FEDERATED EQUITY INCOME FUND INC, N-30D, 1998-05-27

FEDERATED EQUITY INCOME FUND INC
N-30D, 1998-05-27

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FEDERATED EQUITY INCOME FUND, INC.

12TH ANNUAL REPORT
MARCH 31, 1998

ESTABLISHED 1986

Dear Fellow Shareholder:

Federated Equity Income Fund, Inc. was created in 1986, and I am pleased to
present its 12th Annual Report. The fund invests in large, well-known
corporations with histories of steadily rising dividends and steadily rising
values. Over the 12-month reporting period, fund assets continued to grow and
had reached over $2 billion by March 31, 1998. This extraordinary asset growth
reflected 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. An average of $90 million in assets came into the
fund monthly over the past year.

This report covers the 12-month period from April 1, 1997 through March 31,
1998. It begins with a discussion with the fund's portfolio manager, Linda
Duessel, Vice President of Federated Advisers. Following her discussion are
three additional items of shareholder interest. First, is a series of graphs
showing long-term investment performance. 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.

Certainly we are enjoying this remarkable stock market. Shareholders enjoyed
fine performance from the fund's sector-neutral portfolio of more than 78 good,
dividend-paying common and preferred stocks and 10 convertible securities. The
fund's manager does not overweight the best performing sector, but remains
"sector neutral." The fund's holdings included such well-known names as Avon
Products, Bristol-Myers Squibb, DuPont, Exxon, Ford, General Electric, H. J.
Heinz, IBM, Microsoft, and J.C. Penney.

During the 12-month reporting period, the fund did not match the explosive
48.00% total return achieved by the Standard & Poor's ("S&P") 500 Index.* Why?
Because the fund was and is defensively managed to help protect its share value
in this highly valued market. This defensive strategy has served its
shareholders well over the years. As Linda Duessel discusses, the fund
outperformed the S&P 500 Index during all 13 market corrections of 2% or more
during 1997 and continued to provide a current dividend yield that was
consistently 50% greater than the yield of the S&P 500 Index. Since May 1991,
the fund's total return has matched that of the S&P 500 Index. Considering the
extended, highly valued market that we have been experiencing, the fund's
defensive strategy may offer the fund's portfolio manager and shareholders a
degree of comfort.

* The S&P 500 Index is an unmanaged index of common stocks in industry,
transportation and financial and public utility companies. Investments may not
be made in an index.

Individual share class total return performance, including capital appreciation,
income dividends, and realized gains, follows.** <TABLE> <CAPTION>

TOTAL CAPITAL NET ASSET
RETURN INCOME GAINS VALUE INCREASE
<S> <C> <C> <C> <C>
Class A Shares 31.80% $0.40 $0.87 $15.59 to $19.14 = 23%
Class B Shares 30.90% $0.26 $0.87 $15.59 to $19.15 = 23%
Class C Shares 30.90% $0.26 $0.87 $15.59 to $19.15 = 23%
Class F Shares 31.54% $0.35 $0.87 $15.59 to $19.15 = 23%
</TABLE>

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,

Richard B. Fisher
President

May 15, 1998

** Performance quoted is based on net asset value, 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 reporting period based on
offering price for Class A, B, C, and F Shares were 24.53%, 25.02%, 29.80%, and
29.12%, respectively.

INVESTMENT REVIEW
[Graphic]
Linda Duessel
Vice President
Federated Advisers
[Graphic]

PLEASE COMMENT ON THE FUND'S FISCAL YEAR, WHICH WAS AN EXTRAORDINARY PERIOD FOR
EQUITIES.

The U.S. stock market completed an exceedingly strong year in 1997, adding
numerous first-time statistics to the record books:

* For the first time in history, the U.S. stock market posted three years of
gains in excess of 20%.

* The current bull market was unprecedented in its duration since the 1990
bottom.

* The market completed an unprecedented streak of seven straight years without a
down year.

Going into 1998, the bull market marched on as stocks soared in the first
quarter of 1998, with the Dow Jones Industrial Average returning 11.30% -- the
best first quarter since 1987. The first quarter's return of 13.95% for the S&P
500 Index has already surpassed most market forecasters' projected returns for
the entire year. This strength was particularly impressive given the fact that
analysts' first quarter earnings estimates for companies in the S&P 500 Index
were slashed over recent months to just 0.90%, which would have been the weakest
quarter since the 1990-1991 recession.*

[Graphic]

WHAT IS YOUR PERSPECTIVE ON THE MARKET'S VALUATION?

As we discussed in the fund's last report that covered the first half of its
fiscal year, the market has been historically overvalued and priced as if we
were in a perfect environment for stocks. In recent months, we have seen
evidence that the environment is not perfect; the currency crisis in Asia has
strongly affected many emerging country stock markets, their economies, and
their currencies. Interestingly, the nearly 10% decline in the S&P 500 Index in
late October, which was spurred by Asian concerns, was completely recovered in
just six weeks. This was surely an impressive comeback.

* Source: IBES International

[Graphic]

HOW DID FEDERATED EQUITY INCOME FUND, INC. PERFORM FOR ITS SHAREHOLDERS FOR
THE FISCAL YEAR ENDED MARCH 31, 1998?

For the 12-month reporting period ended March 31, 1998, the fund's Class A, B,
C, and F Shares produced competitive total returns of 31.80%, 30.90%, 30.90%,
and 31.54%, respectively, based on net asset value.* By comparison, the total
return of the S&P 500 Index was 48.00% and the average equity-income fund
return, as tracked by Lipper Analytical Services, Inc., was 37.99%.+

[Graphic]

THE FUND'S DEFENSIVE POSTURE IS THE PRIMARY REASON THAT ITS TOTAL RETURN
LAGGED THE RETURN OF THIS EXPLOSIVE MARKET. CAN YOU ELABORATE?

Approximately 25% of the fund's portfolio was invested in convertible securities
which have served to increase the dividend payout of the portfolio, reduce its
risk, and helped the fund outperform the S&P 500 Index in periods of correction.
However, they caused the fund to lag a particularly strong market.

The benefit of the fund's defensive posture is evident when we look at its
record during market corrections. The fund outperformed the S&P 500 Index during
all 13 market corrections of 2% or more during 1997, and continued to provide a
current dividend yield that was consistently 50% greater than the yield of the
S&P 500 Index. Since May 1991, the fund provided investors with outstanding
gains, matching that of the S&P 500 Index.

* Performance quoted is based on net asset value, 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 24.53%, 25.02%, 29.80%, and 29.12%,
respectively.

+ Lipper indices measure the performance of the 30 largest mutual funds in each
respective fund category. The equity-income funds category contains funds that
seek relatively high current income and growth of income through investing 60%
or more of their portfolios in equities.

[Graphic]

WHAT HAVE YOU BEEN BUYING AND SELLING RECENTLY IN THE FUND?

In the Finance sector, we eliminated our position in MGIC/MML STRYPES, the
convertible preferred securities of MGIC INVESTMENT CORP. and replaced it with
BANC ONE CORP., a major regional bank that appeared quite inexpensive and has
been enjoying improved fundamentals. We also eliminated our position in FRONTIER
INSURANCE convertible preferreds. We used the proceeds from these sales to
purchase positions in two high-quality real estate investment trusts ("REITs"),
DUKE REALTY INVESTMENTS, INC., and MEDITRUST CORP. The defensive REITs group is
undervalued versus the broad market.

In the Health Care sector, we eliminated the convertible securities positions of
MEDPARTNERS, INC. and TENET HEALTHCARE (VENCOR), INC. We sold our position in
DURA PHARMACEUTICALS convertible bond, as well as our holdings in AMERICAN HOME
PRODUCTS CORP. common stock after each appreciated rapidly. Our purchases
included ABBOTT LABORATORIES, a leading pharmaceutical and health care products
company, as well as MCKESSON CORP. convertible preferreds, a major
pharmaceutical distributor.

In the Technology sector, we eliminated the ADAPTEC, INC. convertible bond
position. We purchased HEWLETT-PACKARD CO., a leader in printers, computers,
calculators, and workstations, at an inexpensive valuation. We also purchased
AMP, INC., a worldwide producer of electrical connection devices.

[Graphic]

WHAT WERE THE FUND'S TOP 10 HOLDINGS AS OF MARCH 31, 1998, AND WHAT WERE THE
INDUSTRY WEIGHTINGS?

The top holdings and sector weightings were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME NET ASSETS
<S> <C>
Microsoft Corp. Conv. Pfd. 2.23%
General Mills, Inc. 2.16%
First Union Corp. 2.16%
Heinz (H.J.) Co. 1.85%
Merck & Co. 1.79%
Dresser Industries, Inc. 1.75%
Enron Corp. 1.74%
Bristol-Myers Squibb Co. 1.72%
General RE Corp. 1.69%
Mellon Bank Corp. 1.68%
TOTAL 18.77%

<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SECTOR NET ASSETS S&P 500 INDEX
<S> <C> <C>
Finance 15.98% 16.90%
Technology 13.48% 14.67%
Consumer Non-Durables 12.83% 10.78%
Utilities 12.16% 10.60%
Health Care 9.46% 11.78%
Energy/Minerals 6.86% 7.65%
Producer Manufacturing 6.34% 7.69%
Retail Trade 5.02% 5.16%
Basic Industry 4.28% 4.83%
Services 4.02% 5.35%
Consumer Durables 4.00% 3.36%
Transportation 1.48% 1.23%
Other 4.09% 0.00%
</TABLE>
[Graphic]

WHAT IS YOUR PERSPECTIVE ON THIS UNPRECEDENTED BULL MARKET?

We acknowledge the continued strength of the U.S. stock market, fueled by low
inflation, low interest rates, a strong economy, and mutual fund inflows. Still,
the further advance of stocks will depend on earnings improvements, and this is
where we believe the market is vulnerable. We will maintain our defensive
posture by investing, as always, in dominant dividend-paying companies, with an
emphasis on those which are growing dividends and which appear inexpensive in
our technical work. We will remain fully invested, sector neutral, and will
maintain a healthy component of convertible securities.

SHAREHOLDER MEETING RESULTS

A Special Meeting of fund shareholders was held on November 14, 1997. On
September 10, 1997, the record date for shareholders voting at the meeting,
there were 85,698,207 total outstanding shares. The following items were
considered by shareholders and the results of their voting were as follows:

AGENDA ITEM 1: To elect two Directors:*

SHARES VOTED SHARES WITHHELD
FOR AUTHORITY
Thomas G. Bigley 48,257,795 2,102,951
John E. Murray, Jr. 48,247,792 2,112,954

AGENDA ITEM 2: To approve or disapprove the removal of the fund's fundamental
investment limitation restricting the fund's investment in restricted securities
to 10% of its total assets.

The results of shareholders voting were as follows:

SHARES VOTED SHARES VOTED SHARES BROKER
FOR AGAINST ABSTAINED NON-VOTE
36,138,596 2,446,671 2,869,434 8,906,045

AGENDA ITEM 3: To approve or disapprove the removal of the fund's fundamental
investment limitation regarding investing in oil, gas, or other mineral
exploration or development programs.

The results of shareholders voting were as follows:

SHARES VOTED SHARES VOTED SHARES BROKER
FOR AGAINST ABSTAINED NON-VOTE
35,472,984 2,989,087 2,992,631 8,906,044

AGENDA ITEM 4: To approve or disapprove an amendment to the fund's
fundamental investment limitation concerning diversification.

The results of shareholders voting were as follows:

SHARES VOTED SHARES VOTED SHARES BROKER
FOR AGAINST ABSTAINED NON-VOTE
36,234,102 2,342,031 2,878,570 8,906,043

* The following directors of the fund continued their terms as directors of
the fund: John F. Donahue, J. Christopher Donahue, John T. Conroy, Jr.,
William J. Copeland, James E. Dowd, Lawrence D. Ellis, M.D., Edward L.
Flaherty, Jr., Peter E. Madden, Wesley W. Posvar, Marjorie P. Smuts.

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 $12,000 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 HAVE BEEN WORTH $53,427
ON 3/31/98. YOU WOULD HAVE EARNED A 14.19%* AVERAGE ANNUAL TOTAL RETURN FOR THE
INVESTMENT LIFE SPAN.

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 3/31/98, the Class A Shares' average annual 1-year, 5-year, and 10-year
total returns were 24.53%, 17.09%, and 15.68%, respectively. Class B Shares'
average annual 1-year and since inception (9/27/94) total returns were 25.02%
and 22.59%, respectively. Class C Shares' average annual 1-year and since
inception (5/3/93) total returns were 29.80% and 18.16%, respectively. Class F
Shares' average annual 1-year and since inception (11/12/93) total returns were
29.12% and 18.08%, respectively.**

[Graphic] - See Appendix (A)

* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50% 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 that an investor's
shares, when redeemed, may be worth more or less than their original cost.

** The total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, the 1.00%
contingent deferred sales charge for Class C Shares, and the 1.00% sales charge
and 1.00% contingent deferred sales charge for Class F Shares.

FEDERATED EQUITY INCOME FUND, INC.

ONE STEP AT A TIME:

$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR 11
YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $32,935.

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 $12,000, but
your account would have reached a total value of $32,935* by 3/31/98. You would
have earned an average annual total return of 16.44%.

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. An 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] - See Appendix (B)

* This chart assumes that the subsequent annual investments are made on the last
day of each anniversary month. 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. All accumulated shares have the ability to pay income to the investor.

Because such a plan involves continuous investment, regardless 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. On March
31, 1988, 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 $93,678.
This represents a 16.55% average annual total return. For the Rices, a dedicated
program of monthly investments really paid off.

[Graphic] - See Appendix (C)

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 Federated
Equity Income Fund, Inc. (Class A Shares) (the "Fund") from March 31, 1988 to
March 31, 1998, compared to the Standard and Poor's 500 Index (S&P 500) and the
Lipper Equity Income Fund Index (LEIFI).+

[Graphic] - See Appendix (D)

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 Federated
Equity Income Fund, Inc. (Class B Shares) (the "Fund") from September 27, 1994
(start of performance) to March 31, 1998, compared to the Standard & Poor's 500
Index (S&P 500) and the Lipper Equity Income Fund
Index (LEIFI).+

[Graphic] - See Appendix (E)

* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 3.00% contingent deferred sales charge on any redemption
less than four 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 Federated
Equity Income Fund, Inc. (Class C Shares) (the "Fund") from May 3, 1993 (start
of performance) to March 31, 1998, compared to the Standard & Poor's 500 Index
(S&P 500) and the Lipper Equity Income Fund Index (LEIFI).+

[Graphic] - See Appendix (F)

* 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.

** 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 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 Federated
Equity Income Fund, Inc. (Class F Shares) (the "Fund") from November 12, 1993
(start of performance) to March 31, 1998, compared to the Standard and Poor's
500 Index (S&P 500) and the Lipper Equity Income Fund
Index (LEIFI).+

[Graphic] - See Appendix (G)

* 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, 1998
<TABLE>
<CAPTION>

SHARES VALUE
<S> <C> <C>
COMMON STOCKS -- 72.3%
BASIC INDUSTRY -- 3.5%
962,400 Allegheny Teledyne, Inc. $26,766,750
520,100 Crown Cork & Seal Co., Inc. 27,825,350
282,600 Du Pont (E.I.) de Nemours & Co. 19,216,800
Total 73,808,900
CONSUMER DURABLES -- 2.6%
910,000 Cooper Tire & Rubber Co. 21,612,500
435,000 Ford Motor Co. 28,193,438
60,400 Magna International, Inc., Class A 4,707,425
Total 54,513,363
CONSUMER NON-DURABLES -- 10.6%
336,600 Avon Products, Inc. 26,254,800
559,440 Diageo PLC, ADR 27,167,805
1,298,000 Dial Corp. 31,070,875
603,400 General Mills, Inc. 45,858,400
673,250 Heinz (H.J.) Co. 39,300,969
156,100 Interstate Bakeries Corp. 5,043,981
424,500 Kimberly-Clark Corp. 21,278,063
679,300 Philip Morris Cos., Inc. 28,318,319
Total 224,293,212
ENERGY/MINERALS -- 4.6%
440,200 Burlington Resources, Inc. 21,102,087
453,100 Exxon Corp. 30,640,887
429,800 Mobil Corp. 32,933,425
387,800 YPF Sociedad Anonima, ADR 13,185,200
Total 97,861,599
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS -- CONTINUED
FINANCE -- 12.5%
474,770 Banc One Corp. $ 30,029,202
312,000 Colonial Properties Trust 9,925,500
364,700 Duke Realty Investments, Inc. 8,889,562
169,050 Equity Residential Properties Trust 8,494,762
808,000 First Union Corp. 45,854,000
162,800 General RE Corp. 35,917,750
320,200 Liberty Property Trust 8,605,375
255,400 Meditrust Corp. 7,885,475
560,400 Mellon Bank Corp. 35,585,400
366,500 Morgan Stanley, Dean Witter & Co. 26,708,688
359,062 NationsBank Corp. 26,189,121
345,000 New Plan Realty Trust 8,668,125
333,200 Post Properties, Inc. 13,307,175
Total 266,060,135
HEALTH CARE--8.7%
467,700 Abbott Laboratories 35,223,656
139,900 Bausch & Lomb, Inc. 6,391,681
628,400 Baxter International, Inc. 34,640,550
349,700 Bristol-Myers Squibb Co. 36,478,081
296,445 Merck & Co., Inc. 38,056,127
1,050,600 U.S. Surgical Corp. 34,669,800
Total 185,459,895
PRODUCER MANUFACTURING--5.5%
771,400 Dresser Industries, Inc. 37,075,412
381,400 General Electric Co. 32,871,913
386,600 Textron, Inc. 29,768,200
410,400 York International Corp. 18,468,000
Total 118,183,525
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.

<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS -- CONTINUED
RETAIL TRADE -- 2.4%
761,700 Food Lion, Inc., Class A $ 8,140,669
868,100 Food Lion, Inc., Class B 9,521,972
437,900 Penney (J.C.) Co., Inc. 33,143,556
Total 50,806,197
SERVICES -- 1.7%
194(a)Advanstar Corp., Warrants 0
399,300 Block (H&R), Inc. 18,991,706
389,700 Browning-Ferris Industries, Inc. 12,713,963
271,200 Hollinger International Publishing, Inc. 4,508,700
Total 36,214,369
TECHNOLOGY -- 8.0%
603,800 AMP, Inc. 26,453,987
526,900 Avnet, Inc. 30,329,681
255,800 General Dynamics Corp. 22,030,775
437,200 Hewlett-Packard Co. 27,707,550
337,500 International Business Machines Corp. 35,057,813
246,500 Lockheed Martin Corp. 27,731,250
Total 169,311,056
TRANSPORTATION -- 1.5%
429,700 CNF Transportation, Inc. 15,442,343
284,500 Union Pacific Corp. 15,985,344
Total 31,427,687
UTILITIES -- 10.7%
445,500 CMS Energy Corp. 20,910,656
154,000 El Paso Natural Gas 10,866,625
740,712 Enron Corp. 34,350,542
1,105,500 Pacificorp 27,222,938
119,600 Peco Energy Co. 2,646,150
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.

<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS -- CONTINUED
UTILITIES -- CONTINUED
600,146 SBC Communications, Inc. $ 26,181,369
360,900 Sonat, Inc. 15,699,150
285,300 Sprint Corp. 19,311,244
1,023,900 TECO Energy, Inc. 28,925,175
637,000 Texas Utilities Co. 25,042,063
540,500 Williams Cos., Inc. (The) 17,296,000
Total 228,451,912
TOTAL COMMON STOCKS (IDENTIFIED COST $1,212,617,773) 1,536,391,850

CONVERTIBLE PREFERRED STOCKS -- 13.8%
BASIC INDUSTRY -- 0.8%
445,000 Merrill Lynch & Co., Inc., STRYPES 16,910,000
CONSUMER NON-DURABLES -- 2.3%
404,200 Ralston Purina Co., SAILS, $1.08 25,515,125
440,000(b)Suiza Foods Corp., Conv. Pfd., $2.75 22,464,200
Total 47,979,325
ENERGY/MINERALS -- 0.8%
321,900 Unocal Corp., Cumulative Conv. Pfd., $3.13 18,015,134
FINANCE -- 3.5%
510,000 Conseco, Inc., Cumulative PRIDES, Series F, 30,759,375
$3.50
169,500 Jefferson-Pilot Corp., Conv. Pfd., $5.26 21,293,438
147,500 SunAmerica, Inc., PERCS, Series E, $3.10 20,945,000
Total 72,997,813
HEALTH CARE -- 0.7%
187,700(b)McKesson Corp., Conv. Pfd., $2.50 15,305,997
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>

<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
PRODUCER MANUFACTURING -- 0.8%
356,800(b)EVI, Inc., Cumulative Conv. Pfd., $2.50 $ 16,247,958
SERVICES -- 2.3%
246,600 Browning-Ferris Industries, Inc., ACES, 7,891,200
$2.58
1,663,800 Hollinger International Publishing, Inc., 23,813,138
Conv. Pfd., $.95
330,500 Wendy's International, Inc., Cumulative 17,371,906
Conv. Pfd., Series A, $2.50
Total 49,076,244
TECHNOLOGY -- 2.2%
510,500 Microsoft Corp., Cumulative Conv. Pfd., 47,221,250
Series A, $2.20
UTILITIES -- 0.4%
62,000 Williams Cos., Inc. (The), Conv. Pfd., $3.50 9,331,992
TOTAL CONVERTIBLE PREFERRED STOCKS
(IDENTIFIED COST $268,511,277) 293,085,713
CONVERTIBLE CORPORATE BONDS -- 9.7%
CONSUMER DURABLES -- 1.4%
$ 9,540,000(b)Magna International, Inc., Conv. Bond, 11,203,585
4.875%, 2/15/2005
13,200,000 Magna International, Inc., Conv. Bond, 19,075,980
5.00%, 10/15/2002
Total 30,279,565
ENERGY MINERALS -- 1.4%
30,900,000 Diamond Offshore Drilling, Inc., Conv. Bond, 29,732,598
3.125%, 9/15/2007
RETAIL TRADE -- 2.6%
38,700,000(b)Costco Cos., Inc., Conv. Bond, 8/19/2017 25,765,299
19,350,000 Federated Department Stores, Inc., Conv. 30,007,400
Bond, 5.00%, 10/1/2003
Total 55,772,699
TECHNOLOGY -- 3.3%
4,650,000 EMC Corp. Mass, Conv. Bond, 3.25%, 3/15/2002 8,184,744
14,250,000(b)EMC Corp. Mass, Sub. Note, 3.25%, 3/15/2002 25,082,280
</TABLE>
FEDERATED EQUITY INCOME FUND, INC.
<TABLE>

<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS -- CONTINUED
TECHNOLOGY -- CONTINUED
$ 9,860,000(b)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 $ 13,703,822
22,500,000 Xilinx, Inc., Conv. Sub. Note, 5.25%, 22,408,875
11/1/2002
Total 69,379,721
UTILITIES--1.0%
19,000,000(b)Bell Atlantic Financial Services, Inc., Conv. 20,270,720
Bond, 5.75%, 4/1/2003
TOTAL CONVERTIBLE CORPORATE BONDS
(IDENTIFIED COST $173,916,989) 205,435,303
U.S. TREASURY -- 2.7%
58,000,000 U.S. Treasury Bill, 6/18/1998 (IDENTIFIED
COST $57,370,562) 57,384,620
(C)REPURCHASE AGREEMENT -- 1.1%
23,245,000 BT Securities Corp., 5.97%, dated 3/31/1998,
due 4/1/1998 (AT AMORTIZED COST) 23,245,000
TOTAL INVESTMENTS (IDENTIFIED COST
$1,735,661,601)(D) $ 2,115,542,486
</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, 1998, these securities amounted to
$150,043,861 which represents 7.1% 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
investment 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 $1,736,391,762.
The net unrealized appreciation of investments on a federal tax basis amounts to
$379,150,724 which is comprised of $393,960,624 appreciation and $14,809,900
depreciation at March 31, 1998.

Note: The categories of investments are shown as a percentage of net assets
($2,123,930,715) at March 31, 1998.

The following acronyms are used throughout this portfolio:

ACES --Adjustable Convertible Extendable Securities

ADR --American Depositary Receipt

PERCS --Preferred Equity Redemption Cumulative Stock

PLC --Public Limited Company

PRIDES --Preferred Redeemable Increased Dividend Equity Securities

SAILS --Stock Appreciation Income Linked Security

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, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $2,115,542,486
$1,735,661,601 and tax cost $1,736,391,762)
Income receivable 4,254,424
Receivable for investments sold 4,278,714
Receivable for shares sold 12,425,586
Receivable for daily variation margin 252,000
Total assets 2,136,753,210
LIABILITIES:
Payable for investments purchased $9,003,197
Payable for shares redeemed 1,955,287
Income distribution payable 540,904
Payable to Bank 105,419
Payable for taxes withheld 2,990
Accrued expenses 1,214,698
Total liabilities 12,822,495
NET ASSETS for 110,945,074 shares outstanding $2,123,930,715
NET ASSETS CONSIST OF:
Paid in capital $1,710,422,239
Net unrealized appreciation of investments 380,112,800
Accumulated net realized gain on investments 33,405,383
Distributions in excess of net investment income (9,707)
Total Net Assets $2,123,930,715
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($809,103,152 / 42,277,075 shares outstanding) $19.14
Offering Price Per Share (100/94.50 of $19.14)* $20.25
Redemption Proceeds Per Share $19.14
CLASS B SHARES:
Net Asset Value Per Share ($1,015,339,433 / 53,027,041 shares $19.15
outstanding)
Offering Price Per Share $19.15
Redemption Proceeds Per Share (94.50/100 of $19.15)** $18.10
CLASS C SHARES:
Net Asset Value Per Share ($173,900,162 / 9,082,399 shares outstanding) $19.15
Offering Price Per Share $19.15
Redemption Proceeds Per Share (99.00/100 of $19.15)** $18.96
CLASS F SHARES:
Net Asset Value Per Share ($125,587,968 / 6,558,559 shares outstanding) $19.15
Offering Price Per Share (100/99.00 of $19.15)* $19.34
Redemption Proceeds Per Share (99.00/100 of $19.15)** $18.96
</TABLE>

* See "Purchasing Shares" in the Prospectus.

** See "Redeeming and Exchanging Shares" 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, 1998
<TABLE>
<CAPTION>

<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 40,930,923
Interest 11,733,752
Total income 52,664,675
EXPENSES:
Investment advisory fee $9,452,360
Administrative personnel and services fee 1,188,800
Custodian fees 73,252
Transfer and dividend disbursing agent fees and expenses 1,216,513
Directors'/Trustees' fees 21,660
Auditing fees 19,351
Legal fees 13,038
Portfolio accounting fees 201,106
Distribution services fee -- Class B Shares 5,291,320
Distribution services fee -- Class C Shares 1,012,511
Distribution services fee -- Class F Shares 273,046
Shareholder services fee -- Class A Shares 1,564,088
Shareholder services fee -- Class B Shares 1,763,773
Shareholder services fee -- Class C Shares 337,504
Shareholder services fee -- Class F Shares 273,046
Share registration costs 555,107
Printing and postage 356,676
Insurance premiums 12,218
Taxes 83,821
Miscellaneous 28,163
Total expenses 23,737,353
Net investment income 28,927,322
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 74,063,229
Net change in unrealized appreciation of investments 298,409,164
Net realized and unrealized gain on investments 372,472,393
Change in net assets resulting from operations $401,399,715
</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,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 28,927,322 $ 15,731,060
Net realized gain on investments
($74,636,492 and $51,113,225, respectively, as computed for
federal tax purposes) 74,063,229 50,872,590
Net change in unrealized appreciation on investments 298,409,164 42,343,319
Change in net assets resulting from operations 401,399,715 108,946,969
NET EQUALIZATION CREDITS-- 139,007 480,911
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (13,769,552) (8,786,457)
Class B Shares (10,269,214) (4,349,221)
Class C Shares (1,956,444) (1,455,111)
Class F Shares (2,122,295) (1,747,407)
Distributions from net realized gains
Class A Shares (29,798,530) (16,098,902)
Class B Shares (33,144,518) ( 9,615,580)
Class C Shares (6,381,098) (3,712,059)
Class F Shares (5,258,251) (3,635,381)
Change in net assets resulting from distributions to (102,699,902) (49,400,118)
shareholders
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED TO NET
INVESTMENT INCOME) --
Proceeds from sale of shares 981,235,447 671,827,000
Net asset value of shares issued to shareholders in payment of
distributions declared 86,200,577 39,864,665
Cost of shares redeemed (282,342,329) (122,876,164)
Change in net assets resulting from share transactions 785,093,695 588,815,501
Change in net assets 1,083,932,515 648,843,263
NET ASSETS:
Beginning of period 1,039,998,200 391,154,937
End of period $2,123,930,715 $1,039,998,200
</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,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF $15.59 $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84 $ 9.22
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.41 0.42 0.46 0.49 0.43 0.55 0.69 0.84 0.91 0.89
Net realized and
unrealized gain
(loss)
on investments 4.41 2.16 2.96 0.40 0.15 1.22 1.08 (0.16) (1.18) 1.59
Total from
investment
operations 4.82 2.58 3.42 0.89 0.58 1.77 1.77 0.68 (0.27) 2.48
LESS DISTRIBUTIONS
Distributions
from net
investment (0.40) (0.41) (0.41) (0.45) (0.43) (0.53) (0.69) (0.86) (0.87) (0.86)
income
Distributions in
excess of net
investment -- -- -- -- -- -- -- -- (0.41) --
income(a)
Distributions
from
net realized
gain on
investments (0.87) (0.84) (0.25) -- -- -- -- -- (0.52) --
Total (1.27) (1.25) (0.66) (0.45) (0.43) (0.53) (0.69) (0.86) (1.80) (0.86)
distributions
NET ASSET VALUE,
END
OF PERIOD $19.14 $15.59 $14.26 $11.50 $11.06 $10.91 $ 9.67 $ 8.59 $ 8.77 $10.84
TOTAL RETURN(B) 31.80% 18.82% 30.37% 8.31% 5.29% 18.98% 21.19% 8.95% (3.19%) 28.25%
Ratios to
average
NET ASSETS
Expenses 1.09% 1.08% 1.03% 1.00% 1.00% 0.99% 1.04% 1.05% 0.97% 0.77%
Net investment
income 2.25% 2.68% 3.19% 4.01% 3.82% 5.45% 7.36% 10.25% 9.34% 9.02%
Expense waiver/
reimbursement(c) -- 0.04% 0.20% 0.36% 0.89% 1.60% 1.46% 1.46% 1.43% 1.25%
SUPPLEMENTAL DATA
Net assets, end
of
period (000 $809,103 $431,281 $220,268 $108,683 $84,665 $30,616 $25,176 $22,589 $22,052 $11,306
omitted)
Average
commission
rate paid(d) $0.0521 $0.0530 -- -- -- -- -- -- -- --
Portfolio 69% 75% 96% 91% 43% 79% 115% 31% 54% 49%
turnover
</TABLE>

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

(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.

(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,
1998 1997 1996 1995(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.50 $11.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.27 0.34 0.32(d) 0.19
Net realized and unrealized gain on investments 4.42 2.13 3.01 0.26
Total from investment operations 4.69 2.47 3.33 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.26) (0.30) (0.32) (0.19)
Distributions from net realized gain on (0.87) (0.84) (0.25) --
investments
Total distributions (1.13) (1.14) (0.57) (0.19)
NET ASSET VALUE, END OF PERIOD $19.15 $15.59 $14.26 $11.50
TOTAL RETURN(B) 30.90% 17.92% 29.40% 4.14%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.84% 1.87% 1.83% 1.80%*
Net investment income 1.50% 1.85% 2.31% 3.42%*
Expense waiver/reimbursement(c) -- -- 0.16% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $1,015,339 $418,675 $71,019 $6,072
Average commission rate paid(e) $0.0521 $0.0530 -- --
Portfolio turnover 69% 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.

(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,
1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.50 $11.06 $10.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.27 0.30 0.32 0.37 0.34
Net realized and unrealized gain on 4.42 2.16 3.00 0.44 0.28
investments
Total from investment operations 4.69 2.46 3.32 0.81 0.62
LESS DISTRIBUTIONS
Distributions from net investment income (0.26) (0.29) (0.31) (0.37) (0.32)
Distributions from net realized gain on (0.87) (0.84) (0.25) -- --
investments
Total distributions (1.13) (1.13) (0.56) (0.37) (0.32)
NET ASSET VALUE, END OF PERIOD $19.15 $15.59 $14.26 $11.50 $11.06
TOTAL RETURN(B) 30.90% 17.90% 29.39% 7.52% 5.66%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.84% 1.87% 1.80% 1.76% 1.79%*
Net investment income 1.50% 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) $173,900 $101,588 $48,161 $30,189 $24,632
Average commission rate paid(d) $0.0521 $0.0530 -- -- --
Portfolio turnover 69% 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.

(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,
1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.59 $14.26 $11.51 $11.06 $11.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.36 0.38 0.39 0.42 0.17
Net realized and unrealized gain (loss) on 4.42 2.16 2.99 0.46 (0.68)
investments
Total from investment operations 4.78 2.54 3.38 0.88 (0.51)
LESS DISTRIBUTIONS
Distributions from net investment income (0.35) (0.37) (0.38) (0.43) (0.17)
Distributions from net realized gain on (0.87) (0.84) (0.25) -- --
investments
Total distributions (1.22) (1.21) (0.63) (0.43) (0.17)
NET ASSET VALUE, END OF PERIOD $19.15 $15.59 $14.26 $11.51 $11.06
TOTAL RETURN(B) 31.54% 18.50% 30.06% 8.05% (4.43%)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.34% 1.36% 1.30% 1.24% 1.29%*
Net investment income 2.00% 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) $125,588 $88,454 $51,707 $34,886 $21,010
Average commission rate paid(d) $0.0521 $0.0530 -- -- --
Portfolio turnover 69% 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.

(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.

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

FEDERATED EQUITY INCOME FUND, INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1998

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 -- U.S. government securities and 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 primarily due to differing treatments for equalization.
The following reclassifications have been made to the financial statements.

INCREASE (DECREASE)
ACCUMULATED
DISTRIBUTIONS IN EXCESS OF
PAID-IN NET INVESTMENT INCOME
CAPITAL
$139,007 $(139,007)

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.

FUTURES CONTRACTS -- The Fund purchases stock index futures contracts to manage
cashflows, enhance yield, and to potentially reduce transaction costs. Upon
entering into a stock index futures contract with a broker, the Fund is required
to deposit in a segregated account a specified amount of cash or U.S. government
securities. Futures contracts are valued daily and unrealized gains or losses
are recorded in a "variation margin" account. Daily, the Fund receives from or
pays to the broker a specified amount of cash based upon changes in the
variation margin account. When a contract is closed, the Fund recognizes a
realized gain or loss. Futures contracts have market risks, including the risk
that the change in the value of the contract may not correlate with changes in
the value of the underlying securities. For the period ended March 31, 1998, the
Fund had realized gains/losses on futures contracts of $0.

At March 31, 1998, the Fund had outstanding futures contracts as set forth
below:

CONTRACTS
TO UNREALIZED
EXPIRATION RECEIVE POSITION APPRECIATION
DATE
June 1998 210 S&P 500 Long $231,915

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, 1998 is as
follows:
<TABLE>

SECURITY ACQUISITION DATE ACQUISITION
COST
<S> <C> <C>
Bell Atlantic Financial 2-12-1998 $19,363,163
Services, Inc., Conv. Bond
Costco Cos., Inc., Conv. Bond 8-14-1997 - 12-19-1997 20,448,166
EMC Corp., Mass, Sub. Note 7-17-1997 - 7-23-1997 5,899,769
EVI Inc., Cumulative Conv. Pfd. 10-29-1997 17,840,000
Magna International, Inc., Conv. Bond 2-10-1998 - 2-18-1998 9,547,350
McKesson Corp., Conv. Pfd. 2-9-1998 - 2-13-1998 14,443,942
Solectron Corp., Conv. Bond 11-12-1996 - 7-17-1997 11,347,175
Suiza Foods Corp., Conv. Pfd. 3-19-1998 22,000,000
</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, 1998, par value shares ($0.01 per share) authorized were as
follows:

NUMBER OF PAR VALUE CAPITAL
CLASS NAME 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,
1998 1997
<S> <C> <C> <C> <C>
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 21,665,520 $384,363,042 16,344,330 $246,303,152
Shares issued to
shareholders in
payment of distributions 1,835,156 32,252,065 1,194,325 17,720,003
declared
Shares redeemed (8,880,080) (158,399,975) (5,333,044) (81,159,165)
Net change resulting
from
Class A Share 14,620,596 $258,215,132 12,205,611 $182,863,990
transactions

YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C> <C> <C>
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 28,472,174 $506,949,254 22,544,007 $339,570,016
Shares issued to
shareholders in
payment of distributions 2,276,373 39,954,264 852,599 12,801,151
declared
Shares redeemed (4,569,309) (81,531,106) (1,529,865) (23,434,206)
Net change resulting
from
Class B Share 26,179,238 $465,372,412 21,866,741 $328,936,961
transactions

<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C> <C> <C>

CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 3,775,445 $ 67,504,456 3,514,431 $52,478,856
Shares issued to
shareholders in
payment of distributions 421,985 7,403,711 308,800 4,586,335
declared
Shares redeemed (1,629,464) (29,184,516) (687,088) (10,415,521)
Net change resulting from
Class C Share transactions 2,567,966 $ 45,723,651 3,136,143 $46,649,670

YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C> <C> <C>
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 1,262,627 $22,418,695 2,247,501 $33,474,976
Shares issued to
shareholders in
payment of distributions 375,370 6,590,537 320,769 4,757,176
declared
Shares redeemed (751,681) (13,226,732) (523,006) (7,867,272)
Net change resulting from
Class F Share 886,316 $15,782,500 2,045,264 $30,364,880
transactions
Net change resulting
from
Share transactions 44,254,116 $785,093,695 39,253,759 $588,815,501
</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, 1998, 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 -- 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. YEAR 2000 ISSUE

Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended March 31, 1998, were as follows:

PURCHASES $1,760,994,123
SALES $1,041,136,040

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, 1998, 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, 1998, 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, 1998, 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 15, 1998

DIRECTORS

John F. Donahue

Thomas G. Bigley

John T. Conroy, Jr.

Nicholas P. Constantakis

William J. Copeland

J. Christopher Donahue

James E. Dowd

Lawrence D. Ellis, M.D.

Edward L. Flaherty, Jr.

Peter E. Madden

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

Matthew S. Hardin
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 prospectuses which contain facts
concerning its objective and policies, management fees, expenses, and other
information.

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

1-800-341-7400

www.federatedinvestors.com

Cusip 313915100
Cusip 313915209
Cusip 313915308
Cusip 313915407
8042506 (5/98)

APPENDIX

A. The graphic representation here displayed entitled "Initial Investment,"
consists of a boxed legend in the upper left quadrant indicating the components
of the corresponding mountain chart. The lighter-shaded portion represents the
value of Reinvested Income for the Class A Shares of Federated Equity Income
Fund, Inc. (the "Fund"). The darker-shaded portion reflects the Principal Value
of a $12,000/1,126 Shares investment in the Fund. The color-coded mountain chart
is a visual representation of the narrative text above it, which shows that an
initial investment of $12,000 in the Fund on 12/30/86, would have a reinvested
total worth of $53,427/2,791 on 3/31/98. The "x" axis reflects computation
periods from 12/30/86 to 3/31/98. The right margin of the chart reflects the
ending values of a hypothetical investment of $12,000 in the Fund measured in
increments of $10,000 ranging from $0 to $60,000.

B. The graphic representation here displayed, entitled "One Step at a Time,"
consists of a boxed legend in the upper left quadrant indicating the components
of the corresponding mountain chart. The lighter-shaded portion represents the
value of Reinvested Income for the Class A Shares of Federated Equity Income
Fund, Inc. (the "Fund"). The darker-shaded portion reflects the Principal Value
of Annual $1,000/93 Shares investments in the Fund (totaling $12,000 by
3/31/98). The color-coded mountain chart is a visual representation of the
narrative text above it, which shows that $1,000 annual investments in the Class
A Shares of the Fund beginning on 12/30/86 would have a reinvested total value
of $32,935/1,721 shares on 3/31/98. The "x" axis reflects computation periods
from 12/30/86 to 3/31/98. The right margin of the chart reflects the ending
values of a hypothetical annual investment of $1,000 in the Fund measured in
increments of $5,000 ranging from $0 to $40,000.

C. The graphic representation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The lighter-shaded portion represents the value of Reinvested Income for
the Class A Shares of Federated Equity Income Fund, Inc. (the "Fund") the
darker-shaded portion represents the Principal Value of original and subsequent
investments (totaling $35,000 by 3/31/98). The color-coded mountain is a visual
representation of the narrative text above it, which shows that an original
$5,000/512 Shares investment in the Fund and additional investments of $250
every month for 10 years totaling $35,000 by 3/31/98 would have grown to a
reinvested total value of $93,678/4,894 Shares on 3/31/98. The "x" axis reflects
computation periods from 3/31/88 to 3/31/98. The right margin of the chart
reflects the ending values of a hypothetical original investment of $5,000 and
subsequent monthly investments of $250 in the Fund measured in increments of
$20,000 ranging from $0 to $100,000.

D. The graphic representation here displayed consists of a boxed legend in the
bottom center indicating the components of the corresponding line graph.
Federated Equity Income Fund, Inc. (Class A Shares) (the "Fund") is represented
by a solid black line. Standard & Poor's 500 Index (S&P 500) is represented by a
dotted line. Lipper Equity Income Fund Index (LEIFI) is represented by a broken
line. The line graph is a visual representation of a comparison of a change in
value of a hypothetical $10,000 investment in the Fund, the S&P 500, and the
LEIFI. The "x" axis reflects computation periods from 3/31/88 to 3/31/98. The
"y" axis reflects the cost of investment in $7,000 increments ranging from
$8,500 to $57,500. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the S&P 500 and the LEIFI;
the ending values are $43,370, $56,506, and $43,013, respectively. Below the
legend are the Average Annual Total Returns for the one-year, five-year,
ten-year, and Start of Performance (12/30/86) for the period ended March 31,
1998; the Average Annual Total Returns are 24.53%, 17.09%, 15.68%, and 14.12%,
respectively.

E. The graphic representation here displayed consists of a boxed legend in the
bottom center indicating the components of the corresponding line graph.
Federated Equity Income Fund, Inc. (Class B Shares) (the "Fund") is represented
by a solid black line. Standard & Poor's 500 Index (S&P 500) is represented by a
dotted line. Lipper Equity Income Fund Index (LEIFI) is represented by a broken
line. The line graph is a visual representation of a comparison of a change in
value of a hypothetical $10,000 investment in the Fund, the S&P 500, and the
LEIFI. The "x" axis reflects computation periods from 9/27/94 to 3/31/98. The
"y" axis reflects the cost of investment in $3,000 increments ranging from
$9,500 to $27,500. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the S&P 500 and the LEIFI;
the ending values were $20,448, $27,073, and $22,048, respectively. Below the
legend are Average Annual Total Returns for the one-year and Start of
Performance (9/27/94) for the period ended March 31, 1998; the Average Annual
Total Returns are 25.02% and 22.59%, respectively.

F. The graphic representation here displayed consists of a boxed legend in the
bottom center indicating the components of the corresponding line graph.
Federated Equity Income Fund, Inc. (Class C Shares) (the "Fund") is represented
by a solid black line. Standard & Poor's 500 Index (S&P 500) is represented by a
dotted line. Lipper Equity Income Fund Index (LEIFI) is represented by a broken
line. The line graph is a visual representation of a comparison of a change in
value of a hypothetical $10,000 investment in the Fund, the S&P 500, and the
LEIFI. The "x" axis reflects computation periods from 5/3/93 to 3/31/98. The "y"
axis reflects the cost of investment in $3,000 increments ranging from $9,500 to
$27,500. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the S&P 500 and the LEIFI; the ending
values are $22,686, $27,460, and $22,877, respectively. Below the legend are
Average Annual Total Returns for the one-year and Start of Performance (5/3/93)
for the period ended March 31, 1998; the Average Annual Total Returns are 29.80%
and 18.16%, respectively.

G. The graphic representation here displayed consists of a boxed legend in the
bottom center indicating the components of the corresponding line graph.
Federated Equity Income Fund, Inc. (Class F Shares) (the "Fund") is represented
by a solid black line. Standard & Poor's 500 Index (S&P 500) is represented by a
dotted line. Lipper Equity Income Fund Index (LEIFI) is represented by a broken
line. The line graph is a visual representation of a comparison of a change in
value of a hypothetical $10,000 investment in the Fund, the S&P 500, and the
LEIFI. The "x" axis reflects computation periods from 11/12/93 to 3/31/98. The
"y" axis reflects the cost of investment in $4,000 increments ranging from
$8,000 to $28,000. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the S&P 500 and the LEIFI;
the ending values are $20,725, $27,460, and $22,877, respectively. Below the
legend are Average Annual Total Returns for the one-year and Start of
Performance (11/12/93) for the period ended March 31, 1998; the Average Annual
Total Returns are 29.12% and 18.08%, respectively.