------------------------------------------------------------
Start of
30-Day 1 Year 5 Years Performance on
Period 4/8/2003
Class K Shares:
Total Return
Before Taxes N/A 4.73% (1.55)% 10.01%
After Taxes on N/A 4.69% (1.84)% 8.90%
Distributions
After Taxes on
Distributions and N/A 3.12% (1.39)% 8.30%
Sale of Shares
Yield 0.32% N/A N/A N/A

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

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

The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $10,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $10,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions. Total returns after taxes are calculated in a
similar manner, but reflect additional standard assumptions required by the SEC.

YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by Shares because of certain adjustments required
by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

To the extent financial intermediaries charge fees in connection with services
provided in conjunction with an investment in Shares, the Share performance is
lower for shareholders paying those fees.

PERFORMANCE COMPARISONS
Advertising and sales literature may include:

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

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

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

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

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

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

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

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

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

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

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

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

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

S&P 500/Barra Growth Index

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

S&P 500/Barra Value Index

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

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

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

<R>

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.

</R>

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2005
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Capital Appreciation Fund dated October 31, 2005.

INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS AAA--Highest credit
quality. 'AAA' ratings denote the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.

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

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

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

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 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.

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

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

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

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

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. .

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 CAPITAL APPRECIATION FUND

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

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

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

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

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

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

APPENDIX

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

CUSTODIAN
State Street Bank and Trust Company

SECURITIES LENDING AGENT
State Street Bank and Trust Company

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP

LEGAL COUNSEL

Dickstein Shapiro Morin & Oshinsky LLP
Reed Smith LLP

SERVICE PROVIDERS
Bloomberg
FactSet
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Vestek
Wilshire Associates, Inc.

SECURITY PRICING SERVICES
FT Interactive Data
Reuters

RATINGS AGENCIES
Standard & Poor's

PERFORMANCE REPORTING/PUBLICATIONS
Evaluation Associates
Fidelity-Strategic Advisors
Lipper, Inc.
Morningstar, Inc.
Morningstar Associates
NASDAQ
Thomson Financial
Value Line
Wiesenberger/Thomson Financial

OTHER
Investment Company Institute

Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

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December 31, 2005

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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

**Not FDIC Insured * May Lose Value * No Bank Guarantee**

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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?		20
Payments to Financial Intermediaries		21
How to Purchase Shares		24
How to Redeem and Exchange Shares		26
Account and Share Information		30
Who Manages the Fund?		33
Legal Proceedings		35
Financial Information		36

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Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

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

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

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

Risk/Return Bar Chart and Table

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

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

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The Fund’s Class A Shares total return for the nine-month period from January 1, 2005 to September 30, 2005 was 6.53%.

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

Average Annual Total Return Table

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

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(For the periods ended December 31, 2004)

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	1 Year	5 Years	10 Years

Class A Shares:¹

Return Before Taxes	8.02%	7.97%	13.09%

Return After Taxes on Distributions²	7.13%	5.67%	10.95%

Return After Taxes on Distributions and Sale of Fund Shares²	6.30%	5.87%	10.65%

Class B Shares¹	8.15%	8.42%	13.27%

Class C Shares¹	11.53%	8.45%	13.06%

RMGI³	15.48%	(3.36)%	11.23%

LMCGI⁴	14.03%	(6.07)%	9.68%

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

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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 for Class B and Class C Shares will differ from those shown above for Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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

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

What are the Fund’s Fees and Expenses?

FEDERATED KAUFMANN FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers and Reimbursement)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²	1.425%	1.425%	1.425%
Distribution (12b-1) Fee	0.250%³	0.750%	0.750%
Other Expenses⁴	0.470%	0.470%	0.470%
Total Annual Fund Operating Expenses	2.145%	2.645%⁵	2.645%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor and administrator waived and the shareholder services provider reimbursed certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2005.
Total Waivers and Reimbursement of Fund Expenses	0.215%	0.155%	0.155%
Total Actual Annual Fund Operating Expenses (after waivers and reimbursement)	1.930%	2.490%	2.490%
2 The Adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 1.280% for the fiscal year ended October 31, 2005.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund’s Class A Shares (after the voluntary waiver) was 0.210% for the fiscal year ended October 31, 2005.
4 Includes a shareholder services fee/account administration fee which is used to compensate intermediaries for shareholder services or account administration services. Also includes a recordkeeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein. The administrator voluntarily waived and the shareholder services provider reimbursed a portion of their fees. The administrator and shareholder services provider can terminate this voluntarily waiver and reimbursement at any time. Total other operating expenses paid by the Fund’s Class A, Class B and Class C Shares (after the voluntary waiver and reimbursement) were 0.440%, 0.460%, and 0.460%, respectively, for the fiscal year ended October 31, 2005.
5 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower expenses than Class B Shares.

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EXAMPLE

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

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

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$756	$1,185	$1,638	$2,891

Expenses assuming no redemption	$756	$1,185	$1,638	$2,891

Class B:

Expenses assuming redemption	$818	$1,222	$1,603	$2,858

Expenses assuming no redemption	$268	$822	$1,403	$2,858

Class C:

Expenses assuming redemption	$465	$914	$1,489	$3,049

Expenses assuming no redemption	$365	$914	$1,489	$3,049

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What are the Fund’s Investment Strategies?

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

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

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

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

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

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

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

HEDGING

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

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

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer’s earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. However, equity securities offer greater potential for appreciation than many other types of securities, because their value increases directly with the value of the issuer’s business. The following describes the principal types of equity securities in which the Fund may invest:

Common Stocks

FOREIGN SECURITIES

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

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

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

ILLIQUID SECURITIES

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.

FIXED INCOME SECURITIES

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

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

Treasury Securities

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

SPECIAL TRANSACTIONS

Securities Lending

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

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

Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker. Securities lending activities are subject to interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

RISKS RELATED TO INVESTING FOR GROWTH

Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. For instance, the price of a growth stock may experience a larger decline on a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends than value stocks. This means they depend more on price changes for returns and may be more adversely affected in a down market compared to value stocks that pay higher dividends.

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

LIQUIDITY RISKS

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

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

RISKS OF FOREIGN INVESTING

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

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

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

CURRENCY RISKS

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

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

CREDIT RISKS

Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.

LEVERAGE RISKS

INTEREST RATE RISKS

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

What Do Shares Cost?

You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund’s current NAV and public offering price may be found in the mutual funds section of certain local newspapers under “Federated.”

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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.

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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.

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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	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges

Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

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

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

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

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

3 See “Sales Charge When You Redeem.”

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SALES CHARGE WHEN YOU PURCHASE

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The following tables list the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the tables and described below.

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Class A Shares:

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

Less than $50,000	5.50%	5.82%

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

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

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

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

$1 million or greater¹	0.00%	0.00%

Class C Shares:

All Purchases	1.00%	1.01%

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REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

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

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

Larger Purchases

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

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Concurrent and Accumulated Purchases

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

Letter of Intent

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signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months. (Call your financial intermediary or the Fund for more information.) The Fund’s custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases.

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ELIMINATING THE SALES CHARGE

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

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within 120 days of redeeming Shares of an equal or greater amount;

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through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only); or

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as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or

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pursuant to the exchange privilege.

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SALES CHARGE WHEN YOU REDEEM

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

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

Shares that are not subject to a CDSC; and
Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund).

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

Class A Shares:

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

Class B Shares:

Shares Held Up To:		CDSC

1 Year		5.50%

2 Years		4.75%

3 Years		4.00%

4 Years		3.00%

5 Years		2.00%

6 Years		1.00%

7 Years or More		0.00%

Class C Shares:

You will pay a 1% CDSC if you redeem Shares within 12 months of the purchase date.

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

following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);
representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;

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purchased by Trustees or employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;

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purchased through a financial intermediary that did not receive an advance commission on the purchase;

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purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;

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purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); or

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Class B Shares only:

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

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 A Shares, Class B Shares, and Class C Shares. All Share classes have different sales charges and other expenses which affect their performance. Contact your 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 to institutions on behalf of their customers or to individuals, directly or through financial intermediaries. If your Under the Distributor’s Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

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Payments to Financial Intermediaries

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FRONT-END SALES CHARGE REALLOWANCES

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When a financial intermediary’s customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows:

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Class A Shares:

Purchase Amount		Dealer Reallowance as a Percentage of Public Offering Price

Less than $50,000		5.00%

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

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

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

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

$1 million or greater		0.00%

Class C Shares:

All Purchase Amounts		1.00%

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ADVANCE COMMISSIONS

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When a financial intermediary’s customer purchases Shares, the financial intermediary may receive an advance commission as follows:

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Class A Shares (for purchases over $1 million):

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

First $1 million - $5 million		0.75%

Next $5 million - $20 million		0.50%

Over $20 million		0.25%

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Class B Shares:

		Advance Commission as a Percentage of Public Offering Price

All Purchase Amounts		Up to 5.50%

Class C Shares:

All Purchase Amounts		1.00%

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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 0.25% for Class A Shares, 0.75% for Class B Shares and Class C Shares of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund’s Class A Shares, Class B Shares, and Class C 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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SERVICE FEES

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ACCOUNT ADMINISTRATION FEES

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RECORDKEEPING FEES

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NETWORKING FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

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How to Purchase Shares

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THROUGH A 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 three business days. 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.

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

By Wire

Send your wire to:

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

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

By Check

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

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

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

The Federated Funds 66 Brooks Drive Braintree, MA 02184

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

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BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

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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.

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THROUGH A 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.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

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

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

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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.

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder’s trade activity or amount adversely impacts the Fund’s ability to manage its assets.

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

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REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

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

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

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

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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Generally, it is not advisable to continue to purchase Class A Shares or Class C Shares subject to a sales charge while redeeming Shares using this program.

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Systematic Withdrawal Program (SWP) On Class B Shares

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

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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The Fund no longer issues share certificates.

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Account and Share Information

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CONFIRMATIONS AND ACCOUNT STATEMENTS

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DIVIDENDS AND CAPITAL GAINS

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ACCOUNTS WITH LOW BALANCES

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TAX INFORMATION

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

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FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund’s fair valuation procedures are intended in part to discourage short-term trading 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 twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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PORTFOLIO HOLDINGS INFORMATION

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Who Manages the Fund?

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The Adviser has delegated daily management of some of the Fund assets to the Sub-Adviser, Federated Global Investment Management Corp., who is paid by the Adviser and not by the Fund, based on the portion of securities the Sub-Adviser manages. The Sub-Adviser’s address is 450 Lexington Avenue, Suite 3700, New York, NY 10017-3943.

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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.

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PORTFOLIO MANAGEMENT INFORMATION

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Lawrence Auriana

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

Hans P. Utsch

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

Jonathan Art

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

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Mark Bauknight

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Mark Bauknight has been a Portfolio Manager of the Fund since October 2003. Mr. Bauknight was an investment analyst with Edgemont Asset Management Corp., Adviser to the Kaufmann Fund (predecessor to the Federated Kaufmann Fund) from 1997 to 2001. He has been an investment analyst with the Fund’s current Adviser since April 2001. Mr. Bauknight earned a B.A. in Economics and a B.A. in Political Science from the University of North Carolina at Chapel Hill and an M.B.A. from the University of Oxford.

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

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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.

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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.

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Legal Proceedings

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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 intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, 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, 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

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

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

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Financial Highlights–Class A Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31		2005			2004			2003			2002		Period Ended 10/31/2001		¹

Net Asset Value, Beginning of Period		$5.11			$4.90			$3.54			$4.23			$4.33
Income From Investment Operations:
Net investment income (loss)		(0.05	)²		(0.06	)²		(0.06	)²		(0.05	)^2,3		(0.02	)²
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions		0.74			0.31			1.42			(0.28	)³		(0.08	)

TOTAL FROM INVESTMENT OPERATIONS		0.69			0.25			1.36			(0.33	)		(0.10	)

Less Distributions:
Distributions from net realized gain on investments, options and foreign currency transactions		(0.29	)		(0.04	)		--			(0.36	)		--

Net Asset Value, End of Period		$5.51			$5.11			$4.90			$3.54			$4.23

Total Return⁴		14.05	%		5.24	%⁵		38.42	%		(8.90	)%		(2.31	)%


Ratios to Average Net Assets:

Net expenses		1.93	%		1.95	%		1.95	%		1.95	%		1.95	%⁶

Net investment income (loss)		(1.00	)%		(1.29	)%		(1.45	)%		(1.25	)%³		(0.93	)%⁶

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

Supplemental Data:

Net assets, end of period (000 omitted)	$2,166,468			$1,172,380			$1,191,117			$435,500			$85,169

Portfolio turnover		71	%		73	%		72	%		65	%		74	%

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

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

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

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

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

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6 Computed on an annualized basis.

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

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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Financial Highlights–Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31		2005			2004			2003			2002		Period Ended 10/31/2001		¹

Net Asset Value, Beginning of Period		$5.02			$4.84			$3.52			$4.22			$4.33
Income From Investment Operations:
Net investment income (loss)		(0.08	)²		(0.09	)²		(0.08	)²		(0.07	)^2,3		(0.03	)²
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions		0.73			0.31			1.40			(0.27	)³		(0.08	)

TOTAL FROM INVESTMENT OPERATIONS		0.65			0.22			1.32			(0.34	)		(0.11	)

Less Distributions:
Distributions from net realized gain on investments, options and foreign currency transactions		(0.29	)		(0.04	)		--			(0.36	)		--

Net Asset Value, End of Period		$5.38			$5.02			$4.84			$3.52			$4.22

Total Return⁴		13.47	%		4.68	%⁵		37.50	%		(9.20	)%		(2.54	)%


Ratios to Average Net Assets:

Net expenses		2.49	%		2.50	%		2.50	%		2.47	%		2.47	%⁶

Net investment income (loss)		(1.56	)%		(1.84	)%		(2.01	)%		(1.77	)%³		(1.45	)%⁶

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

Supplemental Data:

Net assets, end of period (000 omitted)	$1,102,133			$993,477			$782,171			$427,175			$68,902

Portfolio turnover		71	%		73	%		72	%		65	%		74	%

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

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

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

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6 Computed on an annualized basis.

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

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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Financial Highlights–Class C Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31		2005			2004			2003			2002		Period Ended 10/31/2001		¹

Net Asset Value, Beginning of Period		$5.02			$4.84			$3.52			$4.22			$4.33
Income From Investment Operations:
Net investment income (loss)		(0.08	)²		(0.09	)²		(0.08	)²		(0.07	)^2,3		(0.03	)²
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions		0.73			0.31			1.40			(0.27	)³		(0.08	)

TOTAL FROM INVESTMENT OPERATIONS		0.65			0.22			1.32			(0.34	)		(0.11	)

Less Distributions:
Distributions from net realized gain on investments, options and foreign currency transactions		(0.29	)		(0.04	)		--			(0.36	)		--

Net Asset Value, End of Period		$5.38			$5.02			$4.84			$3.52			$4.22

Total Return⁴		13.47	%		4.68	%⁵		37.50	%		(9.20	)%		(2.54	)%


Ratios to Average Net Assets:

Net expenses		2.49	%		2.50	%		2.50	%		2.47	%		2.47	%⁶

Net investment income (loss)		(1.56	)%		(1.84	)%		(2.00	)%		(1.77	)%³		(1.45	)%⁶

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

Supplemental Data:

Net assets, end of period (000 omitted)	$724,468			$554,799			$337,765			$127,714				$16,234

Portfolio turnover		71	%		73	%		72	%		65	%		74	%

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

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

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6 Computed on an annualized basis.

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

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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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.

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Federated Investors
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2005 © Federated Investors, Inc.

Cusip 314172677
Cusip 314172669
Cusip 314172651

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26103 (12/05)

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Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

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December 31, 2005

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CLASS K SHARES

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

**Not FDIC Insured * May Lose Value * No Bank Guarantee**

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Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		5
What are the Fund’s Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		10
What Do Shares Cost?		12
How is the Fund Sold?		15
Payments to Financial Intermediaries		15
How to Purchase Shares		17
How to Redeem and Exchange Shares		19
Account and Share Information		22
Who Manages the Fund?		25
Legal Proceedings		27
Financial Information		28

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Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

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

Risk/Return Bar Chart and Table

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The Fund is the successor to The Kaufmann Fund, Inc. (Kaufmann Fund) pursuant to a reorganization that took place effective April 23, 2001. Prior to that date, the Fund had no investment operations. Accordingly, the performance information and financial information provided in this prospectus for periods prior to April 20, 2001, is historical information of The Kaufmann Fund. The Kaufmann Fund was managed by Edgemont Asset Management Corp. and had the same investment objectives and strategies as the Fund and substantially the same investment policies as the Fund. Kaufmann Fund shareholders received Class K Shares of the Fund as a result of the reorganization.

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

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

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The Fund’s Class K Shares total return for the nine-month period from January 1, 2005 to September 30, 2005 was 6.53%.

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

Average Annual Total Return Table

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

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(For the periods ended December 31, 2004)

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	1 Year	5 Years	10 Years

Class K Shares:

Return Before Taxes	14.06%	9.23%	13.91%

Return After Taxes on Distributions¹	13.13%	6.91%	11.75%

Return After Taxes on Distributions and Sale of Fund Shares¹	10.30%	6.97%	11.41%

RMGI²	15.48%	(3.36)%	11.23%

LMCGI³	14.03%	(6.07)%	9.68%

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

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

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

What are the Fund’s Fees and Expenses?

FEDERATED KAUFMANN FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		1.425%
Distribution (12b-1) Fee³		0.500%
Other Expenses⁴		0.480%
Total Annual Fund Operating Expenses		2.405%


1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant, and at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor and administrator waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2005.
Total Waivers of Fund Expenses		0.455%
Total Actual Annual Fund Operating Expenses (after waivers)		1.950%
2 The adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time, provided it limits the total net expenses of Class K Shares as described above. The management fee paid by the Fund (after the voluntary waiver) was 1.280% for the fiscal year ended October 31, 2005.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund’s Class K Shares (after the voluntary waiver) was 0.200% for the fiscal year ended October 31, 2005.
4 Includes an account administrative fee which is used to compensate intermediaries for account administrative services. Also includes a recordkeeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein. The administrator voluntarily waived a portion of its fee. The administrator can terminate this voluntarily waiver at any time. Total other operating expenses paid by the Fund’s Class K Shares (after the voluntary waiver) were 0.470% for the fiscal year ended October 31, 2005.

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EXAMPLE

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

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

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Share Class	1 Year	3 Years	5 Years	10 Years

Class K Shares:

Expenses assuming redemption	$264	$770	$1,303	$2,761

Expenses assuming no redemption	$244	$750	$1,283	$2,741

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What are the Fund’s Investment Strategies?

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

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

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

HEDGING

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

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Common Stocks

FOREIGN SECURITIES

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

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

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

ILLIQUID SECURITIES

FIXED INCOME SECURITIES

Treasury Securities

SPECIAL TRANSACTIONS

Securities Lending

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

Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker. Securities lending activities are subject to interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

RISKS RELATED TO INVESTING FOR GROWTH

RISKS RELATED TO COMPANY SIZE

SECTOR RISKS

LIQUIDITY RISKS

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

RISKS OF FOREIGN INVESTING

CURRENCY RISKS

CREDIT RISKS

LEVERAGE RISKS

INTEREST RATE RISKS

What Do Shares Cost?

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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 does not charge a front-end sales charge on Class K Shares. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open.

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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 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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Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charge		Redemption/ Exchange Fee

		Front-End Sales Charge	Contingent Deferred Sales Charge

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

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FEE WHEN YOU REDEEM OR EXCHANGE

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

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

How is the Fund Sold?

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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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Class K Shares of the Fund are only offered for sale to and may be purchased by former shareholders of the Kaufmann Fund, and their immediate family members, through the financial intermediary relationships that existed for the Kaufmann Fund, and through financial intermediaries investing on behalf of retirement plans where plan level omnibus accounts are held on the books of the Fund. Such retirement plans include 401(k) plans, 457 plans, employer sponored 403 (b) plans, profit sharing and money purchase pension plans, defined benefit plans, non-qualified deferred compensation plans and IRA Rollovers. The Kaufmann Fund is the Fund’s predecessor.

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When the Fund’s Distributor, Federated Securities Corp., receives marketing fees, it may pay some or all of them to financial intermediaries. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

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Payments to Financial Intermediaries

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RULE 12B-1 FEES

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SERVICE FEES

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ACCOUNT ADMINISTRATION FEES

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RECORDKEEPING FEES

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NETWORKING FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

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How to Purchase Shares

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THROUGH A 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.

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

By Wire

Send your wire to:

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

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

By Check

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

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

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

The Federated Funds 66 Brooks Drive Braintree, MA 02184

THROUGH AN EXCHANGE

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You may purchase Shares through an exchange from Class K Shares 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

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BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

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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.

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THROUGH A 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.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

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

Send requests by private courier or overnight delivery service to:

The Federated Funds 66 Brooks Drive Braintree, MA 02184

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

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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.

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder’s trade activity or amount adversely impacts the Fund’s ability to manage its assets.

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

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REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

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You may exchange Shares of the Fund into Class A Shares or Class K Shares of another Federated fund. To do this, you must:

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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.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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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

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CONFIRMATIONS AND ACCOUNT STATEMENTS

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DIVIDENDS AND CAPITAL GAINS

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If you purchase Shares just before the record date for a 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 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

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TAX INFORMATION

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

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FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. As described above, the Fund imposes a fee on redemptions or exchanges of Class K Shares. See “What Do Shares Cost?” The Fund 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 twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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

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PORTFOLIO HOLDINGS INFORMATION

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Who Manages the Fund?

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PORTFOLIO MANAGEMENT INFORMATION

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Lawrence Auriana

Hans P. Utsch

Jonathan Art

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Mark Bauknight

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

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ADVISORY FEES

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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.

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Legal Proceedings

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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 intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, 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, 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

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

Financial Highlights

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(For a Share Outstanding Throughout Each Period)

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Year Ended October 31	2005		2004	³	2003		2002		Period Ended 10/31/2001		^1,2	Year Ended 12/31/2000

Net Asset Value, Beginning of Period	$5.11		$4.90		$3.54		$4.23			$4.43			$5.95
Income From Investment Operations:
Net investment income (loss)	(0.05	)⁴	(0.06	)⁴	(0.06	)⁴	(0.05	)^4,⁵		(0.03	)⁴		(0.05	)
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.75		0.31		1.42		(0.28	)⁴		(0.17	)		0.76

TOTAL FROM INVESTMENT OPERATIONS	0.70		0.25		1.36		(0.33	)		(0.20	)		0.71

Less Distributions:
Distributions from net realized gain on investments, options and foreign currency transactions	(0.29	)	(0.04)		--		(0.36	)		--			(2.23	)

Net Asset Value, End of Period	$5.52		$5.11		$4.90		$3.54			$4.23			$4.43

Total Return⁶	14.25	%	5.24	%⁷	38.42	%	(8.92	)%		(4.51	)%		10.86	%


Ratios to Average Net Assets:

Net expenses	1.95	%	1.95	%	1.95	%	1.95	%		1.95	%⁸		1.89	%

Net investment income (loss)	(1.01	)%	(1.29)	%	(1.46	)%	(1.25	)%⁴		(0.48	)%⁸		(0.80	)%

Expense waiver/reimbursement⁹	0.45	%	0.47	%	0.52	%	0.45	%		0.30	%⁸		0.12	%

Supplemental Data:

Net assets, end of period (000 omitted)	$3,856,427	$3,534,720		$3,494,765		$2,603,263			$3,018,540			$3,367,994

Portfolio turnover	71	%	73	%	72	%	65	%		74	%		78	%

Redemption fees consisted of the following per share amounts¹⁰	$0.00	¹¹	$0.00	¹¹	$0.00	¹¹	$0.00	¹¹		$0.00	¹¹		--

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

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2 Beginning with the period ended October 31, 2001, the Fund was audited by Ernst & Young LLP. Each of the previous years was audited by other another independent registered public accounting firm.

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3 Effective January 1, 2004 Federated Equity Management Company of Pennsylvania became the Fund’s investment adviser.

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

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

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

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7 During the period, the Fund was reimbursed by the Adviser, which had an impact of 0.21% on total returns.

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8 Computed on an annualized basis.

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

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

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11 Represents less than $0.01.

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Further Information about the Fund’s performance is contained in the Annual Report, dated October 31, 2005, which can be obtained free of charge.

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A Statement of Additional Information (SAI) dated December 31, 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 Annual Report’s Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. The SAI contains a description of the Fund’s policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your 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.

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Federated Investors
World-Class Investment Manager

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Federated Kaufmann Fund

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

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017

Federated is a registered mark of Federated Investors, Inc.
2005 © Federated Investors, Inc.

Cusip 314172644

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26104 (12/05)

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FEDERATED KAUFMANN FUND
A Portfolio of Federated Equity Funds

STATEMENT OF ADDITIONAL INFORMATION
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DECEMBER 31, 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 prospectuses for Class A, Class B, Class C and Class
K Shares of Federated Kaufmann Fund (Fund), dated December 31, 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 [GRAPHIC OMITTED][GRAPHIC OMITTED]

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?.............................9
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How is the Fund Sold?...........................11
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Exchanging Securities for Shares................13
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Subaccounting Services..........................13
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Redemption in Kind [GRAPHIC OMITTED][GRAPHIC OMITTED]13
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Massachusetts Partnership Law...................13
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Account and Share Information...................14
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Tax Information.................................14
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Who Manages and Provides Services to the Fund?..15
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How Does the Fund Measure Performance?..........26
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Who is Federated Investors, Inc.?...............27
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Financial Information...........................28
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Investment Ratings..............................28
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Addresses.........................................
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Appendix..........................................
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[GRAPHIC OMITTED][GRAPHIC OMITTED]

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HOW IS THE FUND ORGANIZED?

The Fund is the successor to the Kaufmann Fund, Inc. (Kaufmann Fund) pursuant to
a reorganization that took place on or about April 20, 2001. Prior to that date,
the Fund had no investment operations. Accordingly, the performance information
and financial information provided in the prospectus and this SAI for periods
prior to April 20, 2001, is historical information of the Kaufmann Fund. The
Kaufmann Fund was managed by Edgemont Asset Management Corp. (Edgemont) and had
the same investment objectives and strategies as the Fund and substantially the
same investment policies as the Fund. Kaufmann Fund shareholders received Class
K Shares of the Fund as a result of the reorganization.

The Board of Trustees (the "Board") has established four classes of shares of
the Fund, known as Class A, Class B, Class C and Class K (Shares). This SAI
relates to all classes of Shares. The Fund's investment adviser is Federated
Equity Management Company of Pennsylvania and the Fund's sub-adviser is
Federated Global Investment Management Corp. (collectively, the Adviser).

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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

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

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

INTERESTS IN OTHER LIMITED LIABILITY COMPANIES
Entities such as limited partnerships, limited liability companies, business
trusts and companies organized outside the United States may issue securities
comparable to common or preferred stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by a
foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are not traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs), and International Depositary
Receipts (IDRs), are traded globally or outside the United States. Depositary
receipts involve many of the same risks of investing directly in foreign
securities, including currency risks and risks of foreign investing.

FOREIGN EXCHANGE CONTRACTS
In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivative contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivative contracts may be higher or lower than the spot exchange rate. Use of
these derivative contracts may increase or decrease the Fund's exposure to
currency risks.

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

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

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, exchange traded funds, portfolio
securities, index futures, currencies (both foreign and U.S. dollar) and
financial futures to generate income from premiums, and in anticipation of
a decrease or only limited increase in the value of the underlying asset.
If a call written by the Fund is exercised, the Fund foregoes any possible
profit from an increase in the market price of the underlying asset over
the exercise price plus the premium received.

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

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

o Write put options on indices, portfolio securities, index futures,
currencies (both foreign and U.S. dollar) and financial futures to
generate income from premiums, and in anticipation of an increase or only
limited decrease in the value of the underlying asset. In writing puts,
there is a risk that the Fund may be required to take delivery of the
underlying asset when its current market price is lower than the exercise
price.

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

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.

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

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

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

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

SPECIAL TRANSACTIONS

Repurchase Agreements
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed-upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

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.

Securities lending activities are subject to interest rate risks and credit
risks. These transactions may create leverage risks.

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

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 maturing in more than seven days, and
securities eligible for resale under Rule 144A of the Securities Act of 1933
("1933 Act"). Rule 144A allows certain qualified institutional investors to
trade privately placed securities despite the fact that such securities are not
registered under the 1933 Act. In deciding whether to purchase such securities,
the Fund, acting pursuant to guidelines approved by the Board, will consider the
frequency of such trades and quotes, the number of dealers and potential
purchasers, dealer undertakings to make a market, the nature of the securities
and the marketplace trades.

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

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

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

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.

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

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

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

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

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

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

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

Credit Risks
o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.

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

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

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

INVESTMENT LIMITATIONS

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

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

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

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

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

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

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

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

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

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

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

The Fund is prohibited from investing in other registered investment companies
in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act.

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

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

For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." Except with
respect to borrowing money, if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such limitation.

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

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

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

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

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TRADING IN FOREIGN SECURITIES

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

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WHAT DO SHARES COST?

The Fund's per Share fluctuates and is based on the market value of all
securities and other assets of the Fund.

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

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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.

RULE 12b-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor for activities principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses and sales literature to prospective shareholders and financial
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.

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 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 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.

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, Class C Shares and Class K Shares of the Fund and the amount retained
by the Distributor for the last three fiscal years ended October 31, 2005:

2005 2004 2003
Total Sales Total Sales
Charges Amount Retained Charges Amount ---------------- --------------
Retained Total Sales Amount
Charges Retained
Class A Shares $9,780,075 $990,541 $13,435,912 $1,344,6430 $6,218,171 $615,194
Class B Shares $1,801,457 $0 $2,364,019 $0 $1,878,270 $0
Class C Shares $370,695 $38,640 $1,052,877 $84,174 $780,794 $41,532
Class K Shares $0 $0 $0 $0 $0 $0

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EXCHANGING SECURITIES FOR SHARES

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SUBACCOUNTING SERVICES

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REDEMPTION IN KIND

MASSACHUSETTS PARTNERSHIP LAW

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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.

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class A Shares: Edward Jones &
Co., Maryland Heights, MO, owned approximately 74,307,653 Shares (17.70%) and
MLPF&S, Jacksonville, FL, owned approximately 27,029,538 (6.45%).

As of December 5, 2005,the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class B Shares: Pershing LLC, Jersey City,
NJ, owned approximately 25,223, 794 Shares (11.73%), Citigroup Global Markets
LLC, New York, NY, owned approximately 14,326,542 Shares (6.66%) and Edward
Jones & Co., Maryland Heights, Co., owned approximately 13,821,930 Shares
(6.43%).

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class C Shares: MLPFS,
Jacksonville, FL, owned approximately 31,616,523 Shares (22.06%), Citigroup
Global Markets Inc., New York, NY, owned approximately 19,117,713 Shares
(13.34%) and Legg Mason Wood Walker Inc., Baltimore, MD, owned approximately
11,042,882 Shares (7.70)

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class K Shares: Charles Schwab
& Co. Inc., San Francisco, CA, owned approximately 86,967,219 Shares (11.88%)
and National Financial Services, New York, NY, owned approximately 52,906,158
Shares (7.23%).

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TAX INFORMATION

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

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<R>

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 nine
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 5, 2005, the Fund's Board and Officers as a group owned less than
1% of each class of the Fund's outstanding Class A Shares, Class B Shares, Class
C Shares and Class K Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

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

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

J. Christopher Donahue* Principal Occupations: Principal $0 $0
Birth Date: April 11, Executive Officer and President of
1949 the Federated Fund Complex;
PRESIDENT AND TRUSTEE Director or Trustee of some of the
Began serving: January Funds in the Federated Fund
2000 Complex; President, Chief
Executive Officer 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.

Lawrence D. Ellis, Principal Occupations: Director or $5,170.42 $148,500
M.D.* Trustee of the Federated Fund
Birth Date: October Complex; Professor of Medicine,
11, 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
Began serving: August Pittsburgh 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

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

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

Name ------------------------------------ Total Compensation
Birth Date Aggregate From Trust and
Address Compensation Federated Fund
Positions Held with Trust Principal Occupation(s) for Past From Fund Complex
Date Service Began Five Years, (past fiscal (past calendar year)
Other Directorships Held and year)
Previous Position(s)
Thomas G. Bigley Principal Occupation: Director or $5,687.44 $163,350
Birth Date: February 3, Trustee of the Federated Fund
1934 Complex.
15 Old Timber Trail
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Member of Executive Committee,
Began serving: October Children's Hospital of Pittsburgh;
1995 Director, University of Pittsburgh.

Previous Position: Senior Partner,
Ernst & Young LLP.

John T. Conroy, Jr. Principal Occupations: Director or $5,687.44 $163,350
Birth Date: June 23, 1937 Trustee of the Federated Fund
Investment Properties Complex; Chairman of the Board,
Corporation Investment Properties Corporation;
3838 North Tamiami Trail Partner or Trustee in private real
Suite 402 estate ventures in Southwest
Naples, FL Florida.
TRUSTEE
Began serving: November Previous Positions: President,
1991 Investment Properties Corporation;
Senior Vice President, John R. Wood
and Associates, Inc., Realtors;
President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Nicholas P. Constantakis Principal Occupation: Director or $5,687.44 $163,350
Birth Date: September 3, Trustee of the Federated Fund
1939 Complex.
175 Woodshire Drive
Pittsburgh, PA Other Directorships Held: Director
TRUSTEE and Member of the Audit Committee,
Began serving: February Michael Baker Corporation
1998 (engineering and energy services
worldwide).

Previous Position: Partner,
Andersen Worldwide SC.

John F. Cunningham Principal Occupation: Director or $5,170.42 $148,500
Birth Date: March 5, 1943 Trustee of the Federated Fund
353 El Brillo Way Complex.
Palm Beach, FL
TRUSTEE Other Directorships Held: Chairman,
Began serving: January President and Chief Executive
1999 Officer, Cunningham & Co., Inc.
(strategic business consulting);
Trustee Associate, Boston College.

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

Peter E. Madden Principal Occupation: Director or $5,170.42 $148,500
Birth Date: March 16, 1942 Trustee of the Federated Fund
One Royal Palm Way Complex.
100 Royal Palm Way
Palm Beach, FL Other Directorships Held: Board of
TRUSTEE Overseers, Babson College.
Began serving: November
1991 Previous Positions: Representative,
Commonwealth of Massachusetts General Court;
President, State Street Bank and Trust Company and
State Street Corporation (retired); Director, VISA
USA and VISA International; Chairman and Director,
Massachusetts Bankers Association; Director,
Depository Trust Corporation; Director, The Boston
Stock Exchange.

Charles F. Mansfield, Jr. Principal Occupations: Director or $5,687.44 $163,350
Birth Date: April 10, 1945 Trustee of the Federated Fund
80 South Road Complex; Management Consultant;
Westhampton Beach, NY Executive Vice President, DVC
TRUSTEE Group, Inc. (marketing,
Began serving: January communications and technology)
1999 (prior to 9/1/00).

Previous Positions: Chief Executive Officer, PBTC
International Bank; Partner, Arthur Young &
Company (now Ernst & Young LLP); Chief Financial
Officer of Retail Banking Sector, Chase Manhattan
Bank; Senior Vice President, HSBC Bank USA
(formerly, Marine Midland Bank); Vice President,
Citibank; Assistant Professor of Banking and
Finance, Frank G. Zarb School of Business, Hofstra
University.

John E. Murray, Jr., Principal Occupations: Director or $6,204.49 $178,200
J.D., S.J.D. Trustee of the Federated Fund
Birth Date: December 20, Complex; Chancellor and Law
1932 Professor, Duquesne University;
Chancellor, Duquesne Partner, Murray, Hogue & Lannis.
University
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Michael Baker Corp. (engineering,
Began serving: February construction, operations and
1995 technical services).

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

Marjorie P. Smuts Principal Occupations: Director or $5,170.42 $148,500
Birth Date: June 21, 1935 Trustee of the Federated Fund
4905 Bayard Street Complex; Public Relations/Marketing
Pittsburgh, PA Consultant/Conference Coordinator.
TRUSTEE
Began serving: April 1984 Previous Positions: National
Spokesperson, Aluminum Company of
America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

John S. Walsh Principal Occupations: Director or $5,170.42 $148,500
Birth Date: November 28, Trustee of the Federated Fund
1957 Complex; President and Director,
2604 William Drive Heat Wagon, Inc. (manufacturer of
Valparaiso, IN construction temporary heaters);
TRUSTEE President and Director,
Began serving: January Manufacturers Products, Inc.
1999 (distributor of portable
construction heaters); President,
Portable Heater Parts, a division
of Manufacturers Products, Inc.

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

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

OFFICERS**

Name
Birth Date
Address
Positions Held with Trust
---------------------------------- Principal Occupation(s) and Previous Position(s)
Date Service Began
John W. McGonigle Principal Occupations: Executive Vice President and
Birth Date: October 26, 1938 Secretary of the Federated Fund Complex; Vice Chairman,
EXECUTIVE VICE PRESIDENT AND Executive Vice President, Secretary and Director,
SECRETARY Federated Investors, Inc.
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.

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

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

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

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

Lawrence Auriana Lawrence Auriana has been the Fund's Portfolio Manager
Birth Date: January 8, 1944 since February 1986.He is Vice President of the Trust. Mr.
VICE PRESIDENT Auriana joined Federated in April 2001 as Co-Head of
Began serving: November 2001 Investments/Federated Kaufmann. From August 1984 to April
2001, Mr. Auriana was President and Treasurer of Edgemont
Asset Management Corp., and Chairman of the Board and
Portfolio Manager to The Kaufmann Fund, Inc. (predecessor
to the Federated Kaufmann Fund). Mr. Auriana earned a B.S.
in economics from Fordham University and has been engaged
in the securities business since 1965.

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

Hans P. Utsch Hans P. Utsch has been the Fund's Portfolio Manager since
Birth Date: July 3, 1936 February 1986. He is Vice President of the Trust. Mr.
VICE PRESIDENT Utsch joined Federated in April 2001 as Co-Head of
Began serving: November 2001 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.

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

COMMITTEES OF THE BOARD

Meetings Held
Board Committee Committee During Last
Members Committee Functions Fiscal Year
Executive John F. Donahue In between meetings of the full Board, the Six
John E. Murray, Executive Committee generally may exercise
Jr., 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 Nine
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 the
Mansfield, Jr. 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

-------------------
Dollar Range of Aggregate
----------------------------- Shares Owned Dollar Range of
---- in Federated ------ Shares Owned in
Interested ------------------- Federated Family of
Board Member Name Kaufmann Fund Investment
Companies
John F. Donahue Over $100,00 Over $100,000
J. Christopher Donahue Over $100,00 Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

Independent
Board Member Name
Thomas G. Bigley $10,001-$50,000 Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis $50,001-$100,000 Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, Jr. None Over $100,000
John E. Murray, Jr., J.D., None Over $100,000
S.J.D.
Marjorie P. Smuts $10,001-$50,000 Over $100,000
John S. Walsh $10,001-$50,000 Over $100,000
</R>
--------------------------------------------------------------------------------------

<R>

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

The Adviser is a wholly owned subsidiary of Federated.

Portfolio Manager Information
The following information about the Fund's Portfolio Manager is provided as of
the end of the Fund's most recently completed fiscal year.'

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

Other Accounts Managed by Lawrence Total Number of Other Accounts Managed /
Auriana Total Assets*

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

Registered Investment Companies 2 funds / $724.99 million
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------

Other Pooled Investment Vehicles 0
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------

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: over $1,000,000.

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.

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

Other Accounts Managed by Hans Utsch Total Number of Other Accounts Managed /
Total Assets*
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

Registered Investment Companies 1 fund / $ 640.50 million
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

Other Pooled Investment Vehicles 0
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

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: $100,001-$500,000.

Hans 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.

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

Other Accounts Managed by Jonathan Art Total Number of Other Accounts Managed /
Total Assets*
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------

Registered Investment Companies 0
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------

Other Pooled Investment Vehicles 0
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------

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: $100,001-$500,000.

Jonathan Art 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. Additionally, Mr. Art provides research and
analytical support for other accounts. Investment performance is calculated with
an equal weighting of each account he manages or for which he provides research
and analytical support. As a separate matter, pursuant to the terms of a
business acquisition agreement, Mr. Art may receive additional consideration
based on the achievement of specified revenue growth.

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

Other Accounts Managed by Mark Bauknight Total Number of Other Accounts Managed / Total
Assets*
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------

Registered Investment Companies 0
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------

Other Pooled Investment Vehicles 0
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------

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: $100,001-$500,000.

Mark Bauknight 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. Additionally, Mr. Bauknight provides research
and analytical support for other accounts. Investment performance is calculated
with an equal weighting of each account he manages or for which he provides
research and analytical support. As a separate matter, pursuant to the terms of
a business acquisition agreement, Mr. Bauknight may receive additional
consideration based on the achievement of specified revenue growth.

</R>

CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING

<R>

</R>

<R>

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.

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 October 31 2005, the Fund's Adviser directed brokerage transactions to
certain brokers due to research services they provided. The total amount of
these transactions was $7,085,580,860 for which the Fund paid $16,338,629 in
brokerage commissions.

</R>

Kaufmann Fund Affiliated Brokerage
As permitted by Section 17(e) of the 1940 Act and Rule 17e-1 there under,
Bowling Green Securities ("Bowling Green") acted as a broker to the Kaufmann
Fund (prior to its reorganization into the Fund) in connection with the sale of
various securities traded on an exchange. Bowling Green was an affiliate of
Messrs. Utsch and Auriana; Hans P. Utsch was the sole shareholder of Bowling
Green and Lawrence Auriana was a registered representative thereof. Pursuant to
conditions and procedures adopted by the Board of Directors of the Kaufmann
Fund, in accordance with Rule 17e-1, the Kaufmann Fund's investment adviser was
required to ascertain that any commissions, fees or other remuneration paid to
Bowling Green were reasonable and fair compared to those of other brokers in
connection with transactions involving similar securities purchased or sold on a
securities exchange during a comparable period of time. Bowling Green does not
act as a broker to the Fund.

Bowling Green was required to provide regular brokerage services to the Kaufmann
Fund at competitive rates that are in accordance with Section 11(a) of the
Securities Exchange Act of 1934. The SEC is authorized to regulate or prohibit
broker/dealers such as Bowling Green from effecting transactions in securities
owned by an account such as the Kaufmann Fund, over which the principals of
Bowling Green have investment discretion. Bowling Green could not buy or sell
portfolio securities as a principal from or to the Kaufmann Fund. The Kaufmann
Fund was also permitted to purchase underwritten securities during the existence
of an underwriting syndicate of which Bowling Green was a member, subject to
restrictions of applicable law and the Kaufmann Fund's policies.

The Board of the Kaufmann Fund received quarterly reports, prepared by the
Kaufmann Fund's independent public accountants, to review the exchange trades
executed by Bowling Green at the end of each quarter, and reviewed the
appropriateness of the conditions and procedures on an annual basis.

The affiliations of Hans P. Utsch and Lawrence E. Auriana as: (1) a Director and
Officer of the Kaufmann Fund; (2) a 50% Shareholder and Officer of Edgemont; and
(3) a sole shareholder (Mr. Utsch) and affiliate (Mr. Auriana) of Bowling Green;
created, for each of them, an inherent potential conflict of interest. The
Kaufmann Fund's Directors, who are not interested persons, were aware of these
potential conflicts and did not perceive them as detrimental to the Kaufmann
Fund.

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

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, the Fund's registered transfer agent,
maintains all necessary shareholder records.

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

<R>

FEES PAID BY THE FUND FOR SERVICES

-------------------------- ----------------- --------------- -----------------
For the Year Ended 2005 2004 2003
October 31
Advisory Fee Earned $107,666,544 $91,637,470 $59,532,296
Advisory Fee Reduction $11,010,747 9,520,271 6,180,168
Advisory Fee Reimbursement $310,920 128,872 86,397
Sub-Advisory Fee $88,777,677 43,597,007
Sub-Advisory Fee Waiver $0
Brokerage Commissions $17,220,375 19,152,301 14,853,758
Administrative Fee $5,757,329 4,900,193 3,141,520
12b-1 Fee:
Class A Shares $4,317,975 -- --
Class B Shares $8,138,814 -- --
Class C Shares $4,928,477 -- --
Class K Shares $7,703,546 -- --
Shareholder Services Fee:
Class A Shares $4,501,968 -- --
Class B Shares $2,677,640 -- --
Class C Shares $1,649,028 -- --
Class K Shares $8,831,008 -- --

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

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

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

</R>

HOW DOES THE FUND MEASURE PERFORMANCE?

<R>

AVERAGE ANNUAL TOTAL RETURNS AND YIELD
The total returns shown for the Fund's Class K Shares are those of the Fund's
predecessor, the Kaufmann Fund. The Fund's Class A Shares, Class B Shares and
Class C Shares are also those of the Kaufmann Fund, but have been adjusted to
reflect the sales charges or CDSC and expenses applicable to that class. Total
returns are given for the one-year, five-year and ten-year periods ended October
31, 2005.

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

30-Day Period 1 Year 5 Years 10 Years
Class A Shares:
Total Return
Before Taxes N/A 7.78% 5.30% 10.44%
After Taxes on N/A 6.90% 3.05% 8.35%
Distributions
After Taxes on N/A
Distributions and Sale of 6.10% 3.53% 8.19%
Shares
Yield N/A N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class B Shares:
Total Return
Before Taxes N/A 7.97% 5.71% 10.63%
After Taxes on N/A 7.02% 3.43% 8.54%
Distributions
After Taxes on N/A
Distributions and Sale of 6.31% 3.89% 8.38%
Shares
Yield 0.00% N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class C Shares:
Total Return
Before Taxes N/A 11.34% 5.75% 10.40%
After Taxes on N/A 10.41% 3.49% 8.31%
Distributions
After Taxes on N/A
Distributions and Sale of 8.49% 3.93% 8.18%
Shares
Yield N/A N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Class K Shares:
Total Return
Before Taxes N/A 14.02% 6.51% 11.23%
After Taxes on Distributions N/A 13.09% 4.25% 9.13%
After Taxes on N/A
Distributions and Sale of 10.22% 4.58% 8.92%
Shares
Yield N/A N/A N/A N/A

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

</R>

Total returns after taxes are calculated in a similar manner, but reflect
additional standard assumptions required by the SEC.

<R>

To the extent financial intermediaries charge fees in connection with services
provided in conjunction with an investment in Shares, the Share performance is
lower for shareholders paying those fees.

</R>

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

Russell Midcap Growth Index measures the performance of those Russell Midcap
companies with higher price-to-book ratios and higher forecasted growth values.
The stocks are also members of the Russell 1000 Growth Index.

Russell 2000 Index measures the performance of the 2,000 smallest companies in
the Russell 3000 Index, which represents approximately 10% of the total market
capitalization of the Russell 3000 Index.

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

Consumer Price Index is a measure of change in consumer prices, as determined by
a monthly survey of the U.S. Bureau of Labor Statistics.

Gross National Product is a measure, based on current market prices, of the
total of all goods and services produced in the United States over a particular
period of time, usually one year, with the amount expressed in dollars.

<R>

WHO IS FEDERATED INVESTORS, INC.?

FEDERATED FUNDS OVERVIEW

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.

</R>

<R>

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2005
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Kaufmann Fund dated October 31, 2005.

</R>

<R>

INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade. B--Highly speculative. 'B' ratings indicate that significant
credit risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic environment.

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

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.

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

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.

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.

a--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.

bib--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.

coca, 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 "a" to "coca" 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.

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.

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.

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.

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.

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ADDRESSES

FEDERATED KAUFMANN FUND

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

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

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

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

Sub-Adviser
Federated Global Investment Management Corp.
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

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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
HSBC
State Street Bank and Trust Company

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP

LEGAL COUNSEL
Reed Smith LLP
Dickstein Shapiro Morin & Oshinsky, LLP

SERVICE PROVIDERS
Bloomberg
Factset
Institutional Shareholder Services, Inc.
Investor Responsibility Research Center
Wilshire Associates, Inc.

SECURITY PRICING SERVICES
FT Interactive Data

Reuters

RATINGS AGENCIES
Standard & Poor's

PERFORMANCE REPORTING/PUBLICATIONS
Fidelity-Strategic Advisors
Lipper
Morningstar
NASDAQ
Value Line
Wiesenberger/Thomson Financial

OTHER
ICI

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Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Kaufmann Small Cap Fund

A Portfolio of Federated Equity Funds

PROSPECTUS

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December 31, 2005

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 10

What Do Shares Cost? 13

How is the Fund Sold? 20

Payments to Financial Intermediaries 20

How to Purchase Shares 23

How to Redeem and Exchange Shares 26

Account and Share Information 29

Who Manages the Fund? 32

Legal Proceedings 34

Financial Information 35

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

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 $ 3.1 million to $ 4. 107 billion as of November 30, 2005) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $ 4 million to $ 5. 59 billion as of November 30, 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.

Risk/Return Bar Chart and Table

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

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

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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).

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Average Annual Total Return Table

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The Average Annual Total Returns for the Fund's Class A, Class B, and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund's Class A Shares to illustrate the effect of federal taxes on the Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell 2000 Growth Index (R2000G), a broad based market index, and the Lipper Small Cap Growth Funds Average (LSCGFA), an average of funds with similar objectives. Index returns do not reflect taxes, sales charges, expenses or other fees that the Securities and Exchange Commission (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 A Shares:
Return Before Taxes	<R> 16. 32%</R>	<R> 44. 00%</R>
Return After Taxes on Distributions²	<R> 14. 40%</R>	<R> 42. 48%</R>
Return After Taxes on Distributions and Sale of Fund Shares²	<R> 10. 78%</R>	<R> 37. 42%</R>
Class B Shares:
Return Before Taxes	<R> 16. 94%</R>	<R> 46. 12%</R>
Class C Shares:
Return Before Taxes	<R> 20. 29%</R>	<R> 46. 72%</R>
R2000G	<R> 14. 31%</R>	<R> 27.93%</R>
LSCGFA	<R> 11. 12%</R>	<R> 26.71%</R>

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1 The Fund's Class A, Class B and Class C 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 for the Fund's Class B Shares and Class C Shares will differ from those shown above for the Fund's Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

What are the Fund's Fees and Expenses?

FEDERATED KAUFMANN SMALL CAP FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²	1.425%	1.425%	1.425%
Distribution (12b-1) Fee	0.250%³	0.750%	0.750%
Other Expenses⁴	0.555%	0.555%	0.555%
Total Annual Fund Operating Expenses	2.230%	2.730%⁵	2.730%

1 The percentages shown are based on expenses for the entire fiscal year ended October 31, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the Adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 2005.
Total Waivers of Fund Expenses	0.280%	0.230%	0.230%
Total Actual Annual Fund Operating Expenses (after waivers)	1.950%	2.500%	2.500%
2 The Adviser voluntarily waived a portion of management fee. The Adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 1.195% for the fiscal year ending October 31, 2005.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund's Class A Shares (after the voluntary waiver) was 0.20% for the fiscal year ending October 31, 2005.
4 Includes a shareholder services fee/account administrative fee which is used to compensate intermediaries for shareholder services or account administrative services. Also includes a recordkeeping fee which is used to compensate intermediaries for recordkeeping services. Please see "Payments to Financials Intermediaries" herein.
5 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

EXAMPLE

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

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

Share Class	1 Year	3 Years	5 Years	10 Years
Class A:
Expenses assuming redemption	$764	$1,209	$1,679	$2,974
Expenses assuming no redemption	$764	$1,209	$1,679	$2,974
Class B:
Expenses assuming redemption	$826	$1,247	$1,645	$2,941
Expenses assuming no redemption	$276	$ 847	$1,445	$2,941
Class C:
Expenses assuming redemption	$473	$ 939	$1,530	$3,130
Expenses assuming no redemption	$373	$ 939	$1,530	$3,130

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.

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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 $ 3.1 million to $ 4. 107 billion as of November 30, 2005) or the Standard & Poor's Small Cap 600 Index (which had a market capitalization range of $ 4 million to $ 5. 59 billion as of November 30, 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

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

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

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FIXED-INCOME SECURITIES

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

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

Treasury Securities

SPECIAL TRANSACTIONS

Securities Lending

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

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

Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker.

Securities lending activities are subject to interest rate risks and credit risks. These transactions may create leverage risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund's portfolio will rise and fall. These fluctuations could be a sustained trend or a drastic movement. The Fund's portfolio will reflect changes in prices of individual portfolio stocks or general changes in stock valuations. Consequently, the Fund's Share price may decline.
The Adviser attempts to manage market risk by limiting the amount the Fund invests in each company's equity securities. However, diversification will not protect the Fund against widespread or prolonged declines in the stock market.

RISKS RELATED TO INVESTING FOR GROWTH

Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. For instance, the price of a growth stock may experience a larger decline on a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends than value stocks. This means they depend more on price changes for returns and may be more adversely affected in a down market compared to value stocks that pay higher dividends.

RISKS RELATED TO COMPANY SIZE

Generally, the smaller the market capitalization of a company, the fewer the number of shares traded daily, the less liquid its stock and the more volatile its price. Market capitalization is determined by multiplying the number of its outstanding shares by the current market price per share.
Companies with smaller market capitalizations also tend to have unproven track records, a limited product or service base and limited access to capital. These factors also increase risks and make these companies more likely to fail than companies with larger market capitalizations.

SECTOR RISKS

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

LIQUIDITY RISKS

Trading opportunities are more limited for equity securities that are not widely held. This may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses. Over-the-counter (OTC) derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

RISKS OF FOREIGN INVESTING

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

CURRENCY RISKS

Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund's foreign investments and the value of the shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.
The Adviser attempts to limit currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.

CREDIT RISKS

Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.

LEVERAGE RISKS

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

INTEREST RATE RISKS

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

What Do Shares Cost?

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You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund's assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open .

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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 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.

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Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges
Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Front-End Sales Charge²	Contingent Deferred Sales Charge³
Class A	$1,500/$100	5.50%	0.00%
Class B	$1,500/$100	None	5.50%
Class C	$1,500/$100	1.00%	1.00%

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1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amounts for Systematic Investment Programs ( SIP) is $50. Financial intermediaries may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $100,000 or more of Class B Shares or $1 million or more of Class C Shares will be invested in Class A Shares instead of Class B Shares or Class C Shares to maximize your return and minimize the sales charges and marketing fees. Accounts held in the name of a financial intermediary may be treated differently. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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

3 See "Sales Charge When You Redeem."

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

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

SALES CHARGE WHEN YOU PURCHASE

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The following tables list the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the tables and described below.

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

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Class C Shares:
Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV
All Purchases	1.00%	1.01%

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

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

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

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

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

Larger Purchases

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

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Concurrent and Accumulated Purchases

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

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Letter of Intent

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signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months. (Call your financial intermediary or the Fund for more information.) The Fund's custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases.

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ELIMINATING THE SALES CHARGE

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

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within 120 days of redeeming Shares of an equal or greater amount;

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through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;

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as a Federated Life Member (Federated shareholders who originally were issued shares through the "Liberty Account," which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only) ; or

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as a Trustee or employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or

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pursuant to the exchange privilege.

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SALES CHARGE WHEN YOU REDEEM

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

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

Shares that are not subject to a CDSC; and

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

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

Class A Shares:
If you make a purchase of Class A Shares in the amount of $1 million or more and your financial intermediary received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.
Class B Shares:
Shares Held Up To:		CDSC
1 Year		5.50%
2 Years		4.75%
3 Years		4.00%
4 Years		3.00%
5 Years		2.00%
6 Years		1.00%
7 Years or More		0.00%
Class C Shares:
You will pay a 1% CDSC if you redeem Shares within 12 months of the purchase date.

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

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

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representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70-1/2;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;

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purchased by Trustees or employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;

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purchased through a financial intermediary that did not receive an advance commission on the purchase;

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purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;

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purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period ( the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange ) ; and

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Class B Shares only:

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

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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 A Shares, Class B Shares, and Class C Shares. All Share classes have different sales charges and other expenses which affect their performance. Contact your 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 to institutions or to individuals, directly or through financial intermediaries. Under the Distributor's Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

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Payments to Financial Intermediaries

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FRONT-END SALES CHARGE REALLOWANCES

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The Distributor receives a front-end sales charge on certain Share sales. The Distributor pays a portion of this charge to financial intermediaries that are eligible to receive it (the "Dealer Reallowance") and retains any remaining portion of the front-end sales charge.

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When a financial intermediary's customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows:

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

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

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ADVANCE COMMISSIONS

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When a financial intermediary's customer purchases Shares, the financial intermediary may receive an advance commission as follows:

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<R>Class A Shares (for purchases over $1 million)</R>
<R>Purchase Amount</R>		<R>Advance Commission as a Percentage of Public Offering Price</R>
<R>First $1 million - $5 million</R>		<R>0.75%</R>
<R>Next $5 million - $20 million</R>		<R>0.50%</R>
<R>Over $20 million</R>		<R>0.25%</R>

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<R>Class B Shares:</R>		<R>Advance Commission as a Percentage of Public Offering Price</R>
<R>All Purchase Amounts</R>		<R>Up to 5.50%</R>

<R>Class C Shares:</R>		<R>Advance Commission as a Percentage of Public Offering Price</R>
<R>All Purchase Amounts</R>		<R>1.00%</R>

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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 0.25% for Class A Shares, 0.75% for Class B Shares and Class C Shares of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund's Class A Shares, Class B Shares, and Class C 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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SERVICE FEES

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ACCOUNT ADMINISTRATION FEES

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RECORDKEEPING FEES

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NETWORKING FEES

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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 and/or Service Fees 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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THROUGH A 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 three business days. 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.

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</R>

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:

<R>

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

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

By Check

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

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

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

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

THROUGH AN EXCHANGE

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BY SYSTEMATIC INVESTMENT PROGRAM

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BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

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How to Redeem and Exchange Shares

You should redeem or exchange Shares:

<R>

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.

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</R>
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THROUGH A 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.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time), you will receive a redemption amount based on that day's NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

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

Send requests by private courier or overnight delivery service to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging , the Fund Name and Share Class, account number and account registration into which you are exchanging.

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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.

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets.

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

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REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

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

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

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

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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Generally, it is not advisable to continue to purchase Class A Shares or Class C Shares subject to a sales charge while redeeming Shares using this program.

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Systematic Withdrawal Program (SWP) On Class B Shares

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

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

The Fund does not issue share certificates.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

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If you have elected to receive dividends and/or capital gain distributions in cash, and your check is returned by the postal or other delivery service as "undeliverable," or you do not respond to mailings from Federated with regard to uncashed distribution checks, your distribution option will automatically be converted to having all dividends and capital gains reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution checks.

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ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

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 twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund's management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund's portfolio and its performance.

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The Fund's 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.

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PORTFOLIO HOLDINGS INFORMATION

<R>

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.

</R>

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

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

Who Manages the Fund?

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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.

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The Adviser has delegated daily management of some of the Fund assets to the Sub-Adviser, Federated Global Investment Management Corp., who is paid by the Adviser and not by the Fund, based on the portion of securities the Sub-adviser manages. The Sub-Adviser's address is 450 Lexington Avenue, Suite 3700, New York, NY 10017- 3943.

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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.

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PORTFOLIO MANAGEMENT INFORMATION

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Lawrence Auriana

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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.

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Hans P. Utsch

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

Aash M. Shah

Aash M. Shah has been the Fund's Portfolio Manager since inception. Mr. Shah joined Federated in 1993 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since January 1997. Mr. Shah was a Portfolio Manager and served as an Assistant Vice President of the Adviser from 1995 through 1996, and as an Investment Analyst from 1993 to 1995. Mr. Shah received his Masters in Industrial Administration from Carnegie Mellon University with a concentration in Finance and Accounting. Mr. Shah is a Chartered Financial Analyst.

John Ettinger

John Ettinger has been the Fund's Portfolio Manager since October 2003. Mr. Ettinger has been an investment analyst with the Fund's Adviser since April 2001. He served as an investment analyst with Edgemont Asset Management Corp. from 1996 to 2001. Mr. Ettinger is a Chartered Financial Analyst. He earned a B.A. in Economics from Duke University.

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

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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.

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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.

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Legal Proceedings

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Since October 2003, Federated and related entities (collectively, "Federated"), and various Federated funds (Funds), have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. 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. These lawsuits began to be filed shortly after Federated's first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (NYAG), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless: (i) at least 75% of the fund's directors are independent of Federated; (ii) the chairman of each such fund is independent of Federated; (iii) no action may be taken by the fund's board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively; and (iv) the fund appoints a "senior officer" who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated's announcement which, along with previous press releases and related communications on those matters, is available in the "About Us" section of Federated's website at FederatedInvestors.com .

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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 intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys' fees, and expenses, 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, 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

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

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

Financial Highlights - Class A Shares

(For a Share Outstanding Throughout Each Period)

	Year Ended October 31,				Period Ended
	2005		2004		10/31/2003	¹
Net Asset Value, Beginning of Period	$19.30		$17.07		$10.00
Income From Investment Operations:
Net investment income (loss)	(0.35	)²	(0.31	)²	(0.21	)²
Net realized and unrealized gain on investments and foreign currency transactions	2.76		2.79		7.28
TOTAL FROM INVESTMENT OPERATIONS	2.41		2.48		7.07
Less Distributions:
Distributions from net realized gain on investments	(1.11	)	(0.25	)	--
Net Asset Value, End of Period	$20.60		$19.30		$17.07
Total Return³	12.79	%	14.72	%	70.70	%

Ratios to Average Net Assets:
Net expenses	1.95	%	1.95	%	1.95	%⁴
Net investment income (loss)	(1.73	)%	(1.72	)%	(1.67	)%⁴
Expense waiver/reimbursement⁵	0.28	%	0.31	%	0.85	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$371,092		$216,310		$121,125
Portfolio turnover	42	%	68	%	70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2005, which can be obtained free of charge.

Financial Highlights - Class B Shares

(For a Share Outstanding Throughout Each Period)

	Year Ended October 31,				Period Ended
	2005		2004		10/31/2003	¹
Net Asset Value, Beginning of Period	$19.16		$17.04		$10.00
Income From Investment Operations:
Net investment income (loss)	(0.46	)²	(0.41	)²	(0.29	)²
Net realized and unrealized gain on investments and foreign currency transactions	2.74		2.78		7.33
TOTAL FROM INVESTMENT OPERATIONS	2.28		2.37		7.04
Less Distributions:
Distributions from net realized gain on investments	(1.11	)	(0.25	)	--
Net Asset Value, End of Period	$20.33		$19.16		$17.04
Total Return³	12.17	%	14.09	%	70.40	%

Ratios to Average Net Assets:
Net expenses	2.50	%	2.50	%	2.50	%⁴
Net investment income (loss)	(2.28	)%	(2.27	)%	(2.22	)%⁴
Expense waiver/reimbursement⁵	0.23	%	0.26	%	0.80	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$117,744		$87,938		$43,390
Portfolio turnover	42	%	68	%	70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2005, which can be obtained free of charge.

Financial Highlights - Class C Shares

(For a Share Outstanding Throughout Each Period)

	Year Ended October 31,				Period Ended
	2005		2004		10/31/2003	¹
Net Asset Value, Beginning of Period	$19.16		$17.04		$10.00
Income From Investment Operations:
Net investment income (loss)	(0.46	)²	(0.41	)²	(0.29	)²
Net realized and unrealized gain on investments and foreign currency transactions	2.74		2.78		7.33
TOTAL FROM INVESTMENT OPERATIONS	2.28		2.37		7.04
Less Distributions:
Distributions from net realized gain on investments	(1.11	)	(0.25	)	--
Net Asset Value, End of Period	$20.33		$19.16		$17.04
Total Return³	12.17	%	14.09	%	70.40	%

Ratios to Average Net Assets:
Net expenses	2.50	%	2.50	%	2.50	%⁴
Net investment income (loss)	(2.28	)%	(2.27	)%	(2.22	)%⁴
Expense waiver/reimbursement⁵	0.23	%	0.26	%	0.80	%⁴
Supplemental Data:
Net assets, end of period (000 omitted)	$152,232		$100,873		$47,696
Portfolio turnover	42	%	68	%	70	%

1 Reflects operations for the period from December 18, 2002 (date of initial public investment) to October 31, 2003.

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's Annual Report, which is dated October 31, 2005, which can be obtained free of charge.

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A Statement of Additional Information (SAI) dated December 31, 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 Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The SAI contains a description of the Fund's policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your 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.

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

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Investment Company Act File No. 811-4017

Federated
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Cusip 314172636
Cusip 314172628
Cusip 314172610

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28057 (12/ 05)

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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
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DECEMBER 31, 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,
2005 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 [GRAPHIC OMITTED][GRAPHIC OMITTED]

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?............................11
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How is the Fund Sold?...........................12
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Exchanging Securities for Shares................13
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Subaccounting Services..........................13
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Redemption in Kind [GRAPHIC OMITTED][GRAPHIC OMITTED]14
------------------ --
Massachusetts Partnership Law...................14
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Account and Share Information...................14
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Tax Information.................................15
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Who Manages and Provides Services to the Fund?..15
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How Does the Fund Measure Performance?..........25
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Who is Federated Investors, Inc.?...............27
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Financial Information...........................29
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Investment Ratings..............................29
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Addresses.........................................
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Appendix..........................................
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[GRAPHIC OMITTED][GRAPHIC OMITTED]

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HOW IS THE FUND ORGANIZED?

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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.

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.

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.

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.

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.

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.

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 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

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

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.

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.

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.

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.

SPECIAL TRANSACTIONS

Repurchase agreements are subject to credit risks.

Delayed Delivery Transactions
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default. These transactions create leverage
risks.

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.

Securities lending activities are subject to interest rate risks and credit
risks. These transactions may create leverage risks.

Asset Coverage
In order to secure its obligations in connection with 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.

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.

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.

<R>

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.

</R>

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

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

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

Credit Risks
o Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.

o Many fixed-income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.

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

o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.

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

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.

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

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

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

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.

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

<R>

TRADING IN FOREIGN SECURITIES

</R>
<R>

WHAT DO SHARES COST?

The Fund's NAV per Share fluctuates and is based on the market value of all
securities and other assets of the Fund.

</R>
<R>

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.

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.

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 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 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.

2005 2004 2003
Total Sales Total Sales Total Sales Amount
Charges Amount Retained Charges Amount Retained Charges Retained
Class A Shares $2,058,165 $211,666 $2,369,755 $240,968 $1,026,430 $102,666
Class B Shares $213,821 $0 $256,730 $0 $38,058 $0
Class C Shares $170,673 $11,308 $377,552 $58,085 $314,022 $2,238
</R>
--------------------------------------------------------------------------------------

EXCHANGING SECURITIES FOR SHARES

<R>

SUBACCOUNTING SERVICES

</R>

REDEMPTION IN KIND

MASSACHUSETTS PARTNERSHIP LAW

<R>

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.

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class A Shares: MPPF&S,
Jacksonville, FL, owned approximately 1,519,996 Shares (8.21%), Edward Jones &
Co., Maryland Heights, MO, owned approximately 1,189,044 Shares (6.42%),
Citigroup Global Markets, Inc., New York, NY, owned approximately 1,143,855
Shares (6.18%) and Frojack Co., Grand Forks, ND, owned approximately 1,090,621
Shares (5.89%).

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class B Shares: Pershing, LLC,
Jersey City, NJ, owned approximately 786,478 Shares (13.28%), Citigroup Global
Markets Inc., New York, NY, owned approximately 515,637 Shares (8.70%) and
MLPF&S, Jacksonville, FL, owned approximately 310,885 Shares (5.25%).

As of December 5, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class C Shares: Citigroup, New
York, NY, owned approximately 1,213,817 Shares (15.78) and MLPF&S, Jacksonville,
Fl, owned approximately 1,026,855 Shares (13.35%).

</R>

TAX INFORMATION

<R>

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 eight
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 5, 2005, the Fund's Board and Officers as a group owned less than
1% of each class of the Fund's outstanding Class A Shares, Class B Shares and
Class C Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

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

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

J. Christopher Donahue* Principal Occupations: Principal $0 $0
Birth Date: April 11, Executive Officer and President of
1949 the Federated Fund Complex;
PRESIDENT AND TRUSTEE Director or Trustee of some of the
Began serving: January Funds in the Federated Fund
2000 Complex; President, Chief Executive
Officer 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.

Lawrence D. Ellis, M.D.* Principal Occupations: Director or $468.53 $148,500
Birth Date: October 11, Trustee of the Federated Fund
1932 Complex; Professor of Medicine,
3471 Fifth Avenue University of Pittsburgh; Medical
Suite 1111 Director, University of Pittsburgh
Pittsburgh, PA Medical Center Downtown;
TRUSTEE Hematologist, Oncologist and
Began serving: August Internist, University of Pittsburgh
1987 Medical Center.

Other Directorships Held: Member,
National Board of Trustees,
Leukemia Society of America.

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

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION

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

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

Name --------------------------------------- Total
Birth Date Aggregate Compensation
Address Compensation From Trust and
Positions Held with Principal Occupation(s) for Past From Fund Federated Fund
Trust Date Service Five Years, (past fiscal Complex
Began Other Directorships Held and year) (past calendar
Previous Position(s) year)
Thomas G. Bigley Principal Occupation: Director or $515.37 $163,350
Birth Date: February Trustee of the Federated Fund
3, 1934 Complex.
15 Old Timber Trail
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Member of Executive Committee,
Began serving: October Children's Hospital of Pittsburgh;
1995 Director, University of Pittsburgh.

Previous Position: Senior Partner,
Ernst & Young LLP.

John T. Conroy, Jr. Principal Occupations: Director or $515.37 $163,350
Birth Date: June 23, Trustee of the Federated Fund
1937 Complex; Chairman of the Board,
Investment Properties Investment Properties Corporation;
Corporation Partner or Trustee in private real
3838 North Tamiami estate ventures in Southwest
Trail Florida.
Suite 402
Naples, FL Previous Positions: President,
TRUSTEE Investment Properties Corporation;
Began serving: Senior Vice President, John R. Wood
November 1991 and Associates, Inc., Realtors;
President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Nicholas P. Principal Occupation: Director or $515.37 $163,350
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: (engineering and energy services
February 1998 worldwide).

Previous Position: Partner,
Andersen Worldwide SC.

John F. Cunningham Principal Occupation: Director or $468.53 $148,500
Birth Date: March 5, Trustee of the Federated Fund
1943 Complex.
353 El Brillo Way
Palm Beach, FL Other Directorships Held: Chairman,
TRUSTEE President and Chief Executive
Began serving: January Officer, Cunningham & Co., Inc.
1999 (strategic business consulting);
Trustee Associate, Boston College.

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

Peter E. Madden Principal Occupation: Director or $468.53 $148,500
Birth Date: March 16, Trustee of the Federated Fund
1942 Complex.
One Royal Palm Way
100 Royal Palm Way Other Directorships Held: Board of
Palm Beach, FL Overseers, Babson College.
TRUSTEE
Began serving: Previous Positions: Representative,
November 1991 Commonwealth of Massachusetts
General Court; President, State
Street Bank and Trust Company and
State Street Corporation (retired);
Director, VISA USA and VISA
International; Chairman and
Director, Massachusetts Bankers
Association; Director, Depository
Trust Corporation; Director, The
Boston Stock Exchange.

Charles F. Mansfield, Principal Occupations: Director or $515.37 $163,350
Jr. Trustee of the Federated Fund
Birth Date: April 10, Complex; Management Consultant;
1945 Executive Vice President, DVC
80 South Road Group, Inc. (marketing,
Westhampton Beach, NY communications and technology)
TRUSTEE (prior to 9/1/00).
Began serving: January
1999 Previous Positions: Chief Executive
Officer, PBTC International Bank;
Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank;
Senior Vice President, HSBC Bank
USA (formerly, Marine Midland
Bank); Vice President, Citibank;
Assistant Professor of Banking and
Finance, Frank G. Zarb School of
Business, Hofstra University.

John E. Murray, Jr., Principal Occupations: Director or $562.24 $178,200
J.D., S.J.D. Trustee of the Federated Fund
Birth Date: December Complex; Chancellor and Law
20, 1932 Professor, Duquesne University;
Chancellor, Duquesne Partner, Murray, Hogue & Lannis.
University
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Michael Baker Corp. (engineering,
Began serving: construction, operations and
February 1995 technical services).

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

Marjorie P. Smuts Principal Occupations: Director or $468.53 $148,500
Birth Date: June 21, Trustee of the Federated Fund
1935 Complex; Public Relations/Marketing
4905 Bayard Street Consultant/Conference Coordinator.
Pittsburgh, PA
TRUSTEE Previous Positions: National
Began serving: April Spokesperson, Aluminum Company of
1984 America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

John S. Walsh Principal Occupations: Director or $468.53 $148,500
Birth Date: November Trustee of the Federated Fund
28, 1957 Complex; President and Director,
2604 William Drive Heat Wagon, Inc. (manufacturer of
Valparaiso, IN construction temporary heaters);
TRUSTEE President and Director,
Began serving: January Manufacturers Products, Inc.
1999 (distributor of portable
construction heaters); President,
Portable Heater Parts, a division
of Manufacturers Products, Inc.

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

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

OFFICERS**

Name
Birth Date
Address
Positions Held with Trust
----------------------------------- Principal Occupation(s) and Previous Position(s)
Date Service Began
John W. McGonigle Principal Occupations: Executive Vice President and
Birth Date: October 26, 1938 Secretary of the Federated Fund Complex; Vice Chairman,
EXECUTIVE VICE PRESIDENT AND Executive Vice President, Secretary and Director,
SECRETARY Federated Investors, Inc.
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.

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

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

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

Lawrence Auriana Lawrence Auriana has been the Fund's Portfolio Manager
Birth Date: January 8, 1944 since December 2002. He is Vice President of the Trust.
VICE PRESIDENT Mr. Auriana joined Federated in April 2001 as Co-Head
Began serving: November 2001 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.

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

Hans P. Utsch Hans P. Utsch has been the Fund's Portfolio Manager
Birth Date: July 3, 1936 since December 2002.He is Vice President of the Trust.
VICE PRESIDENT Mr. Utsch joined Federated in April 2001 as Co-Head of
Began serving: November 2001 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.

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

COMMITTEES OF THE BOARD
Meetings Held
Board Committee Committee During Last
Members Committee Functions 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 Nine
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.

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

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

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

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

The Adviser is a wholly owned subsidiary of Federated.

Portfolio Manager Information
The following information about the Fund's Portfolio Manager is provided as of
the end of the Fund's most recently completed fiscal year.

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

Other Accounts Managed by Total Number of Other Accounts
Managed / Total Assets*
Lawrence Auriana

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

Registered Investment Companies 2 funds / $ 7,937.25 million
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Other Pooled Investment Vehicles 0
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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: over $1,000,000.

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

Other Accounts Managed by Hans Utsch Total Number of Other Accounts
Managed / Total Assets*
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Registered Investment Companies 1 fund / $ 7,852.76 million
----------------------------------------------------------------------------
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Other Pooled Investment Vehicles 0
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Other Accounts 0
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*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.

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

Other Accounts Managed by Aash Shah Total Number of Other Accounts Managed /
Total Assets*
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Registered Investment Companies 1 fund / $ 470.66 million
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Other Pooled Investment Vehicles 0
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Other Accounts 0
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*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 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. Additionally, Mr. Shah provides research
and analytical support for other accounts. Investment performance is calculated
with an equal weighting of each account he manages or for which he provides
research and analytical support.

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

Other Accounts Managed by John Ettinger Total Number of Other Accounts
Managed / Total Assets*
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Registered Investment Companies 0
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Other Pooled Investment Vehicles 0
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Other Accounts 0
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*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.

John Ettinger 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. Additionally, Mr. Ettinger provides research
and analytical support for other accounts. Investment performance is calculated
with an equal weighting of each account he manages or for which he provides
research and analytical support. As a separate matter, pursuant to the terms of
a business acquisition agreement, Mr. Ettinger may receive additional
consideration based on the achievement of specified revenue growth.

</R>

CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING

<R>

For the fiscal year ended, October 31, 2005, the Fund's Adviser directed
brokerage transactions to certain brokers due to research services they
provided. The total amount of these transactions was $491,049,138 for which the
Fund paid $1,687,868 in brokerage commissions.

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The administrative fee received during any fiscal year shall be at least
$150,000 per portfolio and $40,000 per each additional class of Shares. FAS may
voluntarily waive a portion of its fee and may reimburse the Fund for expenses.

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

</R>

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 amp; Young
LLP, conducts its audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require it to plan and perform
its audits to provide reasonable assurance about whether the Fund's financial
statements and financial highlights are free of material misstatement.

<R>

FEES PAID BY THE FUND FOR SERVICES

------------------------------ ---------------- --------------- --------------
For the Year Ended October 31 2005 2004 2003
Advisory Fee Earned $8,192,334 $4,658,806 $684,620
Advisory Fee Reduction $1,307,408 $821,151 $317,694
Advisory Fee Reimbursement $- $495 $407
Brokerage Commissions $1,814,312 $1,703,403 $715,999
Administrative Fee $438,074 $249,124 $92,753
12b-1 Fee:
Class A Shares $663,875 -- --
Class B Shares $837,671 -- --
Class C Shares $1,008,342 -- --
Shareholder Services Fee:
Class A Shares $805,064 -- --
Class B Shares $279,224 -- --
Class C Shares $335,715 -- --

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</R>

HOW DOES THE FUND MEASURE PERFORMANCE?

<R>

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 NA 6.60% 29.22%
After Taxes on NA 5.09% 28.35%
Distributions
After Taxes on
Distributions and Sale ---------------- 4.70% 25.13%
of Shares NA

--------------------------- ---------------- NA NA
Yield NA

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Start of
Performance on
30-Day Period 1 Year 12/18/2002
Class B Shares
Total Return
Before Taxes NA 6.67% 30.35%
After Taxes on NA 5.06% 29.46%
Distributions
After Taxes on
Distributions and Sale ---------------- 4.78% 26.14%
of Shares NA

--------------------------- ---------------- NA NA
Yield NA

--------------------------------------------------------------------------------------
Start of
Performance on
30-Day Period 1 Year 12/18/2002
Class C Shares
Total Return
Before Taxes NA 10.08% 30.74%
After Taxes on NA 8.49% 29.86
Distributions
After Taxes on
Distributions and Sale ---------------- 6.99% 26.50%
of Shares NA

--------------------------- ---------------- NA NA
Yield NA

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</R>
<R>

Total returns after taxes are calculated in a similar manner, but reflect
additional standard assumptions required by the SEC.

To the extent financial intermediaries charge fees in connection with services
provided in conjunction with an investment in Shares, the Share performance is
lower for shareholders paying those fees.

</R>

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

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.

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 FUNDS OVERVIEW

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.

<R>

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31, 2005
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Kaufmann Small Cap Fund dated October 31, 2005.