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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, 2005                            

OR

    For the transition period from                             to                             

Commission File Number         001-14818        

Federated Investors, Inc.

(Exact name of registrant as specified in its charter)

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 April 27, 2005, the Registrant had outstanding 9,000 shares of Class A Common Stock and 106,575,282 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 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; legal proceedings; future cash needs; accounting for intangible assets, loss contingencies and income taxes; market risk to investments and revenue; the impact of increased regulation; and the effect of rising interest rates on money market funds and other short-term duration fixed income products 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 costs associated with the internal review of mutual fund trading activities, other regulatory inquiries, legal proceedings and future cash needs will be impacted by any additional information requests from or fines or penalties paid to governmental agencies; the cost associated with private litigation; insurance costs; and the costs to implement regulatory changes; 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 and fixed-income funds. Certain 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 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, 2004, and other reports on file with the Securities and Exchange Commission

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P art 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

(dollars in thousands, except per share data)

(unaudited)

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 U.S. generally accepted accounting principles. In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.

In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from such estimates, and such differences may be material to the Consolidated 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, 2004. Certain items previously reported have been reclassified to conform with the current year presentation.

(b) Deferred Sales Commissions and Nonrecourse Debt

Federated pays upfront commissions to broker/dealers to promote the sale of certain mutual fund shares. Under various fund-related contracts, Federated is entitled to distribution and servicing fees from the mutual fund over the life of such shares. Both of these fees are calculated as a percentage of average managed assets associated with the related classes of shares. For these share classes, Federated is also entitled to receive a contingent deferred sales charge (CDSC), which is collected from certain redeeming shareholders.

For share classes that offer both a distribution fee and CDSC, excluding B-shares, Federated capitalizes all or a portion of the upfront commissions as deferred sales commissions, dependent upon expected recoverability rates. The deferred sales commission asset is amortized over the estimated period of benefit ranging from one to four years. The distribution and servicing fees are recognized in the Consolidated Statements of Income over the life of the mutual fund share class. CDSCs collected on these share classes are used to reduce the deferred sales commission asset.

For share classes that do not offer both a distribution fee and CDSC, Federated expenses the cost of the upfront commission in “Marketing and distribution” in the Consolidated Statements of Income as it is incurred and credits “Marketing and distribution” for any CDSCs collected.

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 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.

(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 principally on the net asset value of the

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

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 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 months ended March 31, 2005 and 2004 were $41.0 million and $43.1 million, respectively.

(d) Employee Stock-Based Compensation

Effective January 1, 2003, Federated adopted, on a prospective basis, the fair-value-based method of accounting for stock-based awards under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 123). As a result of this adoption, 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 zero to ten 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 three to ten years.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

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, 2005 and 2004. 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.

² During the first three months of 2004, significant forfeitures resulted in a pro forma credit to net income.

(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 March 31, 2005 and December 31, 2004, Federated did not hold any available-for-sale securities that were classified as long-term assets. Federated’s trading securities held at March 31, 2005 and December 31, 2004, are classified as current and are included in “Marketable securities” on the Consolidated Balance Sheets. 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, 2004, 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.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

In accordance with SFAS 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. Federated uses either the straight-line or an accelerated method of amortization after considering specific characteristics of the underlying fund shareholder base to forecast the pattern in which the economic benefits will be consumed, including fund 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 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

SFAS 123(R) – In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123(R)). SFAS 123(R) supersedes APB 25, and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123, which as discussed above in Note (1)(d), Federated adopted on a prospective basis as of January 1, 2003. However, SFAS 123(R) requires all share-based payments to employees, including prior grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Securities and Exchange Commission (SEC) announced in April 2005 that it would require that registrants that are not small business issuers adopt SFAS 123(R) no later than the beginning of the first fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued.

SFAS 123(R) permits public companies to adopt its requirements using one of two methods. (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date; or (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Federated plans to adopt SFAS 123(R) no later than January 1, 2006, but has not yet determined which method of adoption it will use. Federated adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Currently, Federated uses the Black-Scholes formula to estimate the value of stock options granted to employees and is evaluating the most appropriate valuation model to utilize (Black-Scholes or a lattice model) upon the required adoption of SFAS 123(R). Since (1) SFAS 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and (2) Federated adopted SFAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for certain previously granted awards that were not recognized under SFAS 123 will be recognized under SFAS 123(R). However, had Federated adopted SFAS 123 using the retroactive restatement method described in SFAS 148 in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note (1)(d). SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While Federated cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such tax deductions were $0.1 million and $21.2 million for the three months ended March 31, 2005 and 2004, respectively.

FSP 109-2 – In December 2004, the FASB issued Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2) which provides guidance with respect to reporting the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act). The Jobs Act provides conditions under which the repatriation of certain foreign earnings in either 2004 or 2005 will qualify for preferential tax treatment. If these conditions are met, a maximum 5.25% income tax rate rather than the maximum regular tax rate of 35% would apply to eligible repatriations of certain foreign earnings.

Federated is currently evaluating these provisions in conjunction with an analysis of its foreign earnings subject to tax upon repatriation to determine the feasibility of developing and implementing a plan that would qualify it for this preferential tax treatment. Additional interpretive guidance relating to the application of these provisions is anticipated and may impact the analysis that is expected to be completed in 2005. At this time, the amount under consideration for application of this one-time reduced tax rate ranges from $0 to $4.6 million resulting in an estimated impact to Federated’s federal income tax provision ranging from $0 to a benefit of approximately $1.4 million.

FSP EITF 85-24-1 – In March 2005, the FASB issued Staff Position EITF 85-24-1 “Application of EITF Issue No. 85-24, “Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” When Cash for the Right to Future Distribution Fees for Shares Previously Sold Is Received from Third Parties” (FSP EITF 85-24-1). FSP EITF 85-24-1 addresses when revenue should be recognized by the seller for sales of rights to future cash flows relating to certain distribution fees and is effective for reporting periods beginning after March 11, 2005. 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 CDSCs. For financial reporting purposes, these arrangements are currently treated as financings. Federated is currently evaluating the implications of this guidance and will adopt the provisions in the second quarter of 2005.

(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.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

The results of operations of the transfer agency business included in discontinued operations were as follows for the three months ended March 31:

For the quarter ended March 31, 2005, 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.

(3) Intangible Assets and Goodwill

Federated’s identifiable intangible assets consisted of the following:

¹ Weighted average amortization period of 10.4 years

² Weighted average amortization period of 6.3 years

³ Weighted average amortization period of 4.4 years

⁴ Weighted average amortization period of 9.4 years

Amortization expense for identifiable intangible assets for the three-month periods ended March 31, 2005 and 2004 was $2.5 million and $2.7 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, 2005 and December 31, 2004 was $263.7 million and $260.0 million, respectively. During the first quarter 2005, Federated recorded an additional $3.6 million of goodwill to account for the additional portion of the contingent purchase price to be paid in May 2005, but earned as of March 31, 2005 in connection with the acquisition of substantially all of the business of the former advisor of the Kaufmann Fund in 2001 (Kaufmann Acquisition). See Note (14) for details regarding the potential remaining payments. Approximately 89% of the goodwill balances at March 31, 2005 and December 31, 2004, respectively resulted from this acquisition.

(4) Other Current Liabilities - Other

Federated’s Other current liabilities – other at March 31, 2005, included $16.5 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 (14) for a discussion regarding the internal review). The retention of this advance payment is contingent upon

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

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 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.

Federated’s Other current liabilities – other at March 31, 2005 also included $6.7 million related to the first closing’s purchase price of the acquisition of the cash management business of Alliance Capital Management L.P. (Alliance Acquisition). See Note (13) for additional information on this acquisition.

(5) Recourse Debt

Federated’s total recourse debt balance of $0.3 million and $0.5 million at March 31, 2005 and December 31, 2004, respectively, represented liabilities on capital leases. The capital leases carry interest rates ranging from 2.90% to 3.76% with weighted-average interest rates of 3.45% and 3.60% at March 31, 2005 and December 31, 2004, respectively. The three capital leases outstanding at March 31, 2005 have expiration dates that range from the third quarter 2005 to the first quarter 2006.

As of March 31, 2005, 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.

(6) 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 (See Note (1)(b)):

¹ As of March 31, 2005

² As of December 31, 2004

In December 2003, Federated signed an agreement with an independent financial institution to continue funding the B-share sales commissions through December 2006.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(7) Common Stock

(a) Cash Dividends and Stock Repurchases

Cash dividends of $0.125 per share or approximately $13.3 million were paid in the first quarter of 2005 to holders of common shares.

Federated repurchased 672,100 shares of its stock as part of its current share buyback programs during the three months ended March 31, 2005. As of March 31, 2005, Federated can repurchase approximately 5.1 million additional shares under the board-approved programs, of which 0.1 million shares will expire on April 30, 2005 due to the expiration of the time limit on one of the board-approved programs.

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, 2005, Federated had the ability to make additional stock repurchase and dividend payments of more than $108 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 March 31, 2005, a total of 73,048 shares had been purchased by employees in this plan since the plan’s inception.

(c) Employee Stock-Based Compensation

During the first quarter of 2005, Federated awarded 212,796 shares of restricted Federated Class B common stock in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under the Stock Incentive Plan. This restricted stock was granted at a 15% discount from the fair market value of Federated’s stock price on the bonus payment date, was issued out of treasury and will vest over a three-year period. During the same time period, 2,000 and 51,000 shares of restricted stock and employee stock options, respectively were forfeited and 10,896 employee stock options were exercised by purchasing shares out of treasury.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

(8) Income Taxes

The reconciliation between the Federal statutory income tax rate and Federated’s effective income tax rate attributable to continuing operations consisted of the following for the three-month periods ended March 31:

¹ The Consolidated Financial Statements for the quarters ended March 31, 2005 and 2004 reflect a $52.9 million and $4.3 million pretax charge, respectively, for various legal, regulatory and compliance matters, including costs incurred and estimated to complete Federated’s internal review, as well as costs incurred on behalf of the funds. Of the amount for the quarter ended March 31, 2005, $50.6 million relates to management’s revised estimate of the costs relating to anticipated settlements of governmental investigations concerning market timing and late trading allegations (Settlement Charges) of $17.4 million and $7.6 million recorded during 2004 and 2003, respectively. Neither the SEC nor any state attorney general’s office has passed on the establishment or amount of these Settlement Charges. 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 settlement negotiations. If actual experience differs significantly from the judgments used to determine the initial estimates, the amount accrued as of March 31, 2005 would be subject to further revision. In addition, Federated’s management is unable to estimate the ultimate impact of any settlement proceedings, including the tax deductibility of these costs, and therefore final resolution of these matters may have a material impact on Federated’s consolidated results of operations, financial position or cash flows.

(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 March 31, 2005 and 2004, options to purchase 2.1 million and 1.2 million shares of common stock, respectively, at a weighted-average exercise price per share of $31.92 and $33.65, 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. 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 $6.9 million and $51.7 million for the quarters ended March 31, 2005 and 2004, respectively.

(11) Variable Interest Entities

At March 31, 2005, Federated acted as the investment manager for two high-yield CDO products pursuant to the terms of an investment management agreement between Federated and each CDO. The CDOs 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 CDOs are subject to greater risk than traditional investment products. The notes issued by the CDOs are backed by diversified portfolios consisting primarily of structured debt and had original stated maturities of 12 years. As a result of their corporate governance, the CDOs meet the definition of a variable interest entity (VIE) under FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46). After performing an expected cash flow analysis for each CDO, management determined that Federated is not the primary beneficiary of the CDOs as defined by FIN 46 and thus has not consolidated the financial condition and results of operations of these CDOs in Federated’s Consolidated Financial Statements. As of March 31, 2005, aggregate total assets and aggregate total obligations of the CDOs approximated $400 million and $500 million, respectively.

Federated holds an investment in each CDO, which exposes it to risk of loss to the extent of the carrying value of the investments. As of March 31, 2005, Federated had no remaining carrying value of these investments.

In addition, a number of Federated-sponsored investment products, including Irish-domiciled 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 March 31, 2005, 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, 2005, Federated’s investment in these investment products was $26.7 million, of which $26.5 million was invested in Irish-domiciled money market funds.

(12) Related Party Transactions

Federated has classified certain entities as affiliates in accordance with SFAS 57 “Related Party Disclosures.”

At March 31, 2005 and December 31, 2004, Receivables—affiliates totaled $30.4 million and $30.8 million, respectively and Accrued revenue—affiliates totaled $2.0 million and $1.1 million, respectively relating to services provided to various Federated products.

At March 31, 2005 and December 31, 2004, Accounts payable and accrued expenses—affiliates totaled $29.2 million and $10.3 million, respectively. The balance at March 31, 2005 is primarily composed of $26.2 million related to the internal review and estimated settlement related to past mutual fund trading practices (see Note (14)), $1.2 million related to remedial actions in connection with various fund transactions and trading issues and $0.5 million related to distribution fees payable to Federated Asset Management GmbH (FAM). The balance at December 31, 2004 is primarily composed of $3.6 million related to the internal review and estimated settlement related to past mutual fund trading practices, $3.3

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

million related to shareholder service fees payable to various Federated funds resulting from an administrative delay in the implementation of contractual terms, $2.0 million related to remedial actions in connection with various fund transactions and trading issues and $0.6 million related to distribution fees payable to FAM.

At March 31, 2005 and December 31, 2004, Other current liabilities—affiliates totaled $33.1 million and $29.5 million, respectively and represented the accrual for the contingent purchase price payment earned as of those periods ended related to the Kaufmann Acquisition (see Note (3)).

At March 31, 2005 and December 31, 2004, Other long-term liabilities—affiliates totaled $12.0 million and $4.0 million, respectively and represented the long-term portion of management’s current estimate of the costs relating to the Settlement Charges (see Note (14)).

(13) Business Combinations and Acquisitions

In the fourth quarter 2004, Federated reached a definitive agreement to acquire the cash management business of Alliance Capital Management L.P. (Alliance). Currently, in connection with this acquisition, up to approximately $22 billion in assets from 22 third-party-distributed money market funds of AllianceBernstein Cash Management Services is expected to be transitioned into Federated money market funds. This transaction has been approved by the boards of directors of both Federated and Alliance, as well as by each mutual fund’s board of directors/trustees. This transaction, which is expected to close in phases by the end of the second quarter of 2005, includes upfront cash payments totaling approximately $25.8 million due at the transaction closing dates (of which $0.7 million was paid in the first quarter of 2005) as well as contingent purchase price payments payable over five years. The contingent purchase price payments will be calculated as 1) a percentage of annual revenues less operating expenses over the five-year period directly attributed to these assets and 2) a one-time payment payable if certain net revenue targets are met. At the current levels, these additional payments would approximate $68 million over five years. This acquisition is being accounted for using the purchase method of accounting. In the first quarter 2005, approximately $821 million of third-party-distributed money market fund assets were transitioned into Federated money market funds in connection with the Alliance Acquisition. In connection with the first closing, Federated paid $0.7 million as upfront purchase price and has recorded a $2.2 million investment advisory contract intangible asset. This asset is being amortized on an accelerated basis over a seven-year useful life. Federated also recorded an intangible asset of $5.8 million for the non-compete agreement obtained from Alliance. This asset is being amortized on a straight-line basis over a seven-year useful life. In connection with these intangible assets, Federated recorded $6.7 million in Other current liabilities – other as of March 31, 2005.

(14) Commitments and Contingencies

(a) Contractual

Pursuant to various acquisition agreements, Federated is required to make additional payments to the seller contingent upon the occurrence of certain events. In 2001, Federated completed the Kaufmann Acquisition. Pursuant to this acquisition agreement, Federated could pay an additional $66.2 million as contingent purchase price ($33.1 million of which is accrued at March 31, 2005 (see Note (3))) and $13.4 million as contingent incentive compensation ($6.4 million of which is accrued at March 31, 2005) between 2005 and 2007 if certain revenue targets are met. The purchase price payments are recorded as additional goodwill at such time as performance targets have been met, while the incentive compensation payments are recognized as compensation expense during the periods in which the payments are earned.

In 2005, Federated completed the first of anticipated multiple closings related to the Alliance Acquisition. The contingent purchase price payments will be calculated as 1) a percentage of annual revenues less operating expenses over the five-year period directly attributed to these assets and 2) a one-time payment payable if certain net revenue targets are met. These contingent purchase price payments could be paid annually from 2006 through 2010.

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Pursuant to certain other 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 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 Office for the Western District of Pennsylvania, 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 currently comprised of the board as a whole. 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 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 paid restoration of $8.0 million to compensate for the detrimental impact from the improper trading activities identified in the review. Federated has substantially completed its review of information relating to trading activities.

Federated announced on January 24, 2005 that it was in settlement discussions with the SEC and New York State Attorney General.

The Consolidated Financial Statements for the quarters ended March 31, 2005 and 2004 reflect a $52.9 million and $4.3 million pretax charge, respectively, for various legal, regulatory and compliance matters, including costs incurred and estimated to complete Federated’s internal review, as well as costs incurred on behalf of the funds. Of the amount for the quarter ended March 31, 2005, $50.6 million relates to management’s revised estimate of the Settlement Charges of $17.4 million and $7.6 million recorded during 2004 and 2003, respectively. Neither the SEC nor any state attorney general’s office has passed on the establishment or amount of these Settlement Charges. 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 settlement negotiations. If actual experience differs significantly from the judgments used to determine the initial estimates, the amount accrued as of March 31, 2005 would be subject to further revision. In addition, Federated’s management is unable to estimate the

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Notes to the Consolidated Financial Statements (continued)

(Unaudited)

ultimate impact of any settlement proceedings, including the tax deductibility of these costs, and therefore final resolution of these matters may have a material impact on Federated’s consolidated results of operations, financial position or cash flows.

(d) Legal Proceedings

Since October 2003, Federated Investors, Inc. and related entities (collectively, the Federated Defendants) have been named as defendants in twenty-one cases filed in various federal district courts and state courts involving allegations relating to market timing, late trading and excess fees. All of the pending cases involving allegations related to market timing and late trading have been transferred to the U.S. District Court for the District of Maryland and consolidated for pre-trial proceedings. One market timing/late trading case was voluntarily dismissed by the plaintiff without prejudice.

The six excessive fee cases were originally filed in four different federal courts and one state court. Five of the federal cases are now pending in the U.S. District Court for the Western District of Pennsylvania. The state court case was voluntarily dismissed by the plaintiff without prejudice.

In addition to the market timing and excessive fee litigation, certain Federated entities have recently been named defendants in a new class action filed in the U.S District Court for the Eastern District of Pennsylvania. Plaintiffs in this case claim that Federated has failed to ensure that the Federated Funds participated in class action settlements for which they were eligible.

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 other 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.

(15) Subsequent Events

On April 28, 2005, the board of directors declared a dividend of $0.15 per share to be paid on May 13, 2005, to shareholders of record as of May 9, 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, 2004.

General

Federated Investors, Inc. (together with its subsidiaries, “Federated”) is one of the largest investment managers in the United States with $179.0 billion in managed assets as of March 31, 2005. 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 servicing, trade clearing and retirement plan recordkeeping services (collectively, Other Services).

Investment advisory fees, administrative fees 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 advisory 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 operating 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 recurring operating expenses include compensation and related costs, which represent fixed and variable compensation and related employee benefits, and marketing and distribution costs.

Business Developments

The Consolidated Financial Statements for the quarters ended March 31, 2005 and 2004 reflect a $52.9 million and $4.3 million pretax charge, respectively, for various legal, regulatory and compliance matters, including costs incurred and estimated to complete Federated’s internal review, as well as costs incurred on behalf of the funds. Of the amount for the quarter ended March 31, 2005, $50.6 million relates to management’s revised estimate of the costs relating to anticipated settlements of governmental investigations concerning market timing and late trading allegations (Settlement Charges) of $17.4 million and $7.6 million recorded during 2004 and 2003, respectively. Neither the Securities and Exchange Commission (SEC) nor any state attorney general’s office has passed on the establishment or amount of these Settlement Charges. 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 settlement negotiations. If actual experience differs significantly from the judgments used to determine the initial estimates, the amount accrued as of March 31, 2005 would be subject to further revision. In addition, Federated’s management is unable to estimate the ultimate impact of any settlement proceedings, including the tax deductibility of

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Management’s Discussion and Analysis (continued)

of Financial Condition and Results of Operations (Unaudited)

these costs, and therefore final resolution of these matters may have a material impact on Federated’s consolidated results of operations, financial position or cash flows.

In the fourth quarter 2004, Federated reached a definitive agreement to acquire the cash management business of Alliance Capital Management L.P. (Alliance Acquisition). Currently in connection with this acquisition, up to approximately $22 billion in assets from 22 third-party-distributed money market funds of AllianceBernstein Cash Management Services is expected to be transitioned into Federated money market funds. This transaction has been approved by the boards of directors of both Federated and Alliance, as well as by each mutual fund’s board of directors/trustees. This transaction, which is expected to close in phases by the end of the second quarter of 2005, includes upfront cash payments totaling approximately $25.8 million due at the transaction closing dates (of which $0.7 million was paid in the first quarter of 2005) as well as contingent purchase price payments payable over five years. The contingent purchase price payments will be calculated as 1) a percentage of annual revenues less operating expenses over the five-year period directly attributed to these assets and 2) a one-time payment payable if certain net revenue targets are met. At the current levels, these additional payments would approximate $68 million over five years. This acquisition is being accounted for using the purchase method of accounting. In the first quarter 2005, approximately $821 million of third-party-distributed money market fund assets were transitioned into Federated money market funds in connection with the Alliance Acquisition. In connection with the first closing, Federated paid $0.7 million as upfront purchase price and has recorded a $2.2 million investment advisory contract intangible asset. This asset is being amortized on an accelerated basis over a seven-year useful life. Federated also recorded an intangible asset of $5.8 million for the non-compete agreement obtained from Alliance. This asset is being amortized on a straight-line basis over a seven-year useful life. In connection with these intangible assets, Federated recorded $6.7 million in “Other current liabilities – other” as of March 31, 2005.

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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