FEDERATED EQUITY INCOME FUND, INC.

485BPOS 1 feifform.htm FEDERATED EQUITY INCOME FUND, INC.




                                                       1933 Act File No. 33-6901
                                                      1940 Act File No. 811-4743

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933             X

    Pre-Effective Amendment No.

    Post-Effective Amendment No.   33                               X

                                     and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940     X

    Amendment No.   30                                              X

                       FEDERATED EQUITY INCOME FUND, INC.
               (Exact Name of Registrant as Specified in Charter)

                            Federated Investors Funds
                              5800 Corporate Drive
                       Pittsburgh, Pennsylvania 15237-7000
                    (Address of Principal Executive Offices)

                                 (412) 288-1900
                         (Registrant's Telephone Number)

                           John W. McGonigle, Esquire
                            Federated Investors Tower
                               1001 Liberty Avenue
                       Pittsburgh, Pennsylvania 15222-3779
                     (Name and Address of Agent for Service)
                (Notices should be sent to the Agent for Service)

It is proposed that this filing will become effective:

 X   immediately upon filing pursuant to paragraph (b)
     on ____________ pursuant to paragraph (b)
     60 days after filing pursuant to paragraph (a) (i)
     on              pursuant to paragraph (a)(i)
     75 days after filing pursuant to paragraph (a) (ii)
     on ____________ pursuant to paragraph (a) (ii) of Rule 485.

If appropriate, check the following box:

____  This post-effective amendment designates a new effective date for a
      previously filed post-effective amendment.


                                Copies to:

Matthew G. Maloney, Esquire
Dickstein Shapiro  Morin and Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C.  20037

[Logo of Federated Investors]

Federated Equity
Income Fund, Inc.

PROSPECTUS

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January 31, 2004

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES

A mutual fund seeking to provide above average income and capital appreciation by investing primarily in income-producing equity securities.

As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Not FDIC Insured * May Lose Value * No Bank Guarantee

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Risk/Return Summary		1
What are the Fund's Fees and Expenses?		5
What are the Fund's Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		10
What Do Shares Cost?		12
How is the Fund Sold?		15
How to Purchase Shares		15
How to Redeem Shares and Exchange Shares		18
Account and Share Information		21
Who Manages the Fund?		22
Legal Proceedings		22
Financial Information		24

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Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide above average income and capital appreciation. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing primarily in income- producing equity securities, including securities that are convertible into common stocks. The Fund's investment adviser (Adviser) ordinarily selects securities that have a comparatively low volatility in share price relative to the overall equity market and which may provide relatively high dividend income, but may also select securities of companies that offer superior growth prospects.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:

Stock Market Risks. The value of equity securities in the Fund's portfolio will fluctuate and, as a result, the Fund's Share price may decline suddenly or over a sustained period of time.
Sector Risks. Companies with similar characteristics may be grouped together in broad categories called sectors. Sector risk is the possibility that a certain sector may underperform other sectors or the market as a whole. As the Adviser allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments which generally affect that sector.
Investment Style Risk. Due to the Fund's value style of investing, the Fund's Share price may lag that of other Funds using a different investment style.

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The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.

Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

The total returns shown in the bar chart do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.

Within the periods shown in the bar chart, the Fund's Class A Shares highest quarterly return was 16.99% (quarter ended June 30, 2003). Its lowest quarterly return was (14.70)% (quarter ended September 30, 2002).

Average Annual Total Return Table

The Average Annual Total Returns for the Fund's Class A, Class B, Class C and Class F Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund's Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depends on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Russell 1000^® Value Index (RUS1V) a broad-based market index and the 90% Russell 1000^® Value Index/10% Merrill Lynch 91 day Treasury Bill Index (90% RUS1V/10% ML 91DTB) a blended benchmark index. The RUS1V measures the performance of the 1,000 largest of the 3,000 largest U.S.-domiciled companies (based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values. The 90% RUS1V/10% ML91DTB is a blended index which is comprised of the RUS1V and the ML91DTB. The ML91DTB is an index tracking short-term U.S. government securities. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

(For the periods ended December 31, 2003)

	1 Year	5 Years	10 Years	Start of Performance¹
Class A Shares:
Return Before Taxes	17.40%	(2.47)%	7.23%	NA
Return After Taxes on Distributions^²	16.40%	(3.24)%	5.62%	NA
Return After Taxes on Distributions and Sale of Fund Shares^²	11.23%	(2.51)%	5.35%	NA
Class B Shares:
Return Before Taxes	17.85%	(2.48)%	NA	7.86%
Class C Shares:
Return Before Taxes	21.14%	(2.31)%	6.93%	NA
Class F Shares:
Return Before Taxes	21.74%	(1.80)%	7.47%	NA
RUS1V	30.03%	3.56%	11.88%	NA
90% RUS1V/10% ML91DTB	27.14%	3.57%	11.34%	NA

1 The Fund's Class B Shares start of performance date was September 27, 1994.

2 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns for Class B, Class C and Class F Shares will differ from those shown above for Class A Shares. After-tax returns are not relevant to 1investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

What are the Fund's Fees and Expenses?

FEDERATED EQUITY INCOME FUND, INC.

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold the Fund's Class A, Class B, Class C and F Shares.

Shareholder Fees	Class A	Class B	Class C	Class F
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	1.00%	1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)	None	5.50%	1.00%	1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)	None	None	None	None
Redemption Fee (as a percentage of amount redeemed, if applicable)	None	None	None	None
Exchange Fee	None	None	None	None

Annual Fund Operating Expenses (Before Waiver)¹
Expenses That are Deducted From Fund Assets (as percentage of average net assets)
Management Fee	0.60%	0.60%	0.60%	0.60%
Distribution (12b-1) Fee	0.50%²	0.75%	0.75%	0.25%
Shareholder Services Fee	0.25%	0.25%	0.25%	0.25%
Other Expenses	0.33%	0.33%	0.33%	0.33%
Total Annual Fund Operating Expenses	1.68%	1.93%³	1.93%	1.43%

1 Although not contractually obligated to do so, the distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the period ended November 30, 2003.
Total Waiver of Fund Expenses	0.50%	0.00%	0.00%	0.00%
Total Actual Annual Fund Operating Expenses (after waiver)	1.18%	1.93%	1.93%	1.43%
2 The Fund's Class A Shares did not pay or accrue the distribution (12b-1) fee during the period ended November 30, 2003. The Fund has no present intention of paying or accruing the distribution (12b-1) fee for Class A Shares during the fiscal year ending November 30, 2004.
3 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund's Class A, Class B, Class C and Class F Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Class A, Class B, Class C and Class F Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. Expenses assuming no redemption are also shown. The Example also assumes that your investment has a 5% return each year and that the Fund's Class A, Class B, Class C and Class F Shares operating expenses are before the waiver as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

Share Class	1 Year	3 Years	5 Years	10 Years
Class A:
Expenses assuming redemption	$711	$1,050	$1,412	$2,428
Expenses assuming no redemption	$711	$1,050	$1,412	$2,428
Class B:
Expenses assuming redemption	$746	$1,006	$1,242	$2,189
Expenses assuming no redemption	$196	$ 606	$1,042	$2,189
Class C:
Expenses assuming redemption	$394	$ 700	$1,131	$2,331
Expenses assuming no redemption	$294	$ 700	$1,131	$2,331
Class F:
Expenses assuming redemption	$344	$ 648	$ 874	$1,796
Expenses assuming no redemption	$244	$ 548	$ 874	$1,796

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What are the Fund's Investment Strategies?

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The Fund pursues its investment objective by investing primarily in income- producing equity securities, including securities that are convertible into common stocks. The Fund's holdings ordinarily will be in large and middle capitalization companies. The Adviser attempts to manage the Fund so that, on average, the Fund's portfolio yield is greater than the yield of the S&P 500. A description of the various types of securities in which the Fund invests, and their risks, immediately follows the strategy discussion.

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Companies with similar characteristics may be grouped together in broad categories called sectors. The Adviser diversifies the Fund's investments, limiting the Fund's risk exposure with respect to individual securities and industry sectors.

The Adviser performs a technical review of potential issuers, looking at criteria appropriate to the Fund's investment goals. The Adviser examines primarily large and middle capitalization companies, which, in the Adviser's opinion, are trading at a low valuation in relation to their historic and current market prices, and to their expected future price based on projected earnings. In addition, the equity securities held by the Fund will generally have a history and an expectation of paying increasing dividends to shareholders.

Additionally, the Adviser performs traditional fundamental analysis to select securities that exhibit the most promising long-term value for the Fund's portfolio, as well as securities that exhibit growth characteristics. In selecting securities, the Adviser focuses on the current financial condition of the issuing company, in addition to examining its business and product strength, earnings quality, competitive position, management expertise and sustainability of current growth trends. In addition to these factors, it looks at the issuing company's earnings quality and sustainability of current growth trends. Further, the Adviser considers current economic, financial market, and industry factors, which may affect the issuing company. To determine the timing of purchases of portfolio securities, the Adviser compares the current stock price of an issuer with the Adviser's judgment as to that stock's current and expected value based on projected future earnings. The Adviser sells a portfolio security if it determines that the issuer's prospects have deteriorated, or if it finds an attractive security which the Adviser deems has superior risk and return characteristics to a security held by the Fund.

The Adviser's process for selecting equity investments attempts to identify mature, high-quality, mid- to large-cap companies with high relative dividend yields that are likely to maintain and increase their dividends. Small, rapidly growing companies typically reinvest their earnings into expansion and therefore do not pay dividends.

A company's dividend yield is high when it is both higher than the current yield of the stock market and higher than its past dividend yields compared to past stock market yields. By investing in companies with high relative dividend yields, the Adviser seeks to reduce the downside risk and volatility of the Fund's portfolio and to purchase undervalued stocks that may significantly increase in price as the market recognizes the company's true value. Similarly, the Adviser expects to sell stocks when their prices rise and relative dividend yields drop.

After identifying candidates through a screening process, the Adviser performs fundamental research and analysis to select stocks. The Adviser's key buy criteria favor companies operating within mature industries, with long operating histories, that are market leaders, with well-known brand names or market franchises, or with above average sales and strong cash flows that have efficient capital allocation processes.

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The Fund purchases convertible preferred stocks and convertible bonds, which have a higher yield than common stocks, and higher yielding fixed income securities in order to increase the Fund's yield and to generally provide a measure of protection against market declines.

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Because the Fund refers to equity income investments in its name, it will notify shareholders at least 60 days in advance of any change in its investment policies that would enable the Fund to invest normally less than 80% of its assets in income producing equity investments.

TEMPORARY DEFENSIVE INVESTMENTS

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The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.

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What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Equity securities represent a share of an issuer's earnings and assets, after the issuer pays its liabilities. The Fund cannot predict the income it will receive from equity securities because issuers generally have discretion as to the payment of any dividends or distributions. However, equity securities offer greater potential for appreciation than many other types of securities, because their value increases directly with the value of the issuer's business. The following describes the principal types of equity securities in which the Fund invests:

Common Stocks

Common stocks are the most prevalent type of equity security. Common stocks receive the issuer's earnings after the issuer pays its creditors and any preferred stockholders. As a result, changes in an issuer's earnings directly influence the value of its common stock.

American Depositary Receipts

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American Depositary Receipts (ADRs) represent interests in underlying securities issued by a foreign company. Depositary receipts are not traded in the same market as the underlying security. ADRs provide a way to buy shares of foreign-based companies in the United States rather than in overseas markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign exchange transactions.

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CONVERTIBLE SECURITIES

Convertible securities are convertible preferred stock or convertible bonds that the Fund has the option to exchange for equity securities of the issuer at a specified conversion price. The option allows the Fund to realize additional returns if the market price of the equity securities exceeds the conversion price. For example, the Fund may hold securities that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock reached $12, the Fund could realize an additional $2 per share by converting its securities.

Convertible preferred stock and convertible bonds pay or accrue interest or dividends at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a convertible bond must repay the principal amount of the bond, normally within a specified time. Convertible preferred stock and convertible bonds provide more income than equity securities.

FIXED INCOME SECURITIES

Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.

A security's yield measures the annual income on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.

Lower rated fixed income securities are securities rated below investment grade (i.e., BBB or lower) by a nationally recognized rating service. There is no minimum acceptable rating for a security to be purchased or held by the Fund.

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FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in, another country;
the principal trading market for its securities is in another country; or
it (or its subsidiaries) derived in its most current fiscal year at least 50% of its total assets, capitalization, gross revenue or profit from goods produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest its assets in securities of other investment companies, including the securities of affiliated money market funds, as an efficient means of carrying out its investment policies and managing its uninvested cash.

The Fund may invest in mortgage backed, high yield and emerging market fixed income securities primarily by investing in other investment companies (which are not available for general investment by the public) that own those securities and that are advised by an affiliate of the Adviser. These other investment companies are managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.

DERIVATIVE CONTRACTS

Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, commodities, currencies, financial indices or other assets or instruments. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset or instrument. The other party to a derivative contract is referred to as a counterparty.

Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.

Depending on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument, derivative contracts may increase or decrease the Fund's exposure to interest rate, stock market and currency risks, and may also expose the fund to liquidity and leverage risks.

Futures Contracts

Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures, index futures and foreign currency forward contracts.

Options

Options are rights to buy or sell an underlying asset or instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or writer) of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of underlying assets or instruments, including financial indices, individual securities, and other derivative instruments, such as futures contracts.

Swaps

Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include interest rate swaps, total return swaps, currency swaps, and caps and floors.

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What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The value of equity securities in the Fund's portfolio will rise and fall. These fluctuations could be a sustained trend or a drastic movement. The Fund's portfolio will reflect changes in prices of individual portfolio stocks or general changes in stock valuations. Consequently, the Fund's Share price may decline.

The Adviser attempts to manage market risk by limiting the amount the Fund invests in each company's equity securities. However, diversification will not protect the Fund against widespread or prolonged declines in the stock market.

RISKS RELATING TO INVESTING FOR VALUE

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Due to their relatively low valuations, value stocks are typically less volatile than growth stocks. For instance, the price of a value stock may experience a smaller increase on a forecast of higher earnings, a positive fundamental development, or positive market development. Further, value stocks tend to have higher dividends than growth stocks. This means they depend less on price changes for returns and may lag behind growth stocks in certain up markets.

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CREDIT RISKS

Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

The credit risks of corporate debt securities vary widely among issuers. In addition, the credit risk of an issuer's debt securities may vary based on their priority for repayment. For example, higher-ranking (senior) securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. Typically, both senior and subordinated debt securities have a higher priority than redeemable preferred stock. Some of the fixed income securities in which the Fund may invest will be uncollateralized and subordinated to other debt that a corporation has outstanding.

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Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.

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SECTOR RISKS

Companies with similar characteristics may be grouped together in broad categories called sectors. Sector risk is the possibility that a certain sector may underperform other sectors or the market as a whole. As the Adviser allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments which generally affect that sector.

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RISKS OF FOREIGN INVESTING

Foreign securities pose additional risks because foreign economic or political conditions may be less favorable than those of the United States. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.

Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than United States companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.

Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.

CURRENCY RISKS

Exchange rates for currencies fluctuate daily. The combination of currency risk and market risk tends to make securities traded in foreign markets more volatile than securities traded exclusively in the U.S.

The Adviser attempts to manage currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

The Fund's use of derivative contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivative contracts may also involve other risks described in this prospectus, such as stock market, credit, liquidity and leverage risks.

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What Do Shares Cost?

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You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). If the Fund purchases foreign securities that trade in foreign markets on day the NYSE is closed, the value of the Fund's assets may change on days you cannot purchase or redeem shares. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values equity securities according to the last sale price in the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost. Futures contracts and options are generally valued at market rates established by the exchanges on which they are traded at the close of trading on such exchanges. Options traded in the over-the-counter-market are generally valued according to the mean between one last bid and the last asked price for the option as provided by an independent sale or other financial institution that deals in the option. The Fund's current NAV and public offering price may be found in the mutual fund section of certain local newspapers under "Federated".

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The following table summarizes the minimum required investment amount and the maximum sales charge, if any, that you will pay on an investment in the Fund. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.

Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charge
Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Front-End Sales Charge²	Contingent Deferred Sales Charge³
Class A Shares	$1,500/$100	5.50%	0.00%
Class B Shares	$1,500/$100	None	5.50%
Class C Shares	$1,500/$100	1.00%	1.00%
Class F Shares	$1,500/$100	1.00%	1.00%

1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amounts for Systematic Investment Programs (SIP) is $50. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $250,000 or more will be invested in Class A Shares instead of Class B Shares to maximize your return and minimize the sales charges and marketing fees. Accounts held in the name of an investment professional may be treated differently. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

2 Front-End Sales Charge is expressed as a percentage of public offering price. See "Sales Charge When You Purchase."

3 See "Sales Charge When You Redeem."

SALES CHARGE WHEN YOU PURCHASE

Class A Shares
Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV
Less than $50,000	5.50%	5.82%
$50,000 but less than $100,000	4.50%	4.71%
$100,000 but less than $250,000	3.75%	3.90%
$250,000 but less than $500,000	2.50%	2.56%
$500,000 but less than $1 million	2.00%	2.04%
$1 million or greater¹	0.00%	0.00%
Class C Shares
All Purchases	1.00%	1.01%
Class F Shares
Less than $1 million	1.00%	1.01%
$1 million or greater	0.00%	0.00%

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1 A contingent deferred sales charge of 0.75% may apply. See "Sales Charge When You Redeem.

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If your investment qualifies for a reduction or elimination of the sales charge as described below, you or your investment professional should notify the Fund's Distributor at the time of purchase. If the Distributor is not notified, you will receive the reduced sales charge only on additional purchases, and not retroactively on previous purchases.

The sales charge at purchase of Class A Shares and Class F Shares only, may be reduced or eliminated by:

purchasing Shares in greater quantities to reduce the applicable sales charge;
combining concurrent purchases of Shares:
by you, your spouse, and your children under age 21; or
of the same share class of two or more Federated funds (other than money market funds);
accumulating purchases (in calculating the sales charge on an additional purchase, include the current value of previous Share purchases still invested in the Fund); or

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signing a letter of intent to purchase a specific dollar amount of Shares within 13 months. (Call your investment professional or the Fund for more information).

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The sales charge will be eliminated when you purchase Shares:

within 120 days of redeeming Shares of an equal or greater amount;

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when the Fund's Distributor does not advance payment to the investment professional for your purchase;

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by exchanging shares from the same share class of another Federated fund;
through wrap accounts or other investment programs where you pay the investment professional directly for services;
as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
for trusts or pension or profit-sharing plans where the third-party administrator has an arrangement with the Fund's Distributor or its affiliates to purchase Shares without a sales charge;
through investment professionals that receive no portion of the sales charge;
as a Federated Life Member (Class A Shares only) and their immediate family members; or
as a Director or employee of the Fund, the Adviser, the Distributor and their affiliates, and the immediate family members of these individuals.

SALES CHARGE WHEN YOU REDEEM

Your redemption proceeds may be reduced by a sales charge, commonly referred to as a contingent deferred sales charge (CDSC).

Class A Shares (Purchase amount of $1 million or greater):
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up to 24 months after purchase under certain investment programs where an investment professional received an advance payment on the transaction.
Class B Shares:
Shares Held Up To:		CDSC
1 Year		5.50%
2 Years		4.75%
3 Years		4.00%
4 Years		3.00%
5 Years		2.00%
6 Years		1.00%
7 Years or More		0.00%
Class C Shares:
You will pay a 1% CDSC if you redeem Shares within one year of the purchase date.

Class F Shares:
Purchase Amount	Shares Held	CDSC
Up to $2 million	4 years or less	1.00%
$2 - $5 million	2 years or less	0.50%
$5 million or more	1 year or less	0.25%

If your investment qualifies for a reduction or elimination of the CDSC as described below, you or your investment professional should notify the Distributor at the time of redemption. If the Distributor is not notified, the CDSC will apply.

You will not be charged a CDSC when redeeming Shares:

purchased with reinvested dividends or capital gains;
purchased within 120 days of redeeming Shares of an equal or lesser amount;
that you exchanged into the same share class of another Federated fund if the shares were held for the applicable CDSC holding period (other than a money market fund);
purchased through investment professionals who did not receive advanced sales payments;
if, after you purchase Shares, you become disabled as defined by the IRS;
if the Fund redeems your Shares and closes your account for not meeting the minimum balance requirement;
if your redemption is a required retirement plan distribution; or
upon the death of the last surviving shareholder of the account. The beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder of the account.

To keep the sales charge as low as possible, the Fund redeems your Shares in this order:

Shares that are not subject to a CDSC; and
Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund).

The CDSC is then calculated using the Share price at the time of purchase or redemption, whichever is lower.

How is the Fund Sold?

The Fund offers four Share classes: Class A Shares, Class B Shares, Class C Shares and Class F Shares, each representing interests in a single portfolio of securities. The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals.

When the Distributor receives marketing fees and sales charges, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Class A Shares, Class B Shares, Class C Shares and Class F Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.

How to Purchase Shares

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You may purchase Shares through an investment professional, directly from the Fund, or through an exchange from another Federated fund. The Fund reserves the right to reject any request to purchase or exchange Shares. Where the Fund offers more than one Share class and you do not specify the class choice on your New Account Form or form of payment (e.g., Federal Reserve wire or check), you automatically will receive Class A Shares.

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THROUGH AN INVESTMENT PROFESSIONAL

Establish an account with the investment professional; and
Submit your purchase order to the investment professional before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive the next calculated NAV if the investment professional forwards the order to the Fund on the same day and the Fund receives payment within three business days. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are restricted.

By Check

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Make your check payable to The Federated Funds, note your account number on the check, and mail it to:

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Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

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If you send your check by a private courier or overnight delivery service that requires a street address, send it to:

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

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH AN EXCHANGE

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You may purchase Shares through an exchange from the same share class of another Federated fund. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have identical registrations.

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BY SYSTEMATIC INVESTMENT PROGRAM

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Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the SIP section of the New Account Form or by contacting the Fund or your investment professional.

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BY AUTOMATED CLEARING HOUSE (ACH)

Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.

RETIREMENT INVESTMENTS

You may purchase Shares as retirement investments (such as qualified plans and IRAs or transfer or rollover of assets). Call your investment professional or the Fund for information on retirement investments. We suggest that you discuss retirement investments with your tax adviser. You may be subject to an annual IRA account fee.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

through an investment professional if you purchased Shares through an investment professional; or
directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

Submit your redemption or exchange request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

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If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time), you will receive a redemption amount based on that day's NAV.

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By Mail

You may redeem or exchange Shares by mailing a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

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

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees

Signatures must be guaranteed if:

your redemption will be sent to an address other than the address of record;
your redemption will be sent to an address of record that was changed within the last 30 days;
a redemption is payable to someone other than the shareholder(s) of record; or
if exchanging (transferring) into another fund with a different shareholder registration.

A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.

PAYMENT METHODS FOR REDEMPTIONS

Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.

LIMITATIONS ON REDEMPTION PROCEEDS

Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your redemption from a retirement account in the Fund may be withheld for taxes. This withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGE

You may exchange Shares of the Fund into shares of the same class of another Federated fund. To do this, you must:

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

The Fund may modify or terminate the exchange privilege at any time. The Fund's management or Adviser may determine from the amount, frequency and pattern of exchanges that a shareholder is engaged in excessive trading that is detrimental to the Fund and other shareholders. If this occurs, the Fund may terminate the availability of exchanges to that shareholder and may bar that shareholder from purchasing other Federated funds.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income.

Generally, it is not advisable to continue to purchase Class A Shares, Class C Shares and Class F Shares subject to a sales charge while redeeming Shares using this program.

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Systematic Withdrawal Program (SWP) On Class B Shares

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You will not be charged a CDSC on SWP redemptions if:

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

You will be subject to a CDSC on redemption amounts that exceed the 12% annual limit. In measuring the redemption percentage, your account is valued when you establish the SWP and then annually at calendar year-end. You can redeem monthly, quarterly, or semi-annually.

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ADDITIONAL CONDITIONS

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Telephone Transactions

The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.

Share Certificates

The Fund no longer issues share certificates. If you are redeeming or exchanging Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption or exchange request. For your protection, send your certificates by registered or certified mail, but do not endorse them.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases, redemptions and exchanges (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, dividends and capital gains paid.

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays any dividends monthly to shareholders. Dividends are paid to all shareholders invested in the Fund on the record date. The record date is the date on which a shareholder must officially own Shares in order to earn a dividend.

In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.

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If you purchase Shares just before the record date for a dividend or capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the record date for a dividend or capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.

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ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, non-retirement accounts may be closed if redemptions or exchanges cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.

TAX INFORMATION

The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.

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Fund distributions are expected to be both dividends and capital gains. Redemptions and exchanges are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.

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Who Manages the Fund?

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The Board of Directors (the "Board") governs the Fund. The Board selects and oversees the Adviser, Federated Equity Management Company of Pennsylvania. The Adviser manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The Adviser and other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

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THE FUND'S PORTFOLIO MANAGERS ARE:

John L. Nichol

John L. Nichol has been the Fund's Portfolio Manager since October 2002. Mr. Nichol joined Federated in September 2000 as an Assistant Vice President/Senior Investment Analyst. He has been a Portfolio Manager since December 2000 and was named a Vice President of the Fund's Adviser in July 2001. Mr. Nichol served as a portfolio manager and analyst for the Public Employees Retirement System of Ohio from 1992 through August 2000. Mr. Nichol is a Chartered Financial Analyst. He received his M.B.A. with an emphasis in Finance and Management and Information Science from the Ohio State University.

Steven J. Lehman

Steven J. Lehman has been the Fund's Portfolio Manager since April 2003. Mr. Lehman joined the Fund's Adviser in May 1997 as a Portfolio Manager and Vice President. He has been a Senior Portfolio Manager since 1998. From 1986 to May 1997, Mr. Lehman served as a Portfolio Manager, then Vice President/Senior Portfolio Manager, at First Chicago NBD. Mr. Lehman is a Chartered Financial Analyst; he received his M.A. from the University of Chicago.

Kevin R. McCloskey

Kevin R. McCloskey was named a Portfolio Manager of the Fund in April 2003. Mr. McCloskey joined Federated in 1999 as a Portfolio Manager and is a Vice President of the Fund's Adviser. From September 1994 to July 1999, he served as a portfolio manager, and from January 1994 to September 1994, he served as an investment/quantitative analyst at Killian Asset Management Corporation. Mr. McCloskey is a Chartered Financial Analyst. He received his M.B.A. from the University of Dayton.

Linda A. Duessel

Linda A. Duessel has been the Fund's Portfolio Manager since February 1997. She is Vice President of the Fund. Ms. Duessel joined Federated in 1991and has been a Portfolio Manager since 1995. She became a Senior Vice President of the Fund's Adviser in January 2000 and served as a Vice President of the Fund's Adviser from 1995 through 1999. Ms. Duessel was a Senior Investment Analyst and an Assistant Vice President of the Fund's Adviser from 1991 until 1995. Ms. Duessel is a Chartered Financial Analyst and received her M.S. in Industrial Administration from Carnegie Mellon University.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.60% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.

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Legal Proceedings

Like many other mutual fund companies, in September 2003, Federated, the parent company of the Federated funds' Adviser and distributor, received detailed requests for information on shareholder trading activities in the Federated funds from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Federated immediately retained the law firm of Reed Smith LLP to conduct an internal investigation, which is ongoing. Additionally, attorneys from the law firm of Dickstein Shapiro Morin & Oshinsky LLP, independent counsel to the Federated funds, are participating in the investigation and are reporting to the independent directors of the Federated funds on their progress.

The internal investigation is examining, among other things, circumstances in which it appears that a few Federated fund investors were granted exceptions to Federated's internal procedures for limiting frequent transactions, and that some of these investors made additional investments in other Federated funds. The investigation is also examining instances in which it appears that orders for Federated funds with variable NAVs were placed and accepted after the Federated funds' closing time at 4:00 p.m. Federated is taking steps to ensure that Federated fund shareholder trading policies are adhered to.

On October 22, 2003, Federated issued a press release that discusses these matters and announces that Federated is committed to taking remedial actions when and as appropriate, including compensating the Federated funds for any detrimental impact these transactions may have had on them. Based upon the progress of the investigation to date, Federated does not have sufficient information regarding these transactions to make a reasonable estimate of the amount, if any, by which the Federated funds have been impacted. The press release is available in the "About Us" section of Federated's website www.federatedinvestors.com , and any future press releases on this subject will also be posted there.

Shortly after the press release was issued, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Federated funds were named as defendants in several class action lawsuits filed in the United States District Court for the Western District of Pennsylvania seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. Federated and the Federated funds are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. Although we do not believe that these lawsuits will have a material adverse effect on the Federated funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Federated fund redemptions, reduced sales of Federated fund shares, or other adverse consequences for the Federated funds.

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Financial Information

FINANCIAL HIGHLIGHTS

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The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years. Some of the information is presented on a per Share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.

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This information has been audited by Ernst & Young LLP, whose report, along with the Fund's audited financial statements, is included in the Annual Report.

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Financial Highlights -- Class A Shares

(For a Share Outstanding Throughout Each Period)

	Period Ended 11/30/2003		Year Ended March 31,
	Period Ended 11/30/2003	¹		2003			2002			2001			2000			1999

Net Asset Value, Beginning of Period	$12.21			$16.66			$16.96			$23.69			$19.49			$19.14
Income From Investment Operations:
Net investment income	0.23			0.27			0.25			0.34			0.27			0.31
Net realized and unrealized gain (loss) on investments, futures contracts, options and foreign currency transactions	2.81			(4.48	)		(0.26	)		(6.26	)		4.20			1.54

TOTAL FROM INVESTMENT OPERATIONS	3.04			(4.21	)		(0.01	)		(5.92	)		4.47			1.85

Less Distributions:
Distributions from net investment income	(0.20	)		(0.24	)		(0.29	)		(0.34	)		(0.27	)		(0.30	)
Distributions from net realized gain on investments, futures contracts, options and foreign currency transactions	--			--			--			(0.47	)		(0.00	)²		(1.20	)

TOTAL DISTRIBUTIONS	(0.20	)		(0.24	)		(0.29	)		(0.81	)		(0.27	)		(1.50	)

Net Asset Value, End of Period	$15.05			$12.21			$16.66			$16.96			$23.69			$19.49

Total Return³	24.99	%⁴		(25.36	)%		(0.07	)%		(25.58	)%		23.14	%		10.18	%


Ratios to Average Net Assets:

Expenses	1.18	%^5,6		1.17	%⁶		1.10	%		1.07	%		1.10	%		1.11	%

Net investment income	2.35	%⁵		1.93	%		1.49	%		1.65	%		1.28	%		1.66	%

Expense waiver/ reimbursement⁷	0.00	%^5,8		0.00	%⁸		0.00	%⁸		0.00	%8		--			--

Supplemental Data

Net assets, end of period (000 omitted)	$616,835		$549,359			$923,647			$1,077,582			$1,187,734			$932,544

Portfolio turnover	44	%		123	%		86	%		85	%		58	%		69	%

1 The Fund has changed its fiscal year end from March 31 to November 30.

2 Represents less than $0.01.

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

4 During the period, the Fund was reimbursed by the Adviser for certain losses on investments which had an impact of less than 0.01% on total return. See Note 7 on page 27 of the Fund's Annual Report.

5 Computed on an annualized basis.

6 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.16% and 1.15% for the period ended November 30, 2003 and for the year ended March 31, 2003, respectively, after taking into account these expense reductions.

7 This expense decrease is reflected in both the expense and the net investment income ratios shown above.

8 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Annual Report, dated November 30, 2003, which can be obtained free of charge.

Financial Highlights -- Class B Shares

(For a Share Outstanding Throughout Each Period)

	Period Ended 11/30/2003		Year Ended March 31,
	Period Ended 11/30/2003	¹		2003			2002			2001			2000			1999

Net Asset Value, Beginning of Period	$12.21			$16.65			$16.96			$23.68			$19.49			$19.15
Income From Investment Operations:
Net investment income	0.16			0.17			0.12			0.18			0.12			0.17
Net realized and unrealized gain (loss) on investments, futures contracts, options and foreign currency transactions	2.80			(4.47	)		(0.27	)		(6.25	)		4.19			1.54

TOTAL FROM INVESTMENT OPERATIONS	2.96			(4.30	)		(0.15	)		(6.07	)		4.31			1.71

Less Distributions:
Distributions from net investment income	(0.13	)		(0.14	)		(0.16	)		(0.18	)		(0.12	)		(0.17	)
Distributions from net realized gain on investments, futures contracts, options and foreign currency transactions	--			--			--			(0.47	)		(0.00	)²		(1.20	)

TOTAL DISTRIBUTIONS	(0.13	)		(0.14	)		(0.16	)		(0.65	)		(0.12	)		(1.37	)

Net Asset Value, End of Period	$15.04			$12.21			$16.65			$16.96			$23.68			$19.49

Total Return³	24.29	%⁴		(25.89	)%		(0.88	)%		(26.11	)%		22.18	%		9.32	%


Ratios to Average Net Assets:

Expenses	1.93	%^5,6		1.92	%⁶		1.85	%		1.82	%		1.85	%		1.86	%

Net investment income	1.60	%⁵		1.16	%		0.74	%		0.89	%		0.53	%		0.91	%

Expense waiver/ reimbursement⁷	0.00	%^5,8		0.00	%⁸		0.00	%⁸		0.00	%⁸		--			--

Supplemental Data

Net assets, end of period (000 omitted)	$603,043		$551,204			$1,021,453			$1,225,097			$1,537,957			$1,262,258

Portfolio turnover	44	%		123	%		86	%		85	%		58	%		69	%

1 The Fund has changed its fiscal year end from March 31 to November 30.

2 Represents less than $0.01.

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

5 Computed on an annualized basis.

6 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.91% and 1.90% for the period ended November 30, 2003 and the year ended March 31, 2003, respectively, after taking into account these expense reductions.

7 This expense decrease is reflected in both the expense and the net investment income ratios shown above.

8 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Annual Report, dated November 30, 2003, which can be obtained free of charge.

Financial Highlights -- Class C Shares

(For a Share Outstanding Throughout Each Period)

	Period Ended 11/30/2003		Year Ended March 31,
	Period Ended 11/30/2003	¹		2003			2002			2001			2000			1999

Net Asset Value, Beginning of Period	$12.21			$16.66			$16.96			$23.69			$19.50			$19.15
Income From Investment Operations:
Net investment income	0.16			0.17			0.12			0.18			0.12			0.17
Net realized and unrealized gain (loss) on investments, futures contracts, options and foreign currency transactions	2.81			(4.48	)		(0.26	)		(6.26	)		4.19			1.54

TOTAL FROM INVESTMENT OPERATIONS	2.97			(4.31	)		(0.14	)		(6.08	)		4.31			1.71

Less Distributions:
Distributions from net investment income	(0.13	)		(0.14	)		(0.16	)		(0.18	)		(0.12	)		(0.16	)
Distributions from net realized gain on investments, futures contracts, options and foreign currency transactions	--			--			--			(0.47	)		(0.00	)²		(1.20	)

TOTAL DISTRIBUTIONS	(0.13	)		(0.14	)		(0.16	)		(0.65	)		(0.12	)		(1.36	)

Net Asset Value, End of Period	$15.05			$12.21			$16.66			$16.96			$23.69			$19.50

Total Return³	24.37	%⁴		(25.94	)%		(0.83	)%		(26.14	)%		22.17	%		9.37	%


Ratios to Average Net Assets:

Expenses	1.93	%^5,6		1.92	%⁶		1.85	%		1.82	%		1.85	%		1.86	%

Net investment income	1.60	%⁵		1.16	%		0.74	%		0.90	%		0.53	%		0.91	%

Expense waiver/ reimbursement⁷	0.00	%^5,8		0.00	%⁸		0.00	%⁸		0.00	%⁸		--			--

Supplemental Data

Net assets, end of period (000 omitted)	$92,145		$85,242			$160,217			$213,472			$249,004			$196,583

Portfolio turnover	44	%		123	%		86	%		85	%		58	%		69	%

1 The Fund has changed its fiscal year end from March 31 to November 30.

2 Represents less than $0.01.

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

5 Computed on an annualized basis.Computed on an annualized basis.

6 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.91% and 1.90% for the period ended November 30, 2003 and for the year ended March 31, 2003, respectively, after taking into account these expense reductions.

7 This expense decrease is reflected in both the expense and the net investment income ratios shown above.

8 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Annual Report, dated November 30, 2003, which can be obtained free of charge.

Financial Highlights -- Class F Shares

(For a Share Outstanding Throughout Each Period)

	Period Ended 11/30/2003		Year Ended March 31,
	Period Ended 11/30/2003	¹		2003			2002			2001			2000			1999

Net Asset Value, Beginning of Period	$12.22			$16.67			$16.97			$23.70			$19.50			$19.15
Income From Investment Operations:
Net investment income	0.20			0.24			0.21			0.29			0.22			0.27
Net realized and unrealized gain (loss) on investments, futures contracts, options and foreign currency transactions	2.81			(4.48	)		(0.27	)		(6.27	)		4.20			1.54

TOTAL FROM INVESTMENT OPERATIONS	3.01			(4.24	)		(0.06	)		(5.98	)		4.42			1.81

Less Distributions:
Distributions from net investment income	(0.17	)		(0.21	)		(0.24	)		(0.28	)		(0.22	)		(0.26	)
Distributions from net realized gain on investments, futures contracts, options and foreign currency transactions	--			--			--			(0.47	)		(0.00	)²		(1.20	)

TOTAL DISTRIBUTIONS	(0.17	)		(0.21	)		(0.24	)		(0.75	)		(0.22	)		(1.46	)

Net Asset Value, End of Period	$15.06			$12.22			$16.67			$16.97			$23.70			$19.50

Total Return³	24.75	%⁴		(25.54	)%		(0.32	)%		(25.76	)%		22.82	%		9.90	%


Ratios to Average Net Assets:

Expenses	1.43	%^5,6		1.42	%⁶		1.35	%		1.32	%		1.35	%		1.36	%

Net investment income	2.10	%⁵		1.66	%		1.24	%		1.39	%		1.03	%		1.41	%

Expense waiver/ reimbursement⁷	0.00	%^5,8		0.00	%⁸		0.00	%⁸		0.00	%⁸		--			--

Supplemental Data

Net assets, end of period (000 omitted)	$49,192		$43,366			$81,067			$103,323			$147,313			$127,676

Portfolio turnover	44	%		123	%		86	%		85	%		58	%		69	%

1 The Fund has changed its fiscal year end from March 31 to November 30.

2 Represents less than $0.01.

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

5 Computed on an annualized basis.

6 The expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The expense ratios are 1.41% and 1.40% for the period ended November 30, 2003 and for the year ended March 31, 2003, respectively, after taking into account these expense reductions.

7 This expense decrease is reflected in both the expense and the net investment income ratios shown above.

8 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Annual Report, dated November 30, 2003, which can be obtained free of charge.

A Statement of Additional Information (SAI) dated January 31, 2004 is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated's Internet site at www.federatedinvestors.com.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.

[Logo of Federated Investors]

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Federated EquityIncome Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com

</R>

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4743

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Federated is a registered mark of Federated Investors, Inc.
2004 © Federated Investors, Inc.

</R>

Cusip 313915100
Cusip 313915209
Cusip 313915308
Cusip 313915407

<R>

G00492-01 (1/04)

</R>

FEDERATED EQUITY INCOME FUND, INC.

Statement of Additional Information
<R>

January 31, 2004

</R>

Class A Shares
Class B Shares
Class C Shares
Class F Shares
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This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Equity Income Fund, Inc.
(Fund), dated January 31, 2004.

</R>

This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectus or the Annual Report without charge by calling 1-800-341-7400.

Contents
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Exchanging Securities for Shares
Subaccounting Services
Redemption in Kind
Account and Share Information
Tax Information
Who Manages and Provides Services to
the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings
Addresses
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8062806B (1/04)

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HOW IS THE FUND ORGANIZED?

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The Fund is a diversified open-end, management investment company that was
established under the laws of the State of Maryland on July 29, 1986.

The Board of Trustees (the Board) has established three classes of shares of the
Fund, known as Class A Shares, Class B Shares and Class C Shares (Shares). This
SAI relates to all classes of Shares. The Fund's investment adviser is Federated
Equity Management Company of Pennsylvania (Adviser). Prior to January 1, 2004,
Federated Investment Management Company was investment adviser to the Fund. Both
the current Adviser and the former Adviser are wholly owned subsidiaries of
Federated Investors, Inc. (Federated).

</R>

SECURITIES IN WHICH THE FUND INVESTS

In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment
objective.

SECURITIES DESCRIPTIONS AND TECHNIQUES

Equity Securities

Equity securities represent a share of an issuer's earnings and assets, after
the issuer pays its liabilities. The Fund cannot predict the income it will
receive from equity securities because issuers generally have discretion as to
the payment of any dividends or distributions. However, equity securities offer
greater potential for appreciation than many other types of securities, because
their value increases directly with the value of the issuer's business. The
following describes the types of equity securities in which the Fund invests:

Common Stocks

Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings directly
influence the value of its common stock.

Preferred Stocks

Holders of preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments to common stockholders. Some
preferred stocks also participate in dividends and distributions paid on common
stock. The issuer may in certain circumstances redeem the preferred stock. The
Fund may also treat such redeemable preferred stock as a fixed income security.

Interests in Other Limited Liability Companies

Entities such as limited partnerships, limited liability companies, business
trusts and companies organized outside the United States may issue securities
comparable to common or preferred stock.

Real Estate Investment Trusts (REITs)

REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial real
estate market.

Warrants

Warrants give the Fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the expiration
date). The Fund may buy the designated securities by paying the exercise price
before the expiration date. Warrants may become worthless if the price of the
stock does not rise above the exercise price by the expiration date. This
increases the market risks of warrants as compared to the underlying security.
Rights are the same as warrants, except companies typically issue rights to
existing stockholders.

Fixed Income Securities

Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.

A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.

The following describes the types of fixed income securities in which the Fund
may invest:

Treasury Securities

Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.

Agency Securities

Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risks, but not as low as treasury
securities.

The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the market and prepayment risks of these mortgage backed securities.

Corporate Debt Securities

Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities. The Fund may also purchase interests in bank loans to
companies. The credit risks of corporate debt securities vary widely among
issuers.

In addition, the credit risk of an issuer's debt security may vary based on its
priority for repayment. For example, higher-ranking (senior) debt securities
have a higher priority than lower-ranking (subordinated) securities. This means
that the issuer might not make payments on subordinated securities while
continuing to make payments on senior securities. In addition, in the event of
bankruptcy, holders of senior securities may receive amounts otherwise payable
to the holders of subordinated securities. Some subordinated securities, such as
trust preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer any
payment that would reduce its capital below regulatory requirements.

Commercial Paper

Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.

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Mortgage Backed Securities

The Fund may invest in mortgage backed securities primarily by investing in
another investment company (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of the
Adviser. This other investment company is managed independently of the Fund and
may incur additional administrative expenses. Therefore, any such investment by
the Fund may be subject to duplicate expenses. However, the Adviser believes
that the benefits and efficiencies of this approach should outweigh the
potential additional expenses. The Fund may also invest in such securities
directly. Mortgage backed securities represent interests in pools of mortgages.
The mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates. Interests in pools of adjustable rate mortgages are known as ARMs.

Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and pre-payments from the underlying mortgages.
As a result, the holders assume all the prepayment risks of the underlying
mortgages.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

CMOs, including interests in real estate mortgage investment conduits (REMICs),
allocate payments and prepayments from an underlying pass-through certificate
among holders of different classes of mortgage backed securities. This creates
different prepayment and interest rate risks for each CMO class.

SEQUENTIAL CMOS

In a sequential pay CMO, one class of CMOs receives all principal payments and
prepayments. The next class of CMOs receives all principal payments after the
first class is paid off. This process repeats for each sequential class of CMO.
As a result, each class of sequential pay CMOs reduces the prepayment risks of
subsequent classes.

PACS, TACS AND COMPANION CLASSES

More sophisticated CMOs include planned amortization classes (PACs) and targeted
amortization classes (TACs). PACs and TACs are issued with companion classes.
PACs and TACs receive principal payments and prepayments at a specified rate.
The companion classes receive principal payments and prepayments in excess of
the specified rate. In addition, PACs will receive the companion classes' share
of principal payments, if necessary, to cover a shortfall in the prepayment
rate. This helps PACs and TACs to control prepayment risks by increasing the
risks to their companion classes.

IOS AND POS

CMOs may allocate interest payments to one class (Interest Only or IOs) and
principal payments to another class (Principal Only or POs). POs increase in
value when prepayment rates increase. In contrast, IOs decrease in value when
prepayments increase, because the underlying mortgages generate less interest
payments. However, IOs tend to increase in value when interest rates rise (and
prepayments decrease), making IOs a useful hedge against interest rate risks.

FLOATERS AND INVERSE FLOATERS

Another variant allocates interest payments between two classes of CMOs. One
class (Floaters) receives a share of interest payments based upon a market index
such as LIBOR. The other class (Inverse Floaters) receives any remaining
interest payments from the underlying mortgages. Floater classes receive more
interest (and Inverse Floater classes receive correspondingly less interest) as
interest rates rise. This shifts prepayment and interest rate risks from the
Floater to the Inverse Floater class, reducing the price volatility of the
Floater class and increasing the price volatility of the Inverse Floater class.

Z CLASSES AND RESIDUAL CLASSES

CMOs must allocate all payments received from the underlying mortgages to some
class. To capture any unallocated payments, CMOs generally have an accrual (Z)
class. Z classes do not receive any payments from the underlying mortgages until
all other CMO classes have been paid off. Once this happens, holders of Z class
CMOs receive all payments and prepayments. Similarly, REMICs have residual
interests that receive any mortgage payments not allocated to another REMIC
class. The degree of increased or decreased prepayment risks depends upon the
structure of the CMOs. However, the actual returns on any type of mortgage
backed security depend upon the performance of the underlying pool of mortgages,
which no one can predict and will vary among pools.

Asset Backed Securities

Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed income
assets (including other fixed income securities) may be used to create an asset
backed security. Asset backed securities may take the form of commercial paper,
notes, or pass through certificates. Asset backed securities have prepayment
risks. Like CMOs, asset backed securities may be structured like Floaters,
Inverse Floaters, IOs and POs.

</R>

Demand Instruments

Demand instruments are corporate debt securities that the issuer must repay upon
demand. Other demand instruments require a third party, such as a dealer or
bank, to repurchase the security for its face value upon demand. The Fund treats
demand instruments as short-term securities, even though their stated maturity
may extend beyond one year.

Bank Instruments

Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.

Zero Coupon Securities

Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a "coupon payment"). Investors buy zero coupon securities at a price below
the amount payable at maturity. The difference between the purchase price and
the amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate and credit risks of a zero coupon security.

There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's couponpayments from the right to receive the bond's principal due at
maturity, a process known as "coupon stripping." In addition, some securities
give the issuer the option to deliver additional securities in place of cash
interest payments, thereby increasing the amount payable at maturity. These are
referred to as pay-in-kind or PIK securities.

Convertible Securities

Convertible securities are convertible preferred stock or convertible bonds that
the Fund has the option to exchange for equity securities of the issuer at a
specified conversion price. The option allows the Fund to realize additional
returns if the market price of the equity securities exceeds the conversion
price. For example, the Fund may hold securities that are convertible into
shares of common stock at a conversion price of $10 per share. If the market
value of the shares of common stock reached $12, the Fund could realize an
additional $2 per share by converting its securities.

Convertible preferred stock and convertible bonds pay or accrue interest or
dividends at a specified rate. The rate may be a fixed percentage of the
principal or adjusted periodically. In addition, the issuer of a convertible
bond must repay the principal amount of the bond, normally within a specified
time. Convertible preferred stock and convertible bonds of a company generally
provide more income, but may pay a lower total return than that company's equity
securities.

Foreign Securities

Foreign securities are securities of issuers based outside the United States.
The Fund considers an issuer to be based outside the United States if:

o it is organized under the laws of, or has a principal office located in,
another country;

o the principal trading market for its securities is in another country; or

o it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along with
the risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing. Trading
in certain foreign markets is also subject to liquidity risks.

Depositary Receipts

Depositary receipts represent interests in underlying securities issued by a
foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are traded outside the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts, Global Depositary Receipts and International Depositary Receipts, are
traded globally or outside the United States. Depositary receipts involve many
of the same risks of investing directly in foreign securities, including
currency risks and risks of foreign investing.

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Foreign Exchange Contracts

In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivative contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivative contracts may be higher or lower than the spot exchange rate. Use of
these derivative contracts may increase or decrease the Fund's exposure to
currency risks.

Foreign Government Securities

Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.

Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political unit
that are not backed by the national government's full faith and credit. Further,
foreign government securities include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.

Brady Bonds

Brady Bonds are U.S. dollar denominated debt obligations that foreign
governments issue in exchange for commercial bank loans. The International
Monetary Fund (IMF) typically negotiates the exchange to cure or avoid a default
by restructuring the terms of the bank loans. The principal amount of some Brady
Bonds is collateralized by zero coupon U.S. Treasury securities which have the
same maturity as the Brady Bonds. However, neither the U.S. government nor the
IMF has guaranteed the repayment of any Brady Bond.

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Hedging

Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a derivative
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different derivatives
contracts, or derivatives contracts and securities. The Fund's ability to hedge
may be limited by the costs of the derivatives contracts. The Fund may attempt
to lower the cost of hedging by entering into transactions that provide only
limited protection, including transactions that: (1) hedge only a portion of its
portfolio; (2) use derivatives contracts that cover a narrow range of
circumstances; or (3) involve the sale of derivatives contracts with different
terms. Consequently, hedging transactions will not eliminate risk even if they
work as intended. In addition, hedging strategies are not always successful, and
could result in increased expenses and losses to the Fund.

DERIVATIVE CONTRACTS

Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty. Many
derivative contracts are traded on securities or commodities exchanges. In this
case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.

The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.

Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to interest
rate, stock market, and currency risks, and may also expose the Fund to
liquidity and leverage risks. OTC contracts also expose the Fund to credit risks
in the event that a counterparty defaults on the contract.

The Fund may trade in the following types of derivative contracts.

Futures Contracts

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Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. The Fund has claimed an exclusion from
the definition of the term "commodity pool operator" under the Commodity
Exchange Act and, therefore, is not subject to registration or regulation as a
commodity pool operator under that Act. Futures contracts traded OTC are
frequently referred to as forward contracts. The Fund can buy or sell financial
futures, index futures and foreign currency forward contracts.

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Options

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Options are rights to buy or sell an underlying asset or instrument for a
specified price (the exercise price) during, or at the end of, a specified
period. The seller (or writer) of the option receives a payment, or premium,
from the buyer, which the writer keeps regardless of whether the buyer uses (or
exercises) the option. Options can trade on exchanges or in the OTC market and
may be bought or sold on a wide variety of underlying assets or instruments,
including financial indices, individual securities, and other derivative
instruments, such as futures contracts. Options that are written on futures
contracts will be subject to margin requirements similar to those applied to
futures contracts.

The Fund may buy/sell the following types of options:

CALL OPTIONS

A call option gives the holder (buyer) the right to buy the underlying asset
from the seller (writer) of the option. The Fund may use call options in the
following ways:

o Buy call options on indices, individual securities, index futures,
currencies (both foreign and U.S. dollar) and financial futures in
anticipation of an increase in the value of the underlying asset or
instrument; and

o Write call options on indices, portfolio securities, index futures,
currencies (both foreign and U.S. dollar) and financial futures to generate
income from premiums, and in anticipation of a decrease or only limited
increase in the value of the underlying asset. If a call written by the
Fund is exercised, the Fund foregoes any possible profit from an increase
in the market price of the underlying asset over the exercise price plus
the premium received.

PUT OPTIONS

A put option gives the holder the right to sell the underlying asset to the
writer of the option. The Fund may use put options in the following ways:

o Buy put options on indices, individual securities, index futures,
currencies (both foreign and U.S. dollar) and financial futures in
anticipation of a decrease in the value of the underlying asset; and

o Write put options on indices, portfolio securities, index futures,
currencies (both foreign and U.S. dollar) and financial futures to generate
income from premiums, and in anticipation of an increase or only limited
decrease in the value of the underlying asset. In writing puts, there is a
risk that the Fund may be required to take delivery of the underlying asset
when its current market price is lower than the exercise price.

The Fund may also buy or write options, as needed, to close out existing option
positions.

Swaps

Swaps are contracts in which two parties agree to pay each other (swap) the
returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party, and
the parties might not own the assets underlying the swap. The payments are
usually made on a net basis so that, on any given day, the Fund would receive
(or pay) only the amount by which its payment under the contract is less than
(or exceeds) the amount of the other party's payment. Swap agreements are
sophisticated instruments that can take many different forms, and are known by a
variety of names including caps, floors and collars. Common swap agreements that
the Fund may use include:

INTEREST RATE SWAPS

Interest rate swaps are contracts in which one party agrees to make regular
payments equal to a fixed or floating interest rate times a stated principal
amount of fixed income securities, in return for payments equal to a different
fixed or floating rate times the same principal amount, for a specific period.
For example, a $10 million LIBOR swap would require one party to pay the
equivalent of the London Interbank Offer Rate of interest (which fluctuates) on
$10 million principal amount in exchange for the right to receive the equivalent
of a stated fixed rate of interest on $10 million principal amount.

TOTAL RATE OF RETURN SWAPS

Total rate of return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset during the specified
period, in return for payments equal to a fixed or floating rate of interest or
the total return from another underlying asset.

CURRENCY SWAPS

Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amount as
well.

CAPS AND FLOORS

Caps and Floors are contracts in which one party agrees to make payments only if
an interest rate or index goes above (Cap) or below (Floor) a certain level in
return for a fee from the other party.

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Hybrid Instruments

Hybrid instruments combine elements of derivative contracts with those of
another security (typically a fixed income security). All or a portion of the
interest or principal payable on a hybrid security is determined by reference to
changes in the price of an underlying asset or by reference to another benchmark
(such as interest rates, currency exchange rates or indices). Hybrid instruments
also include convertible securities with conversion terms related to an
underlying asset or benchmark.

The risks of investing in hybrid instruments reflect a combination of the risks
of investing in securities, options, futures and currencies, and depend upon the
terms of the instrument. Thus, an investment in a hybrid instrument may entail
significant risks in addition to those associated with traditional fixed income
or convertible securities. Hybrid instruments are also potentially more volatile
and carry greater interest rate risks than traditional instruments. Moreover,
depending on the structure of the particular hybrid, it may expose the Fund to
leverage risks or carry liquidity risks.

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Special Transactions

Repurchase Agreements

Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed-upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.

Repurchase agreements are subject to credit risks.

Reverse Repurchase Agreements

Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed-upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.

Delayed Delivery Transactions

Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.

Securities Lending

The Fund may lend portfolio securities to borrowers that the Fund's custodian
deems creditworthy. In return, the Fund receives cash or liquid securities from
the borrower as collateral. The borrower must furnish additional collateral if
the market value of the loaned securities increases. Also, the borrower must pay
the Fund the equivalent of any dividends or interest received on the loaned
securities.

The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.

Loans are subject to termination at the option of the Fund or the borrower. The
Fund will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.

Securities lending activities are subject to interest rate risks and credit
risks. Those transactions may create leverage risks.

Asset Coverage

In order to secure its obligations in connection with derivatives contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting derivative contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on derivative contracts or special
transactions.

Inter-Fund Borrowing and Lending Arrangements

The Securities and Exchange Commission (SEC) has granted an exemption that
permits the Fund and all other funds advised by subsidiaries of Federated
Investors, Inc. (Federated funds) to lend and borrow money for certain temporary
purposes directly to and from other Federated funds. Participation in this
inter-fund lending program is voluntary for both borrowing and lending funds,
and an inter-fund loan is only made if it benefits each participating fund.
Federated Investors, Inc. (Federated) administers the program according to
procedures approved by the Fund's Board, and the Board monitors the operation of
the program. Any inter-fund loan must comply with certain conditions set out in
the exemption, which are designed to assure fairness and protect all
participating funds.

For example, inter-fund lending is permitted only (a) to meet shareholder
redemption requests, and (b) to meet commitments arising from "failed" trades.
All inter-fund loans must be repaid in seven days or less. The Fund's
participation in this program must be consistent with its investment policies
and limitations, and must meet certain percentage tests. Inter-fund loans may be
made only when the rate of interest to be charged is more attractive to the
lending fund than market-competitive rates on overnight repurchase agreements
(Repo Rate) and more attractive to the borrowing fund than the rate of interest
that would be charged by an unaffiliated bank for short-term borrowings (Bank
Loan Rate), as determined by the Board. The interest rate imposed on inter-fund
loans is the average of the Repo Rate and the Bank Loan Rate.

Investing in Securities of Other Investment Companies

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The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.

The Fund may invest in mortgage backed, high yield and emerging market fixed
income securities primarily by investing in another investment company (which is
not available for investment by the general public) that owns those securities
and that is advised by an affiliate of the Adviser. This other investment
company is managed independently of the Fund and may incur additional
administrative expenses. Therefore, any such investment by the Fund may be
subject to duplicate expenses. However, the Adviser believes that the benefits
and efficiencies of this approach should outweigh the potential additional
expenses. The Fund may also invest in such securities directly.

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Investment Ratings for Investment Grade Securities

The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's (S&P), a rating service, assigns ratings to
investment grade securities (AAA, AA, A and BBB) based on their assessment of
the likelihood of the issuer's inability to pay interest or principal (default)
when due on each security. Lower credit ratings correspond to higher credit
risk. If a security has not received a rating, the Fund must rely entirely upon
the Adviser's credit assessment.

INVESTMENT RISKS

There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.

Equity Securities Investment Risks

Stock Market Risks

o The value of equity securities in the Fund's portfolio will rise and fall.
These fluctuations could be a sustained trend or a drastic movement. The
Fund's portfolio will reflect changes in prices of individual portfolio
stocks or general changes in stock valuations. Consequently, the Fund's
share price may decline.

o The Adviser attempts to manage market risk by limiting the amount the Fund
invests in each company's equity securities. However, diversification will
not protect the Fund against widespread or prolonged declines in the stock
market.

Sector Risks

o Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain
sector may underperform other sectors or the market as a whole. As the
Adviser allocates more of the Fund's portfolio holdings to a particular
sector, the Fund's performance will be more susceptible to any economic,
business or other developments which generally affect that sector.

Liquidity Risks

o Trading opportunities are more limited for equity securities that are not
widely held. This may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up an
investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.

o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants to. If
this happens, the Fund will be required to continue to hold the security or
keep the position open, and the Fund could incur losses.

o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

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Risks Related to Investing for Value

o Due to their relatively low valuations, value stocks are typically less
volatile than growth stocks. For instance, the price of a value stock may
experience a smaller increase on a forecast of higher earnings, a positive
fundamental development, or positive market development. Further, value
stocks tend to have higher dividends than growth stocks. This means they
depend less on price changes for returns and may lag behind growth stocks
in certain up markets.

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Risks Related to Company Size

o Generally, the smaller the market capitalization of a company, the fewer
the number of shares traded daily, the less liquid its stock and the more
volatile its price. Market capitalization is determined by multiplying the
number of its outstanding shares by the current market price per share.

o Companies with smaller market capitalizations also tend to have unproven
track records, a limited product or service base and limited access to
capital. These factors also increase risks and make these companies more
likely to fail than companies with larger market capitalizations.

Risks of Foreign Investing

o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United States.
Securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S. investors.

o Foreign companies may not provide information (including financial
statements) as frequently or to as great an extent as companies in the
United States. Foreign companies may also receive less coverage than U.S.
companies by market analysts and the financial press. In addition, foreign
countries may lack uniform accounting, auditing and financial reporting
standards or regulatory requirements comparable to those applicable to U.S.
companies. These factors may prevent the Fund and its Adviser from
obtaining information concerning foreign companies that is as frequent,
extensive and reliable as the information available concerning companies in
the United States.

o Foreign countries may have restrictions on foreign ownership of securities
or may impose exchange controls, capital flow restrictions or repatriation
restrictions which could adversely affect the liquidity of the Fund's
investments.

Currency Risks

o Exchange rates for currencies fluctuate daily. The combination of currency
risk and market risk tends to make securities traded in foreign markets
more volatile than securities traded exclusively in the United States.

o The Adviser attempts to manage currency risk by limiting the amount the
Fund invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in the
value of the U.S. dollar relative to other currencies.

Euro Risks

o The Fund may make significant investments in securities denominated in the
Euro, the new single currency of the European Monetary Union (EMU).
Therefore, the exchange rate between the Euro and the U.S. dollar will have
a significant impact on the value of the Fund's investments.

o With the advent of the Euro, the participating countries in the EMU can no
longer follow independent monetary policies. This may limit these
countries' ability to respond to economic downturns or political upheavals,
and consequently reduce the value of their foreign government securities.

Credit Risks

o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.

Fixed Income Securities Investment Risks

Interest Rate Risks

o Prices of fixed income securities rise and fall in response to changes in
the interest rate paid by similar securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market
factors, such as the demand for particular fixed income securities, may
cause the price of certain fixed income securities to fall while the prices
of other securities rise or remain unchanged.

o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.

Credit Risks

o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.

o Many fixed income securities receive credit ratings from services such as
S&P and Moody's Investor Services (Moody's). These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.

o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.

Call Risks

o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market
price. An increase in the likelihood of a call may reduce the security's
price.

o If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

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Prepayment Risks

o Unlike traditional fixed income securities, which pay a fixed rate of
interest until maturity (when the entire principal amount is due) payments
on mortgage backed securities include both interest and a partial payment
of principal. Partial payment of principal may be comprised of scheduled
principal payments as well as unscheduled payments from the voluntary
prepayment, refinancing, or foreclosure of the underlying loans. These
unscheduled prepayments of principal create risks that can adversely affect
a Fund holding mortgage backed securities.

For example, when interest rates decline, the values of mortgage backed
securities generally rise. However, when interest rates decline,
unscheduled prepayments can be expected to accelerate, and the Fund would
be required to reinvest the proceeds of the prepayments at the lower
interest rates then available. Unscheduled prepayments would also limit the
potential for capital appreciation on mortgage backed securities.

Conversely, when interest rates rise, the values of mortgage backed
securities generally fall. Since rising interest rates typically result in
decreased prepayments, this could lengthen the average lives of mortgage
backed securities, and cause their value to decline more than traditional
fixed income securities.

o Generally, mortgage backed securities compensate for the increased risk
associated with prepayments by paying a higher yield. The additional
interest paid for risk is measured by the difference between the yield of a
mortgage backed security and the yield of a U.S. Treasury security with a
comparable maturity (the spread). An increase in the spread will cause the
price of the mortgage backed security to decline. Spreads generally
increase in response to adverse economic or market conditions. Spreads may
also increase if the security is perceived to have an increased prepayment
risk or is perceived to have less market demand.

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Liquidity Risks

o Trading opportunities are more limited for fixed income securities that
have not received any credit ratings, have received ratings below
investment grade or are not widely held.

o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

Risks Associated with Noninvestment Grade Securities

o Securities rated below investment grade, also known as junk bonds,
generally entail greater market, credit and liquidity risks than investment
grade securities. For example, their prices are more volatile, economic
downturns and financial setbacks may affect their prices more negatively,
and their trading market may be more limited.

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Risks Related to the Economy

o The prices of high-yield securities are affected by the economy. The value
of the Fund's portfolio may decline in tandem with a drop in the overall
value of the stock market based on negative developments in the United
States and global economies.

Risks of Investing in Emerging Market Countries

o Securities issued or traded in emerging markets generally entail greater
risks than securities issued or traded in developed markets. For example,
their prices may be significantly more volatile than prices in developed
countries. Emerging market economies may also experience more severe
downturns (with corresponding currency devaluations) than developed
economies.

o Emerging market countries may have relatively unstable governments and may
present the risk of nationalization of businesses, expropriation,
confiscatory taxation or, in certain instances, reversion to closed market,
centrally planned economies.

Leverage Risks

o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.

o Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

Risks Of Investing In Derivatives Contracts And Hybrid Instruments

o The Fund's use of derivative contracts involves risks different from, or
possibly greater than, the risks associated with investing directly in
securities and other traditional investments. First, changes in the value
of the derivative contracts and hybrid instruments in which the Fund
invests may not be correlated with changes in the value of the underlying
asset or if they are correlated, may move in the opposite direction than
originally anticipated. Second, while some strategies involving derivatives
may reduce the risk of loss, they may also reduce potential gains or, in
some cases, result in losses by offsetting favorable price movements in
portfolio holdings. Third, there is a risk that derivatives contracts and
hybrid instruments may be mispriced or improperly valued and, as a result,
the Fund may need to make increased cash payments to the counterparty.
Finally, derivative contracts and hybrid instruments may cause the Fund to
realize increased ordinary income or short-term capital gains (which are
treated as ordinary income for Federal income tax purposes) and, as a
result, may increase taxable distributions to shareholders. Derivative
contracts and hybrid instruments may also involve other risks described in
this prospectus, such as stock market, credit, liquidity and leverage
risks.

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Fundamental Investment Objective

The Fund's fundamental investment objective is to provide above average income
and capital appreciation. The investment objective may not be changed by the
Fund's Directors without shareholder approval.

INVESTMENT LIMITATIONS

Diversification

With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other than cash; cash
items; securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized by
such U.S. government securities; and securities of other investment companies)
if, as a result, more than 5% of the value of its total assets would be invested
in securities of that issuer, or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

Borrowing Money and Issuing Senior Securities

The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the Investment Company Act of 1940 (1940
Act).

Investing in Real Estate

The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.

Investing in Commodities

The Fund may not purchase or sell physical commodities, provided that the und
may purchase securities of companies that deal in commodities.

Underwriting

The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.

Lending

The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.

Concentration

The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.

The above limitations cannot be changed unless authorized by the Board and by
the "vote of a majority of its outstanding voting securities," as defined by the
1940 Act. The following limitations, however, may be changed by the Board
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.

Pledging Assets

The Fund will not mortgage, pledge or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.

Purchases on Margin

The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions, and other financial contracts or
derivative instruments.

Illiquid Securities

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The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.

For purposes of the concentration limitation: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (c) asset-backed
securities will be classified according to the underlying assets securing such
securities. To conform to the current view of the SEC staff that only domestic
bank instruments may be excluded from industry concentration limitations, as a
matter of non-fundamental policy, the Fund will not exclude foreign bank
instruments from industry concentration limitation tests so long as the policy
of the SEC remains in effect. In addition, investments in bank instruments, and
investments in certain industrial development bonds funded by activities in a
single industry, will be deemed to constitute investment in an industry, except
when held for temporary defensive purposes. The investment of more than 25% of
the value of the Fund's total assets in any one industry will constitute
"concentration."

For purposes of the commodities policy, investments in transactions involving
futures contracts and options, forward currency contracts, swap transactions and
other financial contracts that settle by payment of cash are not deemed to be
investments in commodities.

For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." Except with
respect to borrowing money, if a percentage limitations is adhered to at the
time of investment, a later increase or decrease in percentage resulting from
any change in value or net assets will not result in a violation of such
limitation.

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DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities are determined as follows:

o for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;

o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;

o futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of
trading on such exchanges. Options traded in the over-the-counter market
are generally valued according to the mean between the last bid and the
last asked price for the option as provided by an investment dealer or
other financial institution that deals in the option. The Board may
determine in good faith that another method of valuing such investments is
necessary to appraise their fair market value;

o for fixed income securities, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that fixed
income securities with remaining maturities of less than 60 days at the
time of purchase may be valued at amortized cost; and

o for all other securities at fair value as determined in good faith by the
Board.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.

Trading in Foreign Securities

Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its NAV, the Fund
values foreign securities at the latest closing price on the exchange on which
they are traded immediately prior to the closing of the NYSE. Certain foreign
currency exchange rates may also be determined at the latest rate prior to the
closing of the NYSE. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at current rates. Occasionally, events that affect
these values and exchange rates may occur between the times at which they are
determined and the closing of the NYSE. If such events materially affect the
value of portfolio securities, these securities may be valued at their fair
value as determined in good faith by the Fund's Board, although the actual
calculation may be done by others.

WHAT DO SHARES COST?

The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund. The NAV for each class of
Shares may differ due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

You can reduce or eliminate the applicable front-end sales charge, as follows:

Quantity Discounts (Class A Shares and Class F Shares)

Larger purchases of the same Share class reduce or eliminate the sales charge
you pay. You can combine purchases of Shares made on the same day by you, your
spouse and your children under age 21. In addition, purchases made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.

Accumulated Purchases (Class A Shares and Class F Shares)

If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.

Concurrent Purchases (Class A Shares and Class F Shares)

You can combine concurrent purchases of the same share class of two or more
Federated funds in calculating the applicable sales charge.

Letter of Intent (Class A Shares and Class F Shares)

You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.

Reinvestment Privilege

You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.

Purchases by Affiliates of the Fund

The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:

o the Directors, employees and sales representatives of the Fund, the
Adviser, the Distributor and their affiliates;

o any associated person of an investment dealer who has a sales agreement
with the Distributor; and

o trusts, pension or profit-sharing plans for these individuals.

Purchases Through Omnibus Accounts (Class C Shares)

Class C Shares may be purchased without an initial sales charge by any investor
who buys Class C Shares through an omnibus account with a financial
intermediary, such as a broker or a bank, that does not accept or charge the
initial sales charge.

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Reorganizations (Class A Shares)

Class A Shares may be purchased without an initial sales charge by any
shareholder that originally became a shareholder of the Fund pursuant to the
terms of an agreement and plan of reorganization which permits shareholders to
acquire shares at NAV.

</R>

Federated Life Members

Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:

o through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family
of Funds are no longer marketed); or

o as Liberty Account shareholders by investing through an affinity group
prior to August 1, 1987.

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.

Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:

o following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;

o representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age
of 70 1/2;

o of Shares that represent a reinvestment within 120 days of a previous
redemption;

o of Shares held by the Directors, employees, and sales representatives of
the Fund, the Adviser, the Distributor and their affiliates; employees of
any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the
above persons;

o of Shares originally purchased through a bank trust department, a
registered investment adviser or retirement plans where the third party
administrator has entered into certain arrangements with the Distributor or
its affiliates, or any other investment professional, to the extent that no
payments were advanced for purchases made through these entities;

o which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements; and

Class B Shares Only

o which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program; and

Class F Shares Only

o representing a total or partial distribution from a qualified plan. A total
or partial distribution does not include an account transfer, rollover or
other redemption made for purposes of reinvestment. A qualified plan does
not include an Individual Retirement Account, Keogh Plan, or a custodial
account, following retirement.

To keep the sales charge as low as possible, the Fund redeems your Shares in
this order:

o Shares that are not subject to a CDSC; and

o Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated funds that
have been exchanged for Shares of this Fund).

The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.

<R>

FRONT-END SALES CHARGE REALLOWANCES

The Distributor receives a front-end sales charge on certain Share sales. The
Distributor pays a portion of this charge to investment professionals that are
eligible to receive it (the "Dealer Reallowance") and retains any remaining
portion of the front-end sales charge.

When an investment professional's customer purchases Shares, the investment
professional may receive a Dealer Reallowance as follows:

Class A Shares
---------------------------------------------------------------------------
Purchase Amount Dealer Reallowance as a
percentage of Public Offering
Price
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.25%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1 million 1.80%
$1 million or greater 0.00%

---------------------------------------------------------------------------
Class C Shares Dealer Reallowance
as a Percentage of
Public Offering Price
All Purchase Amounts 1.00%

---------------------------------------------------------------------------
Class F Shares
Purchase Amount Dealer Reallowance
as a Percentage of
Public Offering Price
Less than $1 million 1.00%
$1 million or greater1 0.00%

ADVANCE COMMISSIONS
-------------------------------------------------------------------------------
When an investment professional's customer purchases Shares, the investment
professional may receive an advance commission as follows:

Class A Shares (for purchases over $1 million)
Purchase Amount Advance Commission
as a Percentage of
Public Offering Price
First $1 million - $5 million 0.75%
Next $5 million - $20 million 0.50%
Over $20 million 0.25%

Advance commissions are calculated on a year by year basis based on amounts
invested during that year. Accordingly, with respect to additional purchase
amounts, the advance commission breakpoint resets annually to the first
breakpoint on the anniversary of the first purchase.

Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent purchases. The above advance commission will be paid only
on those purchases that were not previously subject to a front-end sales charge
or dealer advance commission. Certain retirement accounts may not be eligible
for this program.

Class B Shares Advance Commission
as a Percentage of
Public Offering
Price
All Purchase Amounts Up to 5.50%
Class C Shares Advance Commission
as a Percentage of
Public Offering
Price
All Purchase Amounts 1.00%
Class F Shares
Purchase Amount Advance Commission
as a Percentage of
Public Offering Price
Less than $2 million 1.00%
$2million -but less than 0.50%
$5 million
$5 million or greater 0.25%

</R>
---------------------------------------------------------------------------

<R>

RULE 12B-1 PLAN (CLASS A Shares, Class B Shares, Class C Shares and Class
F Shares)

As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor for activities principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses and sales literature to prospective shareholders and financial
institutions) and providing incentives to investment professionals to sell
Shares. The Rule 12b-1 Plan allows the Distributor to contract with investment
professionals to perform activities covered by the Plan. The Rule 12b-1 Plan is
expected to benefit the Fund in a number of ways. For example, it is anticipated
that the Plan will help the Fund attract and retain assets, thus providing cash
for orderly portfolio management and Share redemptions and possibly helping to
stabilize or reduce other operating expenses. In addition, the Plan is integral
to the multiple class structure of the Fund, which promotes the sale of Shares
by providing a range of options to investors. The Fund's service providers that
receive asset-based fees also benefit from stable or increasing Fund assets.

The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.

For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses. Federated and its subsidiaries may benefit from
arrangements where the Rule 12b-1 Plan fees related to Class B Shares may be
paid to third parties who have provided the funds to make advance commission
payments to investment professionals.

</R>

<R>

SERVICE FEES

The Fund may pay fees not to exceed 0.25% of average daily net assets (Service
Fees) to investment professionals or to Federated Shareholder Services Company
(FSSC), a subsidiary of Federated, for providing services to shareholders and
maintaining shareholder accounts. . Under certain agreements, rather than paying
investment professionals directly, the Fund may pay Service Fees to FSSC and
FSSC will use the fees to compensate investment professionals.

</R>

<R>

SUPPLEMENTAL PAYMENTS

Investment professionals may be paid fees, in significant amounts, out of the
assets of the Distributor. These fees do not come out of Fund assets. The
Distributor may be reimbursed by the Adviser or its affiliates.

These supplemental payments may be based upon such factors as the number or
value of Shares the investment professional sells or may sell; the value of
client assets invested; and/or the type and nature of services, sales support or
marketing support furnished by the investment professional. In addition to these
supplemental payments, an investment professional may also receive payments
under the Rule 12b-1 Plan and/or Service Fees.

</R>

EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in exchange for
securities you own. The Fund reserves the right to determine whether to accept
your securities and the minimum market value to accept. The Fund will value your
securities in the same manner as it values its assets. This exchange is treated
as a sale of your securities for federal tax purposes.

SUBACCOUNTING SERVICES

Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.

REDEMPTION IN KIND

Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.

Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act,
the Fund is obligated to pay Share redemptions to any one shareholder in cash
only up to the lesser of $250,000 or 1% of the net assets represented by such
Share class during any 90-day period.

Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.

Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.

ACCOUNT AND SHARE INFORMATION

VOTING RIGHTS

<R>

Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote.

All Shares of the Fund have equal voting rights, except that in matters
affecting only a particular class, only Shares of class are entitled to vote.

Directors may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Fund's outstanding Shares.

As of January 2, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class A Shares: Edward Jones & Co.,
Maryland Hts., MO, owned approximately 23,360,606 Shares (58.43)%.

As of January 2, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class B Shares: Edward Jones & Co.,
Maryland Hts., MO, owned approximately 5,152,535 Shares (13.10)%.

As of January 2, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class C Shares: MLPF&S, Jacksonville, FL,
owned approximately 1,1651,848 Shares (19.52)%; Edward Jones & Co., Maryland
Hts., MO, owned approximately 1,089,845 Shares (18.31)% and Citigroup Global
Markets, Inc., New York, NY, owned approximately 326,648 Shares (5.49)%.

As of January 2, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class F Shares: MLPF&S, Jacksonville, FL,
owned approximately 462,149 Shares (14.78)% and Edward Jones & Co., Maryland
Hts., MO, owned approximately 286,134 Shares (9.15)%.

Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.

</R>

TAX INFORMATION

FEDERAL INCOME TAX

The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will be subject to federal
corporate income tax.

The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.

FOREIGN INVESTMENTS

If the Fund purchases foreign securities, their investment income may be subject
to foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.

Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the income generated by the securities
in the portfolio, whereas tax-basis income includes, in addition, gains or
losses attributable to currency fluctuation. Due to differences in the book and
tax treatment of fixed-income securities denominated in foreign currencies, it
is difficult to project currency effects on an interim basis. Therefore, to the
extent that currency fluctuations cannot be anticipated, a portion of
distributions to shareholders could later be designated as a return of capital,
rather than income, for income tax purposes, which may be of particular concern
to simple trusts.

If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to federal income taxes upon disposition of PFIC investments.

If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund will
qualify for certain Code provisions that allow its shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of the Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD OF DIRECTORS

<R>

The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders. The
following tables give information about each Board member and the senior
officers of the Fund. Where required, the tables separately list Board members
who are "interested persons" of the Fund (i.e., "Interested" Board members) and
those who are not (i.e., "Independent" Board members). Unless otherwise noted,
the address of each person listed is Federated Investors Tower, 1001 Liberty
Avenue, Pittsburgh, PA. The Fund is the Corporation's only portfolio. The
Federated Fund Complex consists of 44 investment companies (comprising 138
portfolios). Unless otherwise noted, each Officer is elected annually. Unless
otherwise noted, each Board member oversees all portfolios in the Federated Fund
Complex; serves for an indefinite term; and also serves as a Board member of the
following investment company complexes: Banknorth Funds-four portfolios; Golden
Oak(R) Family of Funds-seven portfolios and WesMark Funds-five portfolios.

As of January 2, 2004, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Class A, Class B, Class C and Class F Shares.

</R>

<R>

INTERESTED Directors BACKGROUND AND COMPENSATION

Name Principal Occupation(s) for Past Five Aggregate Total Compensation
Birth Date Years, Other Directorships Held and Compensation From Fund and
Address Previous Position(s) From Fund Federated Fund
Positions Held with Fund (past fiscal year) Complex
Date Service Began (past calendar
year)
Principal Occupations: Chairman and $0 $0
John F. Donahue* Director or Trustee of the Federated
Birth Date: July 28, Fund Complex; Chairman and Director,
1924 Federated Investors, Inc.
CHAIRMAN AND DIRECTOR --------------------------------------
Began serving: June 1986
Previous Positions: Trustee,
Federated Investment Management
Company and Chairman and Director,
Federated Investment Counseling.

Principal Occupations: Principal $0 $0
J. Christopher Donahue* Executive Officer and President of
Birth Date: April 11, the Federated Fund Complex; Director
1949 or Trustee of some of the Funds in
PRESIDENT AND DIRECTOR the Federated Fund Complex;
Began serving: June 1986 President, Chief Executive Officer
and Director, Federated Investors,
Inc.; Chairman and Trustee, Federated
Equity Management Company of
Pennsylvania; Trustee, Federated
Investment Counseling; Chairman and
Director, Federated Global Investment
Management Corp.; Chairman, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company;
Director, Federated Services Company.

Previous Positions: President,
Federated Investment Counseling;
President and Chief Executive
Officer, Federated Investment
Management Company, Federated Global
Investment Management Corp. and
Passport Research, Ltd.

Principal Occupations: Director or $1,358.65 $148,500
Lawrence D. Ellis, M.D.* Trustee of the Federated Fund
Birth Date: October 11, Complex; Professor of Medicine,
1932 University of Pittsburgh; Medical
3471 Fifth Avenue Director, University of Pittsburgh
Suite 1111 Medical Center Downtown;
Pittsburgh, PA Hematologist, Oncologist and
DIRECTOR Internist, University of Pittsburgh
Began serving: August Medical Center.
1987
Other Directorships Held: Member,
National Board of Trustees, Leukemia
Society of America.

Previous Positions: Trustee,
University of Pittsburgh; Director,
University of Pittsburgh Medical
Center.

* Family relationships and reasons for "interested" status: John F. Donahue
is the father of J. Christopher Donahue; both are "interested" due to the
positions they hold with Federated and its subsidiaries. Lawrence D. Ellis,
M.D. is "interested" because his son-in-law is employed by the Fund's
principal underwriter, Federated Securities Corp.

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

INDEPENDENT DIRECTORS BACKGROUND AND COMPENSATION

Name Principal Occupation(s) for Past Five Aggregate Total Compensation
Birth Date Years, Other Directorships Held and Compensation From Fund and
Address Previous Position(s) From Fund (past Federated Fund
Positions Held with Fund fiscal year) Complex
Date Service Began (past calendar
year)
Principal Occupation: Director or $1,494.51 $163,350
Thomas G. Bigley Trustee of the Federated Fund Complex.
Birth Date: February 3,
1934 Other Directorships Held: Director,
15 Old Timber Trail Member of Executive Committee,
Pittsburgh, PA Children's Hospital of Pittsburgh;
DIRECTOR Director, University of Pittsburgh.
Began serving: October
1995 Previous Position: Senior Partner,
Ernst & Young LLP.

Principal Occupations: Director or $1,494.51 $163,350
John T. Conroy, Jr. Trustee of the Federated Fund
Birth Date: June 23, Complex; Chairman of the Board,
1937 Investment Properties Corporation;
Grubb & Partner or Trustee in private real
Ellis/Investment estate ventures in Southwest Florida.
Properties Corporation
3838 North Tamiami Previous Positions: President,
Trail Investment Properties Corporation;
Suite 402 Senior Vice President, John R. Wood
Naples, FL and Associates, Inc., Realtors;
DIRECTOR President, Naples Property
Began serving: August Management, Inc. and Northgate
1991 Village Development Corporation.

Principal Occupation: Director or $1,494.51 $163,350
Nicholas P. Constantakis Trustee of the Federated Fund Complex.
Birth Date: September
3, 1939 Other Directorships Held: Director
175 Woodshire Drive and Member of the Audit Committee,
Pittsburgh, PA Michael Baker Corporation
DIRECTOR (engineering and energy services
Began serving: February worldwide).
1998
Previous Position: Partner, Anderson
Worldwide SC.

Principal Occupation: Director or $1,358.65 $148,500
John F. Cunningham Trustee of the Federated Fund Complex.
Birth Date: March 5,
1943 Other Directorships Held: Chairman,
353 El Brillo Way President and Chief Executive
Palm Beach, FL Officer, Cunningham & Co., Inc.
DIRECTOR (strategic business consulting);
Began serving: January Trustee Associate, Boston College.
1999
Previous Positions: Director, Redgate
Communications and EMC Corporation
(computer storage systems); Chairman
of the Board and Chief Executive
Officer, Computer Consoles, Inc.;
President and Chief Operating
Officer, Wang Laboratories; Director,
First National Bank of Boston;
Director, Apollo Computer, Inc.

Principal Occupation: Director or $1,358.65 $148,500
Peter E. Madden Trustee of the Federated Fund
Birth Date: March 16, Complex; Management Consultant.
1942
One Royal Palm Way Other Directorships Held: Board of
100 Royal Palm Way Overseers, Babson College.
Palm Beach, FL
DIRECTOR Previous Positions: Representative,
Began serving: August Commonwealth of Massachusetts General
1991 Court; President, State Street Bank
and Trust Company and State Street
Corporation (retired); Director, VISA
USA and VISA International; Chairman
and Director, Massachusetts Bankers
Association; Director, Depository
Trust Corporation; Director, The
Boston Stock Exchange.

Principal Occupations: Director or $1,494.51 $163,350
Charles F. Mansfield, Trustee of the Federated Fund
Jr. Complex; Management Consultant;
Birth Date: April 10, Executive Vice President, DVC Group,
1945 Inc. (marketing, communications and
80 South Road technology) (prior to 9/1/00).
Westhampton Beach, NY
DIRECTOR Previous Positions: Chief Executive
Began serving: January Officer, PBTC International Bank;
1999 Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, HSBC Bank USA
(formerly, Marine Midland Bank); Vice
President, Citibank; Assistant
Professor of Banking and Finance,
Frank G. Zarb School of Business,
Hofstra University.

John E. Murray, Jr., Principal Occupations: Director or $1,630.38 $178,200
J.D., S.J.D. Trustee of the Federated Fund
Birth Date: December Complex; Chancellor and Law
20, 1932 Professor, Duquesne University;
Chancellor, Duquesne Partner, Murray, Hogue and Lannis.
University
Pittsburgh, PA Other Directorships Held: Director,
DIRECTOR Michael Baker Corp. (engineering,
Began serving: February construction, operations and
1995 technical services).

Previous Positions: President,
Duquesne University; Dean and
Professor of Law, University of
Pittsburgh School of Law; Dean and
Professor of Law, Villanova
University School of Law.

Principal Occupations: Director or $1,358.65 $148,500
Marjorie P. Smuts Trustee of the Federated Fund
Birth Date: June 21, Complex; Public Relations/Marketing
1935 Consultant/Conference Coordinator.
4905 Bayard Street
Pittsburgh, PA Previous Positions: National
DIRECTOR Spokesperson, Aluminum Company of
Began serving: June 1986 America; television producer;
President, Marj Palmer Assoc.; Owner,
Scandia Bord.

Principal Occupations: Director or $1,358.65 $148,500
John S. Walsh Trustee of the Federated Fund
Birth Date: November Complex; President and Director, Heat
28, 1957 Wagon, Inc. (manufacturer of
2604 William Drive construction temporary heaters);
Valparaiso, IN President and Director, Manufacturers
DIRECTOR Products, Inc. (distributor of
Began serving: January portable construction heaters);
1999 President, Portable Heater Parts, a
division of Manufacturers Products,
Inc.

Previous Position: Vice President,
Walsh & Kelly, Inc.

OFFICERS**
---------------------------------------------------------------------------

Name Principal Occupation(s) and Previous Position(s)
Birth Date
Address
Positions Held with Fund
------------------------------------
Date Service Began

Principal Occupations: Executive Vice President and Secretary of
John W. McGonigle the Federated Fund Complex; Executive Vice President, Secretary
Birth Date: October 26, 1938 and Director, Federated Investors, Inc.
EXECUTIVE VICE PRESIDENT AND
SECRETARY Previous Positions: Trustee, Federated Investment Management
Began serving: June 1986 Company and Federated Investment Counseling; Director, Federated
Global Investment Management Corp., Federated Services Company and
Federated Securities Corp.

Principal Occupations: Principal Financial Officer and Treasurer
Richard J. Thomas of the Federated Fund Complex; Senior Vice President, Federated
Birth Date: June 17, 1954 Administrative Services.
TREASURER
Began serving: November 1998 Previous Positions: Vice President, Federated Administrative
Services; held various management positions within Funds Financial
Services Division of Federated Investors, Inc.

Principal Occupations: Vice Chairman or Vice President of some of
Richard B. Fisher the Funds in the Federated Fund Complex; Vice Chairman, Federated
Birth Date: May 17, 1923 Investors, Inc.; Chairman, Federated Securities Corp.
VICE CHAIRMAN
Began serving: August 2002 Previous Positions: President and Director or Trustee of some of
the Funds in the Federated Fund Complex; Executive Vice President,
Federated Investors, Inc. and Director and Chief Executive
Officer, Federated Securities Corp.
Principal Occupations: Chief Investment Officer of this Fund and
Stephen F. Auth various other Funds in the Federated Fund Complex; Executive Vice
Birth Date: September 3, 1956 President, Federated Investment Counseling, Federated Global
CHIEF INVESTMENT OFFICER Investment Management Corp., Federated Equity Management Company
Began serving: November 2002 of Pennsylvania and Passport Research, Ltd II.

Previous Positions: Senior Vice President, Global Portfolio
Management Services Division; Senior Vice President, Federated
Investment Management Company and Passport Research, Ltd; Senior
Managing Director and Portfolio Manager, Prudential Investments.
Linda A. Duessel has been the Fund's Portfolio Manager since
Linda A. Duessel February 1997. She is Vice President of the Fund. Ms. Duessel
Birth Date: September 30, 1957 joined Federated in 1991 and has been a Portfolio Manager since
VICE PRESIDENT 1995. She became a Senior Vice President of the Fund's Adviser in
Began serving: November 1998 January 2000 and served as a Vice President of the Fund's Adviser
from 1995 through 1999. Ms. Duessel was a Senior Investment
Analyst and an Assistant Vice President of the Fund's Adviser from
1991 until 1995. Ms. Duessel is a Chartered Financial Analyst and
received her M.S. in Industrial Administration from Carnegie
Mellon University.
** Officers do not receive any compensation from the Fund.
---------------------------------------------------------------------------

Thomas R. Donahue, Chief Financial Officer, Vice President, Treasurer and
Assistant Secretary of Federated and an officer of its various advisory and
underwriting subsidiaries, has served as a Term Member on the Board of Directors
of Duquesne University, Pittsburgh, Pennsylvania, since May 12, 2000. Mr. John
E. Murray, Jr., an Independent Director of the Fund, served as President of
Duquesne from 1988 until his retirement from that position in 2001, and became
Chancellor of Duquesne on August 15, 2001. It should be noted that Mr. Donahue
abstains on any matter that comes before Duquesne's Board that affects Mr.
Murray personally.

COMMITTEES of the board
Board Committee Committee Committee Functions Meetings
Members Held
During Last
Fiscal Year
Executive In between meetings of the full Board, the One
John F. Donahue Executive Committee generally may exercise all
John E. Murray, the powers of the full Board in the management
Jr., J.D., S.J.D. and direction of the business and conduct of
the affairs of the Corporation in such manner
as the Executive Committee shall deem to be in
the best interests of the Corporation.
However, the Executive Committee cannot elect
or remove Board members, increase or decrease
the number of Directors, elect or remove any
Officer, declare dividends, issue shares or
recommend to shareholders any action requiring
shareholder approval.

Audit The Audit Committee reviews and recommends to Four
Thomas G. Bigley the full Board the independent auditors to be
John T. Conroy, Jr. selected to audit the Fund`s financial
Nicholas P. statements; meets with the independent
Constantakis auditors periodically to review the results of
Charles F. the audits and reports the results to the full
Mansfield, Jr. Board; evaluates the independence of the
auditors, reviews legal and regulatory matters
that may have a material effect on the
financial statements, related compliance
policies and programs, and the related reports
received from regulators; reviews the Fund`s
internal audit function; reviews compliance
with the Fund`s code of conduct/ethics;
reviews valuation issues; monitors inter-fund
lending transactions; reviews custody services
and issues and investigates any matters
brought to the Committee's attention that are
within the scope of its duties.

Board ownership of shares in the fund and in the Federated family of
Investment companies AS OF DECEMBER 31, 2002

----------------------------------------------------------------------------------
Interested Dollar Range of Aggregate
Board Member Name Shares Owned Dollar Range of
in Fund Shares Owned in
Federated Family of
Investment Companies
John F. Donahue None Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

Independent
Board Member Name
Thomas G. Bigley None Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis None Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, Jr. None $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Marjorie P. Smuts $1.00-$10,000 Over $100,000
John S. Walsh $1.00-$10,000 Over $100,000

</R>
----------------------------------------------------------------------------------

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions for the
Fund.

The Adviser is a wholly owned subsidiary of Federated.

The Adviser shall not be liable to the Fund or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Fund.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory contract. The Board's decision to approve the contract reflects the
exercise of its business judgment on whether to continue the existing
arrangements. During its review of the contract, the Board considers many
factors, among the most material of which are: the Fund's investment objectives
and long term performance; the Adviser's management philosophy, personnel and
processes; the preferences and expectations of Fund shareholders and their
relative sophistication; the continuing state of competition in the mutual fund
industry; comparable fees in the mutual fund industry; the range and quality of
services provided to the Fund and its shareholders by the Federated organization
in addition to investment advisory services; and the Fund's relationship to the
Federated funds.

In assessing the Adviser's performance of its obligations, the Board also
considers whether there has occurred a circumstance or event that would
constitute a reason for it to not renew an advisory contract. In this regard,
the Board is mindful of the potential disruptions of the Fund's operations and
various risks, uncertainties and other effects that could occur as a result of a
decision to terminate or not renew an advisory contract. In particular, the
Board recognizes that most shareholders have invested in the Fund on the
strength of the Adviser's industry standing and reputation and in the
expectation that the Adviser will have a continuing role in providing advisory
services to the Fund.

The Board also considers the compensation and benefits received by the Adviser.
This includes fees received for services provided to the Fund by other entities
in the Federated organization and research services received by the Adviser from
brokers that execute fund trades, as well as advisory fees. In this regard, the
Board is aware that various courts have interpreted provisions of the 1940 Act
and have indicated in their decisions that the following factors may be relevant
to an Adviser's compensation: the nature and quality of the services provided by
the Adviser, including the performance of the Fund; the Adviser's cost of
providing the services; the extent to which the Adviser may realize "economies
of scale" as the Fund grows larger; any indirect benefits that may accrue to the
Adviser and its affiliates as a result of the Adviser's relationship with the
Fund; performance and expenses of comparable funds; and the extent to which the
independent Board members are fully informed about all facts bearing on the
Adviser's service and fee. The Fund's Board is aware of these factors and takes
them into account in its review of the Fund's advisory contract.

The Board considers and weighs these circumstances in light of its substantial
accumulated experience in governing the Fund and working with Federated on
matters relating to the Federated funds, and is assisted in its deliberations by
the advice of independent legal counsel. In this regard, the Board requests and
receives a significant amount of information about the Fund and the Federated
organization. Federated provides much of this information at each regular
meeting of the Board, and furnishes additional reports in connection with the
particular meeting at which the Board's formal review of the advisory contracts
occurs. In between regularly scheduled meetings, the Board may receive
information on particular matters as the need arises. Thus, the Board's
evaluation of an advisory contract is informed by reports covering such matters
as: the Adviser's investment philosophy, personnel, and processes; the Fund's
short- and long-term performance (in absolute terms as well as in relationship
to its particular investment program and certain competitor or "peer group"
funds), and comments on the reasons for performance; the Fund's expenses
(including the advisory fee itself and the overall expense structure of the
Fund, both in absolute terms and relative to similar and/or competing funds,
with due regard for contractual or voluntary expense limitations); the use and
allocation of brokerage commissions derived from trading the Fund's portfolio
securities; the nature and extent of the advisory and other services provided to
the Fund by the Adviser and its affiliates; compliance and audit reports
concerning the Federated funds and the Federated companies that service them;
and relevant developments in the mutual fund industry and how the Federated
funds and/or Federated are responding to them.

The Board also receives financial information about Federated, including reports
on the compensation and benefits Federated derives from its relationships with
the Federated funds. These reports cover not only the fees under the advisory
contracts, but also fees received by Federated's subsidiaries for providing
other services to the Federated funds under separate contracts (e.g., for
serving as the Federated funds' administrator and transfer agent). The reports
also discuss any indirect benefit Federated may derive from its receipt of
research services from brokers who execute Federated fund trades.

The Board bases its decision to approve an advisory contract on the totality of
the circumstances and relevant factors, and with a view to past and future
long-term considerations. Not all of the factors and considerations identified
above are relevant to every Federated fund, nor does the Board consider any one
of them to be determinative. Because the totality of circumstances includes
considering the relationship of each Federated fund, the Board does not approach
consideration of every Federated fund's advisory contract as if that were the
only Federated fund.

<R>

Services Agreement

Federated Advisory Services Company, an affiliate of the Adviser, provides
research, quantitative analysis, equity trading and transaction settlement and
certain support services to the Adviser. The fee for these services is paid by
the Adviser and not by the Fund.

</R>

Other Related Services

Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.

Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have
adopted codes of ethics. These codes govern securities trading activities of
investment personnel, Fund Directors, and certain other employees. Although they
do permit these people to trade in securities, including those that the Fund
could buy, they also contain significant safeguards designed to protect the Fund
and its shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.

<R>

Voting Proxies on Fund Portfolio Securities

The Board has delegated to the Adviser authority to vote proxies on the
securities held in the Fund's portfolio. The Board has also approved the
Adviser's policies and procedures for voting the proxies, which are described
below.

</R>

Proxy Voting Policies

<R>

The Adviser's general policy is to cast proxy votes in favor of proposals that
the Adviser anticipates will enhance the long-term value of the securities being
voted. Generally, this will mean voting for proposals that the Adviser believes
will: improve the management of a company; increase the rights or preferences of
the voted securities; and/or increase the chance that a premium offer would be
made for the company or for the voted securities.

The following examples illustrate how these general policies may apply to
proposals submitted by a company's board of directors. However, whether the
Adviser supports or opposes a proposal will always depend on the specific
circumstances described in the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for
proposals to: require independent tabulation of proxies and/or confidential
voting by shareholders; reorganize in another jurisdiction (unless it would
reduce the rights or preferences of the securities being voted); and repeal a
shareholder rights plan (also known as a "poison pill"). The Adviser will
generally vote against the adoption of such a plan (unless the plan is designed
to facilitate, rather than prevent, unsolicited offers for the company).

On matters of capital structure, generally the Adviser will vote: against
proposals to authorize or issue shares that are senior in priority or voting
rights to the securities being voted; for proposals to grant preemptive rights
to the securities being voted; and against proposals to eliminate such
preemptive rights.

On matters relating to management compensation, generally the Adviser will vote:
for stock incentive plans that align the recipients' interests with the
interests of shareholders without creating undue dilution; and against proposals
that would permit the amendment or replacement of outstanding stock incentives
with new stock incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies
relating to proposed mergers, capital reorganizations, and similar transactions
in accordance with the general policy, based upon its analysis of the proposed
transaction. The Adviser will vote proxies in contested elections of directors
in accordance with the general policy, based upon its analysis of the opposing
slates and their respective proposed business strategies. Some transactions may
also involve proposed changes to the company's corporate governance, capital
structure or management compensation. The Adviser will vote on such changes
based on its evaluation of the proposed transaction or contested election. In
these circumstances, the Adviser may vote in a manner contrary to the general
practice for similar proposals made outside the context of such a proposed
transaction or change in the board. For example, if the Adviser decides to vote
against a proposed transaction, it may vote for anti-takeover measures
reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without
the favorable recommendation of a company's board. The Adviser believes that a
company's board should manage its business and policies, and that shareholders
who seek specific changes should strive to convince the board of their merits or
seek direct representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting. For example, if a foreign market
requires shareholders casting proxies to retain the voted shares until the
meeting date (thereby rendering the shares "illiquid" for some period of time),
the Adviser will not vote proxies for such shares.

</R>

<R>

Proxy Voting Procedures

The Adviser has established a Proxy Voting Committee (Proxy Committee), to
exercise all voting discretion granted to the Adviser by the Board in accordance
with the proxy voting policies. The Adviser has hired Investor Responsibility
Research Center (IRRC) to obtain, vote, and record proxies in accordance with
the Proxy Committee's directions. The Proxy Committee directs IRRC by means of
Proxy Voting Guidelines, and IRRC may vote any proxy as directed in the Proxy
Voting Guidelines without further direction from the Proxy Committee (and may
make any determinations required to implement the Proxy Voting Guidelines).
However, if the Proxy Voting Guidelines require case-by-case direction for a
proposal, IRRC will provide the Proxy Committee with all information that it has
obtained regarding the proposal and the Proxy Committee will provide specific
direction to IRRC. The Adviser's proxy voting procedures generally permit the
Proxy Committee to amend the Proxy Voting Guidelines, or override the directions
provided in such Guidelines, whenever necessary to comply with the proxy voting
policies.

</R>

<R>

Conflicts of Interest

The Adviser has adopted procedures to address situations where a matter on which
a proxy is sought may present a potential conflict between the interests of the
Fund (and its shareholders) and those of the Adviser or Distributor. This may
occur where a significant business relationship exists between the Adviser (or
its affiliates) and a company involved with a proxy vote. A company that is a
proponent, opponent, or the subject of a proxy vote, and which to the knowledge
of the Proxy Committee has this type of significant business relationship, is
referred to as an "Interested Company."

The Adviser has implemented the following procedures in order to avoid concerns
that the conflicting interests of the Adviser have influenced proxy votes. Any
employee of the Adviser who is contacted by an Interested Company regarding
proxies to be voted by the Adviser must refer the Interested Company to a member
of the Proxy Committee, and must inform the Interested Company that the Proxy
Committee has exclusive authority to determine how the Adviser will vote. Any
Proxy Committee member contacted by an Interested Company must report it to the
full Proxy Committee and provide a written summary of the communication. Under
no circumstances will the Proxy Committee or any member of the Proxy Committee
make a commitment to an Interested Company regarding the voting of proxies or
disclose to an Interested Company how the Proxy Committee has directed such
proxies to be voted. If the Proxy Voting Guidelines already provide specific
direction on the proposal in question, the Proxy Committee shall not alter or
amend such directions. If the Proxy Voting Guidelines require the Proxy
Committee to provide further direction, the Proxy Committee shall do so in
accordance with the proxy voting policies, without regard for the interests of
the Adviser with respect to the Interested Company. If the Proxy Committee
provides any direction as to the voting of proxies relating to a proposal
affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and
why, the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or
an affiliate) acts as an investment adviser, the Proxy Committee will vote the
Fund's proxies in the same proportion as the votes cast by shareholders who are
not clients of the Adviser at any shareholders' meeting called by such
investment company, unless otherwise directed by the Board.

</R>

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
may also direct certain portfolio trades to a broker that, in turn, pays a
portion of the Fund's operating expenses. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Fund's Board.

Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. Except as noted below, when the Fund and one or
more of those accounts invests in, or disposes of, the same security, available
investments or opportunities for sales will be allocated among the Fund and the
account(s) in a manner believed by the Adviser to be equitable. While the
coordination and ability to participate in volume transactions may benefit the
Fund, it is possible that this procedure could adversely impact the price paid
or received and/or the position obtained or disposed of by the Fund. Investments
for Federated Kaufmann Fund and other accounts managed by that fund's portfolio
managers in initial public offerings ("IPO") are made independently from any
other accounts, and much of their non-IPO trading may also be conducted
independently from other accounts.

Research Services

Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.

ADMINISTRATOR

<R>

Federated Administrative Services (FAS), a subsidiary of Federated, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. FAS provides these at the
following annual rate of the average aggregate daily net assets of all Federated
funds as specified below:

Average Aggregate Daily
Maximum Administrative Fee Net Assets of the Federated Funds
0.150 of 1% on the first $5 billion
0.125 of 1% on the next $5 billion
0.100 of 1% on the next $10 billion
0.075 of 1% on assets over $20 billion

The administrative fee received during any fiscal year shall be at least
$150,000 per portfolio and $40,000 per each additional class of Shares. FAS may
voluntarily waive a portion of its fee and may reimburse the Fund for expenses.
-------------------------------------------------------------------------------

FAS also provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments for a fee based on Fund assets plus
out-of-pocket expenses.

</R>

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Services Company, through its registered transfer agent subsidiary,
FSSC, maintains all necessary shareholder records. The Fund pays the transfer
agent a fee based on the size, type and number of accounts and transactions made
by shareholders.

INDEPENDENT AUDITORS

The independent auditor for the Fund, Ernst & Young LLP, conducts its audits
in accordance with auditing standards generally accepted in the United States of
America, which require it to plan and perform its audits to provide reasonable
assurance about whether the Fund's financial statements and financial highlights
are free of material misstatement.

FEES PAID BY THE FUND FOR SERVICES
For the Year Ended March 31 2003 2002 2001
Advisory Fee Earned $9,436,045 $14,454,347 $18,304,577
Advisory Fee Reduction 0 0 0
Advisory Fee Reimbursement 11,773 10,695 10,117
Brokerage Commissions 3,735,395 3,655,913 3,325,711
Administrative Fee 1,182,651 1,813,099 2,297,224
12b-1 Fee:
Class A Shares 0 -- --
Class B Shares 5,411,236 -- --
Class C Shares 837,455 -- --
Class F Shares 143,634 -- --
Shareholder Services Fee:
Class A Shares 1,705,155 -- --
Class B Shares 1,803,745 -- --
Class C Shares 279,152 -- --
Class F Shares 143,634 -- --

<R>
---------------------------------------------------------------------------
For the Period Ended November 30 2003 1
Advisory Fee Earned $5,421,970
Advisory Fee Reduction 0
Advisory Fee Reimbursement 9,190
Brokerage Commissions 1,874,512
Administrative Fee 680,675
12b-1 Fee:
Class A Shares --
Class B Shares 3,022,377
Class C Shares 463,928
Class F Shares 80,894
Shareholder Services Fee:
Class A Shares 1,016,158
Class B Shares 1,007,459
Class C Shares 154,643
Class F Shares 80,894
1 The Fund has changed its fiscal year end from March 31 to November 30.

---------------------------------------------------------------------------
</R>

Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.

Share performance reflects the effect of non-recurring charges, such as maximum
sales charges, which, if excluded, would increase the total return and yield.
The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.

Share performance fluctuates on a daily basis largely because net earnings
and/or the value of portfolio holdings fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.

Average Annual Total Returns and Yield

Total returns are given for the one-year, five-year and ten-year or Start of
Performance periods ended November 30, 2003.

Yield is given for the 30-day period ended November 30, 2003.

<R>

30-Day Period 1 Year 5 Years 10 Years
Class A Shares:
Total Return
Before Taxes N/A 4.91% (2.99)% 6.67%
After Taxes on N/A 4.08% (3.73)% 5.07%
Distributions
After Taxes on N/A 3.12% (2.91)% 4.88%
Distributions
and Sale of Shares
Yield 1.92% N/A N/A N/A

----------------------------------------------------------------------------------------
30-Day Period 1 Year 5 Years Start of
Performance on
9/27/1994
Class B Shares:
Total Return
Before Taxes N/A 4.71% (3.01)% 7.19%
After Taxes on N/A 4.13% (3.48)% 5.85%
Distributions
After Taxes on N/A 3.01% (2.78)% 5.53%
Distributions
and Sale of Shares
Yield 1.28% N/A N/A N/A

----------------------------------------------------------------------------------------
30-Day Period 1 Year 5 Years 10 Years
Class C Shares:
Total Return
Before Taxes N/A 8.11% (2.84)% 6.36%
After Taxes on N/A 7.54% (3.30) % 5.08%
Distributions
After Taxes on N/A 5.22% (2.62)% 4.82%
Distributions
and Sale of Shares
Yield 1.26% N/A N/A N/A

----------------------------------------------------------------------------------------
30-Day Period 1 Year 5 Years 10 Years
Class F Shares
Total Return
Before Taxes N/A 8.66% (2.33)% 6.90%
After Taxes on N/A 7.89% (2.99)% 5.40%
Distributions
After Taxes on N/A 5.57% (2.32)% 5.16%
Distributions
and Sale of Shares
Yield 1.76% N/A N/A N/A

</R>
----------------------------------------------------------------------------------------

TOTAL RETURN

Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.

The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $10,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $10,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions. Total returns after taxes are calculated in a
similar manner, but reflect additional standard assumptions required by the SEC.

YIELD

The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by Shares because of certain adjustments required
by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;

o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;

o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Fund; and

o information about the mutual fund industry from sources such as the
Investment Company Institute.

The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit and
Treasury bills.

The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.

You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:

Lipper, Inc.

Ranks funds in various fund categories by making comparative calculations using
total return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change in net
asset value over a specific period of time. From time to time, the Fund will
quote its Lipper ranking in the convertible securities and equity income funds
categories in advertising and sales literature.

Dow Jones Averages (DJA)

<R>

Represent share prices of selected blue-chip industrial corporations, public
utility or transportation companies. Each Dow Jones Average indicates daily
changes in the average price of stocks in its category. It also reports total
sales for its industry. Because it represents the top corporations of America,
the Dow Jones Industrial Average index is a leading economic indicator for the
stock market as a whole.

</R>

Standard & Poor's 500 Index

An unmanaged capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate
market value of 500 stocks representing all major industries.

Russell 1000(R) Value Index

Measures the performance of the 1000 largest of the 3000 largest U.S.-domiciled
companies (based on total market capitalization) with lower price-to-book ratios
and lower forecasted growth values.

Morningstar, Inc.

An independent rating service, is the publisher of the bi-weekly Mutual Fund
Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk- adjusted returns. The maximum rating is five
stars, and ratings are effective for two weeks.

Lehman Brothers High Yield Index

Lehman Brothers High Yield Index covers the universe of fixed rate, publicly
issued, noninvestment grade debt registered with the SEC. All bonds included in
the High Yield Index must be dollar- denominated and nonconvertible and have at
least one year remaining to maturity and an outstanding par value of at least
$100 million. Generally securities must be rated Ba1 or lower by Moody's,
including defaulted issues. If no Moody's rating is available, bonds must be
rated BB+ or lower by S&P; and if no S&P rating is available, bonds must
be rated below investment grade by Fitch Ratings. A small number of unrated
bonds is included in the index; to be eligible they must have previously held a
high-yield rating or have been associated with a high-yield issuer, and must
trade accordingly.

In addition, the Fund will, from time to time, use the following standard
convertible securities indices against which it will compare its performance:
Goldman Sachs Convertible 100; Kidder Peabody Convertible Bond Index; Value Line
Convertible Bond Index; and Dow Jones Utility Index.

WHO IS FEDERATED INVESTORS, INC.?

Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.

Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.

Federated Funds overview

<R>

Municipal Funds

In the municipal sector, as of December 31, 2003, Federated managed 14 bond
funds with approximately $3.8 billion in assets and 22 money market funds with
approximately $23.0 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

Equity Funds

In the equity sector, Federated has more than 32 years' experience. As of
December 31, 2003, Federated managed 36 equity funds totaling approximately
$25.6 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

Corporate Bond Funds

In the corporate bond sector, as of December 31, 2003, Federated managed 11
money market funds and 4 bond funds with assets approximating $61.7 billion and
$3.4 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 30 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.

Government Funds

In the government sector, as of December 31, 2003, Federated managed 7 mortgage
backed, 3 multi-sector government funds, 4 government/agency and 19 government
money market mutual funds, with assets approximating $4.9 billion, $0.9 billion,
$2.9 billion and $56.2 billion, respectively. Federated trades approximately
$90.4 billion in U.S. government and mortgage backed securities daily and places
approximately $35 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in U.S. government bond
securities in 1969. Federated has been a major force in the short- and
intermediate-term government markets since 1982 and currently manages
approximately $50 billion in government funds within these maturity ranges.

Money Market Funds

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
2003, Federated managed $136.2 billion in assets across 52 money market funds,
including 19 government, 10 prime, 22 municipal and 1 euro-denominated with
assets approximating $56.2 billion, $59.4 billion, $20.6 billion and $173.9
million, respectively.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: Global Equity - Stephen F. Auth is
responsible for overseeing the management of Federated's domestic and
international equity products; Global Fixed Income - William D. Dawson III is
responsible for overseeing the management of Federated's domestic and
international fixed income and high yield products.

Mutual Fund Market

Forty-nine percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $6.2 trillion to the approximately 8,300 funds available,
according to the Investment Company Institute.

Federated Clients Overview

Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:

Institutional Clients

Federated meets the needs of approximately 3,035 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of purposes, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisers.

Bank Marketing

Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated funds in their clients' portfolios.

Broker/Dealers and Bank Broker/Dealer Subsidiaries Federated funds are available
to consumers through major brokerage firms nationwide--Federated has over 2,000
broker/dealer and bank broker/dealer relationships across the country--supported
by more wholesalers than any other mutual fund distributor. Federated's service
to financial professionals and institutions has earned it high ratings in
several surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement.

</R>

FINANCIAL INFORMATION

<R>

The Financial Statements for the Fund for the fiscal year ended November 30,
2003 are incorporated herein by reference to the Annual Report to Shareholders
of Federated Equity Income Fund, Inc., dated November 30, 2003.

</R>

INVESTMENT RATINGS

<R>

S & P's Long-Term Debt Rating Definitions

AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favourable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favourable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.

Moody's Investors Service Commercial Paper Ratings

Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries, high rates of return on
funds employed, conservative capitalization structure with moderate reliance on
debt and ample asset protection, broad margins in earning coverage of fixed
financial charges and high internal cash generation, and well-established access
to a range of financial markets and assured sources of alternate liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

S&P's Commercial Paper Ratings

A-1-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

Fitch Ratings Commercial Paper Rating Definitions

F-1--Indicates the strongest capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Under their
national rating scale, this rating is assigned to the "best" credit risk
relative to all others in the same country and is normally assigned to all
financial commitments issued or guaranteed by the sovereign state. Where the
credit risk is particularly strong, a "+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. However,
the margin of safety is not as great as in the case of the higher ratings.

</R>

Addresses

Federated Equity Income Fund, Inc.

Class A Shares
Class B Shares
Class C Shares
Class F Shares

Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

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

Investment Adviser
<R>

Federated Equity Management Company of Pennsylvania
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

</R>

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

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

Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

PART C. OTHER INFORMATION

Item 23. Exhibits:

(a) (i) Conformed copy of Articles of Restatement of the
Registrant; (15)
(ii) Conformed copy of Articles of Amendment of the
Registrant; (15)
(iii) Conformed copy of Amendment No. 13 under the
Registrant's Articles of Amendment; (17)
(b) Copy of By-Laws of the Registrant as Restated
and Amended; (3)
(i) Copy of Amendment No. 6 to By-Laws effective
February 23, 1998; (15)
(ii) Copy of Amendment No. 7 to By-Laws effective
February 27, 1998; (15)
(iii) Copy of Amendment No. 8 to By-Laws effective May
12, 1998; (15)
(iv) Copy of Amendment No. 9 to By-Laws effective August 23, 2002; (19)
(v) Copy of Amendment No. 10 to By-Laws effective August 25, 2003; +
(c) Copies of Specimen Certificates for Shares of
Capital Stock for Class A Shares, Class B
Shares, Class C Shares, and Class F Shares of
the Registrant; (12)
(d) (i) Conformed copy of Investment Advisory Contract of
the Registrant; (5)
(ii) Conformed copy of Amendment to Investment Advisory Contract
of the Registrant; (18)
(iii) Conformed copy of Assignment of Investment Advisory Contract; +
(e) (i) Conformed copy of Distributor's Contract of the
Registrant, through and including Exhibit C; (11)
(ii) Conformed copy of Exhibit D to the Distributor's
Contract of the Registrant; (12)
(iii) Conformed copy of Amendment to Distributor's
Contract of the Registrant; (18)
(iv) The Registrant hereby incorporates the conformed
copy of the specimen Mutual Funds Sales and
Service Agreement; Mutual Funds Service
Agreement; and Plan Trustee/Mutual Funds Service
Agreement from Item 24(b)(6) of the Cash Trust
Series II Registration Statement on Form N-1A,
filed with the Commission on July 24, 1995.
(File Nos. 33-38550 and 811-6269).
(v) Conformed copy of Distributor's Contract (Class
B Shares) including Exhibit 1 and Schedule A; (14)
(vi) Conformed copy of Amendment to Distributor's Contract
(Class B Shares) of the Registrant; (18)
(vii) Amendment to Distributors Contracts between the Federated
Funds and Federated Securities Corp.; +
(f) Not applicable;
(g) (i) Conformed copy of Custodian Contract of the
Registrant; (10)
(ii) Conformed Copy of Custody Fee Schedule; (14)
(h) (i) Conformed copy of Amended and Restated Agreement
for Fund Accounting Services, Administrative
Services, Transfer Agency Services, and Custody
Services Procurement of the Registrant; (15)
(ii) Conformed copy of Amendment to Agreement for
Fund Accounting Services, Administrative
Services, Transfer Agency Services and Custody
Services Procurement of the Registrant; (18)
(iii) The responses described in Item 23(e)(iv) are
hereby incorporated by reference.
(iv) The Registrant hereby incorporates the conformed
copy of the Second Amended and Restated Services
Agreement from Item (h)(v) of the Investment
Series Funds, Inc. Registration Statement on
Form N-1A, filed with the Commission on January
23, 2002. (File Nos. 33-48847 and 811-07021).
(v) Conformed copy of Principal Shareholder
Servicer's Agreement (Class B Shares) including
Exhibit 1 and Schedule A; (14)
(vi) Conformed copy of Shareholders Services Agreement
(Class B Shares) including Exhibit 1 and Schedule
A; (14)
(vii) The Registrant hereby incorporates the conformed
copy of the Shareholder Services Sub-Contract
between Fidelity and Federated Shareholder
Services from Item 24(b)(9)(iii) of the
Federated GNMA Trust Registration Statement on
Form N-1A, filed with the Commission on March
26, 1996. (File Nos. 2-75670 and 811-3375).
(viii) The Registrant hereby incorporates the confomed
copy of the Agreement for Administrative
Services from Item (h)(vix) of the Federated
Index Trust's Registration Statement on Form
N-1A filed with the Commission on December 30,
2003. (File Nos. 33-33852 and 811-6061)
(i) Conformed copy of Opinion and Consent of Counsel
as to legality of shares being registered; (2)
(j) Conformed Copy of Consent of Independent
Auditors; (+)
(k) Not applicable;
(l) Copy of Initial Capital Understanding; (2)
(m) (i) Copy of Rule 12b-1 Plan of the Registrant,
through and including Exhibit B; (11)
(ii) Conformed Copy of Exhibit C to the Rule 12b-1
Plan; (12)
(iii) Conformed copy of Exhibit 1 and Schedule A to
the 12b-1 Distribution Plan (Class B Shares) of
the Registrant; (14)
(iv) The responses described in Item 23(e)(iv) are
hereby incorporated by reference.
(n) The Registrant hereby incorporates the conformed
copy of the Multiple Class Plan from Item (n) of
the Federated Income Securities Trust
Registration Statement on Form N-1A, filed with
the Commission on June 30, 2003. (File Nos.
33-3164 and 811-4577).
(o) (i) Conformed copy of Power of Attorney of the
Registrant; (17)
(ii) Conformed copy of Power of Attorney of the
President and Director and the Vice Chairman of the
Registrant; (19)
(iii) Conformed copy of Power of Attorney of Chief
Investment Officer of the Registrant; (19)
(iv) Conformed copy of Power of Attorney of Treasurer
of the Registrant; (15)
(v) Conformed copy of Power of Attorney of Director
of the Registrant; (15)
(p) The Registrant hereby incorporates the conformed
copy of the Code of Ethics for Access Persons
from Item 23(p) of the Federated High Yield
Trust, Registration Statement on Form N-1A filed
with the Commission on April 28, 2003. (File
Nos. 2-91091 and 811-4018).

+ All exhibits have been filed electronically.

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 on Form N-1A filed December 15, 1986 (File Nos. 33-6901 and
811-4743).

3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed May 18, 1988 (File Nos. 33-6901 and
811-4743).

5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 on Form N-1A filed July 28, 1989 (File Nos. 33-6901 and
811-4743).

10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed May 24, 1995 (File Nos. 33-6901 and
811-4743).

11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed May 29, 1996 (File Nos. 33-6901 and
811-4743).

12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed May 30, 1997 (File Nos. 33-6901 and
811-4743).

14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed May 28, 1998 (File Nos. 33-6901 and
811-4743).

15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed March 29, 1999 (File Nos. 33-6901 and
811-4743).

17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 30 on Form N-1A filed May 25, 2001 (File Nos. 33-6901 and
811-4743).

18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed May 28, 2002 (File Nos. 33-6901 and
811-4743).

19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 32 on Form N-1A filed May 29, 2003 (file Nos. 33-6901 and
811-4743).

Item 24. Persons Controlled by or Under Common Control with the Fund:

None

Item 25. Indemnification: (5)

Item 26. Business and Other Connections of Investment Adviser:

For a description of the other business of the investment adviser, see the
section entitled "Who Manages the Fund?" in Part A. The affiliations with
the Registrant of four of the Trustees and one of the Officers of the
investment adviser are included in Part B of this Registration Statement
under "Who Manages and Provides Services to the Fund?" The remaining
Trustees of the investment adviser and, in parentheses, their principal
occupations are: Thomas R. Donahue, (Chief Financial Officer, Federated
Investors, Inc.), 1001 Liberty Avenue, Pittsburgh, PA, 15222-3779 and Mark
D. Olson (a principal of the firm, Mark D. Olson & Company, L.L.C. and
Partner, Wilson, Halbrook & Bayard, P.A.), 800 Delaware Avenue, P.O.
Box 2305, Wilmington, DE 19899-2305.

The remaining Officers of the investment adviser are:

President/ Chief Executive Officer
and Trustee: Keith M. Schappert

Executive Vice President: Stephen F. Auth

Senior Vice Presidents: Linda A. Duessel
James E. Grefenstette

Vice Presidents: G. Andrew Bonnewell
David P. Gilmore
John W. Harris
Steven Lehman
Kevin McClosky
John L. Nichol

Assistant Vice Presidents: Angela A. Kohler
Dana Meissner
Michael R. Tucker

Secretary: G. Andrew Bonnewell

Treasurer: Thomas R. Donahue

Assistant Secretaries: Jay S. Neuman

Assistant Treasurer: Denis McAuley, III

The business address of each of the Officers of the investment adviser is
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of a majority of the
investment advisers to the investment companies in the Federated Fund
Complex described in Part B of this Registration Statement.

Item 27. Principal Underwriters:

(a) Federated Securities Corp. the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment
companies, including the Registrant:

Cash Trust Series, Inc.; Cash Trust Series II; Edward Jones Money Market
Fund; Federated Adjustable Rate Securities Fund; Federated American Leaders
Fund, Inc.; Federated Core Trust; Federated Core Trust II, L.P.; Federated
Equity Funds; Federated Equity Income Fund, Inc.; Federated Fixed Income
Securities, Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated High Income Bond Fund, Inc.; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated International Series, Inc.; Federated Investment Series
Funds, Inc.; Federated Limited Duration Government Fund, Inc.; Federated
Managed Allocation Portfolios; Federated Municipal Opportunities Fund,
Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Securities Income Trust; Federated Premier Intermediate Municipal Income
Fund; Federated Premier Municipal Income Fund; Federated Short-Term
Municipal Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Total Return Government Bond Fund; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated World Investment Series, Inc.; Intermediate
Municipal Trust; Money Market Obligations Trust; MTB Group of Funds;
Regions Morgan Keegan Select Funds and SouthTrust Funds.

(b)

(1) (2) (3)
Positions and Offices Positions and Offices
With Distributor Name With Registrant
_____________________ _________________ ______________________

Chairman: Richard B. Fisher Vice Chairman
Director: Arthur L. Cherry

President-Institutional
Sales and Director: John B. Fisher

Executive Vice
Vice President, Assistant
Secretary and Director: Thomas R. Donahue

President-Broker/Dealer
And Director: James F. Getz

Senior Vice Presidents: Mark W. Bloss
Richard W. Boyd
Laura M. Deger
Peter W. Eisenbrandt
Theodore Fadool, Jr.
Christopher Fives
James S. Hamilton
James M. Heaton
H. Joseph Kennedy
Amy Michaliszyn
Keith Nixon
Solon A. Person, IV
Ronald M. Petnuch
Thomas E. Territ
Robert F. Tousignant

Vice Presidents: Irving Anderson
John B. Bohnet
Edward R. Bozek
Jane E. Broeren-Lambesis
Craig Burness
David J. Callahan
Mark Carroll
Dan Casey
Scott Charlton
Steven R. Cohen
Mary J. Combs
R. Edmond Connell, Jr.
Kevin J. Crenny
Daniel T. Culbertson
G. Michael Cullen
Marc C. Danile
Rick A. DiBernardo
Robert J. Deuberry
Ron Dorman
William C. Doyle
Donald C. Edwards
Lee England
Timothy Franklin
Peter J. Germain
Joseph D. Gibbons
G. Tad Gullickson
Scott Gundersen
Dayna C. Haferkamp
Raymond J. Hanley
Vincent L. Harper, Jr.
Bruce E. Hastings
Teresa M. Johnson
Christopher L. Johnston
Stephen Kittel
Michael W. Koenig
Ed Koontz
Christopher A. Layton
Michael H. Liss
Michael R. Manning
Martin J. McCaffrey
Mary A. McCaffrey
Richard C. Mihm
Vincent T. Morrow
Alec H. Neilly
Rebecca Nelson
James E. Ostrowski
Thomas A. Peter III
Raleigh Peters
Robert F. Phillips
Richard A. Recker
Christopher Renwick
Brian S. Ronayne
Timothy A. Rosewicz
Thomas S. Schinabeck
Edward J. Segura
Peter Siconolfi
Edward L. Smith
David W. Spears
John A. Staley
Colin B. Starks
Jeffrey A. Stewart
Kevin Stutz
Greg Spralding
William C. Tustin
Paul A. Uhlman
G. Walter Whalen
Stephen White
Patrick M. Wiethorn
Edward J. Wojnarowski
Michael P. Wolff

Assistant Vice Presidents: Lisa A. Toma
Robert W. Bauman
Charles L. Davis, Jr.
Beth C. Dell
Jennifer Fetteroff
John T. Glickson
William Rose

Treasurer: Denis McAuley, III

Secretary: Stephen A. Keen

Assistant Secretaries: Thomas R. Donahue
Peter J. Germain

The business address of each of the Officers of Federated Securities Corp. is
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779.

Item 28. Location of Accounts and Records:

All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:

Registrant Reed Smith LLP
Investment Management Group (IMG)
Federated Investors Tower
12th Floor
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(Notices should be sent to the Agent for Service at above address)

Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

Federated Shareholder P.O. Box 8600
Services Company Boston, MA 02266-8600
("Transfer Agent and
Dividend Disbursing Agent")

Federated Services Company Federated Investors Tower
("Administrator") 1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Federated Equity Federated Investors Tower
Management Company 1001 Liberty Avenue
of Pennsylvania Pittsburgh, PA 15222-3779
("Adviser")

State Street Bank and P.O. Box 8600
Trust Company Boston, MA 02266-8600
("Custodian")

Item 29. Management Services: Not applicable.

Item 30. Undertakings:

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors and the calling of special shareholder meetings by
shareholders.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED EQUITY INCOME FUND,
INC., certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
30th day of January 2004.

FEDERATED EQUITY INCOME FUND, INC.

BY: /s/ Nelson M. Winter
Nelson M. Winter, Assistant Secretary
January 30, 2004

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following person in the
capacity and on the date indicated:

NAME TITLE DATE
By:/s/ Nelson M. Winter Attorney In Fact January 30, 2004
Nelson M. Winter For the Persons
ASSISTANT SECRETARY Listed Below

NAME TITLE

John F. Donahue* Chairman and Director

Richard B. Fisher* Vice Chairman

J. Christopher Donahue* President and Director
(Principal Executive Officer)

Richard J. Thomas* Treasurer
(Principal Financial Officer)

Stephen F. Auth* Chief Investment Officer

Thomas G. Bigley* Director

John T. Conroy, Jr.* Director

Nicholas P. Constantakis* Director

John F. Cunningham* Director

Lawrence D. Ellis, M.D.* Director

Peter E. Madden* Director

John E. Murray, Jr., J.D., S.J.D.* Director

Marjorie P. Smuts* Director

John S. Walsh* Director

* By Power of Attorney

Federated EquityIncome Fund, Inc.

CLASS A SHARESCLASS B SHARESCLASS C SHARESCLASS F SHARES

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

Average Annual Total Return Table

What are the Fund's Fees and Expenses?

FEDERATED EQUITY INCOME FUND, INC.

FEES AND EXPENSES

EXAMPLE

What are the Fund's Investment Strategies?

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

Common Stocks

American Depositary Receipts

CONVERTIBLE SECURITIES

FIXED INCOME SECURITIES

FOREIGN SECURITIES

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

DERIVATIVE CONTRACTS

Futures Contracts

Options

Swaps

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

RISKS RELATING TO INVESTING FOR VALUE

CREDIT RISKS

SECTOR RISKS

RISKS OF FOREIGN INVESTING

CURRENCY RISKS

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

SALES CHARGE WHEN YOU PURCHASE

SALES CHARGE WHEN YOU REDEEM

How is the Fund Sold?

RULE 12B-1 PLAN

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Wire

By Check

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

How to Redeem and Exchange Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

By Mail

Signature Guarantees

PAYMENT METHODS FOR REDEMPTIONS

Redemption in Kind

LIMITATIONS ON REDEMPTION PROCEEDS

REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

Systematic Withdrawal Program (SWP) On Class B Shares

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

Who Manages the Fund?

THE FUND'S PORTFOLIO MANAGERS ARE:

John L. Nichol

Steven J. Lehman

Kevin R. McCloskey

Linda A. Duessel

ADVISORY FEES

Legal Proceedings

Financial Information

Federated Equity
Income Fund, Inc.

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES