LIBERTY EQUITY INCOME FUND INC, 497, 1994-05-31

LIBERTY EQUITY INCOME FUND INC
497, 1994-05-31

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LIBERTY EQUITY INCOME FUND, INC.
CLASS A SHARES
PROSPECTUS

The Class A Shares of Liberty Equity Income Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) investing primarily in income-producing equity securities.

THE CLASS A SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
GOVERNMENT AGENCY. INVESTMENT IN THESE CLASS A SHARES INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class C Shares, and Fortress Shares dated May 31, 1994, with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or to make inquiries about the Fund, contact your financial
institution.

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

Prospectus dated May 31, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--CLASS A SHARES 2

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

GENERAL INFORMATION 3
- ------------------------------------------------------

LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------

Liberty Family Retirement Program 4

INVESTMENT INFORMATION 5
- ------------------------------------------------------

Investment Objective 5
Investment Policies 5
Acceptable Investments 5
Convertible Securities 5
Zero Coupon Convertible Securities 6
Temporary Investments 7
Repurchase Agreements 7
When-Issued and Delayed Delivery
Transactions 7
Lending of Portfolio Securities 7
Put and Call Options 7
Financial Futures and Options
on Futures 8
Risks 8
Restricted and Illiquid Securities 8
Foreign Securities 9
High-Yield Corporate Debt Obligations 9
Portfolio Turnover 10
Investment Limitations 10
NET ASSET VALUE 11
- ------------------------------------------------------

INVESTING IN CLASS A SHARES 11
- ------------------------------------------------------

Share Purchases 11
Through a Financial Institution 11
Directly from the Distributor 11
Minimum Investment Required 12
What Shares Cost 12
Dealer Concession 13
Reducing the Sales Charge 13
Quantity Discounts and Accumulated
Purchases 13
Letter of Intent 14
Reinvestment Privilege 14
Purchases with Proceeds from
Redemptions of Unaffiliated
Investment Companies 14
Concurrent Purchases 14
Systematic Investment Program 14
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 15
Dividends and Distributions 15
Retirement Plans 15
EXCHANGE PRIVILEGE 15
- ------------------------------------------------------

Reduced Sales Charge 16
Requirements for Exchange 16
Tax Consequences 16
Making an Exchange 16
Telephone Instructions 16

REDEEMING CLASS A SHARES 17
- ------------------------------------------------------

Through a Financial Institution 17
Directly from the Fund 17
By Telephone 17
By Mail 17
Signatures 18

Contingent Deferred Sales Charge 18

Systematic Withdrawal Program 19
Accounts with Low Balances 19

FUND INFORMATION 19
- ------------------------------------------------------

Management of the Fund 19
Board of Directors 19
Officers and Directors 20
Investment Adviser 23
Advisory Fees 23
Adviser's Background 23

Other Payments to Financial
Institutions 23

Distribution of Class A Shares 24

Distribution and Shareholder
Services Plans 24

Administration of the Fund 25
Administrative Services 25
Custodian 25

Transfer Agent and
Dividend Disbursing Agent 25

Legal Counsel 25
Independent Auditors 25
Brokerage Transactions 25

SHAREHOLDER INFORMATION 26
- ------------------------------------------------------

Voting Rights 26

TAX INFORMATION 26
- ------------------------------------------------------

Federal Income Tax 26
Pennsylvania Corporate and Personal
Property Taxes 26

PERFORMANCE INFORMATION 27
- ------------------------------------------------------

OTHER CLASSES OF SHARES 27
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--FORTRESS SHARES 29

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

FINANCIAL HIGHLIGHTS--CLASS C SHARES 30

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

SUMMARY OF FUND EXPENSES--CLASS A SHARES

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

<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................ 4.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)..................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds as applicable) (1)................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)......................................... None
Exchange Fee............................................................................................... None
<CAPTION>
ANNUAL CLASS A SHARES OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C>
Management Fee (after waiver) (2).......................................................................... 0.00%
12b-1 Fee (3).............................................................................................. 0.00%
Total Other Expenses (after expense reimbursement)......................................................... 1.00%
Shareholder Services Fee (4)................................................................ 0.21%
Total Class A Shares Operating Expenses (5)....................................................... 1.00%
</TABLE>

- ---------

(1) Shareholders who purchased Shares with the proceeds of a redemption of
shares of a mutual fund sold with a sales charge and not distributed by
Federated Securities Corp. prior to June 1, 1994, will be charged a
contingent deferred sales charge by the Fund's distributor of .50 of 1% for
redemptions made within one year of purchase. See "Contingent Deferred Sales
Charge."

(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.60%.

(3) The Class A Shares have no present intention of paying or accruing the 12b-1
fee during the fiscal year ending March 31, 1995. If the Class A Shares were
paying or accruing the 12b-1 fee, the Class would be able to pay up to 0.50%
of its average daily net assets for the 12b-1 fee. "See Fund Information."

(4) The maximum shareholder services fee is 0.25%.

(5) The total Class A Shares operating expenses would have been 1.89% absent the
voluntary waiver of the management fee and the voluntary reimbursement of
certain other operating expenses.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The information set forth in the foregoing table and example relates only to
Class A Shares of the Fund. The Fund also offers two additional classes of
shares, Class C Shares and Fortress Shares. Class A Shares, Class C Shares and
Fortress Shares are subject to certain of the same expenses; however, Class C
Shares are subject to a 12b-1 fee of 0.75% and a contingent deferred sales
charge of 1.00%, but are not subject to a sales load. Fortress Shares are
subject to a 12b-1 fee of 0.25%, a contingent deferred sales charge of 1.00% and
a maximum sales load of 1.00%. See "Other Classes of Shares."

LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES

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

The following table has been audited by Ernst & Young, the Fund's independent
auditors. Their report dated May 6, 1994, on the Fund's financial statements for
the year ended March 31, 1994, is included in the Annual Report dated March 31,
1994, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund free of charge.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
APRIL 30,
1994 1993 1992 1991 1990 1989 1988*** 1987**
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22 $ 10.18 $ 10.00
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.43 0.55 0.69 0.84 0.91 0.89 0.72 0.23
- --------------------------------------
Net realized and unrealized
gain/(loss) on investments 0.15 1.22 1.08 (0.16) (1.18) 1.59 (0.81) 0.18
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
Total from investment operations 0.58 1.77 1.77 0.68 (0.27) 2.48 (0.09) 0.41
- --------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------
Dividends to shareholders from net
investment income (0.43) (0.53) (0.69) (0.86) (0.87) (0.86) (0.72) (0.23)
- --------------------------------------
Distributions to shareholders from
net realized gain on investment
transactions -- -- -- -- (0.52) -- (0.15) --
- --------------------------------------
Distributions in excess of net
investment income -- -- -- -- (0.41)**** -- -- --
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
TOTAL DISTRIBUTIONS (0.43) (0.53) (0.69) (0.86) (1.80) (0.86) (0.87) (0.23)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22 $ 10.18
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- -----------
TOTAL RETURN* 5.29% 18.98% 21.19% 8.95% (3.19)% 28.25% (0.54)% 3.63%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.00% 0.99% 1.04% 1.05% 0.97% 0.77% 1.16%(a) 1.22%(a)
- --------------------------------------
Net investment income 3.82% 5.45% 7.36% 10.25% 9.34% 9.02% 8.32%(a) 6.93%(a)
- --------------------------------------
Expense waiver/reimbursement (b) 0.89% 1.60% 1.46% 1.46% 1.43% 1.25% 0.86 (a) 0.28%(a)
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $84,665 $30,616 $25,176 $22,589 $22,052 $11,306 $8,895 $10,866
- --------------------------------------
Portfolio turnover rate 43% 79% 115% 31% 54% 49% 41% 24%
- --------------------------------------
</TABLE>

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

** Reflects operations for the period from December 30, 1986 to April 30,
1987. For the period from the start of business, November 19, 1986 to
December 29, 1986 net investment income aggregating $0.0685 per share
($685) was distributed to the Fund's investment adviser. Such distribution
represented the net investment income of the Fund prior to the initial
public offering of Fund shares which commenced on December 30, 1986.

*** For the period from May 1, 1987 to March 31, 1988. (Effective November 1,
1987, the Fund changed its fiscal year-end from April 30 to March 31.)

****Distributions in excess of net investment was a result of certain book and
tax timing differences. This distribution did not represent a return of
capital for federal income tax purposes.

(a)Computed on an annualized basis.

(b)This voluntary expense decrease is reflected in both the expense and net
investment income ratio's shown above.

Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Fund was incorporated under the laws of the State of Maryland on July 29,
1986. On December 21, 1992, shareholders of the Fund approved changing the name
of the Fund from Convertible Securities and Income, Inc. to Liberty Equity
Income Fund, Inc. The Fund's address is Liberty Center, Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit
the Fund to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities. The shares in any one portfolio
may be offered in separate classes. With respect to this Fund, as of the date of
this prospectus, the Board of Directors ("Directors") has established three
classes of shares, known as Class A Shares, Class C Shares, and Fortress Shares.
This prospectus relates only to the Class A Shares ("Shares") of the Fund.

Shares of the Fund are designed primarily for individuals and institutions
seeking high current income and capital appreciation through a professionally
managed, diversified portfolio of convertible securities. A minimum initial
investment of $500 is required, unless the investment is in a retirement
account, in which case the minimum initial investment is $50.

Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain Shares redeemed within one year of purchase. For a more
complete description, see "Redeeming Class A Shares."

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Liberty Family of Funds."

LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------

This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are the
Class A Shares of:

_ American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;

_ Capital Growth Fund, providing appreciation of capital primarily through
equity securities;

_ Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;

_ International Equity Fund, providing long-term capital growth and income
through international securities;

_ International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;

_ Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated corporate bonds;

_ Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;

_ Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;

_ Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;

_ Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment grade
securities;

_ Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;

_ Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the State of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;

Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;

Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;

Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and

World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries.

Prospectuses for these funds are available by writing to Federated Securities
Corp.

Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.

The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.

Shareholders of Class A Shares participating in The Liberty Account are
designated as Liberty Life Members. Liberty Life Members are exempt from sales
charges on future purchases in and exchanges between the Class A Shares of any
funds in the Liberty Family of Funds, as long as they maintain a $500 balance in
one of the Liberty Funds.

LIBERTY FAMILY RETIREMENT PROGRAM

The Fund is also a member of the Liberty Family Retirement Program (the
"Program"), an integrated program of investment options, plan recordkeeping, and
consultation services for 401(k) and other participant-directed benefit and
savings plans. Under the Program, employers or plan trustees may
select a group of investment options to be offered in a plan which also uses the
Program for recordkeeping and administrative services. Additional fees are
charged to participating plans for these services. As part of the Program,
exchanges may be readily made between investment options selected by the
employer or plan trustee.

The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc., Capital Growth Fund, Fund for U.S. Government
Securities,Inc., International Equity Fund, International Income Fund, Liberty
High Income Bond Fund, Inc., Liberty Utility Fund, Inc., Prime Cash Series, and
Stock and Bond Fund, Inc.

No sales charge is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

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

INVESTMENT POLICIES

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

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

The Fund's stock selection emphasizes those common stocks in each sector that
have good value, attractive yield, and dividend growth potential. The Fund will
utilize convertible securities because such securities typically offer high
yields and good potential for capital appreciation.

CONVERTIBLE SECURITIES. Convertible securities are fixed-income securities
which may be exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified time
period. Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and warrants
or a combination of the features of several of these securities. The Fund
invests in convertible bonds rated "B" or higher by Standard & Poor's
Corporation ("Standard & Poor's"), or Moody's Investors Service, Inc.
("Moody's") at the time of investment, or if unrated, of comparable quality. If
a convertible bond is rated below "B" according to the characteristics set forth
here after the Fund has purchased it, the Fund is not required to drop the
convertible bond from the portfolio, but will consider appropriate action.

The investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment
objectives.

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

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

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

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

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

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

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

repurchase agreements; and

other short-term instruments.

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

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous. The Fund will limit its purchase of
securities on a when-issued or delayed delivery basis to no more than 20% of the
value of its total assets.

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

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

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

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

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

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

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

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

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

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

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

FOREIGN SECURITIES. The Fund reserves the right to invest in foreign securities
which are traded publicly in the United States. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Fund's investment adviser will consider these and
other factors before investing in foreign securities and will not make such
investments unless, in its opinion, such investments will meet the Fund's
standards and objectives. The Fund will only purchase securities issued in U.S.
dollar denominations.

HIGH-YIELD CORPORATE DEBT OBLIGATIONS. The Fund may invest up to 35% of the
value of its total assets in corporate debt obligations that are not investment
grade bonds or are not rated but are determined by the Fund's investment adviser
to be of comparable quality. Securities which are rated BBB or lower by Standard
& Poor's or Baa or lower by Moody's either have speculative characteristics or
are speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. A description of the rating
categories is contained in the Appendix to the Statement of Additional
Information. There is no lower limit with respect to rating categories for
securities in which the Fund may invest.

Corporate debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, typically subject to greater market fluctuations
and greater risk of loss of income and principal due to an issuer's default. To
a greater extent than investment grade bonds, lower rated bonds tend to reflect
short-term corporate, economic and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower rated bonds may
be more difficult to dispose of or to value than high-rated, lower-yielding
bonds. The Fund does not intend to invest more than 5% of its assets in
corporate debt obligations that are not investment-grade bonds during the
current fiscal year.

Federated Advisers, the Fund's investment adviser, attempts to reduce the risks
described above through diversification of the portfolio and by credit analysis
of each issuer as well as by monitoring broad economic trends and corporate and
legislative developments.

PORTFOLIO TURNOVER

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

INVESTMENT LIMITATIONS

The Fund will not:

borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except that the Fund may borrow up to one-third
of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings;

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

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

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

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

The Fund will not:

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

invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations;

commit more than 5% of the value of its total assets to premiums on open
put option positions; or

invest more than 5% of its total assets in warrants.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Class A Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class A Shares in the liabilities of the Fund and those attributable to Class A
Shares, and dividing the remainder by the total number of Class A Shares
outstanding. The net asset value for Class A Shares may differ from that of
Class C Shares and Fortress Shares 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.

INVESTING IN CLASS A SHARES
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may from time to time offer certain items of nominal
value to any shareholder or investor. The Fund reserves the right to reject any
purchase request.

Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.

THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares of
the Fund. Orders through a financial institution are considered received when
the Fund is notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.

DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from Federated Securities Corp., once an account has been
established. To do so:

complete and sign the new account form available from the Fund;

enclose a check made payable to Liberty Equity Income Fund, Inc.--Class A
Shares; and

mail both to Federated Services Company, P.O. Box 8604, Boston, MA
02266-8604.

Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.

To purchase Shares directly from the distributor by wire, once an account has
been established call the Fund. All information needed will be taken over the
telephone, and the order is considered received
when State Street Bank receives payment by wire. Federal funds should be wired
as follows: Federated Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts 02105; Attention: Mutual Fund Servicing Division; For
Credit to: Liberty Equity Income Fund, Inc.--Class A Shares; Title or Name of
Account; Wire Order Number and/or Account Number. Shares cannot be purchased by
wire on days on which the New York Stock Exchange is closed and on federal
holidays restricting wire transfers.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Class A Shares is $500 unless the investment
is in a retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts which must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the Liberty Family
Retirement Program.)

WHAT SHARES COST

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

<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
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 $750,000 % 2.00 % 2.04
$750,000 but less than $1 million % 1.00 % 1.01
$1 million or more % 0.00 % 0.00
</TABLE>

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

Liberty Life Members are exempt from sales charges.

No sales charge is imposed for Shares purchased through bank trust departments
or investment advisers registered under the Investment Advisers Act of 1940, as
amended, or retirement plans where the third party administrator has entered
into certain arrangements with Federated Securities Corp. or its affiliates.
However, investors who purchase Shares through a trust department or investment
adviser may be charged an additional service fee by that institution.

No sales charge is imposed on purchases made by qualified retirement plans with
over $1 million invested in Funds available in the Liberty Family Retirement
Program.

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

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

Effective June 1, 1994, and until further notice, the entire amount of the
applicable sales charge will be reallowed to dealers. In addition, the
distributor will pay dealers additional bonus payments in an amount equal
to 0.50% of the public offering price of the Shares sold, with the
exception of any transaction in which no sales load is paid at all.

REDUCING THE SALES CHARGE

The sales charge can be reduced on the purchase of Shares through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege;

purchases with proceeds from redemptions of unaffiliated mutual fund
shares; or

concurrent purchases.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.

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

LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Liberty Family of Funds over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold 4.5% of the total amount intended to be purchased in escrow
(in shares) until such purchase is completed.

The 4.5% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.

This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. The letter may be dated
as of a prior date to include any purchases made within the past 90 days towards
the dollar fulfillment of the letter of intent. Prior trade prices will not be
adjusted.

REINVESTMENT PRIVILEGE. If Shares have been redeemed in the Fund, the
shareholder has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to receive this
elimination of sales charge. If the shareholder redeems his Shares in the Fund,
there may be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of an investment company which were
sold with a sales charge or commission and were not distributed by Federated
Securities Corp. (This does not include shares of a mutual fund which were or
would be subject to a contingent deferred sales charge upon redemption.) The
purchase must be made within 60 days of the redemption, and Federated Securities
Corp. must be notified by the investor in writing, or by his financial
institution, at the time the purchase is made.

CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Family of Funds, the purchase price of which includes a
sales charge. For example, if a shareholder concurrently invested $30,000 in one
of the other Liberty Funds with a sales charge, and $70,000 in this Fund, the
sales charge would be reduced.

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

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined
after an order is received by the transfer agent, plus the applicable sales
charge. A shareholder may apply for participation in this program through his
financial institution or directly through the Fund.

EXCHANGING SECURITIES FOR FUND SHARES

Investors may exchange certain convertible securities or a combination of
securities and cash for Shares. The securities and any cash must have a market
value of at least $25,000. From time to time the Fund will prepare a list of
securities which may be eligible for acceptance and furnish this list to brokers
upon request. Securities accepted by the Fund are valued in the same manner as
the Fund values its portfolio securities. Investors wishing to exchange
securities should first contact their investment broker, who will contact
Federated Securities Corp.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent. All shareholders on the record date are entitled to the dividend. If
Shares are redeemed or exchanged prior to the record date or purchased after the
record date, those Shares are not entitled to that month's dividend.

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, contact
Federated Securities Corp. and consult a tax adviser.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

Class A shareholders may exchange all or some of their Shares for Class A Shares
in other funds in the Liberty Family of Funds at net asset value. Shareholders
of Class A Shares may also exchange into certain funds which are advised by
subsidiaries or affiliates of Federated Investors ("Federated Funds") which are
sold with a sales charge different from that of the Fund or with no sales
charge. These exchanges are made at net asset value plus the difference between
the Fund's sales charge already paid and any sales charge of the fund into which
the Shares are to be exchanged, if higher. Neither the Fund nor any of the funds
in the Liberty Family of Funds imposes any additional fees on exchanges.
Participants in a plan under the Liberty Family Retirement Program may exchange
all or some of their Shares for Class A Shares of other funds offered under the
plan at net asset value.

REDUCED SALES CHARGE

If a shareholder making such an exchange qualifies for a reduction of the sales
charge, Federated Securities Corp. must be notified by the shareholder in
writing or by his financial institution.

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset value
of at least $500. Before the exchange, the shareholder must receive the
prospectus of the Federated Fund into which the exchange is being made.

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

Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.

TAX CONSEQUENCES

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

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions during
times of drastic economic or market changes. If a shareholder cannot contact his
broker or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604.

Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.

TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. Telephone exchange instructions may be recorded. If the
instructions are given by a broker, a telephone authorization form completed by
the broker must be on file with the Fund. If reasonable procedures are not
followed by the Fund, it may be liable for loses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8604, Boston, Massachusetts,
02266-8604 and deposited to the shareholder's account before being exchanged.
Telephone instructions will be processed as of 4:00 p.m.
(Eastern time) and must be received by the Fund before that time for Shares to
be exchanged the same day. Shareholders exchanging into a fund will not receive
any dividend that is payable to shareholders of record on that date. This
privilege may be modified or terminated at any time.

REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------

The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemptions can be made through a financial institution or directly
from the Fund. Redemption requests must be received in proper form. Redemptions
of Shares held through the Liberty Family Retirement Program will be governed by
the requirements of the respective plans.

THROUGH A FINANCIAL INSTITUTION

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

DIRECTLY FROM THE FUND

BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the Fund. Telephone
redemption instructions may be recorded. The proceeds will be mailed to the
shareholder's address of record or wire-transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event longer than seven days after
the request. The minimum amount for a wire-transfer is $1,000. If at any time
the Fund shall determine it necessary to terminate or modify these methods of
redemption, shareholders would be promptly notified.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on these services are
available from Federated Securities Corp. If reasonable procedures are not
followed by the Fund, it may be liable for loses due to unauthorized or
fraudulent telephone instructions.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.

BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, P.O. Box 8604, Boston, Massachusetts 02266-8604. The
written request should include the
shareholder's name, the Fund name and class of shares name, the account number,
and the Share or dollar amount requested, and should be signed exactly as the
shares are registered.

If share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.

SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures of all registered owners on written redemption requests
guaranteed by:

a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;

a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or

any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.

CONTINGENT DEFERRED SALES CHARGE

Shareholders who purchased Shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales charge and not distributed by Federated
Securities Corp. prior to June 1, 1994, will be charged a contingent deferred
sales charge by the Fund's distributor of .50 of 1% for redemptions made within
one year of purchase. Purchases under the program made after that date will not
be subject to any type of contingent deferred sales charge. The contingent
deferred sales charge will be calculated based upon the lesser of the original
purchase price of the Shares or the net asset value of the Shares when redeemed.

The contingent deferred sales charge will not be imposed on Shares acquired
through reinvestment of dividends or distributions of short-term or long-term
capital gains. Redemptions are deemed to have occurred in the following order:
i) Shares acquired through the reinvestment of dividends and long-term capital
gains, ii) purchases of Shares occurring more than one year before the date of
redemption, iii) purchases of Shares within the previous year without the use of
redemption proceeds as described above, and iv) purchases of Shares within the
previous year through the use of redemption proceeds as described above.

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or Liberty
Family Retirement Program funds, or in connection with redemptions by the Fund
of accounts with low balances. No contingent deferred sales charge will be
charged for redemptions from the Liberty Family Retirement Program.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually use up, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through Federated Securities Corp. Due
to the fact that Shares are sold with a sales charge, it is not advisable for
shareholders to be purchasing Shares while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement accounts, and pay the proceeds
to the shareholder if the account balance falls below the required minimum value
of $500. This requirement does not apply, however, if the balance falls below
$500 because of changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

FUND INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF THE FUND

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

OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated Securities Corp., Federated
Services Company, Federated Administrative Services, and the Funds (as defined
in the Combined Statement of Additional Information).

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>

John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director Trustee, Federated Adviser, Federated Management and
Pittsburgh, PA Federated Research; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard First Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President and
Director of the Fund.

John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior Vice
Wood/IPC Commercial President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private
Associates, Inc., Realtors real estate ventures in Southwest Florida; Director,
3255 Tamiami Trail North Trustee, or Managing General Partner of the Funds; formerly,
Naples, FL President, Naples Property Management, Inc.

William J. Copeland Director Director and Member of the Executive Committee, Michael
One PNC Plaza-- Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly Vice Chairman and Director, PNC Bank,
Pittsburgh, PA N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.

J. Christopher Donahue* Vice President President and Trustee, Federated Investors; and Trustee,
Federated Investors Tower and Director Federated Advisers, Federated Management and Federated
Pittsburgh, PA Research; Trustee, Federated Administrative Services;
Trustee, Federated Services Company, President or Vice
President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son
of John F. Donahue, Chairman and Director of the Fund.
</TABLE>

<TABLE>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds;
Concord, MA formerly, Director, Blue Cross of Massachusetts, Inc.

Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.

Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc. and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director Trustee, or Managing General Partner
of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.

Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly President, State Street Bank
& Trust Company and State Street Boston Corporation; and
Trustee, Lahey Clinic Foundation, Inc.

Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.

Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management Center;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
& Technology.
</TABLE>

<TABLE>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or
4905 Bayard Street Managing General Partner of the Funds.
Pittsburgh, PA

Richard B. Fisher President Executive Vice President and Trustee, Federated Investors;
Federated Investors Tower Chairman and Director, Federated Securities Corp.; President
Pittsburgh, PA or Vice President of the Funds; Director or Trustee of some
of the Funds.

Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors;
Federated Investors Tower and Treasurer Vice President and Treasurer, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Executive Vice
President, Treasurer, and Director, Federated Securities
Corp.; Trustee, Federated Services Company; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.

John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors Tower and Secretary Federated Investors; Vice President, Secretary and Trustee,
Pittsburgh, PA Federated Advisers, Federated Management, and Federated
Research; Trustee, Federated Services Company; Executive
Vice President, Secretary, and Trustee, Federated
Administrative Services; Trustee, Federated Services
Company; Executive Vice President and Director, Federated
Securities Corp.; Vice President and Secretary of the Funds.

John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Tower Vice President, Federated Securities Corp.; President and
Pittsburgh, PA Trustee, Federated Advisers, Federated Management, and
Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
</TABLE>

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

\Members of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors between
meetings of the Board.

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

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

ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 of 1% 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. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The adviser has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.

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

Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk-averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.

Christopher H. Wiles has been the Fund's portfolio manager since August of
1991. Mr. Wiles joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since 1992. Mr. Wiles served as
Assistant Vice President of the Fund's investment adviser from 1990 until
1992. Mr. Wiles was a portfolio manager at Mellon Bank from 1986 until
1990. Mr. Wiles is a Chartered Financial Analyst and received his M.B.A. in
Finance from Cleveland State University.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. _Federated Securities Corp. will
pay financial institutions, at the time of purchase, an amount equal to .50
of 1% of the net asset value of Shares purchased by their clients or
customers under the Liberty Family Retirement Program or by certain
qualified plans as approved by Federated Securities Corp. (Such payments
are subject to a
reclaim from the financial institution should the assets leave the program
within 12 months after purchase.) These payments will be made directly by
the distributor from its assets, and will not be made from the assets of
the Fund or by the assessment of a sales charge on Shares. Furthermore, the
Adviser or its affiliates may offer to pay a fee from their own assets to
financial institutions as financial assistance for providing substantial
marketing, sales and operational support to the distributor. The support
may include sponsoring sales, educational and training seminars for their
employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the dealer sells or may sell, and/or
upon the type and nature of sales or operational support furnished by the
dealer.

DISTRIBUTION OF CLASS A SHARES

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

DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. _Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of .50
of 1% of the average daily net asset value of Class A Shares to finance any
activity which is principally intended to result in the sale of shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers. The Fund is not currently making payments under the Distribution
Plan, nor does it anticipate doing so in the immediate future.

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

In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class A Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in these capacities or should
Congress relax current restrictions on depository institutions, the Board of
Directors will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. _Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:

<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>

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

CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. _Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for shares of the
Fund and dividend disbursing agent for the Fund.

LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, 2101 L Street, N.W., Washington, D.C. 20037.

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

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with the dealers, 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. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Board of Directors.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class in the Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only shares of that portfolio or class are
entitled to vote.

As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.

Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders as a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

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

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

PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Fund:

the Fund is subject to the Pennsylvania corporate franchise tax; and

Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.

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

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Fund advertises its total return and yield for Class A
Shares.

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

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

The performance information reflects the effect of the maximum sales load and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return.

Total return and yield will be calculated separately for Class A Shares, Class C
Shares, and Fortress Shares. Because Fortress Shares may be subject to lower
Rule 12b-1 fees, the yield for Fortress Shares for the same period, may exceed
that of Class C Shares. Because Class A Shares are subject to a higher maximum
sales load, the total return for Class C Shares and Fortress Shares for the same
period may exceed that of Class A Shares. Depending on the dollar amount
invested and the time period for which any class of shares is held, the total
return for any particular class may exceed that of another.

From time to time the Fund may advertise the performance of Class A Shares,
Class C Shares and Fortress Shares using certain financial publications and/or
compare the performance of Class A Shares, Class C Shares and Fortress Shares to
certain indices.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Fund presently offers Fortress Shares and Class C Shares. Class C Shares
offered by the Fund are sold primarily to customers of financial institutions at
net asset value with no initial sales charge. Class C Shares are subject to a
contingent deferred sales charge of up to 1.00%. Class C Shares are distributed
pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is
paid a fee of up to .75 of 1%, in addition to a shareholder services fee of .25
of 1% of the Class C Shares' average daily net assets. Investments in Class C
Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.

Fortress Shares offered by the Fund are sold primarily to customers of financial
institutions subject to a front-end sales charge of up to 1.00% and a contingent
deferred sales charge of up to 1.00%. Fortress Shares are distributed pursuant
to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is paid a fee
of up to .25 of 1%, in addition to a shareholder services fee of .25 of 1% of
the Fortress Shares' average daily assets. Investments in Fortress Shares are
subject to a minimum initial investment of $1,500, unless the investment is in a
retirement account, in which case the minimum investment is $50.

The amount of dividends payable to Fortress Shares and Class A Shares will
generally exceed that of Class C Shares by the difference between class expenses
and distribution and shareholder service expenses borne by shares of each
respective class.

The stated advisory fee is the same for all classes of shares.

LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--FORTRESS SHARES

- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Ernst & Young, the Fund's independent
auditors. Their report dated May 6, 1994, on the Fund's financial statements for
the year ended March 31, 1994, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's Financial Statements and Notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------
Net investment income 0.17
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments (0.68 )
- ------------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.51 )
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.17)
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 11.06
- ------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* (4.43)%
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses 1.29%(a)
- -------------------------------------------------------------------------------------------------
Net investment income 3.71%(a)
- -------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.89%(a)
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $21,010
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate 43%
- -------------------------------------------------------------------------------------------------
</TABLE>

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

** Reflects operations for the period November 12, 1993 (date of initial public
offering) to March 31, 1994.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratio's shown above.

Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.

LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES

- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Ernst & Young, the Fund's independent
auditors. Their report dated May 6, 1994, on the Fund's financial statements for
the year ended March 31, 1994, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's Financial Statements and Notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.76
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------
Net investment income 0.34
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments 0.28
- ------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.62
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.32)
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 11.06
- ------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 5.66%
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses 1.79%(a)
- -------------------------------------------------------------------------------------------------
Net investment income 2.99%(a)
- -------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.89%(a)
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $24,632
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate 43%
- -------------------------------------------------------------------------------------------------
</TABLE>

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

** Reflects operations for the period May 3, 1993 (date of initial public
offering) to March 31, 1994.

(a) Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.

LIBERTY EQUITY INCOME
FUND, INC.
CLASS A SHARES

PROSPECTUS

An Open-End, Diversified
Management Investment Company

May 31, 1994

[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

8062806A-A (5/94)

LIBERTY EQUITY INCOME FUND, INC.
CLASS C SHARES

PROSPECTUS

The Class C Shares of Liberty Equity Income Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) investing primarily in income-producing equity securities.

THE CLASS C SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.

THIS PROSPECTUS CONTAINS THE INFORMATION YOU SHOULD READ AND KNOW BEFORE YOU
INVEST IN CLASS C SHARES OF THE FUND. KEEP THIS PROSPECTUS FOR FUTURE REFERENCE.

Prospectus dated May 31, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--
CLASS C SHARES 2

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

GENERAL INFORMATION 3
- ------------------------------------------------------

LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------

Liberty Family Retirement Program 4

INVESTMENT INFORMATION 4
- ------------------------------------------------------

Investment Objective 4
Investment Policies 5
Acceptable Investments 5
Convertible Securities 5
Zero Coupon Convertible Securities 6
Temporary Investments 6
Repurchase Agreements 6
When-Issued and Delayed Delivery
Transactions 6
Lending of Portfolio Securities 7
Put and Call Options 7
Financial Futures and Options
on Futures 7
Risks 8
Restricted and Illiquid Securities 8
Foreign Securities 8
High-Yield Corporate Debt Obligations 9
Portfolio Turnover 9
Investment Limitations 9

NET ASSET VALUE 10
- ------------------------------------------------------

INVESTING IN CLASS C SHARES 10
- ------------------------------------------------------

Share Purchases 10
Through a Financial Institution 10
Directly from the Distributor 11
Minimum Investment Required 11
What Shares Cost 11
Systematic Investment Program 12
Exchanging Securities for Fund Shares 12
Certificates and Confirmations 12
Dividends and Distributions 12
Retirement Plans 12

EXCHANGE PRIVILEGE 13
- ------------------------------------------------------

Requirements for Exchange 13
Tax Consequences 13
Making an Exchange 13
Telephone Instructions 13

REDEEMING CLASS C SHARES 14
- ------------------------------------------------------

Through a Financial Institution 14
Directly from the Fund 14
By Telephone 14
By Mail 15
Signatures 15

Contingent Deferred Sales Charge 15

Systematic Withdrawal Program 16
Accounts with Low Balances 16

FUND INFORMATION 17
- ------------------------------------------------------

Management of the Fund 17
Board of Directors 17
Officers and Directors 17
Investment Adviser 20
Advisory Fees 20
Adviser's Background 20
Distribution of Class C Shares 21

Distribution and Shareholder

Services Plans 21

Other Payments to Financial

Institutions 21

Administration of the Fund 22
Administrative Services 22

Custodian 22

Transfer Agent and Dividend

Disbursing Agent 22

Legal Counsel 22
Independent Auditors 22
Brokerage Transactions 23

SHAREHOLDER INFORMATION 23
- ------------------------------------------------------

Voting Rights 23

TAX INFORMATION 23
- ------------------------------------------------------

Federal Income Tax 23
Pennsylvania Corporate and Personal

Property Taxes 23

PERFORMANCE INFORMATION 24
- ------------------------------------------------------

OTHER CLASSES OF SHARES 24
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--
CLASS A SHARES 26
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--
FORTRESS SHARES 27

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

SUMMARY OF FUND EXPENSES--CLASS C SHARES

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

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds as applicable) (1).............................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C>
Management Fee (after waiver) (2)....................................................................... 0.00%
12b-1 Fee............................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)...................................................... 1.04%
Shareholder Services Fee.......................................................................0.25%
Total Class C Shares Operating Expenses (3).................................................... 1.79%
</TABLE>

- ---------

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description see "Redeeming
Class C Shares."

(3) The total Class C Shares operating expenses would have been 2.68% absent the
voluntary waiver of the management fee and the voluntary reimbursement of
certain other operating expenses.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS C SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $ 29 $ 56 $ 97 $ 211
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $ 18 $ 56 $ 97 $ 211
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The information set forth in the foregoing table and example relates only to
Class C Shares of the Fund. The Fund also offers two additional classes of
shares, Class A Shares and Fortress Shares. Class C Shares, Class A Shares and
Fortress Shares are subject to certain of the same expenses; however, Class A
Shares are subject to a maximum sales load of 4.50% and may be subject to a
12b-1 fee of up to 0.50%, but are not subject to a contingent deferred sales
charge. Fortress shares are subject to a 12b-1 fee of 0.25%, a contingent
deferred sales charge of 1.00% and a maximum sales load of 1.00%. See "Other
Classes of Shares."

LIBERTY EQUITY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES

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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

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

** Reflects operations for the period May 3, 1993 (date of initial public
offering) to March 31, 1994.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratio's shown above.

Further information about the Fund's performance is contained in the Fund's
annual report dated March 31, 1994, which can be obtained free of charge.

GENERAL INFORMATION
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Shares of the Fund are designed primarily for individuals and institutions
seeking high current income and capital appreciation through a professionally
managed, diversified portfolio of convertible securities. A minimum initial
investment of $1,500 is required, unless the investment is in a retirement
account, in which case the minimum initial investment is $50.

Shares are sold at net asset value. A contingent deferred sales charge of 1.00%
will be charged on assets redeemed within the first 12 months following
purchase.

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Liberty Family of Funds."

LIBERTY FAMILY OF FUNDS
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This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are the
Class C Shares of: