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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission File Number 001-14818

Federated Investors, Inc.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code) 412-288-1900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of May 5, 2004, the Registrant had outstanding 9,000 shares of Class A Common Stock and 108,093,057 shares of Class B Common Stock.

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Special Note Regarding Forward-Looking Information

Certain statements in this report, including those related to the outsourcing of the transfer agency function; the costs associated with the internal review of mutual fund trading activities; future cash needs; accounting for intangible assets; accounting for income taxes; market risk to revenue; the impact of an increase in interest rates; the strategy for future growth and the prospects for industry growth constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of Federated or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Among other risks and uncertainties, the outsourcing of the transfer agency function is contingent upon reaching a final agreement; the costs associated with the internal review of mutual fund trading activities and future cash needs will be impacted by any additional information requests from or fines or penalties paid to governmental agencies and the cost associated with private litigation; the accounting for intangible assets is based upon estimates and will be affected if actual results differ significantly; the accounting for income taxes will be affected by the ability to utilize capital loss carry forwards; and revenue will be affected by changes in market values of assets under management and the impact of rising interest rates on money market funds. For a discussion of such risk factors, see the section titled “Risk Factors and Cautionary Statements” in Federated’s Annual Report on Form 10-K for the year ended December 31, 2003, and other reports on file with the Securities and Exchange Commission. Many of these factors may be more likely to occur as a result of the ongoing threat of terrorism and the ongoing investigation into the mutual fund industry by federal and state regulators. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements.

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Part I, Item I. Financial Statements

Consolidated Balance Sheets

(dollars in thousands)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements.)

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Consolidated Statements of Income

(dollars in thousands, except per share data)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements.)

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Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

(The accompanying notes are an integral part of these consolidated financial statements.)

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Notes to the Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

The interim consolidated financial statements of Federated Investors, Inc. (Federated) included herein have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair statement of the results for the interim periods presented.

In preparing the unaudited interim consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from such estimates and such differences may be material to the financial statements.

These financial statements should be read in conjunction with Federated’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain items previously reported have been reclassified to conform with the current year presentation.

(b) B-Share Deferred Sales Commissions and Nonrecourse Debt

Federated funds the payment of upfront commissions paid upon the sale of Class B shares of Federated-sponsored mutual funds through arrangements with independent third parties by selling the rights to all future distribution fees, servicing fees and contingent deferred sales charges (CDSCs). For financial reporting purposes, these arrangements are treated as financings. As a result, Federated capitalizes all of the upfront commissions as deferred sales commissions and recognizes B-share-related distribution fees and servicing fees in the Consolidated Statements of Income even though legal title to these fees has been transferred to the third party. In addition, Federated records nonrecourse debt equal to the proceeds received on the sale of future revenue streams. The debt does not contain a contractual maturity or stated interest rate. Interest rates are imputed based on current market conditions at the time of issuance. The deferred sales commission asset and nonrecourse debt balance are amortized over the estimated life of the B-share fund asset dependent upon the level and timing of cash flows from the sold future revenue streams, not to exceed eight years. CDSCs collected on the B-share fund assets are used to reduce the deferred sales commission asset. Management accelerates the write off of these asset and debt balances when reasonably estimable future cash flows indicate that cash flows will not be sufficient to fully amortize the remaining deferred sales commission asset and nonrecourse debt balance.

Sale accounting treatment was applied to account for the sale of distribution fees and CDSCs pursuant to the B-share funding arrangements in 2003. As a result, B-share-related distribution fees and related expenses are not reflected in Federated’s Consolidated Statements of Income for 2003.

(c) Revenue Recognition

Revenue from providing investment advisory, administrative and other services (including distribution, shareholder servicing, clearing and recordkeeping) is recognized during the period in which the services are performed. Investment advisory, administrative and the majority of other service fees are based on the net asset value of the investment portfolios that are managed or administered by Federated. Federated may waive certain fees for services for competitive reasons or to meet regulatory or contractual requirements.

Federated has contractual arrangements with third parties to provide certain fund-related services. Based on the nature of Federated’s involvement and obligations under these arrangements, Federated’s revenue is recorded gross or net of third-party payments. Investment advisory fees, administrative service fees, distribution fees and certain other service fees are generally recorded gross of payments made to third parties while shareholder service fees are recorded net of certain third-party payments. Third-party payments for shareholder services recorded as an offset to revenue for the three months ended March 31, 2004 and 2003 were $43.1 million and $42.5 million, respectively.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(d) Employee Stock-Based Compensation

Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 123), Federated recognizes the estimated fair value of stock-based awards granted, modified or settled on or after January 1, 2003 as compensation expense on a straight-line basis over the awards’ vesting periods, which vary in length from 0 to 10 years. For all employee-related stock option awards granted prior to 2003, Federated continues to apply the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations. Under APB 25, compensation expense is not recognized for stock option awards granted with an exercise price equal to or greater than the market value of Federated’s Class B common stock on the date of grant.

With respect to restricted stock awards, the fair value of the award (the difference between the market value of Federated’s Class B common stock on the date of grant and the purchase price paid by the employee) is charged to “Employee restricted stock awards” on the Consolidated Balance Sheets when the restricted stock is awarded and recognized as compensation expense on a straight-line basis over the period of employee performance during which the restrictions lapse, which is typically 10 years.

Had compensation costs for all stock options and employee restricted stock been determined based upon fair values at the grant dates in accordance with SFAS 123, Federated would have experienced net income and earnings per share similar to the pro forma amounts indicated below for the three months ended March 31, 2004 and 2003. As allowed by SFAS 123, Federated calculates compensation as if all instruments granted are expected to vest and recognizes the effect of actual forfeitures as they occur.

(e) Recent Accounting Pronouncements

In accordance with the applicable transition provisions, Management applied a two-step approach to its adoption of Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (FIN 46). As of December 31, 2003, management adopted the provisions of FIN 46 for all special-purpose entities and concluded that its relationship with the three collateralized bond obligation (CBO) products, for which Federated acts as investment manager, met the definition of significant variable interests. As of March 31,

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

2004, management completed its analysis of the impact of adopting FIN 46 to account for any additional variable interest entities with which Federated is involved. As a result of this analysis, management concluded that Federated was not the primary beneficiary of any variable interests as of March 31, 2004. See Note (9) for a discussion regarding Federated’s significant variable interests as of March 31, 2004.

(2) Intangible Assets and Goodwill

Federated’s identifiable intangible assets consisted of the following at March 31, 2004 and December 31, 2003:

Amortization expense for identifiable intangible assets for the three-month periods ended March 31, 2004 and 2003 was $2.7 million and $2.6 million, respectively. Following is a schedule of expected aggregate annual amortization expense for intangible assets in each of the five succeeding years assuming no new acquisitions or impairments:

Goodwill at March 31, 2004 and December 31, 2003 was $231.2 million and $165.0 million, respectively. The $66.2 million increase in goodwill reflects the amount of contingent purchase price payable on or before May 7, 2004 in connection with the acquisition of substantially all of the business of the former advisor of the Kaufmann Fund in 2001. With this payment, approximately 60% of the total contingent purchase price payment available to be paid over the first six years following the acquisition’s closing date will have been paid. More than 80% of the goodwill balances at March 31, 2004 and December 31, 2003 represented goodwill resulting from this acquisition.

(3) Other Long-term Assets

Federated’s other long-term assets consisted of the following at March 31, 2004 and December 31, 2003:

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(4) Recourse Debt

Federated’s total recourse debt balance of $1.3 million and $1.6 million at March 31, 2004 and December 31, 2003, respectively, represented liabilities on capital leases. The capital leases carry interest rates ranging from 2.90% to 4.55% with weighted-average interest rates of 3.76% and 3.77% at March 31, 2004 and December 31, 2003, respectively. The four capital leases outstanding at March 31, 2004, have expiration dates that range from the first quarter 2005 to the first quarter 2006.

As of March 31, 2004, Federated had no outstanding balance under its $150.0 million Second Amended and Restated Credit Agreement as amended (Credit Facility) or under its $50.0 million discretionary line of credit agreement.

(5) Deferred Sales Commissions and Nonrecourse Debt

Deferred sales commissions consisted of the following:

Nonrecourse debt consisted of the following:

For B shares sold on or after January 1, 2004, Federated funds the payment of the upfront sales commission under a new agreement with an independent financial institution, which expires in December 2006.

(6) Common Stock

(a) Cash Dividends and Stock Repurchases

Cash dividends of $0.085 per share or approximately $9.2 million were paid in the first quarter of 2004 to holders of common shares.

As of March 31, 2004, under Federated’s current share buyback programs, Federated can repurchase approximately 4.5 million additional shares subject to the cash payment limit imposed by the Credit Facility.

Stock repurchases and dividend payments are subject to restrictions under the Credit Facility. These restrictions limit cash payments for additional stock repurchases and dividends to 50% of net income earned during the period from January 1, 2000, to and including the payment date, less certain payments for dividends and stock repurchases. As of March 31, 2004, Federated had the ability to make additional stock repurchase and dividend payments of more than $217 million under these restrictions.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(b) Employee Stock Purchase Plan

Federated offers an Employee Stock Purchase Plan which allows employees to purchase a maximum of 750,000 shares of Class B common stock. Employees may contribute up to 10% of their salary to purchase shares of Federated’s Class B common stock on a quarterly basis at the market price. The shares under the plan may be newly issued shares, treasury shares or shares purchased on the open market. As of March 31, 2004, a total of 66,970 shares had been purchased by employees in this plan since the plan’s inception.

(c) Employee Stock-Based Compensation

During the first quarter of 2004, Federated sold 40,000 shares of restricted Federated Class B common stock under the Stock Incentive Plan. The restricted stock was purchased out of treasury. During the same time period, restrictions lapsed on 3,579,375 shares of Federated Class B common stock, 220,300 employee stock options were exercised by purchasing shares out of treasury and 732,800 employee stock options were forfeited.

(7) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

Federated uses the treasury stock method to reflect the dilutive effect of unvested restricted stock and unexercised stock options in diluted earnings per share. For the quarters ended March 31, 2004 and 2003, options to purchase 1.2 million and 3.4 million shares of common stock, respectively, at a weighted-average exercise price per share of $33.65 and $30.49, respectively, were outstanding but not included in the computation of diluted earnings per share for each quarter because the option exercise price was greater than the average market price of Federated Class B common stock. Under the treasury stock method, in the event the shares of options become dilutive, their dilutive effect would result in the addition of a net number of shares to the weighted-average number of shares used in the calculation of diluted earnings per share.

(8) Comprehensive Income

Comprehensive income was $51.7 million and $48.8 million for the quarters ended March 31, 2004 and 2003, respectively.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(9) Variable Interest Entities

Federated acts as the investment manager for two high-yield CBO products and a mortgage-backed CBO product pursuant to the terms of an investment management agreement between Federated and each CBO. The CBOs are alternative investment vehicles created in 1999 and 2000 for the sole purpose of issuing collateralized debt instruments that offer investors the opportunity for returns that vary with the risk level of their investment. Certain securities issued by the CBOs are subject to greater risk than traditional investment products. The notes issued by the CBOs are backed by diversified portfolios consisting primarily of structured debt and had original expected maturities of five to twelve years. As a result of their corporate governance, the CBOs meet the definition of a VIE under FIN 46. After performing an expected cash flow analysis for each CBO, management determined that Federated is not the primary beneficiary of the CBOs as defined by FIN 46 and thus has not consolidated the financial condition and results of operations of these CBOs in Federated’s Consolidated Financial Statements. As of March 31, 2004, aggregate total assets and aggregate total obligations of the CBOs approximated $1 billion, respectively.

Federated holds an investment in each CBO, which exposes it to risk of loss to the extent of the carrying value of the investments. As of March 31, 2004, the remaining $0.6 million carrying value of these investments represented Federated’s maximum exposure to loss over the remaining life of the CBOs.

In addition, a number of Federated-sponsored investment products, including offshore money market and flucuating-value fund products, closed-end fixed-income funds and a group trust meet the definition of VIEs under FIN 46. Federated is not the primary beneficiary of these VIEs and therefore Federated has not consolidated these entities. As of March 31, 2004, total assets under management in these investment products approximated $9 billion. Federated’s investments in these products represent its maximum exposure to loss. As of March 31, 2004, Federated’s investment was $22.5 million, of which $22.3 million was invested in offshore money market funds.

(10) Related Party Transactions

Federated provides investment advisory, administrative, distribution and shareholder services to various Federated products including the Federated group of funds (Federated funds or affiliates). All of these services provided for the Federated funds are under contracts that definitively set forth the fees to be charged for these services and are approved by the funds’ independent directors/trustees. Federated may waive certain fees charged for these services in order to make the Federated funds more competitive or to meet regulatory or contractual requirements. At March 31, 2004 and December 31, 2003, Federated’s receivable from affiliates totaled $32.7 million and $33.2 million, respectively.

At March 31, 2004 and December 31, 2003, Federated’s payable to affiliates totaled $9.2 million. For 2004, $8.9 million of this amount related to past mutual fund trading practices (see Note (11) Commitments and Contingencies for more detail). The remaining amounts primarily represent fund-related expenses assumed by Federated in certain cases in order to make the Federated funds more competitive or to meet regulatory or contractual requirements.

(11) Commitments and Contingencies

(a) Contractual

Federated is obligated to make certain future payments under various agreements to which it is a party, including capital and operating leases, service contracts and employment arrangements. A schedule of minimum payments due under these agreements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.

Pursuant to various acquisition agreements entered into by Federated in 2003, 2002 and 2001, Federated is required to make additional payments to the seller in each acquisition contingent upon the occurrence of certain events. In 2001, Federated completed the acquisition of substantially all of the business of the former advisor of the Kaufmann

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Fund. Pursuant to this acquisition agreement, Federated could pay an additional $132.3 million as contingent purchase price and $26.9 million as contingent incentive compensation between 2004 and 2007 if certain revenue targets are met. $79.6 million in total contingent payments is payable in May 2004, of which, $66.2 million is capitalized as goodwill and is recorded in “Other current liabilities” and $12.7 million represents incentive compensation recorded in “Accrued expenses – other” as of March 31, 2004. The remaining $0.7 million of incentive compensation will be expensed in the second quarter 2004.

Pursuant to the remaining acquisition agreements, Federated is required to make contingent payments on a periodic basis calculated as a percentage of average assets under management on certain Federated fund shareholder accounts for which the seller is the named broker/dealer of record. In these cases, the payments occur monthly or quarterly and could continue through fourth quarter 2008.

(b) Guarantees and Indemnifications

Federated has not issued any guarantees for the obligations of third parties. On an intercompany basis, various wholly owned subsidiaries of Federated guarantee certain financial obligations of Federated Investors, Inc. and Federated Investors, Inc. guarantees certain financial and performance-related obligations of various wholly owned subsidiaries. In addition, in the normal course of business, Federated has entered into contracts that provide a variety of indemnifications. Any exposure to Federated under these arrangements would involve future claims that may be made against Federated. Federated’s maximum exposure under these arrangements is unknown. However, no such claims have occurred, nor are they expected to occur, and Federated expects the risk of loss to be remote.

(c) Internal Review of Mutual Fund Trading Activities

As previously reported, since September 2003 Federated has conducted an internal review into certain mutual fund trading activities in response to requests for information from the Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD) and New York State Attorney General. Federated subsequently received inquiries relating to such trading activities from the U.S. Attorneys Offices for the Western District of Pennsylvania and the Southern District of New York, the Commodity Futures Trading Commission, the Securities Commissioner and the Attorney General of West Virginia, and the Connecticut Banking Commission. Attorneys from the law firms of Reed Smith LLP and Davis, Polk & Wardwell are conducting the review at the direction of a special investigating committee of Federated’s board of directors. The special investigating committee is comprised of three independent directors, and Federated’s chief executive and chief legal officers. Attorneys from the law firm of Dickstein Shapiro Morin & Oshinsky, LLP, independent counsel for the Federated mutual funds, participated in the review and reported on its progress to the independent directors of the funds.

In February 2004, the Company announced that the special investigative committee of the Board of Directors had substantially completed its assessment of past mutual fund trading issues. Based upon the findings of the internal review and of an independent expert retained by the Federated mutual funds, Federated established a restoration fund of approximately $7.6 million (recorded in 2003) to compensate for the detrimental impact from the improper trading activities identified in the review. The independent directors of the mutual funds have not yet determined how to distribute the restoration fund and no government agency has passed on the establishment or amount of the restoration fund. Federated is continuing to complete the review of information relating to trading activities and to cooperate with ongoing governmental investigations. Federated will conduct further investigation as necessary.

The Consolidated Financial Statements for the first quarter 2004 reflect a $4.3 million pretax charge for various legal, regulatory and compliance matters. Of this amount, $2.8 million represents an additional accrual of estimated costs to complete Federated’s internal review, including costs incurred on behalf of the funds. The charge does not include fines, penalties or other amounts that governmental agencies may impose or claims asserted in private litigation. In order to estimate the accrual for expenses relating to remedying any damages to the Federated funds, management made assumptions concerning the timing and effort involved to complete the internal review and distribute the restoration fund. If actual experience differs significantly from the judgments used to determine the initial estimate, the amount accrued as of March 31, 2004 would be subject to further revision.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(d) Other Regulatory Inquiries

Federated continues to receive information requests from the SEC and NASD on matters in addition to mutual fund trading practices. Since September 2003, Federated has responded to requests concerning: (i) valuation of securities traded in foreign markets, (ii) application of breakpoints to reduce front-end loads, (iii) waiver of front-end loads for transfers made from competing mutual funds, (iv) so called “revenue sharing” payments or brokerage commissions used to support distribution of mutual funds, (v) valuation, liquidity and tax-exemption of high yield municipal securities, (vi) arrangements relating to administrative services provided by Federated to mutual funds sponsored by third-parties, and (vii) management of index mutual funds. The U.S. Attorneys Office for the Eastern District of Missouri and the Connecticut Banking Commission have also requested information regarding “revenue sharing” arrangements.

(e) Legal Proceedings

During the period October 2003 through March 2004, Federated was named as a defendant in 18 class action or derivative lawsuits filed on behalf of certain alleged shareholders in various Federated-sponsored mutual funds. Ten of these actions have been transferred to a multi-district litigation (MDL) panel of judges sitting in the U.S. District Court for the District of Maryland for consolidated pre-trial proceedings. Federated expects four other cases to be transferred to the MDL panel. The cases generally involve claims arising from allegations that Federated permitted improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused injury to the mutual fund shareholders. Three additional cases, alleging excessive advisory and rule 12b-1 fees on behalf of certain Federated mutual funds, have been filed or are being transferred to the U.S. District Court for the District of Western Pennsylvania. One case alleging breach of contract has been filed in an Illinois State Circuit Court.

All of these lawsuits seek unquantified damages, attorneys’ fees and expenses. Federated intends to defend this litigation.

In addition, Federated has other claims asserted and threatened against it in the ordinary course of business. In the opinion of management, after consultation with counsel, it is unlikely that any adverse determination for any pending or threatened other claim will materially affect the financial position or results of operations of Federated.

(12) Subsequent Events

On April 19, 2004, the board of directors declared a dividend of $0.102 per share to be paid on May 14, 2004, to shareholders of record as of May 7, 2004. The board also approved an extension of the existing stock repurchase program which allows management to repurchase the remaining 4.5 million shares of Class B Common Stock eligible for purchase as of March 31, 2004 through the period ending April 30, 2005.

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Part I, Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations (Unaudited)

The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. We have presumed that the readers of this interim financial information have read or have access to management’s discussion and analysis of financial condition and results of operations appearing in Federated’s Annual Report on Form 10-K for the year ended December 31, 2003.

General

Federated Investors, Inc. (together with its subsidiaries, “Federated”) is one of the largest investment management companies in the United States with $193.9 billion in managed assets as of March 31, 2004. The majority of Federated’s revenue is derived from advising and administering Federated mutual funds, separately managed accounts and other Federated-sponsored products, in both domestic and international markets. Federated also derives revenue from administering mutual funds sponsored by third parties and from providing various other mutual fund-related services, including distribution, shareholder, transfer agency, trade execution, trade clearing and retirement plan recordkeeping services (collectively, “Other Services”).

Investment advisory, administrative and certain fees for Other Services, such as distribution and shareholder service fees, are contract-based fees that are calculated as a percentage of the net assets of the investment portfolios that are managed or administered by Federated. As such, Federated’s revenue is primarily dependent upon factors that affect the value of managed and administered assets including market conditions and the ability to attract and maintain assets. Rates for Federated’s services generally vary by asset type and investment objective and, in certain instances, decline as the average net assets of the individual portfolios exceed certain threshold levels. Generally, rates charged for services provided to equity products are higher than rates charged on money market and fixed-income products. Accordingly, revenue is also dependent upon the relative composition of average assets under management. Federated pays a significant portion of its distribution and shareholder service fees to financial intermediaries that sell and service Federated-sponsored products. These payments are generally calculated as a percentage of net assets attributable to the party receiving the payment and are recorded on the Consolidated Statements of Income either as reductions to revenue as in the case of certain shareholder service fee payments or as an expense as in the case of distribution fee payments.

Federated’s remaining Other Services fees are based on fixed rates per shareholder account, transaction or retirement plan participant. Revenue relating to these services will vary with changes in the number of shareholder accounts, transactions and plan participants which are impacted by sales and marketing efforts, competitive fund performance, introduction and market reception of new products and acquisitions.

Federated’s most significant operating expenses include compensation and related costs, which represent fixed and variable compensation and related employee benefits, and marketing and distribution costs.

Business Developments

Effective January 1, 2004, Federated was no longer responsible for providing accounting services to the Federated-sponsored funds. Rather, the funds began contracting directly with an independent third-party provider of portfolio accounting services. As a result, beginning in 2004, Federated no longer recognizes revenue or third-party expenses in the Consolidated Statements of Income for portfolio accounting services provided to the Federated-sponsored funds. Federated’s revenue in the first quarter 2003 included $4.1 million for these portfolio accounting services. In addition, in February 2004, Federated announced its intent to outsource its transfer agency function to an independent third-party provider of these services by June 30, 2004, subject to approval by the independent board of trustees of the Federated-sponsored funds. Negotiations are ongoing and will likely result in the elimination of transfer agency fees from Federated’s revenue. Federated’s revenue in the first quarters of 2004 and 2003 included $6.5 million and $6.7 million, respectively, for transfer agency services.

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Management’s Discussion and Analysis (continued)

of Financial Condition and Results of Operations (Unaudited)

Asset Highlights

Managed Assets at Period End

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Management’s Discussion and Analysis (continued)

of Financial Condition and Results of Operations (Unaudited)

Administered Assets

Components of Changes in Equity and Fixed-Income Fund Managed Assets