FEDERATED EQUITY INCOME FUND INC, 497, 1996-05-30

FEDERATED EQUITY INCOME FUND INC
497, 1996-05-30

Previous: FEDERATED EQUITY INCOME FUND INC, NSAR-B, 1996-05-30

Next: SCOTT & STRINGFELLOW FINANCIAL INC, SC 13E4, 1996-05-30

FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS

The shares of Federated 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 Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated May 31, 1996,
with the Securities and Exchange Commission. The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-245-5051. 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, 1996

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

TABLE OF CONTENTS

Summary of Fund Expenses--
Class A Shares...............................................................1

Summary of Fund Expenses--
Class B Shares...............................................................2

Summary of Fund Expenses--
Class C Shares...............................................................3
Financial Highlights--Class A Shares...........................................4

Financial Highlights--Class B Shares...........................................5

Financial Highlights--Class C Shares...........................................6

General Information............................................................7

Investment Information.........................................................8
Investment Objective.........................................................8
Investment Policies..........................................................8
Portfolio Turnover..........................................................12
Investment Limitations......................................................13

Net Asset Value...............................................................14

Investing in the Fund.........................................................14

Class A Shares..............................................................14

Class B Shares..............................................................14
Class C Shares..............................................................15

How to Purchase Shares........................................................15
Investing in Class A Shares.................................................15
Investing in Class B Shares.................................................17
Investing in Class C Shares.................................................18
Special Purchase Features...................................................19

Exchange Privilege............................................................20
Requirements for Exchange...................................................20
Tax Consequences............................................................20
Making an Exchange..........................................................20

How to Redeem Shares..........................................................21
Special Redemption Features.................................................22
Contingent Deferred Sales Charge............................................23

Account and Share Information.................................................25

Fund Information..............................................................26
Management of the Fund......................................................26
Distribution of Shares......................................................27
Administration of the Fund..................................................28
Brokerage Transactions......................................................28

Shareholder Information.......................................................29
Voting Rights...............................................................29

Tax Information...............................................................29
Federal Income Tax..........................................................29
State and Local Taxes.......................................................29
Performance Information.......................................................30

Other Classes of Shares.......................................................30

Appendix......................................................................31

Addresses.....................................................................34
- -------------------------------------------------------

SUMMARY OF FUND EXPENSES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS A SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... 5.50%
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.48%
12b-1 Fee (3).................................................................................................... 0.00%
Total Other Expenses............................................................................................. 0.59%
Shareholder Services Fee (after waiver) (4)....................................................... 0.21%
Total Operating Expenses (5)............................................................................ 1.07%

</TABLE>

(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of 0.50 of 1% for redemptions
made within one year of purchase. (See "Contingent Deferred Sales Charge.")

(2) The management fee has been reduced to reflect the voluntary waiver of 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) Class A Shares has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending March 31, 1997. If Class A Shares were paying
or accruing the 12b-1 fee, Class A Shares would be able to pay up to 0.50%
of its average daily net assets for the 12b-1 fee. See "Fund Information".

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

(5) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending March 31, 1997. The total operating
expenses were 1.03% for the fiscal year ended March 31, 1996, and were 1.23%
absent the voluntary waivers of portions of the management fee and the
shareholder services 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 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 $87 $111 $178
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $65 $87 $111 $178
</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
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS B SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... None
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.48%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.63%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (3) (4)........................................................................ 1.86%

</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 operating expenses in the table above are based on expenses
expected during the fiscal year ending March 31, 1997. The total operating
expenses were 1.83% for the fiscal year ended March 31, 1996, and would have
been 1.99% 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 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 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.......................................................... $76 $102 $124 $197
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $19 $ 58 $101 $197
</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
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS C SHARES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... None
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.48%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.63%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (3)............................................................................ 1.86%

</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
"Contingent Deferred Sales Charge."

(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 total operating expenses in the table above are based on expenses
expected during the fiscal year ending March 31, 1997. The total operating
expenses were 1.80% for the fiscal year ended March 31, 1996 would have been
1.98% 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.......................................................... $29 $58 $101 $218
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $19 $58 $101 $218
</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--CLASS A SHARES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)

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

YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.50 $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22
- ----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------
Net investment income 0.46 0.49 0.43 0.55 0.69 0.84 0.91 0.89
- ----------------------------------
Net realized and unrealized
gain (loss) on investments 2.96 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59
- ---------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations 3.42 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48
- ----------------------------------
LESS DISTRIBUTIONS
- ----------------------------------
Distributions from net
investment income (0.41) (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86)
- ----------------------------------
Distributions in excess of net
investment income (c) -- -- -- -- -- -- (0.41) --
- ----------------------------------
Distributions from net realized
gain on investments (0.25) -- -- -- -- -- (0.52) --
- ---------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.66) (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86)
- ---------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 11.50 $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84
- ---------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (D) 30.37% 8.31% 5.29% 18.98% 21.19% 8.95% (3.19%) 28.25%
- ----------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------
Expenses 1.03% 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77%
- ----------------------------------
Net investment income 3.19% 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02%
- ----------------------------------
Expense waiver/
reimbursement (e) 0.20% 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25%
- ----------------------------------
SUPPLEMENTAL DATA
- ----------------------------------
Net assets, end of period (000
omitted) $220,268 $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306
- ----------------------------------
Portfolio turnover 96% 91% 43% 79% 115% 31% 54% 49%
- ----------------------------------

<CAPTION>
<S> <C> <C>
1988(B) 1987(A)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.18 $ 10.00
- ----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------
Net investment income 0.72 0.23
- ----------------------------------
Net realized and unrealized
gain (loss) on investments (0.81) 0.18
- ---------------------------------- ----------- -----------
Total from investment operations (0.09) 0.41
- ----------------------------------
LESS DISTRIBUTIONS
- ----------------------------------
Distributions from net
investment income (0.72) (0.23)
- ----------------------------------
Distributions in excess of net
investment income (c) -- --
- ----------------------------------
Distributions from net realized
gain on investments (0.15) --
- ---------------------------------- ----------- -----------
Total distributions (0.87) (0.23)
- ---------------------------------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.22 $ 10.18
- ---------------------------------- ----------- -----------
TOTAL RETURN (D) (0.54%) 3.63%
- ----------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------
Expenses 1.16%* 1.22%*
- ----------------------------------
Net investment income 8.32%* 6.93%*
- ----------------------------------
Expense waiver/
reimbursement (e) 0.86%* 0.28%*
- ----------------------------------
SUPPLEMENTAL DATA
- ----------------------------------
Net assets, end of period (000
omitted) $8,895 $10,866
- ----------------------------------
Portfolio turnover 41 % 24 %
- ----------------------------------
</TABLE>

* Computed on an annualized basis.

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

(b) 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.)

(c) Distributions in excess of net investment income were a result of certain
books and tax timing differences. These distributions did not represent a
return of capital for federal income tax purposes.

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

(e) 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, 1996, which can be obtained
free of charge.

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

FINANCIAL HIGHLIGHTS--CLASS B SHARES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, 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 10, 1996, on the Fund's financial
statements for the year ended March 31, 1996, and on the following table for the
periods presented, is included in the Annual Report, which is incorporated
herein 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,
1996 1995(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50 $ 11.24
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.32(d) 0.19
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 3.01 0.26
- ---------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 3.33 0.45
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.32) (0.19)
- ----------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments (0.25) --
- ---------------------------------------------------------------------------------------------------- --------- -----------
Total distributions (0.57) (0.19)
- ---------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 11.50
- ---------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 29.40% 4.14%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.83% 1.80%*
- ----------------------------------------------------------------------------------------------------
Net investment income 2.31% 3.42%*
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.16% 0.47%*
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $71,019 $6,072
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 96% 91 %
- ----------------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(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 charge or contingent
deferred sales charge, if applicable.

(d) Calculated using average outstanding shares.

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended March 31, 1996, which can be obtained
free of charge.

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

FINANCIAL HIGHLIGHTS--CLASS C SHARES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, 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 10, 1996, on the Fund's financial
statements for the year ended March 31, 1996, and on the following table for the
periods presented, is included in the Annual Report, which is incorporated
herein 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,
1996 1995 1994(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50 $ 11.06 $ 10.76
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.32 0.37 0.34
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.00 0.44 0.28
- ------------------------------------------------------------------------------------------- --------- --------- -----------
Total from investment operations 3.32 0.81 0.62
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions from net investment income (0.31) (0.37) (0.32)
- -------------------------------------------------------------------------------------------
Distributions from net realized gain on investments (0.25) -- --
- ------------------------------------------------------------------------------------------- --------- --------- -----------
Total distributions (0.56) (0.37) (0.32)
- ------------------------------------------------------------------------------------------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 11.50 $ 11.06
- ------------------------------------------------------------------------------------------- --------- --------- -----------
TOTAL RETURN (B) 29.39% 7.52% 5.66%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 1.80% 1.76% 1.79%*
- -------------------------------------------------------------------------------------------
Net investment income 2.43% 3.25% 2.99%*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.18% 0.36% 0.89%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $48,161 $30,189 $24,632
- -------------------------------------------------------------------------------------------
Portfolio turnover 96% 91% 43 %
- -------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(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 the sales charge or
contingent deferred sales charge, if applicable.

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended March 31, 1996, 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. At a meeting of the Board of Directors ("Directors") held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation of
the Fund to change the name of the Fund from Liberty Equity Income Fund, Inc. to
Federated Equity Income Fund, Inc. 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 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 Directors have established four classes of shares, known as
Class A Shares, Class B Shares, Class C Shares, and Class F 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. The minimum initial
investment for Class A Shares is $500. The minimum initial investment for Class
B Shares and Class C Shares is $1,500. 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.

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

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

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 opinion of Federated Advisers (the investment "Adviser" to the Fund), 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

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 associations (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

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 Portfolio Manager to predict market
conditions based upon certain economic analysis and factors. There is a risk
that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio securities to market changes. In addition, the Portfolio
Manager 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 Portfolio Manager 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 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 under certain circumstances the Fund may borrow up to one-third of the
value of its total assets and pledge 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;

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 the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, 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.

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

This prospectus offers investors three classes of Shares that carry sales
charges 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 charge 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 charges. See "Reducing or
Eliminating the Sales Charge." Class A Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales charge, 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 A Shares are
not currently making payments under the Distribution Plan, nor does it
anticipate doing so in the immediate future.

CLASS C SHARES

Class C Shares are sold without an initial sales charge, 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
for business. 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 charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE 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
<S> <C> <C> <C>
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 $1,000,000 2.00% 2.04% 1.80%
$1,000,000 or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other fee
by the financial intermediary. Additionally, no sales charge is imposed on
shareholders designated as Liberty Life Members or on Class A Shares purchased
through "wrap accounts" or similar programs under which clients pay a fee for
services.

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales charge 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 charge; however, the distributor will make
twelve monthly payments to the dealer totaling 0.25% of the public offering
price over the first year following the purchase. Such payments are based on the
original purchase price of Shares outstanding at each month end.

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

REDUCING OR ELIMINATING
THE SALES CHARGE

The sales charge 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 companies.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales charge 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 charge. In addition, the sales charge, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.

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 charge on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of Class A Shares of two or more
funds for which affiliates of Federated Investors serve as investment adviser or
principal underwriter (the "Federated Funds"), the purchase price of which
includes a sales charge. For example, if a shareholder concurrently invested
$30,000 in Class A Shares in one of the other Federated Funds with a sales
charge, and $20,000 in this Fund, the sales charge would be reduced.

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

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of Class A shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold 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 charge.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 Federated
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 charge. 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 charge. 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
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge 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, redemptions of those shares 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 charge, 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 fee under the Fund's Distribution Plan
(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 charge,
fee or other charge. Class B Shares acquired by exchange from Class B Shares of
another Federated Fund 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 Federal Reserve
wire by calling the Fund. All information needed will be

taken over the telephone, and the order is considered received when State Street
Bank and Trust Company receives payment by wire. Federal funds should be wired
as follows: Federated Shareholder Services Company, c/o State Street Bank and
Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund
Class); (Fund Number); Account Number--this number can be found on the account
statement or by contacting the Fund; 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.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

PURCHASING SHARES BY CHECK

Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Shareholder 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 charge, 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 Federated funds at net asset value. Neither the Fund nor any of the
Federated Funds impose any additional fees on exchanges. Shareholders in certain
other Federated Funds may exchange all or some of their shares for Class A
Shares.

CLASS B SHARES

Class B shareholders may exchange all or some of their Shares for Class B Shares
of other Federated Funds. (Not all Federated Funds currently offer Class B
Shares. Contact your financial institution regarding the availability of Class B
Shares of the Federated 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 of other
Federated 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
of other Federated Funds at net asset value without a contingent deferred sales
charge. (Not all Federated Funds currently offer Class C Shares. Contact your
financial institution regarding the availability of Class C Shares of Federated
Funds.) To the extent that a shareholder exchanges Shares for Class C Shares of
other Federated 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."

Please contact your financial institution directly or Federated Securities Corp.
at 1-800-245-5051 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.

Shareholders of Class A Shares who have been designated Liberty Life Members are
exempt from sales charges on future purchases in and exchanges between the Class
A Shares of any Federated Fund, as long as they maintain a $500 balance in one
of the Federated Funds.

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.

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

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 Shareholder Services Company, 1099 Hingham Street, Rockland,
MA 02370-3317.

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 Shareholder 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. Investors who redeem Shares through a financial intermediary may be
charged a service fee by that financial intermediary. Redemption requests must
be received in proper form and can be made as described below.

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

the shareholder's address of record or wire-transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. 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. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement.

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
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA s
02266-8600. If Share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.

The written request should state: the 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. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.

Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; 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.

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

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 charge, 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 charge 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 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</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.

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 more
than 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 for less
than 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

Federated 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

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, and their immediate
family members; 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, 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 the
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 Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested in writing to Federated Shareholder 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 charge, 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 Shares 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 $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 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.

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

Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for Shares of the Fund.
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.

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

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. 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 AND SHAREHOLDER SERVICES

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. Class A Shares may pay to the distributor an amount, computed
at an annual rate of .50 of 1% of the average daily net asset value of Class A
Shares to finance any activity which is principally intended to result in the
sale of shares subject to the Distribution Plan. For Class A and 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 services or distribution-related 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 sales services,
distribution and distribution-related support services pursuant to the
Distribution Plan. Class A Shares are 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 amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholders Services, a subsidiary of Federated Investors, under
which the Fund 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. Under the Shareholder Services Agreement, 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.

SUPPLEMENTAL 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 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
in addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. 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 Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
<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 Services Company may choose voluntarily to waive a portion of its fee.

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.

- -------------------------------------------------------
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 the Directors or by 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.

As of May 6, 1996, the following shareholder of record owned 25% 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 1,661,399 Class C Shares (46.23%).

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

FEDERAL INCOME TAX

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

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

STATE AND LOCAL 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 Class F 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 charge 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 Class F Shares. Expense differences between Class A
Shares, Class B Shares and Class C Shares may affect the performance of each
class.

From time to time, advertisements for Class A Shares, Class B Shares, Class C
Shares and Class F 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 Class F Shares to certain
indices.

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

The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions. Class F Shares
are subject to a front-end sales charge, a 12b-1 Plan, a contingent deferred
sales charge and a Shareholder Service Agreement. Class F Shares has a minimum
initial 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, Class C Shares and Class F Shares are subject to
certain of the same expenses, however, the front-end sales charge for Class F
Shares is 1.00%, which is lower than that for Class A Shares. Expense
differences, however, between Class A Shares, Class B Shares, Class C Shares and
Class F Shares may affect the performance of each class.

To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-245-5051 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 & 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

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.
ADDRESSES

- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Equity Income Fund, Inc.
Class A Shares, Class B Shares, Federated Investors Tower
and Class C Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Custodian
State Street Bank and P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------

Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

FEDERATED EQUITY
INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY
INCOME FUND, INC.)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
May 31, 1996

[LOGO] FEDERATED INVESTORS

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors

Cusip 313915100
Cusip 313915209
Cusip 313915308
G00492-01 (5/96)

FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS A SHARES

PROSPECTUS

The Class A Shares of Federated 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 Class A Shares of the Fund. Keep this prospectus for future reference.

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated May 31, 1996,
with the Securities and Exchange Commission. The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-245-4270. To obtain other
information or to make inquiries about the Fund, contact your financial
institution.

Prospectus dated May 31, 1996

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

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

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

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

Investment Information.........................................................3
Investment Objective.........................................................3
Investment Policies..........................................................3
Portfolio Turnover...........................................................8
Investment Limitations.......................................................8

Net Asset Value................................................................9

How to Purchase Shares........................................................10
Investing in Class A Shares.................................................10
Reducing or Eliminating the Sales
Charge...................................................................11
Special Purchase Features...................................................13
Exchanging Securities for Fund Shares.......................................13
Exchange Privilege..........................................................13
Requirements for Exchange...................................................14
Tax Consequences............................................................14
Making an Exchange..........................................................14

How to Redeem Shares..........................................................15
Special Redemption Features.................................................16
Contingent Deferred Sales Charge............................................16
Elimination of Contingent Deferred
Sales Charge.............................................................17

Account and Share Information.................................................18

Fund Information..............................................................19
Management of the Fund......................................................19
Distribution of Class A Shares..............................................20
Administration of the Fund..................................................21

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

Tax Information...............................................................22
Federal Income Tax..........................................................22
State and Local Taxes.......................................................22

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

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

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

Addresses.....................................................................28

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

SUMMARY OF FUND EXPENSES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)............................................................................. 0.48%
12b-1 Fee (3)................................................................................................. 0.00%
Total Other Expenses.......................................................................................... 0.59%
Shareholder Services Fee (after waiver) (4).................................................... 0.21%
Total Operating Expenses (5)......................................................................... 1.07%
</TABLE>

(3) Class A Shares has no present intention of paying or accruing the 12b-1
fee during the fiscal year ending March 31, 1997. If Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up
to 0.50% of its average daily net assets for the 12b-1 fee. See "Fund
Information".

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

(5) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending March 31, 1997. The total operating
expenses were 1.03% for the fiscal year ended March 31, 1996, and would
have been 1.23% absent the voluntary waivers of portions of the management
fee and the shareholder services fee.

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--CLASS A SHARES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, 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 10, 1996, on the Fund's financial
statements for the year ended March 31, 1996, and on the following table for the
periods presented, is included in the Annual Report, which is incorporated
herein 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,
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50 $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84 $ 9.22
- ------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------
Net investment income 0.46 0.49 0.43 0.55 0.69 0.84 0.91 0.89
- ------------------------------------
Net realized and unrealized gain
(loss) on investments 2.96 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations 3.42 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48
- ------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------
Distributions from net investment
income (0.41) (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86)
- ------------------------------------
Distributions in excess of net
investment income (c) -- -- -- -- -- -- (0.41) --
- ------------------------------------
Distributions from net realized
gain on investments (0.25) -- -- -- -- -- (0.52) --
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.66) (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86)
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 11.50 $ 11.06 $ 10.91 $ 9.67 $ 8.59 $ 8.77 $ 10.84
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (d) 30.37% 8.31% 5.29% 18.98% 21.19% 8.95% (3.19%) 28.25%
- ------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------
Expenses 1.03% 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77%
- ------------------------------------
Net investment income 3.19% 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02%
- ------------------------------------
Expense waiver/reimbursement (e) 0.20% 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25%
- ------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------
Net assets, end of period
(000 omitted) $220,268 $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306
- ------------------------------------
Portfolio turnover 96% 91% 43% 79% 115% 31% 54% 49%
- ------------------------------------

<CAPTION>
1988(B) 1987(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.18 $ 10.00
- ------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------
Net investment income 0.72 0.23
- ------------------------------------
Net realized and unrealized gain
(loss) on investments (0.81) 0.18
- ------------------------------------ ----------- -----------
Total from investment operations (0.09) 0.41
- ------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------
Distributions from net investment
income (0.72) (0.23)
- ------------------------------------
Distributions in excess of net
investment income (c) -- --
- ------------------------------------
Distributions from net realized
gain on investments (0.15) --
- ------------------------------------ ----------- -----------
Total distributions (0.87) (0.23)
- ------------------------------------ ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.22 $ 10.18
- ------------------------------------ ----------- -----------
TOTAL RETURN (d) (0.54%) 3.63%
- ------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------
Expenses 1.16%* 1.22%*
- ------------------------------------
Net investment income 8.32%* 6.93%*
- ------------------------------------
Expense waiver/reimbursement (e) 0.86%* 0.28%*
- ------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------
Net assets, end of period
(000 omitted) $8,895 $10,866
- ------------------------------------
Portfolio turnover 41% 24%
- ------------------------------------
</TABLE>

* Computed on an annualized basis.

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

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

(e) 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, 1996, 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. At a meeting of the Board of Directors ("Directors") held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation of
the Fund to change the name of the Fund from Liberty Equity Income Fund, Inc. to
Federated Equity Income Fund, Inc. 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 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 Directors have established four classes of shares, known as
Class A Shares, Class B Shares, Class C Shares, and Class F Shares. This
prospectus relates only to the Class A Shares ("Shares") of the Fund.

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

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

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

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

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

CONVERTIBLE SECURITIES

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

Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.

The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objectives. Otherwise, the Fund will hold or trade the convertible securities.
In selecting convertible securities for the Fund, the Fund's adviser evaluates
the investment characteristics of the convertible security as a fixed-income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, the Fund's adviser considers numerous factors, including
the economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.

ZERO COUPON CONVERTIBLE SECURITIES

Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.

TEMPORARY INVESTMENTS
The Fund may also invest temporarily, in amounts of 35% or less of the Fund's
assets, in cash and cash items during times of unusual market conditions to
maintain liquidity. Cash items may include the following short-term obligations:
commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);

instruments of domestic and foreign banks and savings associations (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

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 investment adviser has determined are creditworthy under
guidelines established by the Fund's Board of Directors and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned.
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

FINANCIAL FUTURES AND
OPTIONS ON FUTURES

RISKS

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

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

RESTRICTED AND ILLIQUID SECURITIES

The Fund intends to invest up to 10% of its net assets in restricted securities.
This restriction is not applicable to commercial paper issued under Section 4(2)
of the Securities Act of 1933. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objectives and policies
but which are subject to restriction on resale under federal securities law. The
Fund will limit investments in illiquid securities, including certain restricted
securities determined by the Directors not to be liquid, non-negotiable time
deposits and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.

FOREIGN SECURITIES

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

HIGH-YIELD CORPORATE DEBT OBLIGATIONS

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

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 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:

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;

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.
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 the Class A Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class A Shares in the liabilities of the Fund and those attributable to Class A
Shares, and dividing the remainder by the total number of Class A Shares
outstanding. The net asset value for Class A Shares may differ from that of
Class B Shares, Class C Shares and Class F 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.
The net asset value of each class of Shares of the Fund is determined at the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, 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.

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

HOW TO PURCHASE SHARES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares 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 the sale of Shares, Federated Securities Corp. may from time
to time offer certain items of nominal value to any shareholder or investor. The
Fund reserves the right to reject any purchase request. 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 charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE SALES CHARGE 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
<S> <C> <C> <C>
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% 2.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "Dealer Concession."

No sales charge is imposed for Shares purchased through financial intermediaries
that do not receive a reallowance of a sales charge. However, investors who
purchase Shares through a trust department, investment adviser, or other
financial intermediary may be charged a service or other fee by the financial
intermediary. Additionally, no sales charge is imposed on shareholders
designated as Liberty Life Members or on Shares purchased through "wrap
accounts" or similar programs under which clients pay a fee for services.

DEALER CONCESSION

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

REDUCING OR ELIMINATING THE
SALES CHARGE

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

quantity discounts and accumulated purchases;
- -

concurrent purchases;
- -

signing a 13-month letter of intent;
- -

using the reinvestment privilege; and
- -

purchases with proceeds from redemptions of unaffiliated investment companies.
- -

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

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

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 $90,000 and he
purchases $10,000 more at the current public offering price, the sales charge on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.50%.

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction a shareholder has the
privilege of combining concurrent purchases of Class A Shares of two or more
funds for which affiliates of Federated Investors serve as investment adviser or
principal underwriter (the "Federated Funds"), the purchase price of which
includes a sales charge. For example, if a shareholder concurrently invested
$30,000 in Class A Shares of one of the other Federated Funds with a sales
charge, and $20,000 in this Fund, the sales charge would be reduced.

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of Class A Shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter
of intent includes a provision for a sales charge adjustment depending on the
amount actually purchased within the 13-month period and a provision for the
custodian to hold 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 at 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 charge.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 the Federated
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 Shares have been redeemed in the Fund, the shareholder has the privilege,
within 120 days, to reinvest the redemption proceeds at the next determined net
asset value without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of the
reinvestment in order to receive this elimination of sales charge. If the
shareholder redeems his Shares in the Fund, there may be tax consequences.

PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES

Investors may purchase Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of an unaffiliated investment company
that were purchased or sold with a sales charge 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,
redemptions of those Shares 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.

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 of the Fund. Orders through a
financial institution are considered received when the Fund is notified of the
purchase order. Purchase orders through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be transmitted
by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to
be purchased at that day's price. Purchase orders through other financial
institutions must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be purchased at
that day's price. It is the financial institution's responsibility to transmit
orders promptly. Financial institutions may charge additional fees for their
services.

PURCHASING SHARES BY WIRE

Once an account has been established, Shares may be purchased by Federal Reserve
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: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number--the
number can be found on the account statement or by contacting the Fund); 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. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement.

PURCHASING SHARES BY CHECK

Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of shares and account
number) to: Federated Shareholder 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

EXCHANGING SECURITIES FOR FUND
SHARES

Investors may exchange certain convertible securities or a combination of
securities and cash for Shares. The securiites 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.

RETIREMENT PLANS

Shares of the Fund 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 shareholders may exchange all or some of their shares for Class A Shares
of other Federated Funds at net asset value. Neither the Fund nor any of the
Federated Funds impose any additional fees on exchanges. Shareholders in certain
other Federated Funds may exchange all or some of their Shares for Class A
Shares.

Please contact your financial institution directly or Federated Securities Corp.
at 1-800-245-5051 for information and prospectuses for the Federated Funds into

which your Shares may be exchanged free of charge.

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

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

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 exchanging 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 Shareholder Services Company, 1099 Hingham Street, Rockland,
MA 02370-3317.

TELEPHONE INSTRUCTIONS

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts, 02266-8600 and deposited to the shareholder's account before
being exchanged. Telephone instructions will be processed as of 4:00 p.m.
(Eastern time) and must be received by the Fund before that time for Shares to
be exchanged the same day. Shareholders exchanging into a fund will begin
receiving dividends the following business day. This privilege may be modified
or terminated at any time.

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

HOW TO REDEEM SHARES

REDEEMING SHARES THROUGH A
FINANCIAL INSTITUTION

Shares 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 wire-transferred 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. Proceeds from redemption requests received on holidays when wire
transfers are restricted will be wired the following business day. Questions
about telephone redemptions on days when wire transfers are restricted should be
directed to your shareholder services representative at the telephone number
listed on your account statement.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA
02266-8600. If Share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.

Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; 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.

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 use up, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
Federated Securities Corp. Due to the fact that Shares are sold with a sales
charge, it is not advisable for shareholders to be purchasing Shares while
participating in this program.

CONTINGENT DEFERRED SALES CHARGE

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 charge 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.

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 one full
year from the date of purchase. 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 one full year from
the date of purchase; (3) Shares held for less than one full year from the date
of purchase 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 Federated 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

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, and their immediate
family members; 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, 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 Shareholder Services Company maintains
a Share account for each shareholder. Share certificates are not issued unless a
request is made in writing to Federated Shareholder Services Company.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.

DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by 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 required minimum value of
$500. This requirement does not apply, however, if the balance falls below $500
because of changes in the Fund's net asset value. Before Shares are redeemed to
close an account, the shareholder is notified in writing and allowed 30 days to
purchase additional Shares to meet the minimum requirement.
- -------------------------------------------------------

FUND INFORMATION

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

INVESTMENT ADVISER

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

ADVISORY FEES

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 $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 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.

Both the Fund and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal

securities transactions; prohibit personal transactions in securities being
purchased or sold, or being considered for purchase or sale, by the Fund;
prohibit purchasing securities in initial public offerings; and prohibit taking
profits on securities held for less than sixty days. Violations of the codes are
subject to review by the Directors, and could result in severe penalties.

DISTRIBUTION OF CLASS A SHARES

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an amount,
computed at an annual rate of .50 of 1% of the average daily net asset value of
Class A Shares to finance any activity which is principally intended to result
in the sale of shares subject to the Distribution Plan. The distributor may
select financial institutions such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers to provide sales support services
as agents for their clients or customers. The Fund is not currently making
payments under the Distribution Plan, nor does it anticipate doing so in the
immediate future.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
it may make payments up to 0.25 of 1% of the average daily net asset value of
Class A Shares to obtain certain personal services for shareholders and for the
maintenance of shareholder accounts. Under the Shareholder Services Agreement,
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.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase, an amount equal to .50 of 1% of the net asset value of Shares
purchased by their clients or 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, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services agreement, Federated Securities Corp. and Federated
Shareholder Services, from

their own assets may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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

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 Services Company may choose voluntarily to waive a portion of its fee.

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
Board of Directors.

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

VOTING RIGHTS

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

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

FEDERAL INCOME TAX

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

STATE AND LOCAL 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 Class A
Shares.

Total return represents the change, over a specific period of time, in the value
of an investment in Class A Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Class A Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
A Shares over a thirty-day period by the maximum offering price per Share on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Class A Shares, and therefore, may not correlate to the dividends or other
distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge and 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 Class F Shares. Expense differences between Class A
Shares, Class B Shares and Class C Shares may affect the performance of each
class.

From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares and Class F 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 Class F Shares
to certain indices.

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

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

Class B Shares are sold at net asset value and are subject to a 12b-1 Plan, a
Shareholder Services Agreement and a minimum initial investment of $1,500,
unless the investment is in a retirement account, in which the minimum
investment is $50. A contingent deferred sales charge is imposed on certain
Shares which are redeemed within six full years of purchase.
Class C Shares are sold at net asset value and are subject to a 12b-1 Plan, a
Shareholder Services Agreement and a minimum initial investment of $1,500,
unless the investment is in a retirement account, in which the minimum
investment is $50. A contingent deferred sales charge of 1.00% is imposed on
asets redeemed within the first full 12 months following purchase.

Class F Shares are sold subject to a front-end sales charge of 1.00%, a 12b-1
Plan, a contingent deferred sales charge, a Shareholder Services Agreement and a
minimum initial 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, Class C Shares and Class F Shares are subject to
certain of the same expenses, however, the front-end sales charge for Class F
Shares is lower than that for Class A Shares. Expense differences between Class
A Shares, Class B Shares, Class C Shares and Class F Shares may affect the
performance of each class.

To obtain more information and a prospectus for Class B Shares, Class C Shares
or Class F Shares, investors may call 1-800-245-5051 or contact their financial
institution.

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

DESCRIPTION OF BOND RATINGS

STANDARD & 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.

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.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS

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.

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.

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+."

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 for bonds with higher 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.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Equity Income Fund, Inc.
Class A Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

FEDERATED EQUITY
INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND)
CLASS A SHARES

PROSPECTUS
An Open-End, Diversified
Management Investment Company
May 31, 1996

[LOGO] FEDERATED INVESTORS

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors

Cusip 313915100
G00492-04-A (5/96)

FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)

PROSPECTUS

The Class F Shares of Federated 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 Class F Shares of the Fund. Keep this prospectus for future reference.

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated May 31, 1996,
with the Securities and Exchange Commission. The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically free of charge by calling 1-800-245-5051. To obtain other
information or make inquiries about the Fund, contact your financial
institution.

Prospectus dated May 31, 1996

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

TABLE OF CONTENTS

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

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

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

Investment Objective.........................................................3

Investment Policies..........................................................3

Portfolio Turnover...........................................................8

Investment Limitations.......................................................8

Net Asset Value................................................................9

Investing in the Fund.........................................................10

How to Purchase Shares......................................................10

What Shares Cost............................................................11

Eliminating the Sales Charge................................................11

Systematic Investment Program...............................................13

Exchanging Securities for Fund Shares.......................................13

Exchange Privileges.........................................................13

Certificates and Confirmations..............................................13

Dividends...................................................................14

Capital Gains...............................................................14

How to Redeem Shares..........................................................14

Redeeming Shares Through a
Financial Institution....................................................14

Redeeming Shares by Telephone...............................................15

Redeeming Shares By Mail....................................................15

Contingent Deferred Sales Charge............................................15

Systematic Withdrawal Program...............................................16

Accounts with Low Balances..................................................17

Fund Information..............................................................17

Management of the Fund......................................................17

Distribution of Class F Shares..............................................18

Administration of the Fund..................................................19

Brokerage Transactions......................................................20

Shareholder Information.......................................................20

Voting Rights...............................................................20

Tax Information...............................................................21

Federal Income Tax..........................................................21

State and Local Taxes.......................................................21

Performance Information.......................................................21

Other Classes of Shares.......................................................22

Appendix......................................................................23

Addresses.....................................................................26

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

SUMMARY OF FUND EXPENSES
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
<TABLE>
<S> <C> <C>
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................. 1.00%
Maximum Sales Charge 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 OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................................. 0.48%
12b-1 Fee...................................................................................................... 0.25%
Total Other Expenses........................................................................................... 0.61%
Shareholder Services Fee (after waiver) (3)..................................................... 0.23%
Total Operating Expenses (4)........................................................................... 1.34%

</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
"Contingent Deferred Sales Charge".

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

(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending March 31, 1997. The total operating
expenses were 1.30% for the fiscal year ended March 31, 1996 and would have
been 1.48% absent the voluntary waivers of portions of the management fee
and the shareholder services fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class F Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" 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:................. $34 $52 $83 $170
You would pay the following expenses on the same investment, assuming no
redemption....................................................................... $24 $52 $83 $170
</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--CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, 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 10, 1996, on the Fund's financial
statements for the year ended March 31, 1996, and on the following table for the
periods presented, is included in the Annual Report, which is incorporated
herein 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,
1996 1995 1994(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.51 $ 11.06 $ 11.74
- ----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------
Net investment income 0.39 0.42 0.17
- ----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 2.99 0.46 (0.68)
- ---------------------------------------------------------------------------------- --------- --------- -----------
Total from investment operations 3.38 0.88 (0.51)
- ----------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------
Distributions from net investment income (0.38) (0.43) (0.17)
- ----------------------------------------------------------------------------------
Distributions from net realized gain on investments (0.25) -- --
- ---------------------------------------------------------------------------------- --------- --------- -----------
Total distributions (0.63) (0.43) (0.17)
- ---------------------------------------------------------------------------------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 11.51 $ 11.06
- ---------------------------------------------------------------------------------- --------- --------- -----------
TOTAL RETURN (b) 30.06% 8.05% (4.43%)
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------
Expenses 1.30% 1.24% 1.29%*
- ----------------------------------------------------------------------------------
Net investment income 2.95% 3.79% 3.71%*
- ----------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.18% 0.36% 0.89%*
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $51,707 $34,886 $21,010
- ----------------------------------------------------------------------------------
Portfolio turnover 96% 91% 43%
- ----------------------------------------------------------------------------------
</TABLE>

*Computed on an annualized basis.

(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 charge or
contingent deferred sales charge, if applicable.

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended
March 31, 1996, 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. At a meeting of the Board of Directors ("Directors") held on February 26,
1996, the Directors approved an amendment to the Articles of Incorporation of
the Fund to change the name of the Fund from Liberty Equity Income Fund, Inc. to
Federated Equity Income Fund, Inc. and to change the name of Fortress Shares to
Class F Shares. 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 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 Directors have
established four classes of shares, known as Class F Shares, Class A Shares,
Class B Shares, and Class C Shares. This prospectus relates only to the Class F
Shares ("Shares" or "Class F 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.

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

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

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

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

before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
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 associations (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

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 into 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

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

FINANCIAL FUTURES AND
OPTIONS ON FUTURES

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

FOREIGN SECURITIES

HIGH-YIELD CORPORATE DEBT OBLIGATIONS

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:

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;

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 Class F Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class F Shares in the liabilities of the Fund and those attributable to Class F
Shares, and dividing the remainder by the total number of Class F Shares
outstanding.

The net asset value for Class F 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.

The net asset value is determined at the close of trading (normally, 4:00 p.m.,
Eastern time) on the New York Stock Exchange, 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.

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

INVESTING IN THE FUND

HOW TO PURCHASE SHARES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares 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. The Fund reserves the
right to reject any purchase request. 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.

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 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
"Supplemental Payments to Financial Institutions").

PURCHASING SHARES BY WIRE

Once an account has been established, Shares may be purchased by Federal Reserve
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: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, Massachusetts
02105; Attention: EDGEWIRE; For Credit to: Federated Equity Income Fund,
Inc.--Class F Shares; (Fund Number--this number can be found on the account
statement or by contacting the Fund); 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. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales charge for purchases of $1 million or
more. In addition, no sales charge is imposed for Shares purchased through bank
trust departments or investment advisers registered under the Investment
Advisers Act of 1940 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.

Under certain circumstances, described under "How to Redeem 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 charge. Any portion of the sales charge 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 charge for Shares sold other than through
registered broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the initiation of customer accounts and
purchases of Shares.
ELIMINATING THE SALES CHARGE

The sales charge 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 charge 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 charge. 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 charge 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 charge 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 charge 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 Class F Shares over
the next 13 months, the sales charge may be reduced by signing a letter of
intent to that effect. This letter of intent includes a provision for a sales
charge 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 charge.

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 Class F
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 charge on
such purchases will not be adjusted to reflect a lower sales charge).

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 charge. Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
of the reinvestment in order to receive this elimination of the sales charge. If
the shareholder redeems his Shares, there may be tax consequences.

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge elimination, a shareholder has the
privilege of combining concurrent purchases of Class F Shares of two or more
funds for which affiliates of Federated Investors serve as investment advisers
or principal underwriter (the "Federated Funds") the purchase price of which
includes a sales charge. For example, if a shareholder concurrently invested
$400,000 in Class F Shares of one of the Federated Funds, and $600,000 in Class
F Shares, the sales charge would be eliminated. (Not all Federated Funds
currently offer Class F Shares. Contact your financial institution regarding the
availability of other Federated Class F Shares.)

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

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. 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 charge 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

Class F Shareholders may exchange all or some of their Shares, at net asset
value for Class F Shares of other Federated 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 F
Shares of other Federated 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.

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 Class F 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. The
exchange privilege is available to shareholders residing in any state in which
the shares being acquired may be legally sold.

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

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

CERTIFICATES AND CONFIRMATION

As transfer agent for the Fund, Federated Shareholder 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

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
charge, unless shareholders request cash payments on the new account form or by
writing to the transfer agent. All shareholders on the record date are entitled
to the dividend. If Shares are redeemed or exchanged prior to the record date or
purchased after the record date, those Shares are not entitled to that month's
dividend.

CAPITAL GAINS

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

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

HOW TO REDEEM 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.

REDEEMING SHARES 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 (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 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.

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 an Automated Clearing House will not be
wired until that method of payment has cleared. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement.

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. If share
certificates have not been issued, the request should be sent to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.

Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; 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.

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>
4 years or
Up to $1,999,999 less 1%
2 years or
$2,000,000 to $4,999,999 less .50%
$5,000,000 or more 1 year or less .25%
</TABLE>

To the extent that a shareholder exchanges between or among Class F Shares in
other Federated Funds, 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
Federated 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 Federated 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 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 charge and a
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.

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

DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
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.

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

DISTRIBUTION PLAN AND SHAREHOLDER
SERVICES

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
Class F 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 services or
distribution-related support services as agents for their clients or customers.

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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Class F Shares to obtain certain personal services for shareholders and for
the maintenance of shareholder accounts. Under the Shareholder Services
Agreement, with 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.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

Federated Securities Corp. 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 charge 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, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholders Services, from their own assets may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. 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

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 Services Company may choose voluntarily to waive a portion of its fee.

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.

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

As of May 6, 1996, the following shareholders of record owned 25% or more of the
outstanding Class F Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (as
record owner holding Class F Shares for its clients), Jacksonville, Florida,
owned approximately 900,253 Class F Shares (23.83%).

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

FEDERAL INCOME TAX

STATE AND LOCAL 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 Class F
Shares.

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

The yield of Class F Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
F Shares over a thirty-day period by the maximum offering price per share of
Class F 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 Class F 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 charge, contingent deferred sales charges, which, if
excluded, would increase the total return and yield.

- -------------------------------------------------------
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 charge and a Shareholder
Services Agreement. 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 A Shares are subject to a 12b-1 Plan,
however it is not currently making payments, nor does it anticipate doing so in
the immediate future.

Class B Shares are sold at net asset value and are subject to a 12b-1 Plan and a
Shareholder Services Agreement. 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. A contingent deferred sales
charge is imposed on certain shares which are redeemed within six full years of
purchase.

Class C Shares are sold at net asset value and are subject to a 12b-1 Plan and a
Shareholder Services Agreement. 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. A contingent deferred sales charge is
imposed on assets redeemed within the first full 12 months following purchase.

Class A Shares, Class B Shares, Class C Shares and Class F Shares are subject to
certain of the same expenses, however, the front-end sales load for Class F
Shares is lower than that for Class A Shares. Expense differences, however,
between Class A Shares, Class B Shares, C Shares and Class F 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 1-800-245-5051 or contact their
financial institution.

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

DESCRIPTION OF BOND RATINGS

STANDARD & 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.

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

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS

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

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+."

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.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Equity Income Fund, Inc.
Class F Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------

Custodian
State Street Bank and Trust Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219
- ---------------------------------------------------------------------------------------------------------------------

</TABLE>

FEDERATED EQUITY
INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY
INCOME FUND, INC.)
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
PROSPECTUS
An Open-End, Diversified
Management Investment Company
Prospectus dated May 31, 1996

[LOGO] FEDERATED INVESTORS

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors

313915407
8062806A-F (5/96)

FEDERATED EQUITY INCOME FUND, INC.
(FORMERLY, LIBERTY EQUITY INCOME FUND, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares, and the
prospectus for Class F Shares of Federated Equity Income Fund, Inc. (the
"Fund"), dated May 31, 1996. This Statement is not a prospectus itself.
You may request a copy of either prospectus or a paper copy of this
Statement, if you received it electronically, free of charge by calling 1-
800-245-5051.

Statement dated May 31, 1996

FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor
of the Funds and is a subsidiary of Federated Investors.

CUSIP 313915100
CUSIP 313915209
CUSIP 313915308
CUSIP 313915407
8062806B(5/96)

GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVES AND POLICIES 3
CONVERTIBLE SECURITIES 3
TEMPORARY INVESTMENTS 4
WARRANTS 5
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 6
REPURCHASE AGREEMENTS 6
FUTURES AND OPTIONS TRANSACTIONS 6
RESTRICTED AND ILLIQUID SECURITIES 10
LENDING OF PORTFOLIO SECURITIES 10
REVERSE REPURCHASE AGREEMENTS 11
PORTFOLIO TURNOVER 11
INVESTMENT LIMITATIONS 12
FEDERATED EQUITY INCOME FUND, INC. MANAGEMENT 16
OFFICERS AND DIRECTORS COMPENSATION 24
DIRECTOR LIABILITY 13
INVESTMENT ADVISORY SERVICES 26
ADVISER TO THE FUND 26
ADVISORY FEES 26
BROKERAGE TRANSACTIONS 27
OTHER SERVICES 28
FUND ADMINISTRATION 28
CUSTODIAN AND PORTFOLIO ACCOUNTANT 29
TRANSFER AGENT 29
INDEPENDENT AUDITORS 29
PURCHASING SHARES 29
DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT 29
CONVERSION TO FEDERAL FUNDS 30
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND
EMPLOYEES 31
EXCHANGING SECURITIES FOR FUND SHARES 31
DETERMINING NET ASSET VALUE 32
DETERMINING MARKET VALUE OF SECURITIES 32
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY) 33
REDUCED SALES CHARGE 33
REQUIREMENTS FOR EXCHANGE 34
TAX CONSEQUENCES 34
MAKING AN EXCHANGE 34
REDEEMING SHARES 35
REDEMPTION IN KIND 35
TAX STATUS 35
THE FUND'S TAX STATUS 35
SHAREHOLDERS' TAX STATUS 36
TOTAL RETURN 36
YIELD 38
CURRENT DISTRIBUTIONS 38
PERFORMANCE COMPARISONS 39
ECONOMIC AND MARKET INFORMATION 21
ABOUT FEDERATED INVESTORS 41
MUTUAL FUND MARKET 42
INSTITUTIONAL CLIENTS 42
TRUST ORGANIZATIONS 43
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES 43
FINANCIAL STATEMENTS 43

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 February 26, 1996, the Board of Directors approved an
amendment to the Articles of Incorporation of the Fund to change the name of
the Fund from Liberty Equity Income Fund, Inc. to Federated Equity Income
Fund, Inc. 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 Class F Shares (individually and
collectively referred to as "Shares," as the context may require). This
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 associations 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, 1996 and 1995, the
portfolio turnover rates were 96% and 91%, 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 the Fund's net assets, to be included within the
overall 5% limit on investments in warrants, 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 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.

FEDERATED EQUITY INCOME FUND, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Equity Income Fund, Inc., and principal
occupations.

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

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; Director or
Trustee of the Funds; formerly, Senior Partner, Ernst & Young LLP.

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 or Trustee 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 or Trustee 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
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman of
the Company.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee 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 or Trustee 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; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director or Trustee of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.

Peter E. Madden
Seacliff
562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director or
Trustee 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; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee
of the Funds.

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 or Trustee of the Funds.

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director or Trustee of the Funds.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and Secretary
of the Funds.

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

David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President and Trustee, Federated Investors; Vice President,
Federated Shareholder Services; Executive Vice President, Federated
Securities Corp.; Treasurer of some of the Funds.

* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated
GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Master Trust; Federated Municipal Opportunities Fund,
Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; Federated Utility Fund, Inc.;
High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
As of May 6, 1996, 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 1,302,407 Class A
Shares (8.14%).
As of May 6, 1996, the following shareholder of record owned 5% or more
of the outstanding Class A Shares of the Fund: Sheldon & Co., National
City Bank, Cleveland, OH, owned approximately 1,336,070 Class A Shares
(8.35%).
As of May 6 , 1996, the following shareholder of record owned 5% or
more of the outstanding Class B Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class B Shares for its
clients), Jacksonville, Florida, owned approximately 456,559 Class C
Shares (7.60%).
As of May 6, 1996, 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 1,661,399 Class C
Shares (46.23%).
As of May 6, 1996, the following shareholders of record owned 5% or
more of the outstanding Class F Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class F Shares for its
clients), Jacksonville, Florida, owned approximately 900,253 Class F
Shares (23.83%).

OFFICERS AND 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 54 other investment companies in the Fund
Complex
J. Christopher Donahue, $0 $0 for the Fund and
Executive Vice President 16 other investment companies in the Fund
Complex
and Director
Thomas G. Bigley, ++ $611.40 $86,331 for the Fund and
Director 54 other investment companies in the Fund
Complex
John T. Conroy, Jr., $1,305.53 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
William J. Copeland, $1,305.53 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
James E. Dowd, $1,305.53 $115,760 for the Fund and
Director 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., $1,305.53 $115,760 for the Fund and
Director 54 other investment companies in the Fund
Complex
Peter E. Madden, $1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Gregor F. Meyer, $1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
John E. Murray, Jr., $1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Wesley W. Posvar,$1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex
Marjorie P. Smuts, $1,195.40 $104,898 for the Fund and
Director 54 other investment companies in the Fund
Complex

*Information is furnished for the fiscal year ended March 31, 1996.
+The information is provided for the last calendar year.
++ Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee of 15 additional Funds.
DIRECTOR LIABILITY
The Articles of Incorporation provide that the Directors will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

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, 1996, 1995, and 1994, the Fund's Adviser earned
$1,573,643, $960,072 , and $398,315 , respectively, of which $ 418,318 ,
$570,904 and $398,315 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.
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: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates in advising the Fund and 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. 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. During the fiscal
years ended March 31, 1996, 1995, and 1994, the Fund paid total brokerage
commissions of $611,535, $363,114, and 125,372, respectively.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the Adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and
one or more other accounts managed by the Adviser are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will
be to the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the respective prospectuses. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc., served as the Fund's
administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and Federated
Administrative Services, Inc. may hereinafter collectively be referred to as
the Administrators". For the fiscal years ended March 31, 1996, 1995 and
1994, the Administrators earned $214,999, $200,945 and $308,878,
respectively. 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 Services Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh, PA,
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments. 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.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based on the size, type
and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh, PA.
PURCHASING SHARES

Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A
Shares and Class F 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 Class F Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
With respect to all classes of Shares, the Fund has adopted a Distribution
Plan in accordance with Investment Company Act Rule 12b-1. Additionally, the
Fund has adopted a Shareholder Services Agreement with respect to all
classes of Shares.
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, 1996, payment in the amounts of $195,799
(Class B Shares), $280,409 (Class C Shares) and $106,589 (Class F Shares),
were made pursuant to the Distribution Plans. The Fund is not currently
making payments under the Distribution Plan for Class A Shares, nor does it
anticipate doing so in the immediate future. In addition, for the fiscal
year ended March 31, 1996, payment in the amounts of $390,360 (Class A
Shares), $65,266 (Class B Shares), $93,469 (Class C Shares), and $106,589
(Class F Shares), was made pursuant to the Shareholder Services Agreement,
of which $62,458 (Class A Shares), $0 (Class B Shares), $5,957 (Class C
Shares), $8,527 (Class F Shares) was waived.
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 Shareholders Services 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 and their immediate
family members, 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 charge and are not subject to a
contingent deferred sales charge (Class B Shares, Class C Shares, and Class
F 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 charge 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 (CLASS F SHARES ONLY)

This section relates only to Class F 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 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 Class
F Shares for shares in other Federated Funds (which are sold with a sales
charge different from that of the Fund or with no sales charge and which are
advised by subsidiaries or affiliates of Federated Investors) without the
assessment of a contingent deferred sales charge on the exchanged Shares.
The order also allows certain other funds that are not advised by
subsidiaries or affiliates of Federated Investors, which do not have a sales
charge, to exchange their shares for Class F Shares on a basis other than
their current offering price. These exchanges may be made to the extent that
such shares were acquired in a prior exchange, at net asset value, for
shares of a Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Class F 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 fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, Class F 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 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 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 transfer agent
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 may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
respective prospectuses under "How to Redeem Shares" and "Redeeming Class F
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.
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 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:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan 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, 1996 and for the period from December
30, 1986, (date of initial public investment) to March 31, 1996, were
23.20%, 15.16% and 11.87%, respectively.
The Fund's cumulative total returns for Class B Shares, for the fiscal year
ended March 31, 1996 and for the period from September 27, 1994, (date of
initial public offering), to March 31, 1996, were 23.69% and 18.85%,
respectively.
The Fund's average annual total returns for Class C Shares for the fiscal
year ended March 31, 1996 and for the period from May 3, 1993, (date of
initial public offering), to March 31, 1996, were 28.40% and 14.16%,
respectively.
The Fund's average annual total returns for Class F Shares for the fiscal
year ended March 31, 1996 and for the period from November 12, 1993 (date of
initial public offering), to March 31, 1996 were 27.72% and 12.29%,
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 charge, 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 charge 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 30-day SEC yield for Class A Shares, Class B Shares, Class C
Shares, and Class F Shares, were 2.45%, 1.86%, 1.80% and 2.26%,
respectively, for the period ended March 31, 1996.
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 Class F Shares
average net annualized current distributions rate for the thirty days ended
March 31, 1996, were 2.86%, 2.34%, 2.28% and 2.75%, 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.
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 charge or contingent deferred sales charge, as applicable.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which
it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how
such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the
mutual fund industry, including the growth of the industry, from sources
such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS

Federated Investors 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. These traders handle
trillions of dollars in annual trading volume.
In the equity sector, Federated Investors has more than 25 years'
experience. As of December 31, 1995, Federated Investors managed 22 equity
funds totaling approximately $5.4 billion in assets across growth, value,
equity income, international, index and sector (i.e. utility) styles.
Federated Investors '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, 1995, Federated Investors
managed 10 money market funds, and 14 bond funds with assets approximating
$11.5 billion, and $2.7 billion, respectively. Federated Investor'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 Investors introduced one of the first high-yield
bond funds in the industry. In 17 years ending December 1995, Federated
Investor's high-yield portfolios experienced a default rate of just 1.86%,
versus 3.10% for the market as a whole. In 1983, Federated Investors 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 Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' 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 $3 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 CLIENTS
Federated Investors 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 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. Federated Investor's
service to financial professionals and institutions has earned it high
rankings in several DALBAR Surveys. The marketing effort to these firms is
headed by James F. Getz, President, Broker/Dealer Division.
FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended March 31, 1996, are
incorporated herein by reference to the Annual Report of the Fund dated
March 31, 1996 (File Nos. 33-6901 and 811-4743). A copy of this Report may
be obtained without charge by contacting the Fund.