FEDERATED EQUITY INCOME FUND INC, N-30D, 1997-05-21

FEDERATED EQUITY INCOME FUND INC
N-30D, 1997-05-21

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[Graphic]
Federated Investors

Federated
Equity Income
Fund, Inc.

11TH ANNUAL REPORT
MARCH 31, 1997
ESTABLISHED 1986

PRESIDENT'S MESSAGE

[Graphic]

Dear Fellow Shareholder:

Federated Equity Income Fund, Inc. was established in 1986, and I am pleased
to present its 11th Annual Report. Over the 12-month period, fund assets
soared from $391 million on the first day of the period to reach the $1
billion milestone on March 31, 1997. This extraordinary growth reflects a
sizable increase in the value of fund shares, as well as the confidence
expressed by our long-time and new shareholders as they purchased shares for
their accounts.

This report covers the 12-month period from April 1, 1996, through March 31,
1997. It begins with a discussion with portfolio manager Linda Duessel, Vice
President, Federated Advisers. Following her discussion are three additional
items of shareholder interest.

First is a series of graphs indicating the fund's performance with all
distributions reinvested, and the investment results of making additional
investments in the fund with all distributions reinvested.

Second is a complete listing of the fund's common and preferred stocks and
convertible securities.

Third is the publication of the fund's financial statements.

The fund's broadly diversified, sector neutral portfolio responded well to a
highly favorable stock market. Shareholders enjoyed fine performance from
the fund's holdings of more than 41 good, dividend-paying stocks and 29
convertible securities. This sector neutral portfolio invests in the 12
major industry sectors, and includes such well-known names as Avon Products,
Bristol-Myers Squibb, DuPont (E.I.) de Nemours, Exxon, Ford, General
Electric, General Mills, H. J. Heinz, IBM, Microsoft, J.C. Penney, and Union
Pacific.

Although the stock market became more volatile in early 1997, the fund is
managed to provide a measure of defense against difficult market conditions.
As Linda Duessel discusses, the fund has had a strong record of
outperforming the Standard & Poor's 500 Index* during market corrections
over the past 10 years.

* Standard & Poor's 500 Index is an unmanaged index of common stocks in
industry, transportation, and financial and public utility companies.
Investments cannot be made in an index.

The fund's total performance, including capital appreciation, income
dividends, and realized gain distributions, is listed below.**

TOTAL INCOME CAPITAL GAINS NET ASSET VALUE
RETURN DISTRIBUTIONS DISTRIBUTIONS INCREASE
Class A Shares 18.82% $0.41 $0.84 $14.26 TO $15.59=9.33%
Class B Shares 17.92% $0.30 $0.84 $14.26 TO $15.59=9.33%
Class C Shares 17.90% $0.29 $0.84 $14.26 TO $15.59=9.33%
Class F Shares 18.50% $0.37 $0.84 $14.26 TO $15.59=9.33%

We trust you were pleased with the continued positive performance of your
equity-income investment.

Remember, reinvesting your Federated Equity Income Fund, Inc. earnings is a
convenient way to build the value of your account -- and see the number of
shares increase each month. Reinvesting brings into play the benefit of
monthly compounding of shares.

Sincerely,

[Graphic]

Richard B. Fisher
President

May 15, 1997

** Performance quoted is based on net asset value and reflects past
performance. Past performance is not indicative of future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Total returns for the period based on offering price for Class A, B, C, and
F Shares were 12.28%, 12.02%, 16.84%, and 16.29%, respectively.

Investment Review

[Graphic]

Linda Duessel
Vice President
Federated Advisers

[Graphic]

AFTER AN EXTENDED PERIOD OF HIGH RETURNS, THE MARKET'S EUPHORIA WAS
DIMINISHED BY INCREASED VOLATILITY THAT STRUCK LATE IN THE FUND'S FISCAL
YEAR. CAN YOU COMMENT?

The stock market completed a year in 1996 with a gain of 22.96% on the
Standard & Poor's 500 Index ("S&P 500 Index") and a gain of 28.88% on the
Dow Jones Industrial Average. The reason this bull market is so rare is that
there have been only six back-to-back years with gains of +20% since 1900.
While a two-year cumulative gain of 69.09% on the S&P 500 Index should make
everyone joyous, history has shown that the third year (i.e. 1997) is
usually less than stellar. That seems to hold true as increasing nervousness
has been felt in the market as the first quarter of 1997 closed. The S&P 500
Index has fallen 7.25% through March 31, 1997, since reaching its record of
816.29 in mid-February 1997, and the decline continued in early April 1997.

Recent events on the interest rate front have fueled the market's worries.
In late March 1997, Mr. Greenspan raised the Fed Funds Target Rate to 5.50%,
an increase of 0.25%. Concerns about whether additional rate increases will
follow in upcoming months has caused a great deal of market uncertainty.
This concern is legitimate, as past rate increases have typically occurred
in a series when inflation is low.

[Graphic]

HOW DID FEDERATED EQUITY INCOME FUND, INC. PERFORM FOR ITS SHAREHOLDERS OVER
THE 12-MONTH PERIOD ENDED MARCH 31, 1997?

The fund performed well within its peer group. Federated Equity Income Fund,
Inc. A, B, C, and F Share classes delivered total returns of 18.82%, 17.92%,
17.90%, and 18.50%, respectively based on net asset value* -- compared to
the average Lipper equity income fund gain of 15.59%. As a result, the
fund's Class A Shares ranked in the top 25% of 165 equity-income funds over
the 12-month period ended March 31, 1997, as tracked by Lipper Analytical
Services, Inc.** The fund did not quite match the returns of the S&P 500
Index, which advanced 19.83%.

* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Total returns for the period based on offering price for
Class A, B, C, and F Shares were 12.28%, 12.02%, 16.84% and 16.29%,
respectively.

** Lipper Analytical Services, Inc. ranks funds in various fund categories
based on total return and does not include the effect of sales charges. As
of 3/31/97, the Class A Shares ranked 6 out of 59 and 5 out of 27 equity
income funds for the 5- and 10-year periods, respectively.

[Graphic]

WHAT IS YOUR ANALYSIS OF THE MARKET'S VALUATION?

Even with the recent correction, the market still appears expensive. Stocks
are, therefore, vulnerable to earnings surprises, and in fact, we have seen
increasing examples of stocks being punished severely when the companies
fall even slightly short of earnings estimates. Earnings are vulnerable due
to the lack of corporate pricing power, a situation made worse by the
strengthening dollar that allows foreign competitors to price their products
more aggressively than domestic competitors.

[Graphic]

WHAT STRATEGIES HELPED THE FUND COPE WITH THIS TYPE OF MARKET ENVIRONMENT?

In a volatile market environment, we believe in the ownership of higher
dividend yielding, large-capitalization stocks. These stocks generally
outperform the market in that good dividend-paying stocks and convertible
securities should offer some downside protection. In line with that belief,
it is appropriate to note that Federated Equity Income Fund, Inc. has a
gross dividend yield of almost two times that of the S&P 500 Index. In
general, our strategy focuses on three key areas:

1. We avoid market timing strategies; the fund is fully invested, i.e., no
cash call.

2. We maintain a sector-neutral approach to the S&P 500 Index's weightings.
It is extremely difficult to consistently choose winning sectors and avoid
losing sectors. For example, several of last year's leaders in the stock
market are down sharply in 1997. Lower oil prices have hurt energy stocks,
and flattening demand has hurt technology shares. Finance stocks have
suffered recently as investors perceive that rising interest rates will hurt
this sector's profits. We are sector neutral.

3. We focus our efforts on buying high-quality companies with above-average
yield and sustainable dividend growth rates.

[Graphic]

WHAT IS THE TRACK RECORD OF THIS DEFENSIVE STRATEGY?

This defensive strategy has worked very well for our shareholders. The fund
outperformed the S&P 500 Index in 30 of the 31 market corrections of at
least 2% in the period between January 2, 1990 and March 31, 1997.

[Graphic]
CAN YOU LIST A FEW OF THE FUND'S RECENT TRANSACTIONS, ALONG WITH A BRIEF
COMMENTARY ON EACH?

In the ENERGY MINERALS sector, we sold our position in Atlantic Richfield,
which we felt was inferior to our other integrated oil company holdings,
Exxon and Mobil. We purchased a new 3.75% convertible bond of Diamond
Offshore, the leading competitor in the growing deep-water drilling market.

In TECHNOLOGY, we eliminated the Analog Devices 3.5% convertible bond
position, as the company continued to experience flat growth. We replaced it
with the more defensive Lockheed Martin, the dominant supplier to aerospace.
In this sector, we also purchased a new 3.25% convertible bond of EMC Corp.,
the premier company for mainframe and open system disc storage.

In PRODUCER MANUFACTURING, we eliminated the Greenfield Industries 6%
convertible preferred stock holding after a series of disappointing
quarterly earnings reports. We replaced it with the Series A convertible
preferred of Case Corp., the second largest manufacturer of farm equipment
in the U.S. and the largest producer of construction equipment in the world,
which is experiencing strong demand and is also cutting costs.

In FINANCE, we sold our First USA PRIDES after Bank One agreed to buy the
company at a huge premium, and replaced it with a newly issued and
attractively priced 7.875% convertible preferred of National Australia Bank,
a major investment-grade Australian bank and the second largest listed
company in Australia.

In the UTILITY sector, we sold the 6% convertible preferreds of Airtouch
Communications due to increased competition in the wireless industry and
purchased Sprint Corp., the fastest growing long-distance company. We also
sold Southern Co., a high-quality electric utility whose stock has been held
back by concerns of dilutive acquisitions, and replaced it with the
convertible preferreds of CalEnergy, an independent power producer whose
earnings are expected to grow 22% annually for the next two years.

[Graphic]

AT THE CLOSE OF THE PERIOD, HOW WERE THE FUND'S ASSETS ALLOCATED AMONG
DIFFERENT SECTORS COMPARED TO THE S&P 500 INDEX?

This listing clearly displays our sector neutral style:

PERCENTAGE PERCENTAGE
OF NET ASSETS OF S&P 500 INDEX
Technology 14.90 14.01
Finance 14.24 15.17
Consumer Non-Durables 11.61 12.16
Health Care 10.64 11.21
Utilities 9.43 9.92
Energy Minerals 9.07 8.93
Producer Manufacturing 7.12 7.18
Basic Industry 6.04 6.22
Services 4.24 4.69
Retail Trade 3.91 4.61
Consumer Durables 3.64 3.55
Transportation 1.26 1.42

[Graphic]

WHAT WERE THE FUND'S TOP TEN HOLDINGS AT THE END OF THE PERIOD AS A
PERCENTAGE OF THE PORTFOLIO?

The fund's top holdings as of March 31, 1997 were:

PERCENTAGE
NAME OF NET ASSETS CURRENT YIELD
Mellon Bank Corp. 2.50% 3.30%
General Mills, Inc. 2.38% 3.41%
First Union Corp. 2.28% 2.86%
Exxon Corp. 2.25% 2.93%
Heinz (H.J.) Co. 2.23% 2.94%
Mobil Corp. 2.22% 3.25%
Solectron Corp., Conv. Bond 2.21% 5.75%
Guinness PLC, ADR 2.14% 1.66%
Electronic Data Systems 2.14% 1.49%
Avnet, Inc. 2.06% 1.06%
Total Percentage of Portfolio 22.41%

TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED EQUITY INCOME FUND, INC.

INITIAL INVESTMENT:

IF YOU HAD MADE AN INITIAL INVESTMENT OF $11,000 IN THE CLASS A SHARES OF
FEDERATED EQUITY INCOME FUND, INC. ON 12/30/86, REINVESTED DIVIDENDS AND
CAPITAL GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD BE WORTH
$36,870 ON 3/31/97. YOU WOULD HAVE EARNED A 12.52%* AVERAGE ANNUAL TOTAL
RETURN FOR THE INVESTMENT LIFE SPAN OF THE FUND WHICH IS OVER 10 YEARS.

One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends,
and you gain the benefit of compounding.

As of 3/31/97, the Class A Shares' average annual one-year, five-year, and
ten-year total returns were 12.28%, 14.72%, and 12.17%, respectively. Class
B Shares' average annual one-year and since inception (9/27/94) total
returns were 12.02% and 18.88%, respectively. Class C Shares' average annual
one-year and since inception (5/3/93) total returns were 16.84% and 15.11%,
respectively. Class F Shares' average annual one-year and since inception
(11/12/93) total returns were 16.29% and 14.12%, respectively.

`Graphic representation ``A'' omitted. See Appendix.''

* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.5%
sales charge applicable to an initial investment in Class A Shares.

Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so an
investor's shares, when redeemed, may be worth more or less than their
original cost.

FEDERATED EQUITY INCOME FUND, INC.

ONE STEP AT A TIME:

$1,000 INVESTED EACH YEAR FOR OVER TEN YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $24,222.

With this approach, the key is consistency.

If you had started investing $1,000 annually in the Class A Shares of
Federated Equity Income Fund, Inc. on 12/30/86, reinvested your dividends
and capital gains, and did not redeem any shares, you would have invested
only $11,000, but your account would have reached a total value of $24,222*
by 3/31/97. You would have earned an average annual total return of 14.30%.

A practical investment plan helps you pursue growth and income through
common stocks and convertible securities. Through systematic investing, you
buy shares on a regular basis and reinvest all earnings. This investment
plan works for you when you invest only $1,000 annually. You can take it one
step at a time. Put time, money, and compounding to work!

`Graphic representation ``B'' omitted. See Appendix.''

* No method of investing can guarantee a profit or protect against loss in
down markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.

Because such a plan involves continuous investment, regard- less of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.

FEDERATED EQUITY INCOME FUND, INC.
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR A COLLEGE EDUCATION

David and Joan Rice are a fictional couple who, like many shareholders, are
searching for a way to make their money grow over time.

David and Joan are planning for the college education of their child in ten
years. On 3/31/87, they invested $5,000 in the Class A Shares of Federated
Equity Income Fund, Inc. Since then, David and Joan have made additional
investments of $250 every month.

As this chart shows, over 10 years, the original $5,000 investment along
with their additional monthly $250 investments totaling $35,000 has grown to
$78,413. This represents a 13.63% average annual total return.* For the
Rices, a dedicated program of monthly investment really paid off.

`Graphic representation ``C'' omitted. See Appendix.''

* This hypothetical scenario is provided for illustrative purposes only and
does not represent the result obtained by any particular shareholder.

Past performance does not guarantee future results.

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

GROWTH OF $10,000 INVESTED IN FEDERATED EQUITY INCOME FUND, INC. (CLASS A
SHARES)

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Equity Income Fund, Inc. (Class A Shares) (the "Fund") from March
31, 1987 to March 31, 1997, compared to the Standard and Poor's 500 Index
(S&P 500)+ and the Lipper Equity Income Funds Index (LEIFI).+

`Graphic representation ``D'' omitted. See Appendix.''

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.

* Represents a hypothetical investment of $10,000 in the Fund after
deducting the maximum sales charge of 4.50% ($10,000 investment minus $450
sales charge = $9,550) that was in effect prior to October 1, 1994. As of
October 1, 1994, the maximum sales charge was 5.50%. The Fund's performance
assumes the reinvestment of all dividends and distributions. The S&P 500 and
the LEIFI have been adjusted to reflect reinvestment of dividends on
securities in the indices.

** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

+ The S&P 500 and the LEIFI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.

FEDERATED EQUITY INCOME FUND, INC.
(CLASS B SHARES)

GROWTH OF $10,000 INVESTED IN FEDERATED EQUITY INCOME FUND, INC. (CLASS B
SHARES)

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Equity Income Fund, Inc. (Class B Shares) (the "Fund") from
September 27, 1994 (start of performance) to March 31, 1997 compared to the
Standard & Poor's 500 Index (S&P 500)+ and the Lipper Equity Income Funds
Index (LEIFI).+

`Graphic representation ``E'' omitted. See Appendix.''

* Represents a hypothetical investment of $10,000 in the Fund. The ending
value of the Fund reflects a 4.00% contingent deferred sales charge on any
redemption less than three years from the purchase date. The maximum
contingent deferred sales charge is 5.50% on any redemption less than one
year from the purchase date. The Fund's performance assumes the reinvestment
of all dividends and distributions. The S&P 500 and the LEIFI have been
adjusted to reflect reinvestment of dividends on securities in the indices.

** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The S&P 500 and the LEIFI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.

FEDERATED EQUITY INCOME FUND, INC.
(CLASS C SHARES)

GROWTH OF $10,000 INVESTED IN FEDERATED EQUITY INCOME FUND, INC. (CLASS C
SHARES)

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Equity Income Fund, Inc. (Class C Shares) (the "Fund") from May 3,
1993 (start of performance) to March 31, 1997 compared to the Standard &
Poor's 500 Index (S&P 500)+ and the Lipper Equity Income Funds Index
(LEIFI).+

`Graphic representation ``F'' omitted. See Appendix.''

* Represents a hypothetical investment of $10,000 in the Fund. The ending
value of the Fund reflects a 1.00% contingent deferred sales charge on any
redemption less than one year from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions. The S&P 500 and
the LEIFI have been adjusted to reflect reinvestment of dividends on
securities in the indices.

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

GROWTH OF $10,000 INVESTED IN FEDERATED EQUITY INCOME FUND, INC. (CLASS F
SHARES)

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Equity Income Fund, Inc. (Class F Shares) (the "Fund") from
November 12, 1993 (start of performance) to March 31, 1997 compared to the
Standard & Poor's 500 Index (S&P 500)+ and the Lipper Equity Income Funds
Index (LEIFI).+

`Graphic representation ``G'' omitted. See Appendix.''

* Represents a hypothetical investment of $10,000 in the Fund after
deducting the maximum sales charge of 1.00% ($10,000 investment minus $100
sales charge = $9,900). The ending value of the Fund reflects a contingent
deferred sales charge of 1.00% on any redemption less than four years from
the purchase date. The Fund's performance assumes the reinvestment of all
dividends and distributions. The S&P 500 and the LEIFI have been adjusted to
reflect reinvestment of dividends on securities in the indices.

** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

+ The S&P 500 and the LEIFI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the fund's
performance. The indices are unmanaged.

FEDERATED EQUITY INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS

MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 62.4%
BASIC INDUSTRY -- 4.8%
520,000 Allegheny Teledyne, Inc. $ 14,625,000
230,000 Consolidated Papers, Inc. 11,988,750
118,000 Du Pont (E.I.) de Nemours & Co. 12,508,000
205,000 Eastman Chemical Co. 11,018,750
Total 50,140,500
CONSUMER DURABLES -- 1.3%
435,000 Ford Motor Co. 13,648,125
CONSUMER NON-DURABLES -- 11.6%
250,000 Avon Products, Inc. 13,125,000
399,200 General Mills, Inc. 24,800,300
525,000 Guinness PLC, ADR 22,246,875
587,900 Heinz (H.J.) Co. 23,222,050
153,000 Philip Morris Cos., Inc. 17,461,125
463,300 Tambrands, Inc. 19,863,988
Total 120,719,338
ENERGY MINERALS -- 5.7%
216,700 Exxon Corp. 23,349,425
176,600 Mobil Corp. 23,068,375
480,000 YPF Sociedad Anonima, ADR 12,720,000
Total 59,137,800
FINANCE -- 5.5%
291,900 First Union Corp. 23,680,387
356,900 Mellon Bank Corp. 25,964,475
135,500 NationsBank Corp. 7,503,313
Total 57,148,175
</TABLE>

FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
HEALTH CARE -- 7.5%
356,000 American Home Products Corp. $ 21,360,000
326,800 Bristol-Myers Squibb Co. 19,281,200
590,000 Glaxo Wellcome PLC, ADR 20,871,250
200,000 Merck & Co., Inc. 16,850,000
Total 78,362,450
PRODUCER MANUFACTURING -- 5.3%
597,000 Dresser Industries, Inc. 18,059,250
180,000 General Electric Co. 17,865,000
186,800 Textron, Inc. 19,614,000
Total 55,538,250
RETAIL TRADE -- 1.4%
300,000 Penney (J.C.) Co., Inc. 14,287,500
SERVICES -- 1.3%
194 (a)Advanstar Corp., Warrants 0
470,000 Browning-Ferris Industries, Inc. 13,571,250
Total 13,571,250
TECHNOLOGY -- 9.7%
380,000 Avnet, Inc. 21,422,500
550,000 Electronic Data Systems Corp. 22,206,250
280,000 General Dynamics Corp. 18,865,000
154,000 International Business Machines Corp. 21,155,750
200,000 Lockheed Martin Corp. 16,800,000
Total 100,449,500
TRANSPORTATION -- 1.3%
230,000 Union Pacific Corp. 13,052,500
UTILITIES -- 7.0%
30,700 Enron Corp. 1,166,600
470,000 Frontier Corp. 8,401,250
257,800 NIPSCO Industries, Inc. 10,118,650
</TABLE>

FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
UTILITIES -- CONTINUED
328,900 Pacific Telesis Group $ 12,415,975
290,600 Panenergy Corp. 12,532,125
285,000 Portland General Corp. 9,939,375
250,000 Sprint Corp. 11,375,000
150,000 Williams Cos., Inc. (The) 6,675,000
Total 72,623,975
TOTAL COMMON STOCKS (IDENTIFIED COST $583,124,301) 648,679,363
CONVERTIBLE PREFERRED STOCKS -- 23.5%
BASIC INDUSTRY -- 1.2%
335,000 Merrill Lynch & Co., Inc., STRYPES, Series IML, 6.25% 12,646,250
CONSUMER DURABLES -- 1.1%
1,118,100 Tyco Toys, Inc., Conv. Pfd., Series C, $.41 11,320,763
ENERGY MINERALS -- 1.6%
300,000 (b)Tosco Corp., Conv. Pfd. 16,619,100
FINANCE -- 8.8%
320,000 (b)Frontier Insurance Group, Inc., Conv. Pfd., $3.13 17,760,000
169,900 Jefferson-Pilot Corp., Conv. Pfd., $5.26 16,777,625
280,000 Merrill Lynch & Co., Inc., STRYPES, Series MGIC, $3.12 18,340,000
805,500 National Australia Bank, Ltd., Melbourne, Exchangeable
Capital Unit, $1.97 20,137,500
360,000 SunAmerica, Inc., PERCS, 8.50% 14,220,000
42,000 SunAmerica, Inc., PERCS, Series E, $3.10 3,717,000
Total 90,952,125
HEALTH CARE -- 1.7%
210,000 Aetna, Inc., Conv. Pfd., $4.76 17,272,500
</TABLE>

FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
PRODUCER MANUFACTURING -- 1.8%
149,900 Case Corp., Cumulative Conv. Pfd., Series A, $4.50 $ 18,516,697
SERVICES -- 2.9%
1,000,000 Hollinger International Publishing, Inc., Conv. Pfd., $.95 10,000,000
147,500 Ikon Office Solutions, Inc., Conv. Pfd., Series BB, $5.04 11,929,062
200,000 (b)SFX Broadcasting, Inc., Conv. Pfd., $3.25 8,608,600
Total 30,537,662
TECHNOLOGY -- 2.0%
262,600 Microsoft Corp., Cumulative Conv. Pfd., Series A, $2.20 21,303,425
UTILITIES -- 2.4%
175,000 (b)CalEnergy Co. II, Inc., Conv. Pfd. 8,903,125
20,000 CalEnergy Co., Inc., Conv. Pfd., $3.13 1,290,000
160,000 Salomon, Inc., DECS, Series CSN, $3.48 9,440,000
55,000 Williams Cos., Inc. (The), Conv. Pfd., $3.50 5,780,555
Total 25,413,680
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $229,781,621) 244,582,202
CONVERTIBLE CORPORATE BONDS -- 10.2%
CONSUMER DURABLES -- 1.3%
$ 12,000,000 Magna International, Inc., Conv. Bond, 5.00%, 10/15/2002 12,940,680
ENERGY MINERALS -- 1.8%
17,500,000 Diamond Offshore Drilling, Inc., Conv. Bond, 3.75%, 2/15/2007 18,537,575
HEALTH CARE -- 1.4%
13,000,000 Tenet Healthcare Corp., Conv. Bond, 6.00%, 12/1/2005 15,006,160
RETAIL TRADE -- 2.5%
10,000,000 Federated Department Stores, Inc., Conv. Bond, 5.00%, 10/1/2003 11,748,500
15,000,000 Saks Holdings, Inc., Conv. Bond, 5.50%, 9/15/2006 14,614,350
Total 26,362,850
</TABLE>

FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CONVERTIBLE CORPORATE BONDS -- CONTINUED
TECHNOLOGY -- 3.2%
$ 9,990,000 (b)EMC Corp. Mass, Sub. Note, 3.25%, 3/15/2002 $ 10,164,825
22,000,000 (b)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 22,990,000
Total 33,154,825
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST $104,654,097) 106,002,090
(C)REPURCHASE AGREEMENT -- 3.1%
32,715,000 BT Securities Corporation, 6.45%, dated 3/31/1997, due 4/1/1997
(AT AMORTIZED COST) 32,715,000
TOTAL INVESTMENTS (IDENTIFIED COST $950,275,019)(D) $1,031,978,655
</TABLE>

(a) Non-income producing security.

(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At March 31, 1997, these securities amounted
to $85,045,650 which represents 8.2% of net assets.

(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreement is through
participation in a joint account with other Federated funds.

(d) The cost of investments for federal tax purposes amounts to
$950,663,833. The net unrealized appreciation of investments on a federal
tax basis amounts to $81,314,822 which is comprised of $98,943,407
appreciation and $17,628,585 depreciation at March 31, 1997.

Note: The categories of investments are shown as a percentage of net assets
($1,039,998,200) at March 31, 1997.

The following acronyms are used throughout this portfolio:

ADR -- American Depository Receipt

DECS -- Dividend Enhanced Convertible Stock

PERCS -- Preferred Equity Redemption Cumulative Stock

PLC -- Public Limited Company

STRYPES -- Structured Yield Product Exchangeable for Stock
(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES

MARCH 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $950,275,019 and tax cost $ 1,031,978,655
$950,663,833)
Cash 10,781
Income receivable 3,126,478
Receivable for shares sold 10,708,743
Total assets 1,045,824,657
LIABILITIES:
Payable for investments purchased $2,067,233
Payable for shares redeemed 2,596,113
Income distribution payable 398,184
Payable for taxes withheld 71,221
Accrued expenses 693,706
Total liabilities 5,826,457
Net Assets for 66,690,958 shares outstanding $ 1,039,998,200
NET ASSETS CONSIST OF:
Paid in capital $ 925,189,537
Net unrealized appreciation of investments 81,703,636
Accumulated net realized gain on investments 33,924,551
Distributions in excess of net investment income (819,524)
Total Net Assets $ 1,039,998,200
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($431,280,796 / 27,656,479 shares outstanding) $15.59
Offering Price Per Share (100/94.50 of $15.59)* $16.50
Redemption Proceeds Per Share $15.59
CLASS B SHARES:
Net Asset Value Per Share ($418,675,410 / 26,847,803 shares outstanding) $15.59
Offering Price Per Share $15.59
Redemption Proceeds Per Share (94.50/100 of $15.59)** $14.73
CLASS C SHARES:
Net Asset Value Per Share ($101,587,640 / 6,514,433 shares outstanding) $15.59
Offering Price Per Share $15.59
Redemption Proceeds Per Share (99.00/100 of $15.59)** $15.43
CLASS F SHARES:
Net Asset Value Per Share ($88,454,354 / 5,672,243 shares outstanding) $15.59
Offering Price Per Share (100/99.00 of $15.59)* $15.75
Redemption Proceeds Per Share (99.00/100 of $15.59)** $15.43
</TABLE>

* See "How to Purchase Shares" in the Prospectus.

** See "Contingent Deferred Sales Charge" in the Prospectus.

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

STATEMENT OF OPERATIONS

YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 20,671,620
Interest 4,960,286
Total income 25,631,906
EXPENSES:
Investment advisory fee $ 4,100,883
Administrative personnel and services fee 516,371
Custodian fees 100,604
Transfer and dividend disbursing agent fees and expenses 624,509
Directors'/Trustees' fees 20,284
Auditing fees 17,637
Legal fees 4,380
Portfolio accounting fees 149,853
Distribution services fee -- Class B Shares 1,645,601
Distribution services fee -- Class C Shares 556,995
Distribution services fee -- Class F Shares 176,501
Shareholder services fee -- Class A Shares 798,002
Shareholder services fee -- Class B Shares 548,534
Shareholder services fee -- Class C Shares 185,665
Shareholder services fee -- Class F Shares 176,501
Share registration costs 233,345
Printing and postage 114,629
Insurance premiums 8,315
Taxes 53,842
Miscellaneous 3,778
Total expenses 10,036,229
Waivers --
Waiver of shareholder services fee -- Class A Shares $ (127,680)
Waiver of shareholder services fee -- Class F Shares (7,703)
Total waivers (135,383)
Net expenses 9,900,846
Net investment income 15,731,060
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 50,872,590
Net change in unrealized appreciation of investments 42,343,319
Net realized and unrealized gain on investments 93,215,909
Change in net assets resulting from operations $ 108,946,969
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 15,731,060 $ 7,752,425
Net realized gain (loss) on investments
($51,113,225 and $25,405,444 net gains,
respectively, as computed for federal tax 50,872,590 28,594,767
purposes)
Net change in unrealized appreciation 42,343,319 29,709,991
(depreciation)
Change in net assets resulting from 108,946,969 66,057,183
operations
NET EQUALIZATION CREDITS -- 480,911 542,386
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Class A Shares (8,786,457) (5,006,103)
Class B Shares (4,349,221) (660,772)
Class C Shares (1,455,111) (903,387)
Class F Shares (1,747,407) (1,247,685)
Distributions from net realized gains
Class A Shares (16,098,902) (3,301,588)
Class B Shares (9,615,580) (624,304)
Class C Shares (3,712,059) (748,630)
Class F Shares (3,635,381) (845,316)
Change in net assets resulting from (49,400,118) (13,337,785)
distributions to shareholders
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED
TO NET INVESTMENT INCOME) --
Proceeds from sale of shares 671,827,000 191,379,119
Net asset value of shares issued to 39,864,665 9,252,011
shareholders in payment of distributions
declared
Cost of shares redeemed (122,876,164) (42,568,011)
Change in net assets resulting from share 588,815,501 158,063,119
transactions
Change in net assets 648,843,263 211,324,903
NET ASSETS:
Beginning of period 391,154,937 179,830,034
End of period $ 1,039,998,200 $ 391,154,937
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

FINANCIAL HIGHLIGHTS -- CLASS A SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(A) 1987(B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84 $ 9.22 $10.18 $10.00
INCOME FROM INVEST-
MENT OPERATIONS
Net investment
income 0.42 0.46 0.49 0.43 0.55 0.69 0.84 0.91 0.89 0.72 0.23
Net realized and un-
realized gain (loss)
on investments 2.16 2.96 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59 (0.81) 0.18
Total from invest-
ment operations 2.58 3.42 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48 (0.09) 0.41
LESS DISTRIBUTIONS
Distributions from
net investment
income (0.41) (0.41) (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86) (0.72) (0.23)
Distributions in
excess of net invest-
ment income(c) -- -- -- -- -- -- -- (0.41) -- -- --
Distributions from
net realized gain
on investments (0.84) (0.25) -- -- -- -- -- (0.52) -- (0.15) --
Total distributions (1.25) (0.66) (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86) (0.87) (0.23)
NET ASSET VALUE,
END OF PERIOD $15.59 $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84 $ 9.22 $10.18
TOTAL RETURN(D) 18.82% 30.37% 8.31% 5.29% 18.98% 21.19% 8.95% (3.19)% 28.25% (0.54)% 3.63%
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.08% 1.03% 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77% 1.16%* 1.22%*
Net investment
income 2.68% 3.19% 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02% 8.32%* 6.93%*
Expense waiver/
reimbursement(e) 0.04% 0.20% 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25% 0.86%* 0.28%*
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $431,281 $220,268 $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306 $8,895 $10,866
Average commis-
sion rate paid(f) $0.0530 -- -- -- -- -- -- -- -- -- --
Portfolio turnover 75% 96% 91% 43% 79% 115% 31% 54% 49% 41% 24%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations 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.)

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

(c) Distributions in excess of net investment inome were a result of certain
book and tax 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.

(f) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $11.50 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.34 0.32(d) 0.19
Net realized and unrealized gain (loss) on investments 2.13 3.01 0.26
Total from investment operations 2.47 3.33 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.30) (0.32) (0.19)
Distributions from net realized gain on investments (0.84) (0.25) --
Total distributions (1.14) (0.57) (0.19)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.50
TOTAL RETURN(B) 17.92% 29.40% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.87% 1.83% 1.80%*
Net investment income 1.85% 2.31% 3.42%*
Expense waiver/reimbursement(c) -- 0.16% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $418,675 $71,019 $6,072
Average commission rate paid(e) $0.0530 -- --
Portfolio turnover 75% 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 the sales charge or
contingent deferred sales charge, if applicable.

(d) Calculated using average outstanding shares.

(e) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

FINANCIAL HIGHLIGHTS -- CLASS C SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $ 11.50 $11.06 $10.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.30 0.32 0.37 0.34
Net realized and unrealized gain (loss) on investments 2.16 3.00 0.44 0.28
Total from investment operations 2.46 3.32 0.81 0.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.29) (0.31) (0.37) (0.32)
Distributions from net realized gain on investments (0.84) (0.25) -- --
Total distributions (1.13) (0.56) (0.37) (0.32)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(B) 17.90% 29.39% 7.52% 5.66%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.87% 1.80% 1.76% 1.79%*
Net investment income 1.89% 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) $101,588 $48,161 $30,189 $24,632
Average commission rate paid(d) $0.0530 -- -- --
Portfolio turnover 75% 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.

(d) Represents total commissions paid on portfolio securities divided by
total portfolio shares purchased or sold on which commissions were charged.
This disclosure is required for fiscal years beginning on or after
September 1, 1995.

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

FINANCIAL HIGHLIGHTS -- CLASS F SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.26 $11.51 $11.06 $11.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.38 0.39 0.42 0.17
Net realized and unrealized gain (loss) on investments 2.16 2.99 0.46 (0.68)
Total from investment operations 2.54 3.38 0.88 (0.51)
LESS DISTRIBUTIONS
Distributions from net investment income (0.37) (0.38) (0.43) (0.17)
Distributions from net realized gain on investments (0.84) (0.25) -- --
Total distributions (1.21) (0.63) (0.43) (0.17)
NET ASSET VALUE, END OF PERIOD $15.59 $14.26 $11.51 $11.06
TOTAL RETURN(B) 18.50% 30.06% 8.05% (4.43)%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.36% 1.30% 1.24% 1.29%*
Net investment income 2.41% 2.95% 3.79% 3.71%*
Expense waiver/reimbursement(c) 0.01% 0.18% 0.36% 0.89%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $88,454 $51,707 $34,886 $21,010
Average commission rate paid(d) $0.0530 -- -- --
Portfolio turnover 75% 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.

(See Notes which are an integral part of the Financial Statements)

FEDERATED EQUITY INCOME FUND, INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1997

1. ORGANIZATION

Federated Equity Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund offers four classes of
shares: Class A Shares, Class B Shares, Class C Shares, and Class F Shares.
The investment objective of the Fund is to provide above average income and
capital appreciation.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

INVESTMENT VALUATIONS -- Listed corporate bonds are generally valued at the
mean of the latest bid and asked price as furnished by an independent
pricing service. Listed equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are valued
at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at the
time of purchase may be valued at amortized cost, which approximates fair
market value.

REPURCHASE AGREEMENTS -- It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System, or to have segregated within the custodian bank's
vault, all securities held as collateral under repurchase agreement
transactions. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
collateral to ensure that the value of collateral at least equals the
repurchase price to be paid under the repurchase agreement transaction.

The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral securities.

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.

Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are due to differing treatments for
equalization and have been reclassified as follows:

INCREASE (DECREASE)

PAID-IN ACCUMULATED DISTRIBUTIONS IN EXCESS
CAPITAL OF NET INVESTMENT INCOME

$480,911 $(480,911)

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.

EQUALIZATION -- The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

RESTRICTED SECURITIES -- Restricted securities are securities that may only
be resold upon registration under federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Directors. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Fund's pricing committee.

Additional information on each restricted security held at March 31, 1997 is
as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE(S) ACQUISITION COST
<S> <C> <C>
Tosco Corp., Conv. Pfd. 12/10/96 - 2/5/97 $15,504,475
Frontier Insurance Group, Inc., Conv. Pfd. 10/9/96 - 12/19/96 16,156,230
SFX Broadcasting, Inc., Conv. Pfd. 5/22/96 - 11/27/96 10,144,375
CalEnergy Co. II, Inc., Conv. Pfd. 3/20/97 8,750,000
EMC Corp. Mass, Sub. Note 3/6/97 9,990,000
Solectron Corp., Conv. Bond 2/15/96 - 2/20/97 24,871,735
</TABLE>

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.

OTHER -- Investment transactions are accounted for on the trade date.

3. CAPITAL STOCK

At March 31, 1997, par value shares ($0.01 per share) authorized were as
follows:

NUMBER OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
Class A 500,000,000
Class B 500,000,000
Class C 500,000,000
Class F 500,000,000
Total 2,000,000,000

Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT

<S> <C> <C> <C> <C>
Shares sold 16,344,330 $246,303,152 7,673,265 $101,202,866
Shares issued to shareholders in
payment of distributions declared 1,194,325 17,720,003 417,516 5,532,039
Shares redeemed (5,333,044) (81,159,165) (2,086,538) (27,277,129)
Net change resulting from
Class A Share transactions 12,205,611 $182,863,990 6,004,243 $ 79,457,776
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 22,544,007 $339,570,016 4,577,763 $62,087,710
Shares issued to shareholders in
payment of distributions declared 852,599 12,801,151 82,607 1,119,010
Shares redeemed (1,529,865) (23,434,206) (207,101) (2,790,499)
Net change resulting from
Class B Share transactions 21,866,741 $328,936,961 4,453,269 $60,416,221
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,514,431 $52,478,856 1,204,046 $15,997,658
Shares issued to shareholders in
payment of distributions declared 308,800 4,586,335 78,365 1,044,627
Shares redeemed (687,088) (10,415,521) (528,182) (6,800,666)
Net change resulting from
Class C Share transactions 3,136,143 $46,649,670 754,229 $10,241,619
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,247,501 $33,474,976 917,406 $12,090,885
Shares issued to shareholders in
payment of distributions declared 320,769 4,757,176 117,150 1,556,335
Shares redeemed (523,006) (7,867,272) (439,804) (5,699,717)
Net change resulting from
Class F Share transactions 2,045,264 $30,364,880 594,752 $7,947,503
Net change resulting from
Fund Share transactions 39,253,759 $588,815,501 11,806,493 $158,063,119
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE -- Federated Advisers, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.60% of the Fund's average daily net assets.

ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.

DISTRIBUTION SERVICES FEE -- The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp.("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Fund's Class A Shares, Class B Shares, Class C
Shares, and Class F Shares. The Plan provides that the Fund may incur
distribution expenses according to the following schedule annually, to
compensate FSC.

PERCENTAGE OF AVERAGE DAILY
SHARE CLASS NET ASSETS OF CLASS

Class A Shares 0.50%

Class B Shares 0.75%

Class C Shares 0.75%

Class F Shares 0.25%

For the year ended March 31, 1997, Class A Shares did not incur a
distribution services fee.

SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS
up to 0.25% of average daily net assets of the Fund for the period. The fee
paid to FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. FSS may voluntarily choose to waive any
portion of its fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- Federated
Services Company ("FServ"), through its subsidiary, Federated Shareholder
Services Company ("FSSC") serves as transfer and dividend disbursing agent
for the Fund. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.

PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.

GENERAL -- Certain of the Officers and Directors of the Fund are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended March 31, 1997, were as follows:

PURCHASES $ 1,032,150,175
SALES $ 500,896,950

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Directors and Shareholders of
FEDERATED EQUITY INCOME FUND, INC.:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Equity Income Fund,
Inc., as of March 31, 1997, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended and financial highlights for the periods
presented therein. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of March 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Federated Equity Income Fund, Inc. at March 31, 1997, and the results of its
operations for the year then ended, changes in its net assets for each of
the two years in the period then ended, and the financial highlights for
each of the periods presented therein, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

Pittsburgh, Pennsylvania
May 12, 1997

Directors

John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts

Officers

John F. Donahue
Chairman

Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President

Edward C. Gonzales
Executive Vice President

John W. McGonigle
Executive Vice President, Treasurer, and Secretary

S. Elliott Cohan
Assistant Secretary

Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves risk, including
possible loss of principal.

This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses and other
information.

[Graphic]
Federated Investors
Federated Securities Corp., Distributor

Cusip 313915100
Cusip 313915209
Cusip 313915308
Cusip 313915407

8042506 (5/97)

A. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an initial investment of
$11,000 in the Class A Shares of Federated Equity Income Fund, Inc. on
December 30, 1986 would have grown to $36,870 on March 31, 1997. The `x''
axis reflects computation periods from December 30, 1986 to March 31, 1997.
The `y'' axis reflects the cost of the investment which shows a total
investment range from $0 to $40,000. The chart further indicates the ending
market value attributable to principal, as well as the ending market value
attributable to reinvested income.

B. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an initial investment of
$1,000 in the Class A Shares of Federated Equity Income Fund, Inc. on
December 30, 1986 would have grown to $24,222 by March 31, 1997. The `x''
axis reflects computation periods from December 30, 1986 to March 31, 1997.
The `y'' axis reflects the cost of the investment which shows a total
investment range from $0 to $25,000. The chart further indicates the ending
market value attributable to principal, as well as the ending market value
attributable to reinvested income.

C. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an initial investment of
$5,000 in the Class A Shares of Federated Equity Income Fund, Inc. on March
31, 1987 would have grown to $78,413 over a period of ten years. The `x''
axis reflects computation periods from March 31, 1987 to March 31, 1997.
The `y'' axis reflects the cost of the investment which shows a total
investment range from $0 to $80,000. The chart further indicates the ending
market value attributable to principal, as well as the ending market value
attributable to reinvested income.

D. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
A Shares of Federated Equity Income Fund, Inc. (the `Fund'') is
represented by a solid line, whereas Standard & Poor's 500 Index (`S&P
500') is represented by a dotted line and Lipper Equity Income Funds Index
(`LEIFI'') is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $10,000 in the Class A Shares of the Fund and S&P 500 and
LEIFI for the ten year period from March 31, 1987 to March 31, 1997. The
`y'' axis reflects the cost of the investment. The ``x'' axis reflects
computation periods from the ending value of the hypothetical investment in
the Class A Shares of the Fund as compared to S&P 500 and LEIFI; the ending
values are $31,873; $34,995; and $30,058, respectively. Beneath the list of
components that correspond to the line graph are the following total return
data for the Class A Shares of the Fund: total return figures for the one-
year, five-year, ten-year, and inception-to-date average annualized total
return. The corresponding total return figures are as follows: 12.28%,
14.72%, 12.17%, and 12.53%, respectively.

E. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
B Shares of Federated Equity Income Fund, Inc. (the `Fund'') are
represented by a solid line, whereas Standard & Poor's 500 Index (`S&P
500') is represented by a dotted line and Lipper Equity Income Funds Index
(`LEIFI'') is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $10,000 in the Class B Shares of the Fund and S&P 500 and
LEIFI for the period from September 27, 1994 (start of performance) to
March 31, 1997. The `y'' axis reflects the cost of the investment. The
`x'' axis reflects computation periods from the ending value of the
hypothetical investment in the Class B Shares of the Fund as compared to
S&P 500 and LEIFI; the ending values are $15,434; $18,293; and $16,033,
respectively. Beneath the list of components that correspond to the line
graph are the following total return data for the Class B Shares of the
Fund: total return figures for the one-year and inception-to-date average
annualized total return. The corresponding total return figures are as
follows: 12.02% and 18.88%, respectively.

F. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
C Shares of Federated Equity Income Fund, Inc. (the `Fund'') is
represented by a solid line, whereas Standard & Poor's 500 Index (`S&P
500') is represented by a dotted line and Lipper Equity Income Funds Index
(`LEIFI'') is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $10,000 in the Class B Shares of the Fund and S&P 500 and
LEIFI for the period from May 3, 1993 (start of performance) to March 31,
1997. The `y'' axis reflects the cost of the investment. The ``x'' axis
reflects computation periods from the ending value of the hypothetical
investment in the Class C Shares of the Fund compared to S&P 500 and LEIFI;
the ending values are $17,331; $18,554; and $16,636, respectively. Beneath
the list of components that correspond to the line graph are the following
total return data for the Class C Shares of the Fund: total return figures
for the one year and inception-to-date average annualized total return. The
corresponding total return figures are as follows: 16.84% and 15.11%,
respectively.

G. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
F Shares of Federated Equity Income Fund, Inc. (the `Fund'') is
represented by a solid line, whereas Standard & Poor's 500 Index (`S&P
500') is represented by a dotted line and Lipper Equity Income Funds Index
(`LEIFI'') is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $10,000 in the Class F Shares of the Fund and S&P 500 and
LEIFI for the period from November 12, 1993 (start of performance) to March
31, 1997. The `y'' axis reflects the cost of the investment. The ``x'' axis
reflects computation periods from the ending value of the hypothetical
investment of Class F Shares of the Fund as compared to S&P 500 and LEIFI;
the ending values are $15,636; $18,554; and $16,636, respectively. Beneath
the list of components that correspond to the line graph are the following
total return data for Class F Shares of the Fund: total return figures for
the one year and inception-to-date average annualized total return. The
corresponding total return figures are as follows: 16.29% and 14.12%,
respectively.