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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    For the quarterly period ended                September 30, 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 October 29, 2004, the Registrant had outstanding 9,000 shares of Class A Common Stock and 107,445,987 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 changes in the mix of bank clients for fund administration services; the need to make additional contingent payments pursuant to acquisition agreements; the costs associated with the internal review of mutual fund trading activities and other regulatory inquiries; future cash needs; accounting for intangible assets; accounting for income taxes and loss contingencies; market risk to investments and revenue; and the impact of an increase in interest rates 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 mix of bank clients for fund administration services is subject to the decisions of the clients to internalize or change service providers and the impact of mergers in the banking industry; the costs associated with the internal review of mutual fund trading activities, other regulatory inquiries 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 and loss contingencies 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; investments will be impacted by fluctuations in the securities markets; 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. 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 in the future. For a discussion of 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.

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Part I, Item 1. Financial Statements

Consolidated Balance Sheets

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

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Consolidated Statements of Income

¹  Totals may not sum due to rounding.

(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 related 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. In addition, the Consolidated Statement of Cash Flows for 2003 reflects sale accounting treatment while 2004 reflects financing treatment.

(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. Management considers various factors to determine whether Federated’s revenue should be recorded based on the gross amount payable by the funds or net of payments to third-party service providers. Our analysis is based on whether Federated is acting as the principal service provider or is performing as an agent. The primary factors considered include: (1) whether the customer holds Federated or the service provider responsible for the fulfillment and acceptability of the services to be provided; (2) whether Federated has any practical latitude in negotiating the price to pay a third-party provider; (3) whether Federated or the customer selects the ultimate service provider; and (4) whether Federated has credit risk in the arrangement. Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated is acting

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

as the principal in these transactions and should therefore report gross revenues. As a result of considering these factors, investment advisory fees, administrative service fees, distribution fees and certain other service fees are recorded gross of payments made to third parties. By contrast, management determined that in the case of shareholder services Federated acts as an agent; thus Federated records shareholder service fees net of certain third-party payments. Management reached this conclusion based largely on the fact that given the personalized nature of shareholder services, the customer, in this case the shareholder, has a direct relationship with their financial intermediary for the provision of shareholder services. Third-party payments for shareholder services recorded as an offset to revenue for the three and nine months ended September 30, 2004 were $40.5 million and $125.0 million, respectively as compared to $43.7 million and $128.2 million for the three and nine months ended September 30, 2003, respectively.

(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 or modified straight-line basis over the period of employee performance during which the awards vest, which ranges from five to ten 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 and nine months ended September 30, 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.

¹ “All awards” refers to awards granted, modified or settled on or after January 1, 1995, as required by SFAS 123.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(e) Marketable Securities

Marketable securities include available-for-sale and trading securities held by Federated. Federated’s available-for-sale securities are classified as current or long-term assets and are included in “Marketable securities” or “Other long-term assets,” respectively, on the Consolidated Balance Sheets based on management’s intention to sell the investment. At September 30, 2004 and December 31, 2003, Federated did not hold any available-for-sale securities that were classified as long-term assets. Federated’s trading securities held at September 30, 2004, are classified as current and are included in “Marketable securities” on the Consolidated Balance Sheets. Federated did not hold any trading securities at December 31, 2003. For more details regarding Federated’s policy for marketable securities, see Note (1)(g) to the Consolidated Financial Statements for the year ended December 31, 2003, included in Federated’s Annual Report on Form 10-K.

(f) Intangible Assets

Intangible assets, consisting primarily of goodwill, investment advisory contracts and noncompete and employment agreements acquired in connection with various acquisitions, are recorded at fair value determined using a discounted cash flow model as of the date of acquisition. The discounted cash flow model considers various factors to project the present value of future cash flows expected to be generated from the asset. Given the investment advisory nature of Federated’s business and of the businesses acquired over the years, these factors typically include: (1) an estimated rate of change for underlying managed assets; (2) expected revenue per managed asset; (3) incremental operating expenses; (4) useful life of the acquired asset; and (5) a discount rate. Management estimates a rate of change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate. Expected revenue per managed asset, incremental operating expenses and the useful life of the acquired asset are generally based on contract terms and historical experience. The discount rate is equal to Federated’s weighted-average cost of capital. After the fair value of all separately identifiable assets has been estimated, the cost of the acquisition in excess of the sum of the fair values of these assets is allocated to goodwill.

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) which Federated adopted in January 2002, Federated no longer amortizes goodwill but rather tests it for impairment at least annually or when indicators of potential impairment exist. Federated uses a two-step process to test for and measure impairment that begins with an estimation of the fair value of its reporting unit. This first step is a screen for potential impairment, and if impairment has occurred, the second step measures the amount of impairment.

Federated amortizes separately identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. Historically, Federated has used either straight-line or an accelerated method of amortization after considering specific characteristics of the underlying shareholder base to forecast the pattern in which the economic benefits will be consumed, including shareholder behavior, demographics and persistency levels. The assets are amortized over their estimated useful lives, which range from four to 14 years. Management periodically evaluates the remaining useful lives and carrying values of the intangible assets to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment monitored by management include a decline in the level of managed assets, changes to contractual provisions underlying certain intangible assets and reductions in operating cash flows. Should there be an indication of a change in the useful life or impairment in value, Federated compares the carrying value of the asset and its related useful life to the projected undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows. Federated writes-off the cost and accumulated amortization balances for all fully amortized intangible assets.

(g) Loss Contingencies

In accordance with SFAS 5, “Accounting for Contingencies,” Federated accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that a liability has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a suit and

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

management’s estimate. These differences could have a material impact on Federated’s results of operations, financial position or cash flows.

(h) 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, 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 the adoption of FIN 46 at March 31, 2004. See Note (11) Variable Interest Entities for a discussion regarding Federated’s significant variable interests as of September 30, 2004.

(2) Discontinued Operations

On June 30, 2004, Federated completed the sale of its transfer agency business to Boston Financial Data Services. Total net assets included in the transfer agency sale were approximately $1.1 million and consisted primarily of $0.7 million of goodwill and $0.7 million of fixed assets offset by $0.3 million of unamortized balances of specifically identified refurbishment allowances and deferred rent associated with the assignment of a building lease. There was no material gain or loss associated with this transaction.

The results of operations of the transfer agency business included in discontinued operations were as follows:

For the quarter ended September 30, 2004, Federated reported a loss from discontinued operations, net of tax, of $0.2 million. This loss was primarily attributable to residual costs associated with the sold transfer agency business, partially offset by revenue relating to one customer that continued to receive transfer agency services from Federated for a three-week transition period in July 2004.

(3) Intangible Assets and Goodwill

Federated’s identifiable intangible assets consisted of the following at September 30, 2004 and December 31, 2003:

On August 27, 2004, assets of four mutual funds previously advised by Banknorth N.A., a subsidiary of Banknorth Group, Inc., totaling approximately $265 million were acquired by four Federated-sponsored mutual funds. This

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

transaction occurred in connection with an agreement between Federated, Banknorth Group, Inc. and Banknorth N.A. As a result of this transaction, Federated recorded $1.1 million as an investment advisory contract intangible asset, which included the capitalization of transaction costs. This asset will be amortized on an accelerated basis over a ten-year useful life.

Amortization expense for identifiable intangible assets for the three- and nine-month periods ended September 30, 2004 were $2.7 million and $8.0 million, respectively, and $2.6 million and $7.8 million, respectively, for the same periods of 2003. 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 September 30, 2004 and December 31, 2003 was $230.6 million and $165.0 million, respectively. During the first quarter 2004, Federated recorded $66.2 million of additional goodwill to account for the contingent purchase price paid in May 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, 60% of the total contingent purchase price payment available to be paid over the first six years following the acquisition’s closing date has been paid. See Note (13) Commitments and Contingencies for details regarding the potential remaining payments. More than 80% of the goodwill balances at September 30, 2004 and December 31, 2003 represented goodwill resulting from this acquisition.

On June 30, 2004, Federated sold $0.7 million in goodwill in connection with the sale of the transfer agency business. See Note (2) Discontinued Operations for further discussion of this sale transaction.

(4) Other Long-term Assets

Federated’s other long-term assets consisted of the following at September 30, 2004 and December 31, 2003:

The lease-related receivable represents a refurbishment allowance associated with Federated’s recently amended operating lease for its corporate headquarters. This allowance is payable in 2006 and was recorded as a long-term receivable as of January 1, 2004, the effective date of the amendment.

(5) Other Current Liabilities

Federated’s other current liabilities at September 30, 2004, included $11.3 million related to an insurance recovery for a claim submitted to cover costs associated with the internal review into past mutual fund trading practices (See Note (13)(c) Commitments and Contingencies – Internal Review of Mutual Fund Trading Activities for a discussion regarding the internal review). The advance payment of this insurance recovery to Federated is contingent upon approval of the claim. In the event that all or a portion of the claim is denied, Federated will be required to repay all or a portion of this

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

advance payment. Because the outcome of this claim is uncertain at this time, Federated recorded the advance payment as a liability and will continue to evaluate the contingency until it is resolved.

(6) Recourse Debt

Federated’s total recourse debt balance of $0.8 million and $1.6 million at September 30, 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 3.69% and 3.77% at September 30, 2004 and December 31, 2003, respectively. The four capital leases outstanding at September 30, 2004 have expiration dates that range from the first quarter 2005 to the first quarter 2006.

As of September 30, 2004, Federated had no outstanding balance under its $150.0 million Second Amended and Restated Credit Agreement as amended (Credit Facility). On September 28, 2004, Federated extended the term of its $50.0 million bank discretionary line of credit agreement to September 27, 2005. As of September 30, 2004, Federated had no outstanding balance under this discretionary line of credit.

(7) Deferred Sales Commissions and Nonrecourse Debt

Deferred sales commissions consisted of the following:

Current and long-term portions of nonrecourse debt consisted of the following (Note (1)(b)):

¹ As of September 30, 2004

² As of December 31, 2003

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

(8) Common Stock

(a) Cash Dividends and Stock Repurchases

Cash dividends of $0.085, $0.102 and $0.102 per share or approximately $9.2 million, $11.0 million and $11.0 million were paid in the first, second and third quarters of 2004, respectively, to holders of common shares.

Federated repurchased 1,718,400 and 3,536,501 shares of its stock as part of its current share buyback program during the three and nine months ended September 30, 2004, respectively. As of September 30, 2004, Federated can repurchase approximately 1.4 million additional shares.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

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 September 30, 2004, Federated had the ability to make additional stock repurchase and dividend payments of more than $154 million under these restrictions.

(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 September 30, 2004, a total of 70,189 shares had been purchased by employees in this plan since the plan’s inception.

(c) Employee Stock-Based Compensation

During the first nine months of 2004, Federated sold 352,000 shares of restricted Federated Class B common stock under the Stock Incentive Plan. The restricted stock was sold out of treasury. During the same time period, restrictions lapsed on 3,579,375 shares of Federated Class B common stock. During the first nine months of 2004, Federated issued 16,500 employee stock options and 843,150 employee stock options were forfeited. During the same time period, 1,890,250 employee stock options to purchase an equal number of Class B common stock were exercised by selling shares out of treasury. Of these exercised options, 1,656,700 options were exercised in the third quarter of 2004 with an exercise price of $1.28 per share after becoming fully vested on June 30, 2004.

(9) Earnings Per Share

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

¹ Totals may not sum due to rounding.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

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 September 30, 2004 and 2003, options to purchase 2.1 million and 2.4 million shares of common stock, respectively, at a weighted-average exercise price per share of $31.90 and $31.98, respectively, were outstanding but not included in the computation of diluted earnings per share for each quarter due to the option exercise price being greater than the average market price of Federated Class B common stock. For the nine months ended September 30, 2004 and 2003, options to purchase 1.6 million and 3.0 million shares of common stock, respectively, at a weighted-average exercise price per share of $32.80 and $31.17, respectively, were outstanding but not included in the computation of diluted earnings per share for each nine-month period due to the option exercise price being greater than the average market price of Federated Class B common stock. Under the treasury stock method, in the event the 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.

(10) Comprehensive Income

Comprehensive income was $47.1 million and $149.4 million for the three- and nine- month periods ended September 30, 2004, respectively, and $51.0 million and $148.9 million, respectively, for the same periods of 2003.

(11) 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 September 30, 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 September 30, 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 fluctuating-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 September 30, 2004, total assets under management in these investment products approximated $8 billion. Federated’s investments in these products represent its maximum exposure to loss. As of September 30, 2004, Federated’s investment in these investment products was $25.2 million, of which $25.0 million was invested in offshore money market funds.

(12) 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 September 30, 2004 and December 31, 2003, Federated’s receivable from affiliates totaled $26.9 million and $33.2 million, respectively.

At September 30, 2004 and December 31, 2003, Federated’s accrued expenses payable to or on behalf of affiliates totaled $4.7 million and $9.2 million, respectively. At September 30, 2004, the balance included $1.5 million related to Federated’s internal review and regulators’ inquiries into past mutual fund trading practices (see Note (13)

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Commitments and Contingencies for more detail), $1.9 million for remedial actions related to various fund transaction and trading issues, as well as 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.

(13) 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 Fund. Pursuant to this acquisition agreement, Federated could pay an additional $66.2 million as contingent purchase price and $13.4 million as contingent incentive compensation between 2005 and 2007 if certain revenue targets are met.

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. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated, under which Federated agrees to hold the other party harmless against losses arising out of the contract, provided the other party’s actions are not deemed to have breached an agreed upon standard of care. In each of these circumstances, payment by Federated is contingent on the other party making a claim for indemnity, subject to Federated’s right to challenge the other party’s claim. Further, Federated’s obligations under these agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated’s obligations and the unique facts and circumstances involved in each particular agreement. Management believes that if Federated were to incur a loss in any of these matters, such loss should not have a material effect on its business, financial position or results of operations.

(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 investigative committee of Federated’s board of directors. The special investigative 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.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

In February 2004, the Company announced that the special investigative committee of the Board of Directors had substantially completed its assessment of the impact 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. Approximately $7.0 million of this amount has been distributed to the funds in accordance with the findings of an independent expert retained by the funds’ board of directors. The Company, the funds and the funds’ independent counsel and independent expert continue to evaluate certain trading records for possible detrimental impact arising from the acceptance and processing of trades after the applicable deadline, none of which are believed to involve any arrangements to permit such trading activities. When this review is completed, the funds’ board of directors is expected to determine what distribution, if any, will be made to shareholders. 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 three and nine months ended September 30, 2004 reflect a $1.3 million and $10.6 million pretax charge, respectively, for various legal, regulatory and compliance matters. Of these amounts, $0.5 million and $7.0 million, respectively, represent costs incurred and estimated 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 remainder of the restoration fund. If actual experience differs significantly from the judgments used to determine the initial estimate, the amount accrued as of September 30, 2004 would be subject to further revision.

(d) Legal Proceedings

During the period October 2003 through September 2004, Federated was named as a defendant in 21 class action or derivative lawsuits filed on behalf of certain alleged shareholders in various Federated-sponsored mutual funds. Fourteen 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. On September 29, 2004, two amended consolidated complaints were filed in these proceedings. The first asserts claims on behalf of the shareholders of certain Federated mutual funds; the second asserts derivative claims on behalf of the Federated mutual funds. Both complaints premise their claims primarily on allegations that Federated permitted improper trading practices, including market timing and late trading in concert with certain institutional traders.

Four additional cases, alleging excessive advisory, Rule 12b-1 and other fees on behalf of certain Federated mutual funds, have been filed in or transferred to the U.S. District Court for the District of Western Pennsylvania. One additional case alleging improper and excessive fees has been filed in the Western District of Tennessee. Two cases have been dismissed voluntarily.

All of these lawsuits seek unquantified damages, attorneys’ fees and expenses. Federated intends to defend this litigation. The potential impact of these recent lawsuits and future potential similar suits is uncertain. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s financial position, results of operations or liquidity in the period in which the effect becomes reasonably estimable.

In addition, Federated has other claims asserted and threatened against it in the ordinary course of business. These claims are subject to inherent uncertainties. 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, results of operations or liquidity of Federated.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(14) Subsequent Events

On October 15, 2004, Federated received an additional $5.1 million related to the insurance recovery discussed in Note (5) Other Current Liabilities. Because the outcome of this claim is uncertain at this time, Federated will record the advance payment as a liability and will evaluate the contingency until it is resolved.

On October 28, 2004, the board of directors declared a dividend of $0.125 per share to be paid on November 15, 2004, to shareholders of record as of November 8, 2004. The board also approved a stock repurchase program which allows management to repurchase an additional 5.0 million shares of Class B Common Stock through the period ending December 31, 2006.

On October 28, 2004, Federated reached a definitive agreement to acquire the cash management business of Alliance Capital Management L.P. (Alliance). In connection with this acquisition, up to $29 billion in assets from 22 third-party-distributed money market funds of AllianceBernstein Cash Management Services will be transitioned into Federated money market funds. The boards of directors at both Federated and Alliance have approved the transaction, but it is still subject to approval by each mutual fund’s board of directors/trustees, the shareholders of each Alliance mutual fund and customary closing considerations. This transaction, which is expected to close in phases occurring between the first and third quarters of 2005, includes upfront cash payments totaling approximately $25 million due at the transaction closing dates as well as contingent purchase price payments payable over five years. The contingent purchase price payments will be calculated as a percentage of revenue less operating expenses directly attributed to these assets. At the current levels, these additional payments would approximate $103 million over five years. This acquisition will be accounted for using the purchase method of accounting.

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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 managers in the United States with $177.6 billion in managed assets as of September 30, 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, 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 certain distribution fee payments.

Federated’s remaining Other Services fees are based on fixed rates per transaction or retirement plan participant. Revenue relating to these services will vary with changes in the number of 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

On October 28, 2004, Federated reached a definitive agreement to acquire the cash management business of Alliance Capital Management L.P. (Alliance). In connection with this acquisition, up to $29 billion in assets from 22 third-party-distributed money market funds of AllianceBernstein Cash Management Services will be transitioned into Federated money market funds. See Note (14) to the Consolidated Financial Statements for more details.

On August 27, 2004, assets of four mutual funds previously advised by Banknorth N.A., a subsidiary of Banknorth Group, Inc., totaling approximately $265 million were acquired by four Federated-sponsored mutual funds. This transaction occurred in connection with an agreement between Federated, Banknorth Group, Inc. and Banknorth N.A.

On June 30, 2004, Federated completed the sale of its transfer agency function to an independent third-party provider of these services. The operating results of this business were reported net of tax as discontinued operations on the Consolidated Financial Statements included elsewhere in this report for all periods presented. See Note (2) to the Consolidated Financial Statements for details regarding this sale.

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 for the three- and nine-month periods ended September 30, 2003 included $4.2 million and $12.4 million, respectively, for these portfolio accounting 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