LIBERTY EQUITY INCOME FUND INC, 497, 1995-05-30

LIBERTY EQUITY INCOME FUND INC
497, 1995-05-30

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LIBERTY EQUITY INCOME FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS

The 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 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 OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE 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, Class B Shares and Class C 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 B Shares, Class C Shares, and Fortress Shares dated May 31,
1995, 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, 1995
- -------------------------------------------------------------------------------
TABLE OF CONTENTS

Summary of Fund Expenses.......................................................1

Financial Highlights...........................................................4

Synopsis.......................................................................7

Liberty Family of Funds........................................................8
Federated LifeTrackTM Program
(Class A Shares and Class C Shares).......................................9

Investment Information........................................................10
Investment Objective........................................................10
Investment Policies.........................................................10
Portfolio Turnover..........................................................14
Investment Limitations......................................................15

Net Asset Value...............................................................16

Investing in the Fund.........................................................16

How to Purchase Shares........................................................17

Investing in Class A Shares.................................................17
Investing in Class B Shares.................................................20
Investing in Class C Shares.................................................20

Special Purchase Features...................................................21

Exchange Privilege............................................................22
Requirements for Exchange...................................................22

Tax Consequences............................................................22
Making an Exchange..........................................................23

How to Redeem Shares..........................................................24

Special Redemption Features.................................................25

Contingent Deferred Sales Charge............................................25

Account and Share Information.................................................27

Fund Information..............................................................28
Management of the Fund......................................................28
Distribution of Shares......................................................29
Administration of the Fund..................................................31
Brokerage Transactions......................................................31

Shareholder Information.......................................................32
Voting Rights...............................................................32

Tax Information...............................................................32
Federal Income Tax..........................................................32
Pennsylvania Personal Property Taxes........................................32

Performance Information.......................................................33

Other Classes of Shares.......................................................34

Appendix......................................................................35

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

SUMMARY OF FUND EXPENSES
LIBERTY EQUITY INCOME FUND, INC.
CLASS A SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... 5.50%
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
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.24%
12b-1 Fee........................................................................................................ None
Total Other Expenses............................................................................................. 0.76%
Shareholder Services Fee (after waiver) (3)....................................................... 0.21%
Total Class A Shares Operating Expenses (4)............................................................. 1.00%
</TABLE>

(1) Class A Shares purchased with the proceeds of a redemption of Shares of an
unaffiliated investment company purchased and sold with a sales load and
not distributed by Federated Securities Corp. may be charged a Contingent
Deferred Sales Charge of .50 of 1.00% for redemptions made within one full
year of purchase.

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion 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 maximum shareholder services fee is 0.25%.

(4) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class A Shares operating expenses were 1.00% for the fiscal year ended March
31, 1995, and were 1.36% absent the voluntary waiver of a portion of the
management fee.

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.

<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....................................................................... $70 $85 $107 $171
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $65 $85 $107 $171
</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.

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

SUMMARY OF FUND EXPENSES
LIBERTY EQUITY INCOME FUND, INC.
CLASS B SHARES
<TABLE>
<S> <C> <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)....................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................................ None
Exchange Fee...................................................................................................... None

ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................. 0.24%
12b-1 Fee......................................................................................................... 0.75%
Total Other Expenses.............................................................................................. 0.80%
Shareholder Services Fee........................................................................... 0.25%
Total Class B Shares Operating Expenses (3)(4)............................................................ 1.79%
</TABLE>

(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").

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

(4) The total Class B Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class B Shares operating expenses were 1.80% for the fiscal year ended March
31, 1995, and were 2.27% absent the voluntary waiver of a portion of the
management fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class B 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 charges permitted under the rules of the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <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............................................................ $75 $100
You would pay the following expenses on the same investment, assuming no redemption.................. $18 $ 56
</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.

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

SUMMARY OF FUND EXPENSES
LIBERTY EQUITY INCOME FUND, INC.
CLASS C SHARES
<TABLE>
<S> <C> <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

ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................. 0.24%
12b-1 Fee......................................................................................................... 0.75%
Total Other Expenses.............................................................................................. 0.78%
Shareholder Services Fee (after waiver) (3)........................................................ 0.23%
Total Class C Shares Operating Expenses (4)............................................................... 1.77%
</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 maximum shareholder services fee is 0.25%.

(4) The total Class C Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class C Shares operating expenses were 1.76% for the fiscal year ended March
31, 1995, and were 2.12% absent the voluntary waiver of a portion of the
management fee.

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 charges 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.................. $28 $56 $96 $208
You would pay the following expenses on the same investment, assuming no
redemption....................................................................... $18 $56 $96 $208
</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.

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent public auditors. Their report dated May 12, 1995, on the Fund's
financial statements for the year ended March 31, 1995, 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,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989 1988(C)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22 $ 10.18
- ---------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------
Net investment income 0.49 0.43 0.55 0.69 0.84 0.91 0.89 0.72
- ---------------------------------------
Net realized and unrealized gain
(loss) on investments 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59 (0.81)
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----------
Total from investment operations 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48 (0.09)
- ---------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------
Distributions from net
investment income (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86) (0.72)
- ---------------------------------------
Distributions in excess of net
investment income 0.00 0.00 0.00 0.00 0.00 (0.41 (d) 0.00 0.00
- ---------------------------------------
Distributions from net realized gain
on investment transactions 0.00 0.00 0.00 0.00 0.00 (0.52) 0.00 (0.15)
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----------
Total distributions (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86) (0.87)
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.50 $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (B) 8.31% 5.29% 18.98% 21.19% 8.95% (3.19%) 28.25% (0.54%)
- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------
Expenses 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77% 1.16%(f)
- ---------------------------------------
Net investment income 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02% 8.32%(f)
- ---------------------------------------
Expense waiver/reimbursement (e) 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25% 0.86%(f)
- ---------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------
Net assets, end of period (000
omitted) $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306 $8,895
- ---------------------------------------
Portfolio turnover 91% 43% 79% 115% 31% 54% 49% 41%
- ---------------------------------------

<CAPTION>
<S> <C>
1987(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------
Net investment income 0.23
- ---------------------------------------
Net realized and unrealized gain
(loss) on investments 0.18
- --------------------------------------- -----------
Total from investment operations 0.41
- ---------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------
Distributions from net
investment income (0.23)
- ---------------------------------------
Distributions in excess of net
investment income 0.00
- ---------------------------------------
Distributions from net realized gain
on investment transactions 0.00
- --------------------------------------- -----------
Total distributions (0.23)
- --------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.18
- --------------------------------------- -----------
TOTAL RETURN (B) 3.63%
- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------
Expenses 1.22%(f)
- ---------------------------------------
Net investment income 6.93%(f)
- ---------------------------------------
Expense waiver/reimbursement (e) 0.28%(f)
- ---------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------
Net assets, end of period (000
omitted) $10,866
- ---------------------------------------
Portfolio turnover 24%
- ---------------------------------------
</TABLE>

(a) Reflects operations for the period from December 30, 1986 (date of initial
public investment) to April 30, 1987.

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

(c) 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.)

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

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

(f) Computed on an annualized basis.

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

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

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31,
1995(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.24
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.19
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- ---------------------------------------------------------------------------------------------------- -------
Total from investment operations 0.45
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.19)
- ---------------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 11.50
- ---------------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 4.14%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.80%(c)
- ----------------------------------------------------------------------------------------------------
Net investment income 3.42%(c)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.47%(c)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 6,072
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 91%
- ----------------------------------------------------------------------------------------------------
</TABLE>

(a) Reflects operations for the period from September 27, 1994 (date of initial
public offering) to March 31, 1995.

(b) Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.

(d) 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 for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1995 1994(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.06 $ 10.76
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income 0.37 0.34
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.44 0.28
- -------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.81 0.62
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------
Distributions from net investment income (0.37) (0.32)
- -------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.50 $ 11.06
- -------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 7.52% 5.66%
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.76% 1.79%(c)
- --------------------------------------------------------------------------------------------------
Net investment income 3.25% 2.99%(c)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.36% 0.89%(c)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $30,189 $24,632
- --------------------------------------------------------------------------------------------------
Portfolio turnover 91% 43%
- --------------------------------------------------------------------------------------------------
</TABLE>

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

(b) Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.

(d) 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 for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

- -------------------------------------------------------------------------------
SYNOPSIS

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 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 (the "Directors") has established four classes of shares,
known as Class A Shares, Class B Shares, Class C Shares, and Fortress Shares
("Shares", individually and collectively as the context requires). This
prospectus relates only to the Class A Shares, Class B Shares, and Class C
Shares of the Fund.

Shares of the Fund are designed primarily for individuals and institutions
seeking high current income and capital appreciation through a professional
managed, diversified portfolio of convertible securities.

For information on how to purchase the Shares offered by this prospectus, please
refer to "How to Purchase Shares." The minimum initial investment for Class A
Shares is $500. The minimum initial investment for Class B Shares and Class C
Shares is $1500. However, the minimum initial investment for a retirement
account in any class is $50. Subsequent investments in any class must be in
amounts of at least $100, except for retirement plans which must be in amounts
of at least $50.

Class A Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see "How
to Redeem Shares."

Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."

Class C 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. See "How to Redeem Shares."

In addition, the Fund also pays a shareholder services fee at an annual rate not
to exceed 0.25% of average daily net assets.

Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as principal underwriter ("Federated Funds") can be found under "Exchange
Privilege."

Federated Advisers is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.

Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in convertible securities and zero coupon convertible
securities, entering into repurchase agreements, investing in when-issued and
delayed delivery securities, lending portfolio securities, the purchasing or
writing of put and call options, the purchasing and selling of financial futures
and options on futures, and investing in restricted and illiquid securities,
foreign securities and high-yield corporate debt obligations. These risks are
described under "Investment Policies."

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

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

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:

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 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 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 the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and

World Utility Fund, providing total return primarily 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 proven, professional investment advisers.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads 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.

FEDERATED LIFETRACKTM PROGRAM (CLASS A SHARES AND CLASS C SHARES)

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

Other funds participating in the Federated LifeTrackTM Program are: American
Leaders Fund, Inc.; Capital Growth Fund; Capital Preservation 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; Stock and Bond Fund, Inc.; and Strategic Income Fund.

With respect to Class A Shares, no sales load is imposed on purchases made by
qualified retirement plans with over $l million invested in funds participating
in the Federated LifeTrackTM 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 Rating Group ("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 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 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
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.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.

The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.

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 Adviser has determined are creditworthy under
guidelines established by the 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.

There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

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 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 Adviser 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 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 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
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 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 this
Prospectus. 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 (excluding
securities convertible into equity securities) during the current fiscal year.

The 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 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;

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; or

invest more than 5% of the value 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. For these purposes, the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities, series,
designations, or other differences.

The above investment limitations cannot be changed 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 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 each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.

The net asset value of each class of Shares of the Fund 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
it's 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, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

- --------------------------------------------------------------------------------
INVESTING IN THE FUND

This prospectus offers investors three classes of Shares that carry sales loads
and contingent deferred sales charges in different forms and amounts and which
bear different levels of expenses.

CLASS A SHARES

An investor who purchases Class A Shares pays a maximum sales load of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales loads. See "Reducing or
Eliminating the Sales Load." Class A Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.

CLASS C SHARES

Class C Shares are sold without an initial sales load, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.

- --------------------------------------------------------------------------------
HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)

In connection with any sale, 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. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.

INVESTING IN CLASS A SHARES

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

<TABLE>
<S> <C> <C> <C>
DEALER
SALES LOAD SALES LOAD CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
Less than $50,000 5.50% 5.82% 5.00%
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "DEALER CONCESSION."

No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Adviser 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, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser, or
retirement plan may be charged an additional service fee by that institution.
Additionally, no sales load is imposed for Class A Shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee or fees for
services.

No sales load is imposed on purchases made by retirement plans with over $1
million invested in funds available through the Federated LifeTrackTM Program.

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement 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 items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; 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 Shares outstanding at each month end.

The sales load 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 load 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 load will be reallowed to dealers. In addition, the distributor
will pay dealers additional bonus payments in an amount equal to 0.50 of 1% of
the public offering price of the Shares sold.

REDUCING OR ELIMINATING
THE SALES LOAD

The sales load can be reduced or eliminated on the purchase of Class A Shares
through:

quantity discounts and accumulated purchases;

concurrent purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

purchases with proceeds from redemptions of unaffiliated investment company
Shares.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, 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.

If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.

To receive the sales load 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 Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.

CONCURRENT PURCHASES

For purposes of qualifying for a sales load 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 load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.

To receive this sales load 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 load
after it confirms the purchases.

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is completed.

The Shares held in escrow in the shareholder's account will be released upon the
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.

PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES.

Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or sold with a sales load or commission and were not
distributed by Federated Securities Corp. 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. From time to time, the Fund may offer dealers a payment of .50 of 1.00%
for Shares purchased under this program. If Shares are purchased in this manner,
Fund purchases will be subject to a contingent deferred sales charge for one
year from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering as described above.

INVESTING IN CLASS B SHARES

Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge--Class B
Shares," a contingent deferred sales charge may be applied by the distributor at
the time Class B Shares are redeemed.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a distribution services fee (see
"Distribution of Shares"). Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Liberty Family of Funds will convert into Class A Shares based on
the time of the initial purchase. For purposes of conversion to Class A Shares,
Shares purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."

PURCHASING SHARES 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. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. 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. Financial
institutions may charge additional fees for their services.

The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.

PURCHASING SHARES BY WIRE

Once an account has been established, Shares may be purchased by wire by calling
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: State Street Bank and Trust Company, Boston,
MA; Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number);
Account Number; Trade Date and Order Number; Group Number or Dealer Number;
Nominee or Institution Name; and ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted.

PURCHASING SHARES BY CHECK

Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Orders by mail are considered received when payment by check is converted into
federal funds (normally the business day after the check is received).

SPECIAL PURCHASE FEATURES

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 at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales load, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.

RETIREMENT PLANS

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

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

CLASS A SHARES

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Neither the
Fund nor any of the funds in the Liberty Family of Funds imposes any additional
fees on exchanges. Participants in a retirement plan under the Federated
LifeTrackTM Program may exchange all or some of their Shares for Class A Shares
of other funds offered under the plan at net asset value.

CLASS B SHARES

Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds). Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.

CLASS C SHARES

Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other Class C Shares in the Liberty Family of Funds.)
Participants in a retirement plan under the Federated LifeTrackTM Program may
exchange some or all of their Shares for Class C Shares of other funds offered
under their plan at net asset value without a contingent deferred sales charge.
To the extent that a shareholder exchanges Shares for Class C Shares in other
funds in the Liberty Family of Funds, the time for which the exchanged-for
Shares are to be held will be added to the time for which exchanged-from Shares
were held for purposes of satisfying the applicable holding period. For more
information, see "Contingent Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for 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
proceeds invested in the same class of 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 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 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, 500
Victory Road--2nd Floor, Quincy, Massachusetts 02171.

Instructions for exchanges for retirement plans participating in the Federated
LifeTrackTM 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.
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 losses 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 8600, Boston, Massachusetts
02266-8600 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such 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 begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.

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

HOW TO REDEEM SHARES

Shares are redeemed 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. Redemption requests must be received in proper form and can be made
as described below. Redemptions of Shares held through retirement plans
participating in the Federated LifeTrackTM Program will be governed by the
requirements of the respective plans.

REDEEMING SHARES THROUGH A
FINANCIAL INSTITUTION

Shares of the Fund may be redeemed by calling your financial institution 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
(such as banks) 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. Customary fees and commissions may be charged by the financial
institution for this service.

REDEEMING SHARES BY TELEPHONE

Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared.

Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses 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
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA 02266-8600.

The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. It is recommended
that any share certificates be sent by registered or certified mail with the
written request.

If you are requesting a redemption of any amount to be sent to an address other
than that on record with the Fund, or a redemption payable to a third party,
then all signatures appearing on the written request must be guaranteed by a
bank which is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, or any other "eligible
guarantor institution," as defined by the Securities and 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.

SPECIAL REDEMPTION FEATURES

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 deplete, 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
his financial institution. Due to the fact that Class A Shares are sold with a
sales load, it is not advisable for shareholders to continue to purchase Class A
Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B Shares and Class C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:

CLASS A SHARES

Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased and sold
with a sales load and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of .50 of 1.00% for redemptions made
within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.

CLASS B SHARES

Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:

<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption. No contingent deferred sales charge
will be charged for redemptions of Class C Shares from the Federated LifeTrackTM
Program.

CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares on
a first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for Shares of other funds in the
Liberty Family of Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged for Shares
are redeemed is calculated as if the shareholder had held the Shares from the
date on which he became a shareholder of the exchanged-from Shares. Moreover,
the contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

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 the Federated LifeTrackTM Program funds or redemptions from the
Federated LifeTrackTM Program.

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Adviser 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, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Directors reserve
the right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.

- --------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION

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 and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.

DIVIDENDS

Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends and distributions are automatically reinvested in
additional Shares of the Fund on payment dates at the ex-dividend date net asset
value without a sales load, unless shareholders request cash payments on the new
account form or by contacting 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.

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.

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 plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. 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.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Advisers, 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 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. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 institutions nationwide. More than
100,000 investment professionals have selected Federated funds for their
clients.

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 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.

DISTRIBUTION OF 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.

The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase (except for participants in the Federated LifeTrackTM
Program). These payments will be made directly by the distributor from its
assets, and will not be made from assets of the Fund. Financial institutions may
elect to waive the initial payment described above; such waiver will result in
the waiver by the Fund of the otherwise applicable contingent deferred sales
charge.

The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES PLANS

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a
fee to the distributor in an amount computed at an annual rate of .75% of the
average daily net assets of each class of Shares to finance any activity which
is principally intended to result in the sale of Shares subject to the
Distribution Plan. For Class C Shares, 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. With respect to Class B Shares, because distribution
fees to be paid by the Fund to the distributor may not exceed an annual rate of
.75% of each class of Shares' average daily net assets, it will take the
distributor a number of years to recoup the expenses it has incurred for its
distribution and distribution-related services pursuant to the Plan.

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 amounts or may earn a profit from future payments made by Shares
under the 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, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for 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 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 the capacities described above or should
Congress relax current restrictions on depository institutions, the 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 laws.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under the Federated
LifeTrackTM 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.)

Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. 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 financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial

institution. Any payments made by the distributor may be reimbursed by the
Adviser or its affiliates.

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 Federated Funds as specified below:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
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 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, 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 dealers, the Adviser will generally utilize 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
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 at 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, as amended, 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 PERSONAL
PROPERTY TAXES

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 each class
of Shares including Fortress Shares described under "Other Classes of Shares."

Total return represents the change, over a specific period of time, in the value
of an investment in each class of 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 each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class 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 each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.

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

Total return and yield will be calculated separately for Class A Shares, Class B
Shares, Class C Shares and Fortress Shares. Because Fortress Shares and Class A
Shares may be subject to lower Rule 12b-1 fees, the yield for Fortress Shares
and Class A Shares, for the same period, may exceed that of Class B Shares and
Class C Shares.

Because Class A Shares are subject to a higher maximum sales load, the total
return for Class B Shares, 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 particular class of Shares is held,
the total return for any particular class may exceed that of another.

From time to time, advertisements for Class A Shares, Class B Shares, Class C
Shares and Fortress Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the performance of
Class A Shares, Class B Shares, Class C Shares and Fortress Shares to certain
indices.

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

The Fund also offers another class of shares called Fortress Shares. Fortress
Shares are sold primarily to customers of financial institutions subject to a
front-end sales load, a contingent deferred sales charge and a minimum initial
investment of $1,500, unless the investment is in a retirement account in which
the minimum investment is $50.

Shares and Fortress Shares are subject to certain of the same expenses. Expense
differences, however, between Shares and Fortress Shares may affect the
performance of each class.

To obtain more information and a prospectus for Fortress Shares, investors may
call 1-800-235-4669 or contact their financial institution.

- --------------------------------------------------------------------------------
APPENDIX

DESCRIPTION OF BOND RATINGS

A rating by a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer.

Consequently, the Adviser believes that the quality of fixed income securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell, or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS

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

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

A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

CCC--Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.

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

C--The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

CI--The rating "CI" is reserved for income bonds on which no interest is being
paid.

D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING

AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

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

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

BAA--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA--Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS

AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.

B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C--Bonds are in imminent default in payment or interest or principal.

DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.

LIBERTY EQUITY
INCOME FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
An Open-End, Diversified
Management Investment Company
May 31, 1995

FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
530461102
530461409
530461201
G00492-01 (5/95)

Liberty Equity Income Fund, Inc.
Class A Shares
Class B Shares
Class C Shares
Fortress Shares
Combined Statement of Additional Information

This Combined Statement of Additional Information should be read
with the combined prospectus for Class A Shares, Class B Shares,
and Class C Shares, and the prospectus for Fortress Shares of
Liberty Equity Income Fund, Inc. (the "Fund"), dated May 31, 1995.
This Statement is not a prospectus itself. To receive a copy of
any of the prospectuses, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated May 31, 1995

FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the
Fund 1
Investment Objectives and
Policies 1
Convertible Securities 1
Temporary Investments 1
Warrants 2
When-Issued and Delayed
Delivery Transactions 2
Repurchase Agreements 2
Futures and Options
Transactions 2
Restricted and Illiquid
Securities 4
Lending of Portfolio Securities 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 5
Liberty Equity Income Fund, Inc.,
Management 7
Directors Compensation 11
Investment Advisory Services 12
Adviser to the Fund 12
Advisory Fees 12
Administrative Services 12
Transfer Agent and Dividend
Disbursing Agent 12
Brokerage Transactions 12
Purchasing Shares 13
Distribution and Shareholder
Services Plans 13
Conversion to Federal Funds 13
Purchases by Sales
Representatives,
Fund Directors, and Employees 14
Exchanging Securities for Fund
Shares 14
Determining Market Value of
Securities 14
Exchange Privilege (Fortress
Shares Only) 15
Reduced Sales Load 15
Requirements for Exchange 15
Tax Consequences 15
Making an Exchange 15
Redeeming Shares 16
Redemption in Kind 16
Tax Status 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
Total Return 17
Yield 17
Current Distributions 17
Performance Comparisons 18
About Federated Investors 19
Mutual Fund Market 19
Institutional 19
Trust Organizations 19
Broker/Dealers and Bank
Broker/Dealer Subsidiaries 19
Financial Statements 20
Appendix 21
General Information About the Fund
The Fund was incorporated under the laws of the State of Maryland on
July 29, 1986. It is qualified to do business as a foreign corporation
in Pennsylvania. 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.
Shares of the Fund are offered in four classes known as Class A Shares,
Class B Shares, Class C Shares, and Fortress Shares (individually and
collectively referred to as "Shares," as the context may require). This
Combined Statement of Additional Information relates to all classes of
Shares of the Fund.
Investment Objectives and Policies
The Fund's investment objective is to provide above average income and
capital appreciation. The investment objective cannot be changed without
approval of shareholders.
Convertible Securities
As with all fixed-income securities, various market forces influence the
market value of convertible securities, including changes in the level
of interest rates. As the level of interest rates increases, the market
value of convertible securities may decline and, conversely, as interest
rates decline, the market value of convertible securities may increase.
The unique investment characteristic of convertible securities, the
right to be exchanged for the issuer's common stock, causes the market
value of convertible securities to increase when the underlying common
stock increases. However, since securities prices fluctuate, there can
be no assurance of capital appreciation, and most convertible securities
will not reflect quite as much capital appreciation as their underlying
common stocks. When the underlying common stock is experiencing a
decline, the value of the convertible security tends to decline to a
level approximating the yield-to-maturity basis of straight
nonconvertible debt of similar quality, often called "investment value,"
and may not experience the same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion
values (i.e., the number of shares of common stock to be received upon
conversion multiplied by the current market price of the stock). This
premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of
capital appreciation due to the conversion privilege. If this
appreciation potential is not realized, the premium may not be
recovered.
Temporary Investments
The temporary investments in which the Fund may invest include, but are
not limited to:
o commercial paper rated A-1 or A-2 by Standard & Poor's Ratings
Group, Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-
1 or F-2 by Fitch Investors Service, Inc., and Europaper rated A-
1, A-2, Prime-1, or Prime-2. In the case where commercial paper or
Europaper has received different ratings from different rating
services, such commercial paper or Europaper is an acceptable
temporary investment so long as at least one rating is one of the
preceding high-quality ratings and provided the Fund's investment
adviser, Federated Advisers (the "Adviser"), has determined that
such investment presents minimal credit risks;
o instruments of domestic and foreign banks and savings and loans if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. These
instruments may include Eurodollar Certificates of Deposits
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs");
o obligations of the U.S. government or its agencies or
instrumentalities;
o repurchase agreements; and
o other short-term instruments which are not rated but are
determined by the Adviser to be of comparable quality to the other
temporary obligations in which the Fund may invest.
Investment Risks
ECDs, ETDs, Yankee CDs, and Europaper are subject to different
risks than domestic obligations of domestic banks or corporations.
Examples of these risks include international economic and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholding or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing entity, and
the possible impact of interruptions in the flow of international
currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan limitations, examinations,
accounting, auditing, recordkeeping, and the public availability
of information. These factors will be carefully considered by the
Adviser in selecting investments for the Fund.
Warrants
Warrants basically are options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants
may have a life ranging from less than a year to twenty years or may be
perpetual. However, warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage
increase or decrease in the market price of the optioned common stock.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-
issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject
to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such
a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of
such securities. The Fund will only enter into repurchase agreements
with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy
pursuant to guidelines established by the Board of Directors (the
"Directors").
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security
called for in the contract ("going short") and the buyer who
agrees to take delivery of the security ("going long") at a
certain time in the future.
In the fixed-income securities market, price moves inversely to
interest rates. A rise in rates means a drop in price. Conversely,
a drop in rates means a rise in price. In order to hedge its
holdings of fixed-income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect
itself against the possibility that the prices of its fixed-income
securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in
the future at a predetermined price) to hedge against a decline in
market interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set date
at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide
on or before a future date whether to assume a short position at
the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value resulting
from an anticipated increase in market interest rates. Generally,
if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also
decrease in value and the option will increase in value. In such
an event, the Fund will normally close out its option by selling
an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do so, it
would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of
the option) and exercise the option. The Fund would then deliver
the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on futures contracts to hedge its
portfolio against an increase in market interest rates. When the
Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the
life of the option if the option is exercised. As market interest
rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's
call option position to increase.
In other words, as the underlying futures price goes down below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received for
the option. This premium can offset the drop in value of the
Fund's fixed-income portfolio which is occurring as interest rates
rise.
Prior to the expiration of a call written by the Fund, or exercise
of it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the
second option will be less than the premium received by the Fund
for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it
has sold or call options it has written on futures contracts if,
in the aggregate, the value of the open positions (marked to
market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close
out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay
or receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of "initial
margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in
securities transactions in that futures contract initial margin
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance
bond or good-faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation
margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount
one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market
its open futures positions.
The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in its
portfolio. A put option gives the Fund, in return for a premium,
the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income.
As writer of a call option, the Fund has the obligation upon
exercise of the option during the option period to deliver the
underlying security upon payment of the exercise price. The Fund
may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain
without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under an Securities and Exchange
Commission's Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive, safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all restricted
securities (eligible for resale under Rule 144A) for determination of
the Directors. The Directors consider the following criteria in
determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker. The
Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase
agreements may enable the Fund to avoid selling portfolio instruments at
a time when a sale may be deemed to be disadvantageous, but the ability
to enter into reverse repurchase agreements does not ensure that the
Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. Securities in the
Fund's portfolio will be sold whenever the 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 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. For the fiscal
years ended March 31, 1995 and 1994, the portfolio turnover rates were
91% and 43%, respectively.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on margin but may obtain
such short-term credits as are necessary for clearance of
transactions. The deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a
security on margin.
Selling Short
The Fund will not sell securities short unless during the time the
short position is open, it owns an equal amount of the securities
sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short; and not more than 10% of the Fund's net
assets (taken at current value) is held as collateral for such
sales at any one time.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of
the portfolio by enabling the Fund to meet redemption requests
when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 10% of the value of total assets at
the time of the borrowing. Margin deposits for the purchase and
sale of financial futures contracts and related options are not
deemed to be a pledge.
Investing in Minerals or Real Estate
The Fund will not invest in oil, gas, or other mineral exploration
or development programs, or real estate, except that it may
purchase portfolio instruments issued by companies that invest in
or sponsor such interests.
Investing in Commodities
The Fund will not purchase or sell commodities, except that the
Fund may purchase and sell financial futures contracts and related
options.
Investing in Restricted Securities
The Fund will not invest more than 10% of its net assets in
securities subject to restrictions on resale under federal
securities law (except for commercial paper issued under Section
4(2) of the Securities Act of 1933).
Underwriting
The Fund will not underwrite any issue of securities, except as it
may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objectives,
policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio
securities up to one-third of the value of its total assets. This
shall not prevent the purchase or holding of corporate bonds,
debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements, or other
transactions which are permitted by the Fund's investment
objectives and policies.
Concentration of Investments
The Fund will not purchase portfolio instruments if, as a result
of such purchase, 25% or more of the value of its total assets
would be invested in any one industry.
Diversification of Investments
The Fund will not invest more than 5% of the value 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. For
these purposes, the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of
priorities, series, designations, or other differences.
The above investment limitations cannot be changed 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.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in portfolio instruments of unseasoned issuers, including
their predecessors, that have been in operation for less than
three years.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or other
acquisition.
Arbitrage Transactions
The Fund will not engage in arbitrage transactions.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose
of exercising control or management. However, the Fund may
purchase up to 10% of the voting securities of any one issuer and
may exercise its voting powers consistent with the best interests
of the Fund. In addition, the Fund, other companies advised by the
Adviser, and other affiliated companies may together buy and hold
substantial amounts of voting stock of a company and may vote
together in regard to such company's affairs. In some cases, the
Fund and its affiliates might collectively be considered to be in
control of such company. In some cases, Directors and other
persons associated with the Fund and its affiliates might possibly
become directors of companies in which the Fund holds stock.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Fund
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Fund or its Adviser owning
individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Writing Covered Call Options and Purchasing Put Options
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment. The
Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio. The Fund will not
commit more than 5% of the value of its total assets to premiums
on open option positions.
Investing in Warrants
The Fund will not invest more than 5% of its total assets in
warrants. No more than 2% of this 5% may be warrants which are not
listed on the New York or American Stock Exchange.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in
illiquid securities, including certain restricted securities
(except for Section 4(2) commercial paper and restricted
securities which the Adviser believes can be sold within seven
days), non-negotiable time deposits in repurchase agreements
providing for settlement in more than seven days after notice.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund did not borrow money, invest in reverse repurchase agreements,
pledge securities, or sell securities short in excess of 5% of the value
of its total assets during the last fiscal year and has no present
intention to do so in the current fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan association having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund (1)
will not invest in real estate limited partnerships or oil, gas, or
other mineral leases.
Liberty Equity Income Fund, Inc., Management
Officers and Directors are listed with their addresses, principal
occupations, and present positions.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Director of the Fund.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.

J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President and Director
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; 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.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.

Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.

Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation.

Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.

* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities
Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Term
Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; The Medalist Funds; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; Newpoint Funds; New York Municipal Cash Trust; 111
Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government
Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; The Virtus Funds; and World Investment
Series, Inc.
Fund Ownership
As of May 5, 1995, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class A Shares for
its clients), Jacksonville, Florida, owned approximately 1,228,254
Class A Shares (12..83%).
As of May 5, 1995, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class C Shares for
its clients), Jacksonville, Florida, owned approximately 1,269,361
Class C Shares (48.36%).
As of May 5, 1995, the following shareholders of record owned 5%
or more of the outstanding Fortress Shares of the Fund: Merrill
Lynch Pierce Fenner & Smith (as record owner holding Fortress
Shares for its clients), Jacksonville, Florida, owned
approximately 791,071 Fortress Shares (25.84%).
Directors Compensation

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND* FROM FUND COMPLEX +

John F. Donahue, $0 $0 for the Fund and
Chairman and Director 68 other investment companies in the Fund
Complex
John T. Conroy, Jr., $1,247 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
William J. Copeland, $1,247 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
J. Christopher Donahue, $0 $0 for the Fund and
Vice President and Director 14 other investment companies in the Fund
Complex
James E. Dowd, $1,247 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $1,132 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., $1,247 $117,202 for the Fund and
Director 64 other investment companies in the Fund
Complex
Peter E. Madden, $959 $90,563 for the Fund and
Director 64 other investment companies in the Fund
Complex
Gregor F. Meyer, $1,132 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
John E. Murray, Jr., $0 $0 for the Fund and
Director 64 other investment companies in the Fund
Complex
Wesley W. Posvar, $1,132 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex
Marjorie P. Smuts, $1,132 $106,460 for the Fund and
Director 64 other investment companies in the Fund
Complex

*Information is furnished for the fiscal year ended March 31, 1995.
+The information is provided for the last calendar year.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers. It is a subsidiary
of Federated Investors. All the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund or any shareholder for any
losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the respective prospectuses. During the
fiscal years ended March 31, 1995, 1994, and 1993, the Fund's Adviser
earned $960,072, $398,315, and $157,855, respectively, of which
$570,904, $398,315 and $157,855 were voluntarily waived because of
undertakings to limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1.5% per year of the remaining average
net assets, the Adviser will reimburse the Fund for its expenses
over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the respective prospectuses. Prior to March 1, 1994,
Federated Administrative Services, Inc., also a subsidiary of Federated
Investors, served as the Fund's administrator. For the fiscal year ended
March 31, 1995, Federated Administrative Services earned $200,945. For
the fiscal year ended March 31, 1994, the Administrators collectively
earned $308,878. For the fiscal year ended March 31, 1993, Federated
Administrative Services, Inc., earned $213,672. Dr. Henry J. Gailliot,
an officer of Federated Advisers, the Fund's investment adviser, holds
approximately 20% of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type, and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising certain other accounts. To
the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would
tend to reduce their expenses.
During the fiscal years ended March 31, 1995, 1994, and 1993, the Fund
paid total brokerage commissions of $363,114, $125,372, and $36,022,
respectively.
Purchasing Shares
Except under certain circumstances described in the respective
prospectuses, Shares are sold at their net asset value (plus a sales
load on Class A Shares and Fortress Shares only) on days the New York
Stock Exchange is open for business. The procedure for purchasing Shares
of the Fund is explained in the respective prospectuses under "How to
Purchase Shares" and "Investing in Fortress Shares."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Directors expects that the Fund
will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the Fund in pursuing its investment
objectives. By identifying potential investors whose needs are served by
the Fund's objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal year ended March 31, 1995, payments in the amount of
$217,661 and $76,543, respectively, were made pursuant to the
Distribution Plans for Class C Shares and Fortress Shares. During the
period from September 27, 1994 to March 31, 1995, payments in the amount
of $9,714 were made pursuant to the Distribution Plan for Class B
Shares.
In addition, for the fiscal year ended March 31, 1995, payments in the
amount of $343,729 were made pursuant to a Shareholder Services Plan
adopted by the Fund.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them
to federal funds.
Purchases by Sales Representatives, Fund Directors, and Employees
Directors, employees, and sales representatives of the Fund, the
Adviser, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., and their spouses and children under 21, may buy Shares at net
asset value without a sales load and are not subject to a contingent
deferred sales charge (Class B Shares, Class C Shares, and Fortress
Shares only) to the extent the financial institution through which the
Shares are sold agrees to waive any initial payment to which it might
otherwise be entitled. Shares may also be sold without a sales load to
trusts or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
Exchanging Securities for Fund Shares
Investors may exchange convertible securities they already own for
Shares, or they may exchange a combination of convertible securities and
cash for Shares. Any securities to be exchanged must meet the investment
objective and policies of the Fund, must have a readily ascertainable
market value, must be liquid, and must not be subject to restrictions on
resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund
reserves the right to reject any security, even though it appears on the
list, and the right to amend the list of acceptable securities at any
time without notice to brokers or investors.
An investment broker acting for an investor should forward the
securities in negotiable form with an authorized letter of transmittal
to Federated Securities Corp. Federated Securities Corp. will determine
that transmittal papers are in good order and will forward them to the
Fund's custodian, State Street Bank and Trust Company. The Fund will
notify the broker of its acceptance and valuation of the securities
within five business days of their receipt by State Street Bank and
Trust Company.
The Fund values such securities in the same manner as the Fund values
its portfolio securities. The basis of the exchange will depend upon the
net asset value of Shares on the day the securities are valued. One
Share will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities
become the property of the Fund, along with the securities.
Tax Consequences
Exercise of this exchange privilege is treated as a sale for
federal income tax purposes. Depending upon the cost basis of the
securities exchanged for Shares, a gain or loss may be realized by
the investor.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the respective
prospectuses.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
o according to the last sale price on a national securities
exchange, if available, or on the basis of prices provided by an
independent pricing service;
o for most short-term obligations, according to the average of the
last offer to buy and the last offer to sell the security, as
provided by independent pricing services;
o for options traded in the over-the-counter market, according to
the mean between the last bid and the last asked price for the
option as provided by an investment dealer or other financial
institution that deals in the option;
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Exchange Privilege (Fortress Shares Only)
This section relates only to Fortress Shares of the Fund. For
information regarding the Exchange Privilege for Class A Shares, Class B
Shares, and Class C Shares of the Fund, please see the combined
prospectus for these classes of Shares.
The Securities and Exchange Commission has issued an order exempting the
Fund from certain provisions of the Investment Company Act of 1940. As a
result, Fund shareholders are allowed to exchange all or some of their
Fortress Shares for shares in other Fortress Funds (which are sold with
a sales load different from that of the Fund or with no sales load and
which are advised by subsidiaries or affiliates of Federated Investors)
without the assesment of a contingent deferred sales charge on the
exchanged Shares.
Reduced Sales Load
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, the shareholder must notify Federated
Securities Corp.
Requirements for Exchange
Shareholders using this privilege must exchange Fortress Shares having a
net asset value of at least $1,500. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, Fortress Shares
submitted for exchange are redeemed and the proceeds invested in shares
of the other fund.
Further information on the exchange privilege and prospectuses for
Fortress Funds or certain Federated funds are available by calling the
Fund.
Tax Consequences
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a short-term or
long-term capital gain or loss may be realized.
Making an Exchange
Instructions for exchanges for Fortress Funds or certain Federated funds
may be given in writing or by telephone. Written instructions may
require a signature guarantee.
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. If the instructions are given by a
broker, a telephone authorization form completed by the broker
must be on file with the Fund. Shares may be exchanged between two
funds by telephone only if the two funds have identical
shareholder registrations.
Telephoned exchange instructions may be recorded and will be
binding upon the shareholder. They must be received by the Fund
before 4:00 p.m. (Eastern time) for Shares to be exchanged that
day. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone
instructions.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions of Class B
Shares, Class C Shares, and Fortress Shares may be subject to a
contingent deferred sales charge. Redemption procedures are explained in
the respective prospectuses under "How to Redeem Shares" and "Redeeming
Fortress Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Fortress Shares redeemed within one to four years of purchase may be
subject to a contingent deferred sales charge. The amount of the
contingent deferred sales charge is based upon the amount of the advance
payment paid at the time of purchase by the distributor to the financial
institutions for services rendered, and the length of time the investor
remains a shareholder in the Fund. Should financial institutions elect
to receive an amount less than the advance payment that is stated in the
prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular
shareholder will be reduced accordingly.
Redemption in Kind
Although the Fund intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price, in whole
or in part, by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of a
class of Shares' net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption
is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value
of their securities and could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special
tax treatment afforded to such companies. To qualify for this treatment,
the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. The dividends received
deduction for corporations will apply to ordinary income distributions
to the extent the distribution represents amounts that would qualify for
the dividends received deduction to the Fund if the Fund were a regular
corporation and to the extent designated by the Fund as so qualifying.
These dividends, and any short-term capital gains, are taxable as
ordinary income.
Capital Gains
Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because
of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless of
the length of time the shareholder has owned the Shares. Any loss
by a shareholder on Shares held for less than six months and sold
after a capital gains distribution will be treated as a long-term
capital loss to the extent of the capital gains distribution.
Total Return
The Fund's average annual total returns for Class A Shares for the one-
year and five-year periods ended March 31, 1995 and for the period from
April 30, 1987 to March 31, 1995, were 2.38%, 11.11% and 9.81%,
respectively.
The Fund's cumulative total return for Class B Shares, for the period
from September 27, 1994 to March 31, 1995, was (1.48%).
The Fund's average annual total return for Class C Shares for the fiscal
year ended March 31, 1995 and the period from May 3, 1993 (date of
initial public offering), to March 31, 1995, were 6.49% and 6.91%,
respectively.
The Fund's average annual total return for Fortress Shares for the
fiscal year ended March 31, 1995 and for the period from November 12,
1993 (date of initial public offering), to March 31, 1995 were 5.97% and
0.90%, respectively.
The average annual total return for all classes of Shares of the Fund is
the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying
the number of Shares owned at the end of the period by the offering
price per Share at the end of the period. The number of Shares owned at
the end of the period is based on the number of Shares purchased at the
beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable
contingent deferred sales charge is deducted from the ending value of
the investments based on the lesser of the original purchase price or
the offering price of Shares redeemed.
Cumulative total return reflects Class B Shares' total performance over
a specific period of time. This total return assumes and is reduced by
the payment of the maximum sales load and contingent deferred sales
charge, if applicable. The Class B Shares' total return is
representative of only six months of investment activity since the date
of initial public offering.
Yield
The Fund's yields for Class A Shares, Class B Shares, Class C Shares,
and Fortress Shares, were 3.19%, 2.65%, 2.64% and 3.10%, respectively,
for the thirty-day period ended March 31, 1995.
The yield for all classes of Shares of the Fund is determined by
dividing the net investment income per Share (as defined by the
Securities and Exchange Commission) earned by any class of Shares over a
thirty-day period by the maximum offering price per Share of any class
of Shares on the last day of the period. This value is then annualized
using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by any class
of Shares because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends
or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in any class of Shares, the performance will be reduced for those
shareholders paying those fees.
Current Distributions
Class A Shares', Class B Shares', Class C Shares', and Fortress Shares
average net annualized current distributions rate for the thirty days
ended March 31, 1995, were 3.73%, 3.29%, 3.31% and 3.73%, respectively.
Each class of Shares calculates its current distributions daily based
upon its past twelve months' income dividends and short-term capital
gains distributions per Share divided by its offering price per Share on
that day. Each class of Shares may reduce the time period upon which it
bases its calculation of current distributions if the Adviser believes a
shortened period would be more representative in light of current market
conditions.
Performance Comparisons
The Fund's performance of each class of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
The Fund may compare the performance of equity income funds to other
types of stock funds and indices.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the
convertible securities and fixed income funds categories in
advertising and sales literature.
o Dow Jones Industrial Average ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public
utility and transportation companies. The DJIA indicates daily
changes in the average price of stocks in any of its categories.
It also reports total sales for each group of industries. Because
it represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o Standard & Poor's Ratings Group Daily Stock Price Index of 500
Common Stocks is a composite index of common stocks in industry,
transportation, and financial and public utility companies which
compares total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the Standard & Poor's
index assumes reinvestment of all dividends paid by stocks listed
on the index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated, in the
Standard & Poor's figures.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
The Fund may compare the performance of equity income funds to other
types of stock funds and indices.
In addition, the Fund will, from time to time, use the following
standard convertible securities indices against which it will compare
its performance: Goldman Sachs Convertible 100; Kidder Peabody
Convertible Bond Index; Value Line Convertible Bond Index; and Dow Jones
Utility Index.
Advertisements and other sales literature for any class of Shares may
quote total returns which are calculated on nonstandardized base
periods. These total returns also represent the historic change in the
value of an investment in any class of Shares based on quarterly
reinvestment of dividends over a specified period of time.
From time to time, the Fund may advertise the performance of any class
of Shares using charts, graphs, and descriptions, compared to federally
insured bank products, including certificates of deposit and time
deposits, and to money market funds using the Lipper Analytical Services
money market instruments average. In addition, advertising and sales
literature for the Fund may use charts and graphs to illustrate the
principals of dollar-cost averaging and may disclose the amount of
dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not reflect
the effect of a sales load or contingent deferred sales charge, as
applicable.
About Federated Investors
Federated is dedicated to meeting investor needs which is reflected in
its investment decision making structured, straightforward, and
consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio
managers, analysts, and traders dedicated to specific market sectors.
In the equity sector, Federated has more than 25 years' experience. As
of December 31, 1994, Federated managed 15 equity funds totaling
approximately $4 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated's value-
oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system
that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1994, Federated managed
8 money market funds, 5 investment grade and 4 high yield bond funds
with assets approximating $7.4 billion, $.9 billion and $.8 billion,
respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 20 years of
experience in the corporate bond sector. In 1972, Federated introduced
one of the first high-yield bond funds in the industry. In 17 years
ending December 1994, Federated's high-yield portfolios experienced a
default rate of just 1.86%, versus 3.10% for the market as a whole. In
1983, Federated was one of the first fund managers to participate in the
asset-backed securities market, a market totaling more than $200
billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity
and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated's domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated's international portfolios.
Mutual Fund Market
Twenty-seven percent of American households are pursuing
their financial goals through mutual funds. These
investors, as well as businesses and institutions, have
entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes
mutual funds for a variety of investment applications.
Specific markets include:
Institutional
Federated meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate
accounts and mutual funds for a variety of applications,
including defined benefit and defined contribution
programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds,
tax-exempt entities, foundations/endowments, insurance
companies, and investment and financial advisors. The
marketing effort to these institutional clients is headed
by John B. Fisher, President, Institutional Sales Division.
Trust Organizations
Other institutional clients include close relationships
with more than 1,500 banks and trust organizations.
Virtually all of the trust divisions of the top 100 bank
holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed
by Mark R. Gensheimer, Executive Vice President, Bank
Marketing & Sales.
Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated mutual funds are available to consumers through major
brokerage firms nationwide-including 200 New York Stock Exchange
firms-supported by more wholesalers than any other mutual fund
distributor. The marketing effort to these firms is headed by James F.
Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
Financial Statements
The Financial Statements for the fiscal year ended March 31, 1995, are
incorporated herein by reference to the Annual Report of the Fund dated
March 31, 1995 (File Nos. 33-6901 and 811-4743). A copy of this Report
may be obtained without charge by contacting the Fund.
Appendix
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1-This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2-Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
P-1-Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a
range of financial markets and assured sources of alternate liquidity.
P-2-Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Debt Ratings
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1-Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2-Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.

530461102
530461409
530461201
530461300
8062806B (5/95)

LIBERTY EQUITY INCOME FUND, INC.
FORTRESS SHARES
PROSPECTUS

The Fortress 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.

This prospectus contains the information you should read and know before you
invest in Fortress 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 B Shares, Class C Shares, and Fortress Shares dated May 31,
1995, 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 make inquiries about the Fund, contact your financial
institution.

Prospectus dated May 31, 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS

Summary of Fund Expenses.......................................................1

Financial Highlights...........................................................2

General Information............................................................3

Fortress Investment Program....................................................4

Investment Information.........................................................5
Investment Objective.........................................................5
Investment Policies..........................................................5
Portfolio Turnover...........................................................9
Investment Limitations......................................................10

Net Asset Value...............................................................11

Investing in Fortress Shares..................................................11
Share Purchases.............................................................11
Minimum Investment Required.................................................12
What Shares Cost............................................................12

Eliminating the Sales Load..................................................13

Systematic Investment Program...............................................14
Exchanging Securities for Fund Shares.......................................14
Exchange Privileges.........................................................14
Certificates and Confirmations..............................................15
Dividends and Distributions.................................................15
Capital Gains...............................................................15

Redeeming Fortress Shares.....................................................16
Through a Financial Institution.............................................16
Directly By Mail............................................................16
Contingent Deferred Sales Charge............................................17
Systematic Withdrawal Program...............................................18
Accounts with Low Balances..................................................18
Exchanges for Shares of Other Funds.........................................18

Fund Information..............................................................19
Management of the Fund......................................................19
Distribution of Fortress Shares.............................................19
Administration of the Fund..................................................21
Brokerage Transactions......................................................21

Shareholder Information.......................................................22
Voting Rights...............................................................22

Tax Information...............................................................22
Federal Income Tax..........................................................22
Pennsylvania Personal Property Taxes........................................22

Performance Information.......................................................23

Other Classes of Shares.......................................................24

Appendix......................................................................25

- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
LIBERTY EQUITY INCOME FUND, INC.
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................................... 1.00%
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

ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................................. 0.24%
12b-1 Fee...................................................................................................... 0.25%
Total Other Expenses........................................................................................... 0.78%
Shareholder Services Fee (after waiver) (3)..................................................... 0.23%
Total Fortress Shares Operating Expenses (4)........................................................... 1.27%
</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 Fortress Shares".

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

(4) The total Fortress Shares operating expenses in the table above are based
on expenses expected during the fiscal year ending March 31, 1996. The
total Fortress Shares operating expenses were 1.24% for the fiscal year
ended March 31, 1995, and were 1.60% absent the voluntary waiver of a
portion of the management fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Fortress Shares of the Fund
will bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Fortress Shares" and "Fund
Information". Wire transferred redemptions of less than $5,000 may be subject to
additional fees.

<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) a 5%
annual return and (2) redemption at the end of each time period:................. $33 $50 $79 $162
You would pay the following expenses on the same investment, assuming no
redemption....................................................................... $23 $50 $79 $162
</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.

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report, dated May 12, 1995, on the Fund's financial
statements for the year ended March 31, 1995, 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,
<S> <C> <C>
1995 1994(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.06 $ 11.74
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.42 0.17
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.46 (0.68)
- ---------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.88 (0.51)
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Distributions from net investment income (0.43) (0.17)
- ---------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.51 $ 11.06
- ---------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (b) 8.05% (4.43%)
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 1.24% 1.29%(c)
- ----------------------------------------------------------------------------------------
Net investment income 3.79% 3.71%(c)
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.36% 0.89%(c)
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,886 $21,010
- ----------------------------------------------------------------------------------------
Portfolio turnover 91% 43%
- ----------------------------------------------------------------------------------------
</TABLE>

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

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

(d) 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 for the fiscal year ended March 31, 1995, 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 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 (the "Directors") has established four classes of shares,
known as Fortress Shares, Class A Shares, Class B Shares, and Class C Shares.
This prospectus relates only to the Fortress Shares ("Shares" or "Fortress
Shares", as the context requires) 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 $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 plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on Shares, other than shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase date.

Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in convertible securities and zero coupon convertible
securities, entering into repurchase agreements, investing in when-issued and
delayed delivery securities, lending portfolio securities, the purchasing or
writing of put and call options, the purchasing and selling of financial futures
and options on futures, and investing in restricted and illiquid securities,
foreign securities and high yield corporate debt obligations. These risks are
described under "Investment Policies."

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

FORTRESS INVESTMENT PROGRAM

The Fortress Shares class is a member of a family of funds ("Fortress Funds"),
collectively known as the Fortress Investment Program. The other funds in the
Program are:

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

California Municipal Income Fund, providing current income exempt from federal
regular income tax and California personal income taxes;

Fortress Adjustable Rate U.S. Government Fund, Inc., providing current income
consistent with lower volatility of principal through a diversified portfolio
of adjustable and floating rate mortgage securities which are issued or
guaranteed by the U.S. government, its agencies or instrumentalities;

Fortress Bond Fund, providing current income primarily through high-quality
corporate debt;

Fortress Municipal Income Fund, Inc., providing a high level of current income
generally exempt from the federal regular income tax by investing primarily in
a diversified portfolio of municipal bonds;

Fortress Utility Fund, Inc., providing high current income and moderate capital
appreciation primarily through equity and debt securities of utility companies;

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

Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value;

Limited Term Municipal Fund, providing a high level of current income which is
exempt from federal regular income tax consistent with the preservation of
capital;

Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;

New York Municipal Income Fund, providing current income exempt from federal
regular income tax, New York personal income taxes, and New York City income
taxes;

Ohio Municipal Income Fund, providing current income exempt from federal
regular income tax and Ohio personal income taxes;

Strategic Income Fund, providing high current income through investing in
domestic corporate debt obligations, U.S. government securities, and foreign
government and corporate debt obligations; and

World Utility Fund, providing total return by investing primarily in securities
issued by domestic and foreign companies in the utilities industry.

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

The Fortress Investment Program 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 proven, professional investment advisers.

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

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

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

CONVERTIBLE SECURITIES

ZERO COUPON CONVERTIBLE SECURITIES

TEMPORARY INVESTMENTS

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

WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS

LENDING OF PORTFOLIO SECURITIES

PUT AND CALL OPTIONS

FINANCIAL FUTURES AND
OPTIONS ON FUTURES

RISKS

RESTRICTED AND ILLIQUID SECURITIES

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

HIGH-YIELD CORPORATE DEBT OBLIGATIONS

PORTFOLIO TURNOVER

INVESTMENT LIMITATIONS

The Fund will not:

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

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

The Fund will not:

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 Fortress Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Fortress Shares in the liabilities of the Fund and those attributable to
Fortress Shares, and dividing the remainder by the total number of Fortress
Shares outstanding. The net asset value for Fortress Shares may differ from that
of Class A Shares, Class B Shares, and Class C 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 FORTRESS 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 who has a sales agreement with the
distributor, or directly from the distributor, Federated Securities Corp.,
either by mail or by wire. The Fund reserves the right to reject any purchase
request.

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. 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.

The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership
periods (see "Other Payments to Financial Institutions").

DIRECTLY BY MAIL

To purchase Shares by mail directly from Federated Securities Corp.:

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

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

mail both to the Fund's transfer agent, Federated Services Company, P.O. Box
8600, Boston, MA 02266-8600.

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.

DIRECTLY BY WIRE

To purchase Shares directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. All information needed will be taken over the telephone,
and the order is considered received when the transfer agent's bank receives
payment by wire.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $1,500, except for an IRA account,
which requires a minimum initial investment of $50. Subsequent investments must
be in amounts of at least $100, except for an IRA account, which must be in
amounts of at least $50.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load is imposed for Shares purchased through bank
trust departments or investment advisers registered under the Investment
Advisers Act of 1940, as amended, purchasing on behalf of their clients, or by
sales representatives, Directors, and employees of the Fund, the Adviser, and
Federated Securities Corp., or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp., or its
affiliates. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any agreement
between the customer and the institution with regard to services provided, the
fees charged for these services, and any restrictions and limitations imposed.

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, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Under certain circumstances, described under "Redeeming Fortress Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.

DEALER CONCESSION

For sales of Shares, broker/dealers will normally receive 100% of the applicable
sales load. Any portion of the sales load which is not paid to a broker/dealer
will be retained by the distributor. However, from time to time, and at the sole
discretion of the distributor, all or a part of that portion may be paid to a
dealer. The sales load 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 load 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.

ELIMINATING THE SALES LOAD

The sales load can be eliminated on the purchase of Shares through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

concurrent purchases.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

There is no sales load for purchases of $1 million or more. 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 load. If an additional
purchase of Shares is made, the Fund will consider the previous purchases still
invested in the Fund. For example, if a shareholder already owns Shares having a
current value at the public offering price of $900,000 and he purchases $100,000
more at the current public offering price, there will be no sales load on the
additional purchase. The Fund will also combine purchases for the purpose of
reducing the contingent deferred sales charge imposed on some Share redemptions.
For example, if a shareholder already owns Shares having current value at the
public offering price of $1 million and purchases an additional $1 million at
the current public offering price, the applicable contingent deferred sales
charge would be reduced to.50% of those additional Shares. For more information
on the levels of contingent deferred sales charges and holding periods, see the
section entitled "Contingent Deferred Sales Charge."

To receive the sales load elimination and/or the contingent deferred 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
eliminate the sales load and/or reduce the contingent deferred sales charge
after it confirms the purchases.

LETTER OF INTENT

If a shareholder intends to purchase at least $1 million of Shares over the next
13 months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load elimination
depending on the amount actually purchased within the 13-month period and a
provision for the Fund's custodian to hold 1.00% of the total amount intended to
be purchased in escrow (in Shares) until such purchase is completed.

The 1.00% 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,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales load.

This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."

This letter of intent will not obligate the shareholder to purchase Shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on such purchases
will not be adjusted to reflect a lower sales load).

REINVESTMENT PRIVILEGE

If Shares have been redeemed, 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 load. 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 the sales load. If the shareholder redeems
his Shares, there may be tax consequences.

CONCURRENT PURCHASES

For purposes of qualifying for a sales load elimination, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Fortress
Investment Program, the purchase price of which includes a sales load. For
example, if a shareholder concurrently invested $400,000 in one of the other
Fortress Funds, and $600,000 in Shares, the sales load would be eliminated.

To receive this sales load elimination, 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 eliminate the sales load
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. 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 Fund plus
the 1.00% sales load for purchases under $1 million. A shareholder may apply for
participation in this program through Federated Securities Corp. or his
financial institution.

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.

EXCHANGE PRIVILEGES

Shares in other Fortress Funds may be exchanged for Shares at net asset value
without a sales load (if previously paid) or a contingent deferred sales charge.
Also, Shares may be exchanged for shares in other Fortress Funds at net asset
value without a contingent deferred sales charge or sales load. The exchange
privilege is available to shareholders residing in any state in which the shares
being acquired may be legally sold.

Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value (plus a sales load, if applicable). Shareholders using this privilege must
exchange Shares having a net asset value equal to the minimum investment
requirements of the fund into which the exchange is being made. Shareholders who
desire to automatically exchange Shares of a predetermined amount on a monthly,
quarterly, or annual basis may take advantage of a systematic exchange
privilege. Further information on these exchange privileges is available by
calling Federated Securities Corp. or the shareholder's financial institution.

Before making an exchange, a shareholder must receive a prospectus of the fund
for which the exchange is being made.

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
on the application or by contacting the Fund.

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. Dividends and distributions are automatically reinvested in
additional Shares on payment dates at the ex-dividend date net asset value
without a sales load, 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.

CAPITAL GAINS

Distributions of any net realized long-term capital gains will be made at least
once every twelve months.

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

REDEEMING FORTRESS 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. Redemption requests must be received in proper form and can be made
through a financial institution or directly from the Fund by written request.

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. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.

Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. 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, such as
"Directly by Mail", should be considered.

Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

DIRECTLY BY MAIL

Shareholders may also redeem Shares by sending a written request to Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. This written request
must include the shareholder's name, the Fund name and class of shares, the
account number, and the share or dollar amount to be redeemed. Shares will be
redeemed at their net asset value, less any applicable contingent deferred sales
charge, next determined after the Fund receives the redemption request.

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, which is administered by the Federal Deposit Insurance Corporation
("FDIC"); a member 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, 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.

RECEIVING PAYMENT

A check for the proceeds is mailed within seven days after receipt of proper
written redemption instructions from a broker or from the shareholder.

CONTINGENT DEFERRED SALES CHARGE

Shareholders redeeming Shares from their Fund accounts within certain periods of
the purchase date of those Shares will be charged a contingent deferred sales
charge by the Fund's distributor of the lesser of the original price or the net
asset value of the Shares redeemed as follows:

<TABLE>
<CAPTION>
Contingent
Amount of Deferred
Purchase Shares Held Sales Charge
<S> <C> <C>
Up to $1,999,999 4 years or less 1%
$2,000,000 to $4,999,999 2 years or less .50%
$5,000,000 or more 1 year or less .25%
</TABLE>

To the extent that a shareholder exchanges between or among Fortress Shares in
other funds in the Fortress Investment Program, the time for which the
exchanged-for Shares were held will be added, or "tacked", to the time for which
the exchanged-from Shares were held for purposes of satisfying the one-year
holding period.

In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through the reinvestment of
dividends or distributions of long-term capital gains. In computing the amount
of contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred in the following
order: 1) first of shares acquired through the reinvestment of dividends and
long-term capital gains, 2) second of purchases of shares occurring prior to the
number of years necessary to satisfy the applicable holding period, and 3)
finally of purchases of shares occurring within the current holding period. For
accounts with shares subject to multiple share holding periods, the redemption
sequence will be determined first, with reinvested dividends and long-term
capital gains, and second, on a first-in, first-out basis.

The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59-1/2; or (iii) from the death or disability of the beneficial
owner. The exemption from the contingent deferred sales charge for
qualified plans, an IRA, Keogh Plan, or a custodial account does not extend to
account transfers, rollovers, and other redemptions made for purposes of
reinvestment. Contingent deferred sales charges are not charged in connection
with exchanges of Shares for shares in other Fortress Funds, or in connection
with redemptions by the Fund of accounts with low balances. Shares of the Fund
originally purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, as amended, and
third-party administrators acting on behalf of deferred contribution plans, are
not subject to the contingent deferred sales charge, to the extent that no
payment was advanced for purchases made by such entities.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum withdrawal amount
is $100. 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 deplete, 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 invested at least
$10,000 in the Fund (at current offering price).

A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that Shares are sold with a sales load and
contingent deferred sales charge, it is not advisable for shareholders to be
purchasing Shares while participating in this program.

A contingent deferred sales charge is charged for Shares redeemed through this
program within four years of their purchase dates.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000. This
requirement does not apply, however, if the balance falls below $1,000 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.

EXCHANGES FOR SHARES OF
OTHER FUNDS

Shares may be exchanged for shares in other Fortress Funds at net asset value
without a contingent deferred sales charge or a sales load.

Shares may also be exchanged for shares in other Federated Funds which are
advised by subsidiaries or affiliates of Federated Investors. With the exception
of exchanges into other Fortress Funds, such exchanges will be subject to a
contingent deferred sales charge and possibly a sales load.

Shareholders using this privilege must exchange shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. A shareholder may obtain information on the exchange
privilege, and may obtain prospectuses for other Fortress Funds and Federated
Funds by calling Federated Securities Corp. or his financial institution.

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

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Advisers, 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 and sale of portfolio instruments, for which it
receives an annual fee from the Fund.

ADVISORY FEES

ADVISER'S BACKGROUND

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. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest investment mutual fund
investment managers in the United States. With more than 1,750 employees,
Federated continues to be led by the management who founded the company in 1955.
Federated funds are presently at work in and through 4,000 financial
institutions nationwide. More than 100,000 investment professionals have
selected Federated funds for their clients.

DISTRIBUTION OF FORTRESS 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 will pay to the distributor an amount,
computed at an annual rate of .25 of 1% of the average daily net asset value of
Fortress 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 Fortress 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.

OTHER PAYMENTS TO
FINANCIAL INSTITUTIONS

The distributor will pay financial institutions, for distribution and/or
administrative services, an amount equal to 1.00% of the offering price of the
Shares acquired by their clients or customers on purchases up to $1,999,999,
.50% of the offering price on purchases of $2,000,000 to $4,999,999, and .25% of
the offering price on purchases of $5,000,000 or more. (This fee is in addition
to the 1.00% sales load on purchases of less that $1 million.) The financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.

Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, 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 financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.

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 the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Directors will consider appropriate changes in the services.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

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 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT

Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for Shares of the Fund and dividend disbursing agent for the
Fund.

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, 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 utilize 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
Directors.

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SHAREHOLDER INFORMATION

VOTING RIGHTS

Each Share 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.

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TAX INFORMATION

FEDERAL INCOME TAX

PENNSYLVANIA PERSONAL
PROPERTY TAXES

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.

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PERFORMANCE INFORMATION

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

Total return represents the change, over a specific period of time, in the value
of an investment in Fortress 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 Fortress Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
Fortress Shares over a thirty-day period by the maximum offering price per share
of Fortress Shares 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 Fortress 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 B
Shares, Class C Shares, and Fortress Shares. Because Class A Shares and Fortress
Shares may be subject to lower Rule 12b-1 fees, the yield for Class A Shares and
Fortress Shares, for the same period, may exceed that of Class B Shares and
Class C Shares. Because Class A Shares are subject to a higher maximum sales
load, the total return for Class B Shares, Class C Shares, and Fortress Shares
for the same period will 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, advertisements for the Class A Shares, Class B Shares, Class
C Shares and Fortress Shares of the Fund may refer to ratings, rankings, and
other information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, Class C Shares and Fortress
Shares to certain indices.

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OTHER CLASSES OF SHARES

The Fund also offers other classes of shares called Class A Shares, Class B
Shares and Class C Shares which are all sold primarily to customers of financial
institutions subject to certain differences.

Class A Shares are sold subject to a front-end sales load and a Shareholder
Services Plan. Investments in Class A Shares are subject to a minimum initial
investment of $500, unless the investment is in a retirement account, in which
the minimum investment is $50.

Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class B Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment is $50.

Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class C Shares are subject to a minimum investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment is $50.

Class A Shares, Class B Shares and Class C Shares and Fortress Shares are
subject to certain of the same expenses. Expense differences, however, between
Class A Shares, Class B Shares and C Shares and Fortress Shares may affect the
performance of each class.

To obtain more information and a combined prospectus for Class A Shares, Class B
Shares and Class C Shares, investors may call 1-800-235-4669 or contact their
financial institution.

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APPENDIX

DESCRIPTION OF BOND RATINGS

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS

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

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

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

CI--The rating "CI" is reserved for income bonds on which no interest is being
paid.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING

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

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

CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS

CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C--Bonds are in imminent default in payment or interest or principal.

LIBERTY EQUITY INCOME
FUND, INC.
FORTRESS SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
Prospectus dated May 31, 1995

FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
530461300
8062806A-FS (5/95)