FEDERATED INVESTORS INC /PA/ (Form: 10-K, Received: 02/22/2011 16:50:34)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-14818

FEDERATED INVESTORS, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		25-1111467
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Federated Investors Tower Pittsburgh, Pennsylvania		15222-3779
(Address of principal executive offices)		(zip code)

412-288-1900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Class B Common Stock, no par value		New York Stock Exchange
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

The aggregate market value of the Class B Common Stock held by non-affiliates of the registrant as of June 30, 2010 was approximately $1.8 billion, based on the last reported sales price of $20.71 as reported by the New York Stock Exchange. For purposes of this calculation, the registrant has deemed all of its executive officers and directors to be affiliates, but has made no determination as to whether any other persons are affiliates within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number of shares of Class A and Class B Common Stock outstanding on February 16, 2011, was 9,000 and 104,037,459, respectively.

Documents incorporated by reference:

Selected portions of the 2010 Annual Report to Shareholders – Part I, Part II and Part IV of this Form 10-K.

Selected portions of the 2011 Information Statement – Part III of this Form 10-K.

Table of Contents


		Page
Part I
Item 1	Business		3
Item 1A	Risk Factors		13
Item 1B	Unresolved Staff Comments		13
Item 2	Properties		13
Item 3	Legal Proceedings		13

Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6	Selected Financial Data		16
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		16
Item 8	Financial Statements and Supplementary Data		16
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		16
Item 9A	Controls and Procedures		16
Item 9B	Other Information		16

Part III
Item 10	Directors, Executive Officers and Corporate Governance		17
Item 11	Executive Compensation		17
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		17
Item 13	Certain Relationships and Related Transactions, and Director Independence		17
Item 14	Principal Accountant Fees and Services		18

Part IV
Item 15	Exhibits, Financial Statement Schedules		18

Signatures			23

Exhibit Index			25

Part I

ITEM 1 – BUSINESS

General

Federated Investors, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated), is a leading provider of investment management products and related financial services. Federated has been in the investment management business since 1955 and is one of the largest mutual fund managers in the United States with $358.2 billion in assets under management at December 31, 2010.

Federated sponsors, markets and provides investment-related services to various investment products, including mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products). Federated’s principal source of revenue is investment advisory fee income earned by various subsidiaries of Federated pursuant to investment advisory contracts with the investment products. These subsidiaries are registered as investment advisers under the Investment Advisers Act of 1940 (Advisers Act). Investment advisers are compensated for their services in the form of investment advisory fees based primarily upon the assets under management of the investment products.

Federated provided investment advisory services to 136 Federated-sponsored funds (the Federated Funds) as of December 31, 2010. Federated markets these funds to banks, broker/dealers and other financial intermediaries who use them to meet the needs of their customers, including retail investors, corporations and retirement plans. The funds sponsored by Federated are domiciled in the U.S., with the exception of Federated International Funds Plc and Federated Unit Trust, which are domiciled in Dublin, Ireland. Most of Federated’s U.S.-domiciled funds are registered under the Investment Company Act of 1940 (Investment Company Act) and under applicable federal laws. Each of the U.S.-domiciled funds enters into an advisory agreement that is subject to annual approval by the fund’s board of directors or trustees, a majority of whom are not interested persons of the funds or Federated as defined under the Investment Company Act. In general, material amendments to such advisory agreements must be approved by the funds’ shareholders. A significant portion of Federated’s revenue is derived from these advisory agreements, which generally are terminable upon 60 days notice to the investment adviser.

Of the 136 Federated Funds as of December 31, 2010, Federated’s investment advisory subsidiaries managed 49 money market funds totaling $244.8 billion in assets under management, 50 fixed-income funds with $31.9 billion in assets under management and 37 equity funds with $22.6 billion in assets under management.

As of December 31, 2010, Federated provided investment advisory services to $48.2 billion in Separate Account assets. These Separate Accounts represent assets of high-net-worth individuals, government entities, pension and other employee benefit plans, corporations, trusts, foundations, endowments, mutual funds and other products sponsored by third parties. Fees for Separate Accounts are typically based on assets under management pursuant to investment advisory agreements that may be terminated at any time.

In addition, Federated managed liquidation portfolios which include portfolios of distressed fixed-income securities. In the distressed security category, Federated has been retained by third parties to manage these assets through an orderly liquidation process that will generally occur over a multi-year period. As of December 31, 2010, Federated managed four liquidation portfolios with $10.7 billion in assets.

Certain Federated Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated for distribution expenses, including sales commissions paid to broker/dealers. These distribution plans are implemented through a distribution agreement between Federated and each respective fund. Although the specific terms of each such agreement vary, the basic terms of the agreements are similar. Pursuant to the agreements, Federated acts as underwriter for the funds and distributes shares of the funds primarily through unaffiliated dealers. Each distribution plan and agreement is initially approved by the directors or trustees of the respective fund and is reviewed for approval by such directors or trustees annually.

Federated also provides a broad range of services to support the operation and administration of the Federated Funds. These services, for which Federated receives fees pursuant to agreements with the Federated Funds, include administrative services, shareholder servicing and general support.

Total Managed Assets (composed of Federated Funds, Separate Accounts and Liquidation Portfolios) represent the balance of assets under management at a point in time. Total Managed Assets for the past three years were as follows:

Managed Assets by Asset Type


	As of December 31,
(dollars in millions)	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Money Market	$	276,026	$	313,260	$	355,658		(12	%)		(12	%)
Fixed-Income		40,705		33,787		23,486		20	%		44	%
Equity		30,802		29,673		26,661		4	%		11	%
Liquidation Portfolios		10,708		12,596		1,505		(15	%)		737	%

Total Managed Assets	$	358,241	$	389,316	$	407,310		(8	%)		(4	%)

Average Managed Assets represent the average balance of assets under management during a period of time. Because substantially all revenue and distribution expense are generally calculated daily based on assets under management, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period. Average Managed Assets for the past three years were as follows:

Average Managed Assets by Asset Type


	Year ended December 31,
(dollars in millions)	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Money Market	$	268,701	$	343,265	$	283,901		(22	%)		21	%
Fixed-Income		37,690		28,684		22,628		31	%		27	%
Equity		29,104		26,680		34,363		9	%		(22	%)
Liquidation Portfolios		11,579		6,966		1,629		66	%		328	%

Total Average Managed Assets	$	347,074	$	405,595	$	342,521		(14	%)		18	%

Changes in Federated’s average asset mix year-over-year across both asset and product types have a direct impact on Federated’s operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates per invested dollar earned on each asset and product type. Equity products generally have a higher management-fee rate than fixed-income products, money market products and liquidation portfolios. Likewise, mutual fund products typically earn a higher management-fee rate than Separate Accounts. Similarly, traditional separate accounts typically have a higher management-fee rate than liquidation portfolios. Additionally, certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than managed assets in equity or fixed-income funds.

Federated’s revenues from investment advisory, administrative and other service fees provided under agreements with the Federated Funds and other entities over the last three years were as follows:

Revenue from Continuing Operations


	Year ended December 31,						2010 vs. 2009			2009 vs. 2008
(dollars in thousands)	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Investment advisory fees, net	$	639,404	$	749,823	$	775,381		(15	%)		(3	%)
Administrative service fees, net		215,715		262,788		222,053		(18	%)		18	%
Other service fees, net		94,035		158,999		221,327		(41	%)		(28	%)
Other, net		2,789		4,340		4,919		(36	%)		(12	%)

Total revenue	$	951,943	$	1,175,950	$	1,223,680		(19	%)		(4	%)

As of December 31, 2010, Federated has the following revenue concentrations:

Revenue concentration by asset class – Approximately 50% of Federated’s total revenue for 2010 was attributable to money market assets. A significant change in Federated’s money market business or a significant reduction in money market assets due to regulatory changes, changes in the financial markets including significant increases in interest rates over a short period of time, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

Through the adverse market conditions of 2008, Federated’s government agency and treasury money market funds experienced significant asset inflows. These funds grew as certain investors favored the perceived safety and liquidity of portfolios backed by government securities over other investment products. In certain products, the gross yield is not sufficient to cover all of the fund’s normal operating expenses. During the fourth quarter 2008, Federated began waiving fees in order for certain funds to maintain positive or zero net yields.

During 2010, fee waivers to maintain positive or zero net yields totaled $241.6 million and were partially offset by a related reduction in distribution expenses of $186.6 million such that the net impact to Federated was $55.0 million in reduced operating income. The impact of these fee waivers for 2010 was significantly more than the impact for 2009 with $120.6 million in waived fees, $86.4 million in reduced distribution expenses and a net impact on operating income of $34.2 million and the impact for 2008 with $3.6 million in waived fees, $1.9 million in reduced distribution expenses and a net impact on operating income of $1.7 million. (See Note (24) to the Consolidated Financial Statements for information regarding the quarterly operating income impact of the fee waivers.) Management expects the fee waivers and the related reduction in distribution expense will continue into 2011 and will likely be material. Management does not expect the quarterly operating income impact from these waivers for the first quarter of 2011 to change materially from the $12.3 million experienced in the fourth quarter 2010. These fee waivers are expected to decrease over time as the market begins to factor in the potential for increases in short-term interest rates and then again when the Federal Reserve begins to increase interest rates. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the operating income impact of these waivers by about one-third from the current levels and a 25-basis-point increase would reduce the impact by about two-thirds. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in expenses of the money market funds, changes in the mix of money market customer assets and Federated’s willingness to continue the fee waivers.

Revenue concentration by product – Approximately 12% of Federated’s total revenue for 2010 was derived from services provided to one sponsored fund (Federated Kaufmann Fund). A significant and prolonged decline in the assets under management in this fund could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to distribution expenses associated with this fund.

Revenue concentration by customer – Approximately 12% of Federated’s total revenue for 2010 was derived from services provided to one intermediary customer, the Bank of New York Mellon Corporation (including its Pershing subsidiary). Significant changes in Federated’s relationship with this customer could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to related material reductions to distribution expenses associated with this intermediary.

Federated’s revenues from domestic and foreign operations over the last three years were as follows:

Revenue from Continuing Operations


	Year ended December 31,						2010 vs. 2009			2009 vs. 2008
(dollars in thousands)	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Domestic	$	929,903	$	1,140,956	$	1,178,508		(18	%)		(3	%)
Foreign		22,040		34,994		45,172		(37	%)		(23	%)

Total revenue	$	951,943	$	1,175,950	$	1,223,680		(19	%)		(4	%)

Investment Products

Federated offers a wide range of products, including money market, equity and fixed-income investments. Federated’s mix includes products that Federated expects to be in demand under a variety of economic and market conditions. Federated has structured its investment process to meet the requirements of fiduciaries and others who use Federated’s products to meet the needs of their customers. Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.

Federated is one of the largest U.S. managers of money market assets, with $276.0 billion in such assets under management at December 31, 2010. Federated has developed expertise in managing cash for institutions, which typically have stringent requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated has managed money market funds for over 35 years and began selling money market fund products to institutions in 1974. Federated also manages retail money market products that are typically distributed through broker/dealers. Federated manages money market assets in the following asset classes: government ($127.2 billion); prime ($121.1 billion); and tax free ($27.7 billion).

Federated’s fixed-income assets totaled $40.7 billion at December 31, 2010 and are managed in a wide range of sectors including multi-sector ($16.2 billion); municipal ($5.9 billion); U.S. government ($5.7 billion); U.S. corporate ($4.4 billion); mortgage-backed ($3.4 billion); high-yield ($2.9 billion); and international/global ($2.2 billion). Federated’s fixed-income products offer fiduciaries and others a broad range of highly defined products designed to meet their investment needs.

Equity assets totaled $30.8 billion at December 31, 2010 and are managed across a wide range of styles including growth ($10.7 billion); value ($8.6 billion); blend ($4.9 billion); alternative ($2.8 billion); and international/global ($2.3 billion). Federated also manages assets in balanced and asset allocation funds ($1.5 billion). These asset allocation funds may include fixed-income assets.

Federated’s liquidation portfolios totaled $10.7 billion at December 31, 2010.

Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative research analysts. Federated’s proprietary, independent investment research process is centered on the integration of several fundamentals: fundamental research and credit analysis, quantitative research models, style-consistent and disciplined portfolio construction and management, performance attribution and trading.

Distribution Channels

Federated’s distribution strategy is to provide products geared toward financial intermediaries, primarily banks, broker/dealers and investment advisers and directly to institutions such as corporations and government entities. Federated provides comprehensive investment management to approximately 5,000 institutions and intermediaries including corporations, government entities, insurance companies, foundations, endowments, banks and broker/dealers. Federated uses its trained sales force of approximately 180 representatives and managers to add new customer relationships and strengthen and expand existing relationships.

Product Markets

Federated’s investment products are primarily distributed in three markets. These markets and the relative percentage of managed assets at December 31, 2010 attributable to such markets are as follows: wealth management and trust (51%), broker/dealer (29%) and global institutional (18%).

Wealth Management & Trust, Global Capital Markets and Institutional Cash. Federated pioneered the concept of providing liquidity management to bank trust departments through money market mutual funds over 35 years ago, and has since expanded our services nationwide to institutional cash management and treasury professionals, as well as financial professionals. Today, wealth management professionals across all of these types of firms use a broad range of Federated’s equity and fixed-income funds to invest the assets over which they have discretion.

The majority of Federated’s Managed Assets from the wealth management channel are invested in money market funds. In allocating investments across various asset classes, investors typically maintain a portion of their portfolios in cash or cash equivalents, including money market funds, irrespective of trends in bond or stock prices. In addition, Federated offers an extensive menu of equity and fixed-income mutual funds and Separate Accounts structured for the wealth management and trust market. In addition to bank trust departments and registered investment advisory firms, Federated provides products and services to capital markets clients (institutional brokerages generally within banks) and directly to cash management and treasury departments at major corporations and government entities.

Federated employs a dedicated sales force backed by an experienced support staff to offer products and services to the wealth management and trust market. As of December 31, 2010, Managed Assets in this market included $162.2 billion in money market assets, $13.7 billion in fixed-income assets and $5.3 billion in equity assets.

Broker/Dealer. Federated distributes its products in this market through a large, diversified group of approximately 1,500 national, regional and independent broker/dealers and bank broker/dealers. Federated maintains sales staff dedicated to calling on broker/dealers, bank broker/dealers and insurance interests. Broker/dealers use Federated’s products to meet the needs of their customers, who are typically retail investors. Federated offers products with a variety of commission structures that enable brokers to offer their customers a choice of pricing options. Federated also offers money market mutual funds as cash management products designed for use by its broker/dealer clients. As of December 31, 2010, Managed Assets in the broker/dealer market included $72.1 billion in money market assets, $17.6 billion in equity assets and $14.8 billion in fixed-income assets.

Global Institutional. Federated maintains a dedicated sales staff to focus on the distribution of its products to a wide variety of global institutional customers: corporations, corporate and public pension funds, government entities, foundations, endowments, hospitals, and non-Federated investment companies. Federated includes institutional assets gathered in the U.S. in this market, as well as assets gathered from customers outside the U.S. through Federated Investors (U.K.) Ltd. and Federated Asset Management GmbH. As of December 31, 2010, Managed Assets in the global institutional market included $39.0 billion in money market assets, $10.7 billion in liquidation portfolios, $10.6 billion in fixed-income assets and $3.7 billion in equity assets.

Competition

The investment management business is highly competitive. Competition is particularly intense among mutual fund providers. According to the Investment Company Institute, at the end of 2010, there were approximately 7,500 open-end mutual funds of varying sizes and investment objectives whose shares are currently being offered to the public both on a sales-load and no-sales-load basis. In addition to competition from other mutual fund managers and investment advisers, Federated and the mutual fund industry compete with investment alternatives offered by insurance companies, commercial banks, broker/dealers, other financial institutions, hedge funds and exchange traded funds.

Competition for sales of investment products is influenced by various factors, including investment performance, in terms of attaining the stated objectives of the particular products and in terms of fund yields and total returns, advertising and sales promotional efforts, investor confidence and type and quality of services.

Regulatory Matters

Federated and its investment management business are subject to extensive regulation in the United States and abroad. Federated and the Federated Funds are subject to Federal securities laws, principally the Securities Act of 1933, the Investment Company Act and the Advisers Act, state laws regarding securities fraud, and regulations promulgated by various regulatory authorities, including the Securities and Exchange Commission (the SEC), the Financial Industry Regulatory Authority (FINRA), and the New York Stock Exchange (the NYSE). Federated is also affected by the regulations governing banks and other financial institutions and, to the extent operations take place outside the United States, by foreign laws and regulatory authorities. Changes in laws, regulations or governmental policies, and the costs associated with compliance, could materially and adversely affect the business and operations of Federated.

From time to time, the Federal securities laws have been augmented substantially. For example, among other measures, Federated has been impacted by the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001 and the Gramm-Leach-Bliley Act of 1999. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted into law on July 21, 2010. Under the Dodd-Frank Act, Federated, as well as mutual funds, continue to be primarily regulated by the SEC. The Dodd-Frank Act provides, however, for a new systemic risk regulation regime under which it is possible that Federated and/or any one or more of its mutual funds could be designated by a newly created Financial Stability Oversight Council (FSOC) for enhanced prudential regulation by the Federal Reserve Board, in addition to primary regulation by the SEC. Examples of regulatory changes that could occur are the creation of capital requirements for designated investment advisers or money market funds, and/or a change in the rules governing money market mutual fund net asset value (NAV) calculations including the elimination of amortized cost accounting, which would result in fluctuating NAVs for money market mutual funds. Certain of these regulatory changes, if implemented, such as a change to fluctuating NAVs for money market mutual funds, could have a material adverse affect on the business and operations of Federated. Other provisions of the Dodd-Frank Act may affect intermediaries in their sale or use of Federated’s products. Prior to complete implementation, it will be difficult to assess the full impact of the Dodd-Frank Act on Federated.

In addition, during the past few years the SEC, FINRA and the NYSE have adopted regulations that have increased Federated’s operating expenses and affected the conduct of its business, and may continue to do so. In January 2010, the SEC adopted amendments to Rule 2a-7 of the Investment Company Act which could impact the operation of certain Federated Funds, although Federated does not expect any such impact to Federated or the Federated Funds to be material. Other significant regulations or amendments to regulations (such as proposed changes to Rule 12b-1 of the Investment Company Act) have been proposed and, if adopted, will affect Federated and the Federated Funds, and Federated anticipates that other reforms and regulatory actions affecting Federated and/or the mutual fund industry are likely to occur.

On October 21, 2010, the President’s Working Group issued its report on Money Market Fund Reform Options (the Report). The President’s Working Group was tasked with studying possible reforms relating to money market funds that could mitigate systemic risk in the financial markets (including the potential for disruption in the financial markets caused by rapid shareholder redemptions in money market funds). The Report discusses the conditions that could cause money market funds to experience rapid shareholder redemptions and describes the advantages and

disadvantages of a variety of policy options that could reduce the risk of such rapid redemptions. The Report suggests that the FSOC examine these options as part of its implementation of the Dodd-Frank Act. At this time, it is difficult to assess what impact, if any, the Report’s recommendations will have on Federated.

Over the past few years, various service industries, including mutual fund service providers, have been the subject of changes in tax policy that impact their state and local tax liability. Changes that have been adopted or proposed include (1) an expansion of the nature of a service company's activities that subject it to tax in a jurisdiction, (2) a change in the methodology by which multi-state companies apportion their income between jurisdictions, and (3) a requirement that affiliated companies calculate their state tax as one combined entity. As adopted changes become effective and additional jurisdictions effect similar changes, there could be a material adverse effect on Federated's tax liability and effective tax rate and, as a result, net income.

The federal, state and foreign laws and regulations applicable to most aspects of Federated’s business are primarily intended to benefit or protect Federated’s customers and the funds’ shareholders and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict Federated from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, suspension or revocation of licenses or registrations, including broker/dealer licenses and registrations, as well as the imposition of civil fines and penalties and in certain limited circumstances, prohibition from acting as an adviser to registered investment companies.

For further details regarding recent regulatory matters, see Note (22)(c) and (d) to the Consolidated Financial Statements incorporated by reference in Item 8 of Part II of this Form 10-K.

Employees

At December 31, 2010, Federated employed 1,334 persons.

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K and the 2010 Annual Report to Shareholders, including those related to asset flows and business mix; obligations to make additional contingent payments pursuant to acquisition agreements; obligations to make additional payments pursuant to employment arrangements; legal proceedings; future cash needs and management’s expectations regarding borrowing; future principal uses of cash; performance indicators; impact of accounting policies and new accounting pronouncements; concentration risk; indemnification obligations; the impact of increased regulation; the prospect of increased distribution-related expenses; management’s expectations regarding fee waivers and the impact of such waivers on revenues and net income; the ability to raise additional capital; the rising costs of risk management; possible impairment charges; tax liability and the realization of deferred tax assets; capital losses; the impact of the interest rate swap and the various items set forth under the section entitled Risk Factors 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, market conditions may change significantly resulting in changes to Federated’s asset flows and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on certain growth and fund performance targets and will be affected by the achievement of such targets, and the obligation to make additional payments pursuant to employment agreements is based on satisfaction of certain conditions set forth in those agreements. Future cash needs and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in distributing its products, the resolution of pending litigation, potential increases in costs relating to risk management, as well as potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated’s products to customers. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in market values of assets under management and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of the ongoing threat of terrorism and the increased scrutiny of the mutual fund industry by federal and state regulators, and the recent and ongoing disruption in global financial markets. 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 more information on these items, see the section entitled Risk Factors under Item 7 of Part II, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Officers

The following section sets forth certain information regarding the executive officers of Federated as of February 22, 2011:


Name	Position	Age
John F. Donahue	Chairman and Director	86

J. Christopher Donahue	President, Chief Executive Officer and Director	61

Brian P. Bouda	Vice President and Chief Compliance Officer	63

Gordon J. Ceresino	Vice Chairman and President, Federated International Management Limited	53

Thomas R. Donahue	Vice President, Treasurer and Chief Financial Officer and President, FII Holdings, Inc.	52

John B. Fisher	Vice President and President and Chief Executive Officer of Federated Advisory Companies*	54

Eugene F. Maloney	Executive Vice President and Executive Vice President, Federated Investors Management Company	65

Denis McAuley III	Vice President, Principal Accounting Officer, President of Federated Shareholder Services Company and President of Federated Investors Trust Company	64

John W. McGonigle	Vice Chairman, Executive Vice President, Chief Legal Officer, Secretary and Director	72

Thomas E. Territ	Vice President and President, Federated Securities Corp.	51

Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Passport Research Ltd., Federated Investment Counseling, Federated Investment Management Company and Federated MDTA LLC.

Mr. John F. Donahue is a co-founder of Federated. He has served as director and Chairman of Federated since Federated's initial public offering in May 1998. He is a director or trustee of 41 investment companies managed by subsidiaries of Federated. Mr. Donahue is the father of J. Christopher Donahue who serves as President, Chief Executive Officer and director of Federated and Thomas R. Donahue who serves as Vice President, Treasurer and Chief Financial Officer of Federated.

Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer of Federated since 1998. He is President of 39 investment companies managed by subsidiaries of Federated. He is also director or trustee of 41 investment companies managed by subsidiaries of Federated. Mr. Donahue is the son of John F. Donahue who serves as Chairman and director of Federated and the brother of Thomas R. Donahue who serves as Vice President, Treasurer and Chief Financial Officer.

Mr. Brian P. Bouda has served as Vice President of Federated Services Company since 1999. Mr. Bouda has been Vice President of Federated and serves as Chief Compliance Officer of Federated and for each of Federated’s subsidiaries. He is also Chief Compliance Officer and Senior Vice President of the investment companies managed by subsidiaries of Federated since as early as 2004.

Mr. Gordon J. Ceresino has served as Vice Chairman of Federated since 2007. He is President of Federated International Management Limited and Vice Chairman of Federated MDTA LLC, both of which are wholly owned

subsidiaries of Federated. Mr. Ceresino served as President and Chief Executive Officer of MDTA LLC from 2002 until its acquisition by Federated in 2006.

Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated since 1998. He is President of FII Holdings, Inc., a wholly owned subsidiary of Federated. Mr. Donahue is the son of John F. Donahue who serves as Chairman and director of Federated and the brother of J. Christopher Donahue who serves as director, President and Chief Executive Officer of Federated.

Mr. John B. Fisher has served as Vice President of Federated since 1998. He has also been President and Chief Executive Officer of Federated Advisory Companies since 2006. Prior to that, he served as President of the Institutional Sales Division of Federated Securities Corp., a wholly owned subsidiary of Federated.

Mr. Eugene F. Maloney has served as Vice President of Federated since 1998 and currently serves as Executive Vice President of Federated since March 2009. He is Executive Vice President of Federated Investors Management Company, a wholly owned subsidiary of Federated. Mr. Maloney provides certain legal, technical and management expertise to Federated’s sales divisions, including regulatory and legal requirements relating to a bank’s use of mutual funds in both trust and commercial environments.

Mr. Denis McAuley III has served as Vice President of Federated since 1998 and as Principal Accounting Officer of Federated since 2001. He also serves as President of Federated Investors Trust Company, as President of Federated Shareholder Services Company and as Senior Vice President, Treasurer or Assistant Treasurer for various subsidiaries of Federated. Mr. McAuley is a Certified Public Accountant.

Mr. John W. McGonigle has been a director of Federated since 1998. He has served as Executive Vice President, Chief Legal Officer and Secretary of Federated since 1998 and as Vice Chairman since 2003. Mr. McGonigle is also Chairman of Federated International Management Limited, a wholly owned subsidiary of Federated. Mr. McGonigle is also Secretary of 41 registered investment companies managed by subsidiaries of Federated and Executive Vice President of 40 of those registered investment companies.

Mr. Thomas E. Territ has served as Vice President of Federated since 2006. He is President of Federated Securities Corp., a wholly owned subsidiary of Federated. As President of Federated Securities Corp., Mr. Territ is responsible for the marketing and sales efforts of Federated. Mr. Territ had previously served as Senior Vice President of Federated Securities Corp. since 1995, and held the position of National Sales Director for several of Federated’s sales divisions during that time.

Available Information

Federated makes available, free of charge on its website, www.FederatedInvestors.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.

Federated will also provide, free of charge, a copy of the company's most recent annual report on Form 10-K upon written request. Send requests to: Corporate Communications, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The public may read and copy any materials Federated files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxies and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Other Information

Balance Sheets, Consolidated Statements of Income and Notes to the Consolidated Financial Statements and is incorporated herein by reference.

ITEM 1A – RISK FACTORS

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 – PROPERTIES

Federated’s facilities are concentrated in Pittsburgh, Pennsylvania where it leases space sufficient to meet its operating needs. Federated’s headquarters are located in the Federated Investors Tower, where Federated occupies approximately 259,000 square feet. Federated leases approximately 94,000 square feet at the Keystone Summit Corporate Park location in Warrendale, Pennsylvania. Federated also leases an aggregate of approximately 25,000 square feet at other locations in the Pittsburgh area. Federated maintains office space in Frankfurt, Germany for certain international initiatives; in Rochester, New York, for the operations of Federated Clover Investment Advisors; in New York, New York, for the operations of Federated Global Investment Management Corp.; and in Boston, Massachusetts, for the operations of Federated MDTA LLC.

ITEM 3 – LEGAL PROCEEDINGS

The information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Contingent Liabilities and under the caption Notes to the Consolidated Financial Statements – Note (22) Commitments and Contingencies – (c) Past Mutual Fund Trading Issues and Related Legal Proceedings and (d) Other Legal Proceedings and is incorporated herein by reference.

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table summarizes stock repurchases under Federated’s share repurchase program during the fourth quarter of 2010. Stock repurchases and dividend payments are subject to the restrictions outlined in Note (12) and Note (16) to the Consolidated Financial Statements incorporated by reference in Part II, Item 8 of this Form 10-K.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ¹		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ¹
October		0	$	0		0		3,801,600
November ²		182,226		21.54		160,000		3,641,600
December		40,000		25.87		40,000		3,601,600

Total		222,226	$	22.32		200,000		3,601,600

¹	Federated’s share repurchase program was authorized in August 2008 by the board of directors and permits the purchase of up to 5.0 million shares of Federated Class B common stock with no stated expiration date. No other plans exist as of December 31, 2010.

²	In November 2010, 22,226 shares of restricted stock with a weighted-average price of $2.84 per share were repurchased in connection with employee separations.

The following performance graph compares the total shareholder return of an investment in Federated’s Class B Common Stock to that of the Standard and Poor’s 500 ^® Index (S&P 500 Index), and to a Peer Group Index of publicly traded asset management firms for the five-year period ended on December 31, 2010. A comparison to a broader industry index, the S&P 1500 Asset Management & Custody Banks Index, is also included and will in subsequent years, replace the Peer Group Index. The change in indices is being made in order to compare the total return performance of Federated to a broader group of peer industry companies using a published industry index. All companies in the current Peer Group Index are included in the broader S&P 1500 Asset Management & Custody Banks Index, which currently consists of 15 companies in the asset management and custody space.

The graph assumes that the value of the investment in Federated’s Class B Common Stock and each index was $100 on December 31, 2005. Total return includes reinvestment of all dividends. As a member of the S&P 500 Index, Federated is required to include this comparison. Peer Group returns are weighted by the market capitalization of each firm at the beginning of each measurement period. The historical information set forth below is not necessarily indicative of future performance. Federated does not make or endorse any predictions as to future stock performance.

LOGO


	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
Federated		93.06		115.86		53.94		91.09		94.89

S&P 500 ^® Index		115.79		122.16		76.96		97.33		111.99

Peer Group *		120.94		142.59		77.56		128.01		146.32

S&P 1500 Asset Management & Custody Banks		118.62		138.05		70.86		89.55		102.17

*	The following companies are included in the Peer Group: Affiliated Managers Group, Inc.; Eaton Vance Corp.; Franklin Resources, Inc.; T. Rowe Price Group, Inc.; and Waddell & Reed Financial, Inc.

All other information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the captions Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to the Consolidated Financial Statements (including, but not limited to Note (12) Recourse Debt and Interest Rate Swap and Note (24) Supplementary Quarterly Financial Data (Unaudited)) and is incorporated herein by reference.

ITEM 6 – SELECTED FINANCIAL DATA

The information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the caption Selected Consolidated Financial Data and is incorporated herein by reference.

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the captions Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements, Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Equity, Consolidated Statements of Cash Flows, and Notes to the Consolidated Financial Statements and is incorporated herein by reference.

ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A – CONTROLS AND PROCEDURES

Federated carried out an evaluation, under the supervision and with the participation of management, including Federated’s President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated’s disclosure controls and procedures were effective at December 31, 2010.

There has been no change in Federated’s internal control over financial reporting that occurred during the fourth quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, Federated’s internal control over financial reporting.

All other information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the caption Management’s Assessment of Internal Control Over Financial Reporting and Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting and is incorporated herein by reference.

ITEM 9B – OTHER INFORMATION

None.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item (other than the information set forth below) is contained in Federated’s Information Statement for its 2011 Annual Meeting of Shareholders under the captions Board of Directors and Election of Directors and Security Ownership – Section 16(a) Beneficial Ownership Reporting Compliance, and is incorporated herein by reference.

Executive Officers

The information required by this Item with respect to Federated’s executive officers is contained in Item 1 of Part I of this Form 10-K under the section Executive Officers.

Code of Ethics

In October 2003, Federated adopted a code of ethics for its senior financial officers. This code meets the requirements provided by Item 406 of Regulation S-K and is incorporated by reference in Part IV, Item 15(a)(3) of this Form 10-K as Exhibit 14.01. The code of ethics is available at www.FederatedInvestors.com. In the event that Federated amends or waives a provision of this code and such amendment or waiver relates to any element of the code of ethics definition enumerated in paragraph (b) of Item 406 of Regulation S-K, Federated would post such information on its internet website.

ITEM 11 – EXECUTIVE COMPENSATION

The information required by this Item is contained in Federated’s Information Statement for the 2011 Annual Meeting of Shareholders under the captions Board of Directors and Election of Directors and Executive Compensation and is incorporated herein by reference.

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information regarding Federated’s share-based compensation as of December 31, 2010:


Category of share-based compensation plan	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans
Approved by shareholders		3,215,432	$	28.67		1,824,891
Not approved by shareholders		0		0		0

Total		3,215,432	$	28.67		1,824,891

All other information required by this Item is contained in Federated’s Information Statement for the 2011 Annual Meeting of Shareholders under the caption Security Ownership and is incorporated herein by reference.

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is contained in Federated’s Information Statement for the 2011 Annual Meeting of Shareholders under the captions Transactions with Related Persons, Conflict of Interest Policies and Procedures and Board of Directors and Election of Directors and is incorporated herein by reference.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is contained in Federated’s Information Statement for the 2011 Annual Meeting of Shareholders under the caption Independent Registered Public Accounting Firm and is incorporated herein by reference.

PART IV

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements:

The information required by this Item is contained in Federated’s 2010 Annual Report to Shareholders under the captions Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements, Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Equity, Consolidated Statements of Cash Flows and Notes to the Consolidated Financial Statements and is incorporated herein by reference.

(a)(2) Financial Statement Schedules:

All schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions, are inapplicable, or the required information is either incorporated herein by reference or included in the financial statements or notes thereto included in this Form 10-K.

(a)(3) Exhibits:

The following exhibits are filed or incorporated as part of this Form 10-K:


Exhibit Number		Description

2.01		Agreement and Plan of Merger, dated as of February 20, 1998, between Federated Investors and Federated (incorporated by reference to Exhibit 2.01 to the Registration Statement on Form S-1 (File No. 333-48405))

2.02		Asset Purchase Agreement dated as of October 20, 2000, by and among Federated Investors, Inc., Edgemont Asset Management Corporation, Lawrence Auriana and Hans P. Utsch (incorporated by reference to Exhibit 2.1 of Amendment No. 2 to the Current Report on Form 8-K dated April 20, 2001, filed with the Securities and Exchange Commission on July 3, 2001 (File No. 001-14818))

2.03		Amendment No. 1, dated April 11, 2001, to the Asset Purchase Agreement dated as of October 20, 2000, by and among Federated Investors, Inc., Edgemont Asset Management Corporation, Lawrence Auriana and Hans P. Utsch (incorporated by reference to Exhibit 2.2 of Amendment No. 2 to the Current Report on Form 8-K dated April 20, 2001, filed with the Securities and Exchange Commission on July 3, 2001 (File No. 001-14818))

2.04		Sale, Purchase and Put/Call Agreement dated as of May 11, 2006, among Federated Investors, Inc., MDTA LLC, HBSS Acquisition Co. and the Selling Parties (incorporated by reference to Exhibit 2.1 to the June 30, 2006 Quarterly Report on Form 10-Q (File No. 001-14818))

2.05		Definitive Agreement between Federated Investors, Inc. and David W. Tice & Associates, LLC dated as of July 14, 2008 (incorporated by reference to Exhibit 2.1 to the September 30, 2008 Quarterly Report on Form 10-Q (File No. 001-14818))

2.06		Definitive Agreement between Federated Investors, Inc. and Clover Capital Management, Inc. dated


		as of September 12, 2008 (incorporated by reference to Exhibit 2.2 to the September 30, 2008 Quarterly Report on Form 10-Q (File No. 001-14818))

2.07		Amendment No. 1 dated as of December 1, 2008 to the Asset Purchase Agreement dated as of September 12, 2008, among Federated Investors, Inc. and Clover Capital Management Inc. (incorporated by reference to Exhibit 2.07 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 001-14818))

2.08		Definitive Agreement between Federated Investors, Inc. and SunTrust Banks, Inc. dated July 16, 2010 (incorporated by reference to Exhibit 2.1 to the September 30, 2010 Quarterly Report on Form 10-Q (File No. 001-14818))

3.01		Restated Articles of Incorporation of Federated (incorporated by reference to Exhibit 3.01 to the Registration Statement on Form S-1 (File No. 333-48405))

3.02		Restated By-Laws of Federated (incorporated by reference to Exhibit 3.02 to the Registration Statement on Form S-1 (File No. 333-48405))

4.01		Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.01 to the Registration Statement on Form S-1 (File No. 333-48405))

4.02		Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.02 to the Registration Statement on Form S-1 (File No. 333-48405))

4.05		Shareholder Rights Agreement, dated August 1, 1989, between Federated and The Standard Fire Insurance Company, as amended January 31, 1996 (incorporated by reference to Exhibit 4.06 to the Registration Statement on Form S-1 (File No. 333-48405))

9.01		Voting Shares Irrevocable Trust dated May 31, 1989 (incorporated by reference to Exhibit 9.01 to the Registration Statement on Form S-1 (File No. 333-48405))

10.14		Form of Bonus Stock Option Agreement (incorporated by reference to Exhibit 10.13 of the Form 10-K for the fiscal year ended December 31, 1998 (File No. 001-14818))

10.15		Federated Investors Tower Lease dated January 1, 1993 (incorporated by reference to Exhibit 10.03 to the Registration Statement on Form S-1 (File No. 333-48405))

10.16		Federated Investors Tower Lease dated February 1, 1994 (incorporated by reference to Exhibit 10.04 to the Registration Statement on Form S-1 (File No. 333-48405))

10.19		Employment Agreement, dated December 28, 1990, between Federated Investors and an executive officer (incorporated by reference to Exhibit 10.08 to the Registration Statement on Form S-1 (File No. 333-48405))

10.26		Purchase and Sale Agreement, dated as of December 21, 2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A., and Citicorp North America, Inc. Company (incorporated by reference to Exhibit 10.26 of the Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-14818))

10.27		Amendment No. 2 to the Federated Investors Program Documents dated as of December 21, 2000, among Federated Investors, Inc., Federated Funding 1997-1, Inc., Federated Investors Management Company, Federated Securities Corp., Wilmington Trust Company, Putnam Lovell Finance L.P., Putnam Lovell Securities Inc., and Bankers Trust Company (incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-14818))



10.34		Annual Stock Option Agreement dated April 24, 2002, between Federated Investors, Inc. and the independent directors (incorporated by reference to Exhibit 10.1 to the June 30, 2002 Quarterly Report on Form 10-Q (File No. 001-14818))

10.39		Federated Investors, Inc. Guaranty and Suretyship Agreement, dated as of September 30, 2003 (incorporated by reference to Exhibit 10.2 to the September 30, 2003 Quarterly Report on Form 10-Q (File No. 001-14818))

10.40		Amendment to Purchase and Sale Agreement, dated as of December 31, 2003, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A., and Citicorp North America, Inc. Company (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))

10.41		Amendments No. 6, 5, 4, 3 and 2 to Federated Investors Tower Lease dated as of December 31, 2003; November 10, 2000; June 30, 2000; February 10, 1999; and September 19, 1996 (incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))

10.45		Agreement with Boston Financial Data Services (incorporated by reference to Exhibit 10.1 to the June 30, 2004 Quarterly Report on Form 10-Q (File No. 001-14818))

10.46		Agreement with Alliance Capital Management L.P., dated as of October 28, 2004 (incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 001-14818))

10.47		Amendment dated December 31, 2004 to the Federated Investors Program Documents dated as of December 21, 2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.47 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 001-14818))

10.49		Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.1 to the March 31, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))

10.50		Amendment dated June 29, 2005 to the definitive agreement between Federated Investors and Alliance Capital Management L.P. dated October 28, 2004 and filed as Exhibit 10.46 to Federated’s Annual Report on Form 10-K for the year ended December 31, 2004 (incorporated by reference to Exhibit 10.1 to the June 30, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))

10.51		Amendment dated June 30, 2005 to the Federated Investors Program Documents dated as of December 21, 2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.2 to the June 30, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))

10.52		Amendment dated June 30, 2005 to the Federated Program Master Agreement, dated as of October 24, 1997, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors Inc., Wilmington Trust Company, Putnam Lovell Finance, L.P., Putnam, Lovell NBF Securities Inc. and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.3 to the June 30, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))

10.54		Agreement, effective March 13, 2006, by and among Federated Investors, Inc., Federated Investment Management Company, Federated Global Investment Management Corp., Federated


		Investment Counseling, Federated Advisory Services Company, Passport Research Ltd., Federated Equity Management Company of Pennsylvania, Passport Research II, Ltd. and Keith M. Schappert (incorporated by reference to Exhibit 10.1 to the March 16, 2006 Report on Form 8-K (File No. 001-14818))

10.55		Asset Purchase Agreement dated as of February 15, 2006, by and between Matrix Settlement & Clearing Services, LLC and Edgewood Services, Inc. (incorporated by reference to Exhibit 10.1 to the March 31, 2006 Quarterly Report on Form 10-Q (File No. 001-14818))

10.58		Federated Investors, Inc. Employee Stock Purchase Plan, amended as of October 26, 2006 (incorporated by reference to Exhibit 10.2 to the September 30, 2006 Quarterly Report on Form 10-Q (File No. 001-14818))

10.59		Credit Agreement, dated as of October 31, 2006, by and among Federated Investors, Inc., certain of its subsidiaries, the banks set forth therein and PNC Bank, National Association (incorporated by reference to Exhibit 10.59 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 001-14818)) Exhibits and schedules related to this agreement (incorporated by reference to Exhibit 10.1 to the March 31, 2010 Quarterly Report on Form 10-Q (File No. 001-14818))

10.60		Amendment dated December 29, 2006 to the Federated Investors Program Documents dated as of December 21, 2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to Exhibit 10.60 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 001-14818))

10.61		Agreement, effective March 1, 2007, by and among Federated, Federated Investors Management Company, as transferor, Federated Securities Corp., as distributor, principal shareholder servicer and servicer, Federated Funding 1997-1, Inc., as Seller, Citibank, N.A., as purchaser, and Citicorp North America, Inc., as Program Agent (incorporated by reference to Exhibit 10.1 to the March 7, 2007 Report on Form 8-K (File No. 001-14818))

10.62		Definitive Agreement between Federated Investors, Inc. and Rochdale Investment Management, LLC dated as of April 20, 2007 (incorporated by reference to Exhibit 10.1 to the June 30, 2007 Quarterly Report on Form 10-Q (File No. 001-14818))

10.63		Federated Investors, Inc. Annual Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the June 30, 2007 Quarterly Report on Form 10-Q (File No. 001-14818))

10.64		The Amended and Restated Credit Agreement, dated as of April 9, 2010, by and among Federated Investors, Inc. and PNC Bank, National Association, PNC Bank Capital Markets LLC, Citigroup Global Markets, Inc. and Citibank, N.A. (incorporated by reference to Exhibit 10.1 to the June 30, 2010 Quarterly Report on Form 10-Q (File No. 001-14818))

10.65		Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.65 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 001-14818))

10.66		Federated Investors, Inc. Stock Incentive Plan, amended as of April 22, 2010 (incorporated by reference to Exhibit 10.1 to the April 28, 2010 Report on Form 8-K (File No. 001-14818))

10.67		ISDA Master Agreement and schedule between Federated Investors, Inc. and PNC Bank National Association related to the $425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective April 9, 2010 (incorporated by reference to Exhibit 10.2 to the June 30, 2010 Quarterly Report on Form 10-Q (File No. 001-14818))



10.68		ISDA Master Agreement and schedule between Federated Investors, Inc. and Citibank, N.A. related to the $425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective April 9, 2010 (incorporated by reference to Exhibit 10.3 to the June 30, 2010 Quarterly Report on Form 10-Q (File No. 001-14818))

10.69		Employment Agreement, dated July 6, 1983, between Federated Investors and an executive officer (Filed herewith)

13.01		Selected Portions of 2010 Annual Report to Shareholders (Filed herewith)

14.01		Federated Investors, Inc. Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.01 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))

21.01		Subsidiaries of the Registrant (Filed herewith)

23.01		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (Filed herewith)

31.01		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

31.02		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

32.01		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

101.01		The following materials from Federated’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in Extensible Business Reporting Language, include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text (Furnished herewith)

(b)

Exhibits:

See (a)(3) above.

(c)

Financial Statement Schedules:

See (a)(2) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.


FEDERATED INVESTORS, INC.

By:		/s/ J. Christopher Donahue
		J. Christopher Donahue
		President and Chief Executive Officer

		Date: February 22, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ John F. Donahue	Chairman and Director	February 22, 2011
John F. Donahue

/s/ J. Christopher Donahue	President, Chief Executive Officer	February 22, 2011
J. Christopher Donahue	and Director (Principal Executive Officer)

/s/ Thomas R. Donahue	Chief Financial Officer	February 22, 2011
Thomas R. Donahue

/s/ Michael J. Farrell	Director	February 22, 2011
Michael J. Farrell

/s/ David M. Kelly	Director	February 22, 2011
David M. Kelly


Signature	Title	Date

/s/ Denis McAuley III	Principal Accounting Officer		February 22, 2011
Denis McAuley III

/s/ John W. McGonigle	Director		February 22, 2011
John W. McGonigle

/s/ James L. Murdy	Director		February 22, 2011
James L. Murdy

/s/ Edward G. O’Connor	Director		February 22, 2011
Edward G. O’Connor

EXHIBIT INDEX


Exhibit Number		Description

10.69		Employment Agreement, dated July 6, 1983, between Federated Investors and an executive officer

13.01		Selected Portions of 2010 Annual Report to Shareholders

21.01		Subsidiaries of the Registrant

23.01		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

31.01		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.01		The following materials from Federated’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in Extensible Business Reporting Language, include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text

EXHIBIT 10.69

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made at Pittsburgh, Pennsylvania, this 6 day of July, 1983, by and between FEDERATED SECURITIES CORP., a Pennsylvania corporation (“FSC”) and Thomas Eugene Territ hereinafter referred to as “Representative.”

WITNESSETH:

That in consideration of the mutual convents and agreements hereinafter set forth and for other good and valuable consideration, the parties hereto, intending to be legally bound hereby, agree as follows:

1. EMPLOYMENT - DUTIES. FSC hereby employs Representative as a sales representative for the sale and distribution of investment company shares (“Fund Shares”) and other products and services as may be sold by FSC from time to time. Representative shall vigorously pursue his activities in the territories from time to time assigned to him by the officers of FSC subject to the direction and supervision of officers of FSC. Representative shall devote his entire time, attention and energies to the performance of his duties under this Agreement and shall not directly or indirectly in any fashion engage in or be affiliated with any other commercial activities or pursuits whatsoever during the term of this Agreement.

2. SALARY. Representative shall receive an annual salary of $17,737.00, payable no less frequently than on a monthly basis. The amount of said salary may be adjusted from time to time by mutual agreement of the parties hereto.

3 . EXPENSES AND BENEFITS. Representatives shall be reimbursed for reasonable travel, entertainment and other business expenses incurred by him in the performance of his duties in accordance with FSC policies. Representative shall be

solely responsible for payment of such expenses, however, and shall utilize reimbursements for the prompt payment of all expenses incurred as a result of activities performed on behalf of FSC. In the event that this Agreement is terminated by either party pursuant to the provisions of Paragraph No. 4 below, Representative hereby authorizes FSC to withhold any salary and expense reimbursements owed to him until such time as he (1) returns the credit cards, car, business documents and any other items which have been provided for his use while employed by FSC, and (2) pays off any expenses incurred as a result of the use of such items.

4. TERM . This agreement shall be effective at the date of signing hereof, and shall continue in full force and effect until terminated by either party as set forth below:

(a) Either party may terminate this Agreement for any reason by providing the other with at least thirty (30) days’ written notice of the intention to terminate;

(b) FSC may terminate this Agreement immediately in any situation where the employee has engaged in negligent, willful or wanton conduct which constitutes a breach of Representative’s duties to FSC, including, but not limited to, a breach of the representations or other provisions contained in this Agreement, a violation of any applicable rule or regulation of the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD), or any other regulatory agency having jurisdiction, or which shall result in material damage to the professional reputation or capabilities of FSC and/or its affiliated corporations.

5. CONFIDENCE . Representative covenants and agrees that he will not, without the written consent of FSC (except as required in the course of his employment with FSC) while in the employ of FSC, communicate or divulge to or use for the benefit of himself or any other person, firm, organization or corporation, confidential information relating to the identity and affairs of the customers of FSC or other confidential matters

possessed, owned or used by FSC that may have been communicated or acquired by Representative in the course of or as a result of his employment with FSC. All records and files, memoranda, reports, documents and the like relating to the business of FSC which Representative shall use or prepare or come into contact with shall remain the sole property of FSC and must be returned along with the employee’s credit cards and other items which have been provided for his use while employed by FSC, as provided for in Paragraph No. 3.

6. KNOWLEDGE AND COMPLIANCE . Representative hereby represents that he has studied and is thoroughly familiar with the provisions of all applicable Federal, state and municipal laws and the rules and regulations of the SEC and NASD, that he will continue to remain familiar with such provisions, and that he will fully comply therewith and that he will make all solicitations and sales and use his best efforts to cause all other personnel which may be supervised by him to make solicitations and sales in strict accordance therewith.

7. COVENANTS IN THE EVENT OF TERMINATION . Representative hereby agrees that, upon termination of this Agreement, the following restrictions shall continue in effect:

(a) Representative shall not, for a period of two (2) years from the date of such termination, for himself, as an agent or employee, or on behalf of any person, association, partnership or corporation, directly or indirectly engage in the sale of shares of money market funds or any other securities or other products and services which may be competitive with the Fund Shares or other products and services offered by FSC within any territory to which he has been assigned while employed at FSC at any time during the two (2) year period prior to termination of this Agreement;

(b) Representative will not communicate or divulge or use for the benefit of himself or any other person, firm, organization or corporation, confidential information relating to the identity and affairs of any customer of FSC or other

confidential matters possessed, owned or used by FSC that may have been communicated or acquired by Representative in the course or as a result of employment with FSC.

(c) Representative will not at any time subsequent to such termination solicit any of the other representatives of FSC to terminate their employment or contractual relationship with FSC in order to contract with or be employed by any other firm engaged in the securities business or any other business whether or not the Representative is employed by or has a proprietary interest in or is in any way associated with such other firm or business.

8. ENTIRE AGREEMENT. This Employment Agreement cancels and supercedes all prior employment agreements, if any, between FSC and Representative. No subsequent amendment, alteration, change or addition to this Employment Agreement shall be binding upon FSC or Representative unless reduced to writing and signed by both parties.

9. GOVERNING LAW. All questions concerning the execution of this Agreement and the rights of the parties hereunder shall be decided in accordance with the laws of the Commonwealth of Pennsylvania.

WITNESS the due execution hereof the day and year first above written.


FEDERATED SECURITIES CORP.

By:		/s/ Edward C. Gonzales
		Vice President


ATTEST:

/s/ John W. McGonigle
Secretary


REPRESENTATIVE:

/s/ Thomas E. Territ		(SEAL)

Witness:

/s/ Alison Lynn Territ

EXHIBIT 13.01


		Financial Review

		Selected Consolidated Financial Data		8

		Management’s Discussion and Analysis		9

		Management’s Assessment of Internal Control Over Financial Reporting		30

		Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements		31

		Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting		32

		Consolidated Balance Sheets		33

		Consolidated Statements of Income		34

		Consolidated Statements of Changes in Equity		35

		Consolidated Statements of Cash Flows		37

		Notes to the Consolidated Financial Statements		38

FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K and the 2010 Annual Report to Shareholders, including those related to asset flows and business mix; obligations to make additional contingent payments pursuant to acquisition agreements; obligations to make additional payments pursuant to employment arrangements; legal proceedings; future cash needs and management’s expectations regarding borrowing; future principal uses of cash; performance indicators; impact of accounting policies and new accounting pronouncements; concentration risk; indemnification obligations; the impact of increased regulation; the prospect of increased distribution-related expenses; management’s expectations regarding fee waivers and the impact of such waivers on revenues and net income; the ability to raise additional capital; the rising costs of risk management; possible impairment charges; tax liability and the realization of deferred tax assets; capital losses; the impact of the interest rate swap and the various items set forth under the section entitled Risk Factors 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, market conditions may change significantly resulting in changes to Federated’s asset flows and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on certain growth and fund performance targets and will be affected by the achievement of such targets, and the obligation to make additional payments pursuant to employment agreements is based on satisfaction of certain conditions set forth in those agreements. Future cash needs and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in distributing its products, the resolution of pending litigation, potential increases in costs relating to risk management, as well as potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated’s products to customers. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in market values of assets under management and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of the ongoing threat of terrorism and the increased scrutiny of the mutual fund industry by federal and state regulators, and the recent and ongoing disruption in global financial markets. 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 more information on these items, see the section entitled Risk Factors herein under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

20 10 Annual Report 7

SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except per share data and managed assets)

The selected consolidated financial data below should be read in conjunction with Federated Investors, Inc. and its subsidiaries’ (Federated) Consolidated Financial Statements and Notes. The selected consolidated financial data (except managed assets) of Federated for the five years ended December 31, 2010 have been derived from the audited Consolidated Financial Statements of Federated. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes which follow.


Years Ended December 31,	2010		2009		2008		2007		2006
Statement of Income Data ^{1, 2}
Total revenue	$	951,943	$	1,175,950	$	1,223,680	$	1,127,644	$	978,858
Operating income		309,791		329,227		361,175		357,193		308,472
Income from continuing operations including noncontrolling interest in subsidiaries		189,163		208,540		228,625		223,236		196,647
Amounts attributable to Federated Investors, Inc.
Income from continuing operations		179,114		197,292		221,509		217,471		191,048
Income from discontinued operations		0		0		2,808		0		6,681
Net income		179,114		197,292		224,317		217,471		197,729

Share Data attributable to Federated Investors, Inc.
Earnings per share – Basic ^{1, 2}
Income from continuing operations	$	1.73	$	1.93	$	2.17	$	2.12	$	1.81
Income from discontinued operations		0.00		0.00		0.03		0.00		0.06
Net income		1.73		1.93		2.20		2.12		1.87
Earnings per share – Diluted ^{1, 2}
Income from continuing operations	$	1.73	$	1.92	$	2.15	$	2.10	$	1.78
Income from discontinued operations		0.00		0.00		0.03		0.00		0.06
Net income ³		1.73		1.92		2.18		2.10		1.85
Cash dividends per share ⁴	$	2.22	$	0.96	$	3.69	$	0.81	$	0.69
Weighted-average shares outstanding – basic		99,925		99,923		99,605		100,855		104,293
Weighted-average shares outstanding – diluted		99,993		100,056		100,395		102,067		105,855

Balance Sheet Data at Period End
Intangible assets, net and Goodwill ²	$	720,825	$	662,996	$	657,321	$	534,603	$	488,650
Total assets ²		1,153,504		912,433		846,610		840,971		810,294
Long-term debt—recourse ⁵		361,250		105,000		126,000		71		160
Long-term debt—nonrecourse ⁶		4,436		13,556		30,497		62,701		112,987
Federated Investors shareholders’ equity ⁴		491,799		528,207		423,374		574,015		529,375

Managed Assets (in millions)
As of period end	$	358,241	$	389,316	$	407,310	$	301,616	$	237,440
Average for the period	$	347,074	$	405,595	$	342,521	$	265,055	$	220,702

During 2010 and 2009, fee waivers to maintain positive or zero net yields totaled $241.6 million and $120.6 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $186.6 million and $86.4 million such that the net impact to Federated was $55.0 million and $34.2 million in reduced operating income for 2010 and 2009, respectively.

2	During 2010 and 2009, Federated recorded impairments totaling $10.2 million and $21.7 million, respectively, primarily related to intangible and fixed assets. See Note (7) to the Consolidated Financial Statements.

3	Totals may not sum due to rounding.

4	In 2008, Federated paid $2.76 per share or $281.2 million as a special dividend to shareholders. In 2010, Federated paid $1.26 per share or $129.8 million as a special dividend to shareholders. See Note (16)(a) to the Consolidated Financial Statements.

5	In 2008, Federated entered into a term-loan facility and began borrowing against its revolving credit facility. In 2010, Federated amended and restated the 2008 term-loan facility. See Note (12) to the Consolidated Financial Statements.

In 2007, Federated began accounting for all new sales of its rights to future distribution fees and contingent deferred sales charges related to Class B shares of sponsored funds as sales. Federated began self-funding the sale of Class B shares of sponsored funds in March 2010. See Note (1)(m) and Note (13) to the Consolidated Financial Statements.

8 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS

of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this report.

General

Federated Investors, Inc. (together with its subsidiaries, Federated) is one of the largest investment managers in the United States with $358.2 billion in managed assets as of December 31, 2010. The majority of Federated’s revenue is derived from advising and administering Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. Federated also derives revenue from providing various other mutual fund-related services, including distribution, shareholder servicing, 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 generally calculated as a percentage of the net assets of the investment portfolios that are managed by Federated. As such, Federated’s revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Nearly all assets under management in Federated’s investment products can be redeemed at any time with no advance notice requirement. Fee 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 thresholds. Generally, management-fee rates charged for advisory services provided to equity products are higher than management-fee rates charged on money market and fixed-income products. Likewise, mutual funds typically have a higher management-fee rate than Separate Accounts. Similarly, traditional separate accounts typically have a higher management-fee rate than liquidation portfolios. Accordingly, revenue is also dependent upon the relative composition of average assets under management across both asset and product types. Federated may waive certain fees for competitive reasons such as to maintain positive or zero net yields, to meet regulatory requirements (including settlement-related waivers (see Note (22)(c) to the Consolidated Financial Statements)) or to meet contractual requirements. Since Federated’s products are largely distributed and serviced through financial intermediaries, Federated pays a significant portion of the distribution fees earned from sponsored products to the financial intermediaries that sell these products. These payments are generally calculated as a percentage of net assets attributable to the financial intermediary selling the product and are recorded on the Consolidated Statements of Income as a distribution expense. Certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than managed assets in equity or fixed-income funds.

Federated’s remaining Other Services fees are primarily based on fixed rates per retirement plan participant. Revenue relating to these services generally depends upon the number of plan participants which may vary as a result of sales and marketing efforts, competitive fund performance, introduction and market reception of new product features and acquisitions.

Federated’s most significant operating expenses include distribution costs and compensation and related costs, which include fixed and variable compensation and related employee benefits. Certain of these expenses are dependent upon sales, product performance, levels of assets and asset mix and the willingness to continue fee waivers to maintain positive or zero net yields.

The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated Financial Statements. Management evaluates Federated’s performance at the consolidated level based on the view that Federated operates in a single operating segment, the investment management business. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated’s growth and profitability are dependent upon its ability to attract and retain assets under management and, in light of the recent and continuing adverse market conditions, are also dependent upon the profitability of those assets, which is impacted, in part, by management’s decisions regarding fee waivers to maintain positive or zero net yields on certain money market products. Fees for fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes the most meaningful indicators of Federated’s performance are assets under management, total revenue and net income, both in total and per diluted share.

Business Developments

Continuing Disruption in Global Financial Markets

In recent years, the financial markets have experienced periods of extreme volatility due to uncertainty and disruption in large segments of the credit markets. During the latter half of 2008 and early 2009, the disruptions in the financial markets worsened causing severe dislocations on the functioning of the markets and unprecedented strain on the availability of liquidity in the short-term debt markets, including the commercial paper markets, which are important for the operation of prime money market funds which invest primarily in a portfolio of short-term, high-quality, fixed-income securities.

2010 Annual Report 9

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Through the adverse market conditions of 2008, Federated’s government agency and treasury money market funds experienced significant asset inflows. These funds grew as certain investors favored the perceived safety and liquidity of portfolios backed by government securities over other investment products. In certain products, the gross yield was not sufficient to cover all of the fund’s normal operating expenses. During the fourth quarter 2008, Federated began waiving fees in order for certain funds to maintain positive or zero net yields.

For the year ended December 31, 2010, 50% of Federated’s total revenue was attributable to money market assets as compared to 65% and 61% for 2009 and 2008, respectively. A significant change in Federated’s money market business or a significant reduction in money market assets due to regulatory changes, changes in the financial markets including significant increases in interest rates over a short period of time, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

Business Combinations and Acquisitions

In the third quarter 2010, Federated acquired the money market management business of SunTrust Banks, Inc. (SunTrust Acquisition). Pursuant to the definitive agreement signed on July 16, 2010, $14.1 billion of money market assets transitioned to Federated during the third and fourth quarters of 2010.

The SunTrust Acquisition included upfront cash payments that totaled $6.6 million. The transaction also includes 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 certain eligible assets. At December 31, 2010, management estimated contingent payments could total $27 million over five years, however, the actual amount of the contingent payments will vary based on asset levels and related net revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the extent of reasonably possible flow-rate volatility for the assets under management. The preliminary estimate of fair value of the total consideration is $26.7 million. As of December 31, 2010, a liability of $20.1 million representing the fair value of future consideration payments was recorded in Other current liabilities ($5.3 million) and Other long-term liabilities ($14.8 million) (see Note (7)(a) to the Consolidated Financial Statements for a discussion regarding the valuation methodology). This liability is remeasured at each reporting date with changes in the fair value recognized on the Consolidated Statements of Income.

The SunTrust Acquisition was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the intangible assets acquired based upon preliminary estimates of fair values as of the acquisition date. Federated is currently completing its valuation to determine the fair value of the identifiable intangible assets and the related contingent consideration associated with the SunTrust Acquisition. Although the preliminary results of the valuation are reflected in the Consolidated Financial Statements and the related footnotes as of and for the year ended December 31, 2010, the final valuation results may require adjustments to this preliminary valuation and such adjustments may be material.

In 2008, Federated completed two significant business acquisitions. On December 5, 2008, Federated acquired certain assets of David W. Tice & Associates LLC that relate to the management of the Prudent Bear Fund and the Prudent Global Income Fund (collectively, the Prudent Bear Funds) with $1.1 billion and $0.4 billion in assets under management, respectively, as of December 5, 2008 (Prudent Bear Acquisition). On December 1, 2008, Federated acquired certain assets of Clover Capital Management, Inc. (Clover Capital), a Rochester, New York-based investment manager that specializes in value investing (Clover Capital Acquisition). Clover Capital managed approximately $2.1 billion in assets as of December 1, 2008, consisting primarily of Separate Accounts.

See Note (3) and Note (22)(a) to the Consolidated Financial Statements for additional information on these acquisitions and the related contingent payments.

Recognition of Insurance Proceeds

In the second quarter 2010, Federated obtained the final approval by its insurance carrier for $25 million of claims submitted over the past several years to cover costs associated with the government investigations into past mutual fund trading practices and related

10 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

legal proceedings. Because the retention of these advance insurance payments was contingent upon final approval of the claim by the insurance carrier, Federated had recorded a liability upon receipt of the cash. Upon receipt of final approval from its insurance carrier, Federated reversed the liability and recognized the $25 million of insurance proceeds on the Consolidated Statements of Income as reductions to the operating expense line items originally charged, primarily Professional service fees.

Special Cash Dividends

In the first quarter 2010, Federated paid $1.26 per share, or $129.8 million, as a special cash dividend to shareholders. This payment was in addition to the aggregate $0.96 per share, or $98.9 million, regular quarterly cash dividends paid throughout the course of 2010. The first quarter 2010 dividend of $1.50 per share negatively impacted first quarter 2010 diluted earnings per share by approximately $0.04 per share due to the application of the two-class method of calculating earnings per share.

In 2008, Federated paid $2.76 per share or $281.2 million as a special cash dividend to shareholders. This payment was in addition to the aggregate $0.93 per share, or $94.5 million, regular quarterly cash dividends paid throughout the course of 2008.

All dividends were considered ordinary dividends for tax purposes.

Amended and Restated Term Loan and Interest Rate Swap

In the second quarter 2010, Federated entered into a five-year $425 million amended and restated term loan credit agreement (Term Loan). The Term Loan amended and restated Federated’s $140 million term loan dated August 19, 2008. The Term Loan requires principal payments of $10.6 million per quarter for the first four years and $63.8 million per quarter for the fifth year with the final payment due on April 1, 2015.

The borrowings under the Term Loan bear interest at a spread over the London Interbank Offering Rate (LIBOR). During the first quarter 2010, Federated entered into an interest rate swap transaction (the Swap) which became effective in the second quarter 2010, to hedge its interest rate risk associated with the Term Loan. The Swap had an initial notional amount of $425 million that declines in accordance with the scheduled principal payments associated with the Term Loan. Under the Swap, which expires on April 1, 2015, Federated receives payments based on LIBOR plus a spread and makes payments based on an annual fixed rate of 4.396%. The Term Loan qualified for modification accounting treatment. Accordingly, closing costs of $2.8 million were capitalized in the second quarter 2010 and are being amortized over the 5-year term of the loan. See Note (12) to the Consolidated Financial Statements for additional information regarding the Term Loan and Swap.

Asset Impairments

Since 2008, Federated has experienced significant declines in the assets under management related to certain quantitative investment products acquired in 2006. The declines in assets under management reflect significant market depreciation as well as investor net redemptions. In light of these declines in assets under management, performance relative to peers and indices and the uncertainty regarding each of these in the future, the carrying values of the related intangible assets have been tested for recoverability at various times over the last two years. In 2009, as a result of management’s impairment testing, Federated recorded a $15.5 million impairment charge in Intangible asset amortization and impairment on the Consolidated Statements of Income. In 2010, Federated recorded $10.2 million in impairment charges on the Consolidated Statements of Income, $8.2 million of which was included in Intangible asset amortization and impairment with the remainder in Other operating expenses. See Note (7)(b) and Note (9) to the Consolidated Financial Statements for additional information regarding these impairments and future amortization expense estimates. Given the uncertainties regarding future market conditions, the timing and pace of a forecasted recovery and possible prolonged periods of underperformance of the quantitative products compared to peers and indices and the significance of these factors to assets under management, management cannot be certain of the outcome of future undiscounted cash flow analyses.

As a result of deterioration in the resale market for used aircraft in 2008 and 2009 and management’s intent to sell its aircraft before the end of its previously estimated useful life, Federated recognized impairment charges totaling $5.2 million to write down the carrying value of one of Federated’s aircraft to $3.4 million in 2009. The impairment charges were recorded as operating expense in Other on the Consolidated Statements of Income for the year ended December 31, 2009. As a result of adopting a plan to sell this aircraft late in 2009, the aircraft was included in Other current assets on the Consolidated Balance Sheets as of December 31, 2009. In the first quarter 2010, this aircraft was sold for net proceeds of $3.3 million. The loss on sale was recorded as an operating expense in Other on the Consolidated Statements of Income in the first quarter 2010.

B-Shares

Federated began self-funding the payment of sales commissions on the sale of Class B shares of its sponsored mutual funds in March 2010. Federated capitalizes the upfront commissions related to these B-share sales as deferred sales commissions. The deferred sales commission asset is amortized over the estimated period of benefit of up to eight years. Distribution and shareholder service fees earned are recognized in Other service fees, net-affiliates on the Consolidated Statements of Income over the life of the mutual fund share class. Contingent deferred sales charges collected on these share classes are used to reduce the deferred sales commission asset. As of December 31, 2010, Federated has funded $5.0 million in B-share deferred sales commissions.

2010 Annual Report 11

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Asset Highlights

Managed Assets at Period End


in millions as of December 31,	2010		2009		Percent Change
By Asset Class
Money market	$	276,026	$	313,260		(12	%)
Fixed-income		40,705		33,787		20	%
Equity		30,802		29,673		4	%
Liquidation portfolios ¹		10,708		12,596		(15	%)

Total managed assets	$	358,241	$	389,316		(8	%)

By Product Type
Mutual Funds:
Money market	$	244,796	$	281,569		(13	%)
Fixed-income		31,933		28,427		12	%
Equity		22,626		20,960		8	%

Total mutual fund assets		299,355		330,956		(10	%)

Separate Accounts:
Money market		31,230		31,691		(1	%)
Fixed-income		8,772		5,360		64	%
Equity		8,176		8,713		(6	%)

Total separate account assets		48,178		45,764		5	%

Liquidation Portfolios ¹	$	10,708	$	12,596		(15	%)

Total managed assets	$	358,241	$	389,316		(8	%)

Average Managed Assets


in millions for the years ended December 31,	2010	2009		2008		2010 vs. 2009			2009 vs. 2008
By Asset Class
Money market	$268,701	$	343,265	$	283,901		(22	%)		21	%
Fixed-income	37,690		28,684		22,628		31	%		27	%
Equity	29,104		26,680		34,363		9	%		(22	%)
Liquidation portfolios ¹	11,579		6,966		1,629		66	%		328	%

Total average managed assets	$347,074	$	405,595	$	342,521		(14	%)		18	%

By Product Type
Mutual Funds:
Money market	$238,767	$	311,221	$	254,330		(23	%)		22	%
Fixed-income	30,864		23,989		18,720		29	%		28	%
Equity	21,016		18,325		23,636		15	%		(22	%)

Total average mutual fund assets	290,647		353,535		296,686		(18	%)		19	%

Separate Accounts:
Money market	29,934		32,044		29,571		(7	%)		8	%
Fixed-income	6,826		4,695		3,908		45	%		20	%
Equity	8,088		8,355		10,727		(3	%)		(22	%)

Total average separate account assets	44,848		45,094		44,206		(1	%)		2	%

Liquidation Portfolios ¹	$11,579	$	6,966	$	1,629		66	%		328	%

Total average managed assets	$347,074	$	405,595	$	342,521		(14	%)		18	%

Liquidation portfolios include portfolios of distressed fixed-income securities and liquidating collateralized debt obligation (CDO) products. In the distressed security category, Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over a multi-year period. In the case of liquidating CDOs, the CDO structure has unwound earlier than expected due to events of default related to certain distressed securities in the portfolio.

12 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Changes in Federated’s average asset mix year-over-year across both asset and product types have a direct impact on Federated’s operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates per invested dollar earned on each asset and product type. Equity products generally have a higher management-fee rate than fixed-income products, money market products and liquidation portfolios. Likewise, mutual fund products typically have a higher management-fee rate than Separate Accounts. Similarly, traditional separate accounts typically have a higher management-fee rate than liquidation portfolios. Additionally, certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than managed assets in equity or fixed-income funds. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset type over the last three years:


	Percent of Total Average Managed Assets									Percent of Total Revenue
	2010			2009			2008			2010			2009			2008
By Asset Class
Money market assets		78	%		85	%		83	%		50	%		65	%		61	%
Fixed-income assets		11	%		7	%		7	%		18	%		12	%		9	%
Equity assets		8	%		6	%		10	%		31	%		23	%		29	%
Liquidation portfolios		3	%		2	%		0	%		0	%		0	%		0	%
Other activities		—			—			—			1	%		0	%		1	%

By Product Type
Mutual Funds:
Money market assets		69	%		77	%		74	%		49	%		64	%		60	%
Fixed-income assets		9	%		6	%		5	%		17	%		11	%		9	%
Equity assets		6	%		4	%		7	%		27	%		20	%		25	%
Separate Accounts:
Money market assets		9	%		8	%		9	%		1	%		1	%		1	%
Fixed-income assets		2	%		1	%		2	%		1	%		1	%		0	%
Equity assets		2	%		2	%		3	%		4	%		3	%		4	%
Liquidation Portfolios		3	%		2	%		0	%		0	%		0	%		0	%
Other activities		—			—			—			1	%		0	%		1	%

Total managed assets represent the balance of assets under management at a point in time. By contrast, average managed assets represent the average balance of assets under management during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on assets under management, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.

December 31, 2010 period-end managed assets decreased 8% over period-end managed assets at December 31, 2009 primarily as a result of decreases in money market assets partially offset by increases in fixed-income and equity assets. Average managed assets for 2010 decreased 14% over average managed assets for 2009. Period-end money market assets decreased 12% for 2010 compared to 2009. Average money market assets decreased 22% for 2010 compared to 2009. Period-end equity assets increased 4% for 2010 as compared to 2009. Average equity assets increased 9% for 2010 compared to 2009 primarily due to market appreciation. Period-end fixed-income assets increased 20% for 2010 as compared to 2009. Average fixed-income assets increased 31% for 2010 as compared to 2009 primarily due to positive net sales and, to a lesser extent, market appreciation. Liquidation portfolios at December 31, 2010 decreased 15% as compared to December 31, 2009. Average assets in liquidation portfolios increased significantly for 2010 as compared to 2009 primarily due to the selection of Federated to advise a multi-billion-dollar portfolio in the third quarter 2009.

December 31, 2009 period-end managed assets decreased 4% over period-end managed assets at December 31, 2008 primarily as a result of decreases in money market assets partially offset by increases in liquidation portfolios, fixed-income and equity assets. Average managed assets for 2009 increased 18% over average managed assets for 2008. Period-end money market assets decreased 12% for 2009 compared to 2008. Average money market assets increased 21% for 2009 compared to 2008 primarily as a result of the significant inflows of assets into Federated’s money market funds in late 2008 and early 2009. Period-end equity assets increased 11% for 2009 as compared to 2008 due primarily to market appreciation. Average equity assets decreased 22% for 2009 compared to 2008 primarily due to market depreciation and net redemptions which had largely occurred in 2008, partially offset by the Clover Capital and Prudent Bear Acquisitions. Period-end fixed-income assets increased 44% for 2009 as compared to 2008. Average fixed-income assets increased 27% for 2009 as compared to 2008 primarily due to positive net sales and, to a lesser extent, market appreciation and the Prudent Bear and Clover Capital Acquisitions. Period-end and average assets in liquidation portfolios increased significantly in 2009 compared to 2008 primarily due to the selection of Federated to advise a multi-billion-dollar portfolio in the third quarter 2009.

2010 Annual Report 13

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Changes in Fixed-Income and Equity Fund Assets


in millions for the years ended December 31,	2010			2009			Percent Change
Fixed-Income Funds
Beginning assets	$	28,427		$	19,321			47	%

Sales		15,595			16,892			(8	%)
Redemptions		(13,136	)		(10,073	)		30	%

Net sales		2,459			6,819			(64	%)
Net exchanges		(20	)		128			(116	%)
Market gains and losses/reinvestments ¹		1,067			2,159			(51	%)

Ending assets	$	31,933		$	28,427			12	%

Equity Funds
Beginning assets	$	20,960		$	17,562			19	%

Sales		6,288			5,560			13	%
Redemptions		(7,041	)		(5,607	)		26	%

Net redemptions		(753	)		(47	)		1,502	%
Net exchanges		(47	)		(90	)		(48	%)
Acquisition-related		0			257			(100	%)
Market gains and losses/reinvestments ¹		2,466			3,278			(25	%)

Ending assets	$	22,626		$	20,960			8	%

1	Reflects approximate changes in the market value of the securities held by the funds, and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.

Changes in Fixed-Income and Equity Separate Account Assets and Liquidation Portfolios


in millions for the years ended December 31,	2010			2009			Percent Change
Fixed-Income Separate Accounts
Beginning assets	$	5,360		$	4,165			29	%

Sales ²		4,303			—			—
Redemptions ²		(1,228	)		—			—

Net sales ²		3,075			510			503	%
Market gains and losses/reinvestments ³		337			685			(51	%)

Ending assets	$	8,772		$	5,360			64	%

Equity Separate Accounts
Beginning assets	$	8,713		$	9,099			(4	%)

Sales ²		1,689			—			—
Redemptions ²		(3,149	)		—			—

Net redemptions ²		(1,460	)		(1,515	)		(4	%)
Net exchanges		41			86			(52	%)
Acquisition-related		0			(257	)		(100	%)
Market gains and losses/reinvestments ³		882			1,300			(32	%)

Ending assets	$	8,176		$	8,713			(6	%)

Liquidation Portfolios
Beginning assets	$	12,596		$	1,505			737	%

Sales ²		12			—			—
Redemptions ²		(1,900	)		—			—

Net (redemptions)/sales ²		(1,888	)		11,085			(117	%)
Market gains and losses/reinvestments ³		0			6			(100	%)

Ending assets	$	10,708		$	12,596			(15	%)

For certain accounts, Sales, Redemptions or Net sales/redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of Market gains and losses/reinvestments. Sales and Redemptions data was not reported prior to 2010, therefore some historical data is not available.

3	Reflects approximate changes in the market value of the securities held in the portfolios, and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.

14 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Results of Operations

Revenue. The following table sets forth components of total revenue from continuing operations for the three years ended December 31:


in millions	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Revenue from managed assets	$	944.4	$	1,169.2	$	1,212.6		(19	%)		(4	%)
Revenue from sources other than managed assets		7.5		6.8		11.1		10	%		(39	%)

Total revenue	$	951.9	$	1,176.0	$	1,223.7		(19	%)		(4	%)

Revenue from managed assets decreased $224.8 million in 2010 as compared to 2009 primarily due to a decrease of $173.7 million resulting from a decrease in average money market assets (inclusive of an offsetting $9.1 million increase in revenue from average assets attributable to the SunTrust Acquisition) and an increase of $121.0 million in voluntary fee waivers by certain money market funds in order to maintain positive or zero net yields. See Business Developments – Continuing Disruption in Global Financial Markets for additional information on the related offsetting reduction in expense and the net impact on operating income. The decrease in revenue was partially offset by an increase of $40.7 million due to an increase in average fixed-income assets and a $31.9 million increase due to an increase in average equity assets.

See Business Developments – Continuing Disruption in Global Financial Markets for a discussion of management’s expectation regarding fee waivers and the related reduction in distribution expense for the first quarter of 2011.

Federated’s ratio of revenue from managed assets to average managed assets for 2010 was 0.27% as compared to 0.29% for 2009. The decrease in the rate was primarily due to the significant increase in voluntary fee waivers to maintain positive or zero net yields for 2010 as compared to 2009, offset by the increase in average fixed-income and equity assets for the same periods of comparison. Average assets invested in money market products for 2010 represented 78% of Federated’s total average managed assets as compared to 85% for 2009, while average fixed-income and equity assets represented 11% and 8% of total average managed assets for 2010, respectively, as compared to 7% and 6% for 2009, respectively. Money market products, fixed-income products and liquidation portfolios generally have a lower management-fee rate than equity products.

Revenue from managed assets decreased $43.4 million in 2009 as compared to 2008. Certain money market fund fees for 2009 totaling $120.6 million were voluntarily waived in order to maintain positive or zero net yields. In addition, revenue from managed assets decreased $113.6 million due to a decrease in average equity assets (excluding assets acquired in connection with the significant acquisitions in the fourth quarter 2008). These decreases were partially offset by an increase in revenue of $120.2 million due to an increase in average money market assets, a $31.6 million increase in revenue generated from assets acquired in connection with significant acquisitions in the fourth quarter 2008, a $19.4 million increase due to an increase in average fixed-income assets excluding assets from the aforementioned significant acquisitions and a $12.4 million decrease in voluntary fee waivers for competitive reasons exclusive of fees waived to maintain positive or zero net yields.

Federated’s ratio of revenue from managed assets to average managed assets for 2009 was 0.29% as compared to 0.35% for 2008. The decrease in the rate was primarily due to the increase in average money market assets for 2009 as compared to 2008, the decrease in average equity assets for the same periods of comparison as well as the significant increase in voluntary fee waivers to maintain positive or zero net yields. Average assets invested in money market products for 2009 represented 85% of Federated’s total average managed assets as compared to 83% for 2008, while average equity assets represented 6% of total average managed assets for 2009 as compared to 10% for 2008. Money market products, fixed-income products and liquidation portfolios generally have a lower management-fee rate than equity products.

2010 Annual Report 15

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Operating Expenses. The following table sets forth operating expenses for the three years ended December 31:


in millions	2010		2009		2008		2010 vs. 2009			2009 vs. 2008
Distribution	$	259.2	$	410.0	$	442.2		(37	%)		(7	%)
Compensation and related		242.9		254.4		237.2		(5	%)		7	%
Professional service fees		19.0		38.1		40.3		(50	%)		(5	%)
Amortization of deferred sales commissions		12.2		18.5		31.4		(34	%)		(41	%)
Intangible asset amortization and impairment		22.5		32.6		18.4		(31	%)		77	%
All other		86.4		93.1		93.0		(7	%)		0	%

Total operating expenses	$	642.2	$	846.7	$	862.5		(24	%)		(2	%)

Total operating expenses for 2010 decreased $204.5 million compared to 2009. Distribution expense decreased $150.8 million primarily due to a $100.2 million decrease in 2010 as compared to 2009 associated with maintaining positive or zero net yields in certain money market funds and a $60.3 million decrease related to lower average money market assets in 2010 as compared to 2009. Professional service fees decreased $19.1 million due primarily to the recognition of $21.6 million in insurance proceeds for certain legal defense costs primarily for civil lawsuits brought against Federated related to excessive fees, late-day trading and market timing. See Contractual Obligations and Contingent Liabilities – Past Mutual Fund Trading Issues and Related Legal Proceedings for more information regarding these lawsuits and Business Developments – Recognition of Insurance Proceeds for additional information on the insurance proceeds. Intangible asset amortization and impairment decreased $10.1 million due primarily to the decrease of impairments of certain customer relationship intangible assets in 2010 as compared to 2009. See Business Developments – Asset Impairments for additional information.

Total operating expenses for 2009 decreased $15.8 million compared to 2008. Distribution expense decreased $32.2 million primarily due to the aforementioned $86.4 million reduction associated with maintaining positive or zero net yields in certain money market funds, partially offset by a $56.3 million increase related to increased average money market assets in 2009 as compared to 2008. Compensation and related expense increased $17.2 million primarily due to: (1) a $10.0 million increase due to a full year of expenses in 2009 for the Clover Capital and Prudent Bear Acquisitions as compared to a partial year in 2008, (2) a $3.8 million increase in incentive compensation exclusive of the impact of the Clover Capital and Prudent Bear Acquisitions and (3) a $3.3 million increase in share-based compensation due primarily to new share-based awards. Intangible asset amortization and impairment increased $14.2 million due primarily to the impairment of certain customer relationship intangible assets in the first quarter 2009. See Business Developments – Asset Impairments for additional information. Amortization of deferred sales commission decreased $12.9 million in 2009 as compared to 2008 primarily due to lower average B-share assets.

Nonoperating Income (Expenses). Nonoperating expenses, net, increased $6.3 million in 2010 as compared to 2009. The increase reflects a $10.7 million increase in Debt expense - recourse related primarily to increased average outstanding loan balances ($5.6 million) and an increase due to a higher average interest rate ($4.6 million) as a result of the Term Loan entered into in the second quarter 2010 partially offset by a $2.3 million increase in Investment income, net primarily related to increases in average investment balances and a $1.3 million increase in Gain (loss) on securities, net primarily due to increased realized gains on investments.

Nonoperating expenses, net, decreased $2.0 million in 2009 as compared to 2008 due to a $5.5 million increase in Gain (loss) on securities, net due primarily to increased market values of trading securities and a $1.4 million decrease in Debt expense – nonrecourse primarily as a result of lower average B-share-related debt balances partially offset by a $3.5 million decrease in Investment income, net primarily related to decreases in average investment balances and average yields and a $1.9 million increase in Debt expense – recourse due to a term-loan facility that Federated entered into in the third quarter 2008.

Income Taxes on Continuing Operations. The income tax provision for continuing operations for 2010, 2009, and 2008 was $112.0 million, $118.3 million, and $128.2 million, respectively. The provision for 2010 decreased $6.3 million as compared to 2009 primarily due to lower Income from continuing operations before income taxes partially offset by increases in state taxes. The provision for 2009 as compared to 2008 decreased $9.9 million primarily due to lower Income from continuing operations before income taxes partially offset by increases in valuation allowances on certain deferred tax assets. The effective tax rate was 37.2% for 2010, 36.2% for 2009, and 35.9% for 2008. See Note (18) to the Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax disclosures.

For 2010, Federated’s pretax book income was $69.0 million in excess of federal taxable income due primarily to $33.8 million in temporary tax differences associated with amortization of certain intangible assets and $20.8 million in temporary tax differences related to the insurance proceeds recognized as income for book purposes in 2010 versus when received in a prior year for tax purposes. See Business Developments – Recognition of Insurance Proceeds.

16 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

For 2009, Federated’s pretax book income was $35.3 million in excess of federal taxable income due primarily to $19.4 million in temporary tax differences associated with amortization of certain intangible assets and $15.5 million in temporary tax differences related to bonus accruals.

For 2008, Federated’s pretax book income was $32.7 million in excess of federal taxable income due primarily to $26.0 million in temporary tax differences associated with amortization of certain intangible assets and permanent tax differences of $16.7 million associated with tax deductions on stock options exercised during the year and $6.8 million associated with dividends paid on certain unvested restricted shares, partially offset by temporary differences of $6.3 million associated with insurance proceeds recognized as income in the year of receipt for tax purposes versus a future year for book purposes (see Note (11) to the Consolidated Financial Statements) and $5.8 million related to deferred sales commissions.

Income from Continuing Operations attributable to Federated Investors, Inc. Income from continuing operations decreased $18.2 million in 2010 as compared to 2009 primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per share for income from continuing operations for the year ended December 31, 2010 decreased $0.19 as compared to the same period of 2009 primarily due to decreased income from continuing operations.

Income from continuing operations decreased $24.2 million in 2009 as compared to 2008 primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per share for income from continuing operations for the year ended December 31, 2009 decreased $0.23 as compared to the same period of 2008 primarily due to decreased income from continuing operations.

Discontinued Operations. Discontinued operations, net of tax totaled $2.8 million for 2008. In 2008, Federated recognized a $4.8 million pre-tax gain for the final contingent payment received from the sale of certain assets associated with its TrustConnect ^® mutual fund processing business (the Clearing Business) to Matrix Settlement and Clearance Services, LLC (Matrix) in 2006. The final payment was calculated as a percentage of Matrix’s second quarter 2008 net revenue above a specific threshold directly attributed to the Clearing Business.

Liquidity and Capital Resources

Liquid Assets. At December 31, 2010, liquid assets, consisting of cash and cash equivalents, investments and receivables, totaled $354.9 million as compared to $141.6 million at December 31, 2009. The increase of $213.3 million primarily reflects an increase of $108.3 million in Cash and cash equivalents and an increase of $103.3 million in investments which are described further below.

Cash Provided by Operating Activities. Net cash provided by operating activities totaled $215.9 million for 2010 as compared to $274.6 million for 2009. The decrease of $58.7 million for 2010 as compared to 2009 was primarily due to a decrease in cash received from customers due to the $224.8 million decrease in revenue from managed assets previously discussed and an $8.6 million increase in cash paid for interest due to the increased average outstanding loan balances and a higher average interest rate as a result of the Term Loan. These items were partially offset by a decrease in cash paid for operating expenses primarily related to the previously discussed $150.8 million decrease in Distribution expense and a $49.8 million decrease in cash paid for taxes primarily due to higher overpayments of estimated taxes in 2009 as compared to 2010.

Cash Used by Investing Activities. In 2010, Federated used $144.4 million for investing activities, which included $99.3 million for purchases of securities available for sale, $49.6 million in cash paid in connection with purchase price payments for current and prior year acquisitions and $47.2 million in cash paid for purchases of loans partially offset by $55.1 million of proceeds from sales of securities available for sale.

Cash Provided (Used) by Financing Activities. In 2010, cash provided by financing activities was $36.8 million. During 2010, Federated borrowed an additional $309.5 million and $97.5 million in connection with the Term Loan and its $200 million revolving credit facility, respectively. In addition, during 2010, Federated repaid $97.5 million and $31.8 million in connection with its $200 million revolving credit facility and its Term Loan, respectively. See Note (12) to the Consolidated Financial Statements for more information on Recourse debt. During 2010, Federated also paid $228.7 million or a total of $2.22 per share in dividends to holders of its common shares.

Borrowings. In 2008, Federated entered into a $140 million term loan. In the second quarter 2010, Federated amended and restated this loan. See Business Developments – Amended and Restated Term Loan and Interest Rate Swap for additional information. Federated repaid $14 million of its borrowings on this loan during 2009 and made $31.8 million in principal payments during 2010.

Federated also has a $200 million revolving credit facility that expires October 31, 2011 (Revolving Credit Facility). As of December 31, 2010, Federated had $200 million available for borrowings on the Revolving Credit Facility. See Note (12) to the Consolidated Financial Statements for more information on Recourse debt.

Proceeds from the debt facilities have been used for general corporate purposes including cash payments related to acquisitions, quarterly dividends and share repurchase programs.

2010 Annual Report 17

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Both the Revolving Credit Facility and the Term Loan have interest coverage ratio covenants (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and leverage ratio covenants (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions. Both the Revolving Credit Facility and the Term Loan have an interest coverage ratio covenant of at least 4 to 1, and as of December 31, 2010, the interest coverage ratio was 26.04 to 1. The Revolving Credit Facility and the Term Loan have leverage ratio covenants of no more than 2 to 1 and no more than 2.5 to 1, respectively. As of December 31, 2010, the leverage ratios for the Revolving Credit Facility and the Term Loan were 1.12 to 1 and 1.09 to 1, respectively. Federated was in compliance with its interest coverage and leverage ratios at and during the year ended December 31, 2010. Each of the Revolving Credit Facility, Term Loan and the Swap also have certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of the debt or the Swap if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.

Future Cash Needs. In addition to the contractual obligations and contingent liabilities described below, management expects that principal uses of cash will include funding distribution expenditures, paying incentive and base compensation, repaying recourse debt obligations, paying shareholder dividends, funding business acquisitions, paying taxes, repurchasing company stock, advancing sales commissions, seeding new products and funding property and equipment acquisitions, including computer-related software and hardware. As a result of the highly regulated nature of the investment management business, management anticipates that expenditures for compliance and investment management personnel, compliance systems and related professional and consulting fees may continue to increase. Resolution of the matters previously described regarding past mutual fund trading issues and related legal proceedings, including the excessive fee cases could result in payments which may have a material impact on Federated’s liquidity, capital resources and results of operations.

On January 27, 2011, the board of directors declared a $0.24 per share dividend to shareholders of record as of February 8, 2011, which was paid on February 15, 2011.

After evaluating Federated’s existing liquid assets, expected continuing cash flow from operations, its remaining borrowing capacity under the Revolving Credit Facility and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs. Although management currently is not projecting to draw on the availability under the Revolving Credit Facility in 2011, management may choose to borrow additional amounts up to the maximum available under the Revolving Credit Facility which could cause total outstanding borrowings to total as much as $593 million.

Management estimates that of the $19.1 million of deferred tax assets (net of valuation allowances) at December 31, 2010, $10.1 million will reverse in 2011. These reversals primarily represent various expenses recorded in 2010 or prior years, but not deductible for tax purposes until 2011, such as certain compensation accruals.

Financial Position

The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Prepaid expenses at December 31, 2010 decreased $11.2 million from December 31, 2009 primarily as a result of a decrease in prepaid taxes due to lower overpayments of estimated tax as of December 31, 2010 as compared to the prior year-end.

Current deferred tax asset, net decreased $10.0 million from December 31, 2009 primarily as a result of the recognition in 2010 of insurance proceeds recorded as taxable income in a prior year.

Goodwill at December 31, 2010 increased $53.6 million from December 31, 2009. During 2010, Federated recorded goodwill primarily in connection with accruals and contingent purchase price payments related to the Prudent Bear Acquisition ($44.7 million) and the 2005 acquisition of the cash management business of Alliance Capital Management L.P. (Alliance Acquisition) ($6.8 million). See Note (22)(a) to the Consolidated Financial Statements for additional information. As of December 31, 2010, Federated’s market capitalization exceeded the recorded goodwill balance by more than 300%.

Other current liabilities at December 31, 2010 decreased $36.7 million from December 31, 2009 primarily due to the contingent purchase price payment accrual of $28.9 million related to the Alliance Acquisition (see Contractual Obligations and Contingent Liabilities – Contractual for additional information) and the recognition in 2010 of $20.8 million in insurance proceeds that were accrued at December 31, 2009 (see Business Developments - Recognition of Insurance Proceeds for additional information). These items were partially offset by an accrual of $11.7 million related to the interest rate swap (see Business Developments – Amended and Restated Term Loan and Interest Rate Swap for additional information) and $5.3 million for the short-term portion of the SunTrust Acquisition future consideration payments liability (see Business Developments – Business Combinations and Acquisitions for additional information).

18 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Long-term deferred tax liability, net increased $12.1 million from December 31, 2009 primarily as a result of differences in the amortization of intangible assets.

Off-Balance Sheet Arrangements

As of December 31, 2010 and 2009, Federated did not have any material off-balance sheet arrangements.

Contractual Obligations and Contingent Liabilities

Contractual. The following table presents as of December 31, 2010, Federated’s significant minimum noncancelable contractual obligations by payment date. The payment amounts represent amounts contractually due to the recipient and do not include any unamortized discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included either in the referenced Note to the Consolidated Financial Statements or in a footnote to the table.


				Payments due in
in millions	Note Reference			2011		2012-2013		2014-2015		After 2015		Total
Long-term debt obligations ¹		(12	)	$	59.5	$	113.3	$	287.3	$	0	$	460.1
Operating lease obligations		(17	)		12.3		23.2		14.7		7.0		57.2
Purchase obligations ²					9.2		5.6		1.4		0.8		17.0
Employment-related commitments ³					29.5		18.5		7.6		0		55.6
Acquisition-related contingent payments		(22	)(a)		46.5		0		0		0		46.5

Total				$	157.0	$	160.6	$	311.0	$	7.8	$	636.4

Amounts include principal and interest payments. Assuming the recourse debt balance and the weighted-average interest rate in effect at December 31, 2010 (see Note (12) to the Consolidated Financial Statements), Federated’s minimum contractual interest payments would be approximately $17.0 million, $28.3 million and $11.1 million for 2011, 2012-2013 and 2014-2015, respectively.

Federated is a party to various contracts pursuant to which it receives certain services including legal, access to various fund-related information systems and research databases, as well as trade order transmission and recovery services. These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms. The contracts expire on various dates through the year 2019. Costs for such services are expensed as incurred.

3	Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation payments. These contracts expire on various dates through the year 2014.

As part of the SunTrust Acquisition, Federated is required to make contingent purchase price payments over the five-year period following the acquisition date. The contingent purchase price payments will be calculated as a percentage of revenue less operating expenses directly attributed to certain eligible assets. At December 31, 2010, management estimated contingent payments could total $27 million over five years, however, the actual amount of the contingent payments will vary based on asset levels and related net revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the extent of reasonably possible flow-rate volatility for the assets under management. As of December 31, 2010, a liability of $20.1 million representing the fair value of future consideration payments was recorded in Other current liabilities ($5.3 million) and Other long-term liabilities ($14.8 million) (see Note (7)(a) to the Consolidated Financial Statements for a discussion regarding the valuation methodology). This liability is remeasured at each reporting date with changes in the fair value recognized on the Consolidated Statements of Income.

As part of the Prudent Bear Acquisition, Federated is required to make contingent purchase price payments based upon certain revenue growth targets over the four-year period following the acquisition date. The contingent purchase price payments will be recorded as additional goodwill at the time the contingency is resolved. The first contingent purchase price payment of $5.1 million was paid in the first quarter of 2010. As of December 31, 2010, $44.7 million was accrued in Accounts payable and accrued expenses on the Consolidated Balance Sheets for the second anniversary year payment and was paid in January 2011. The remaining contingent purchase price payments could total as much as $49.0 million.

As part of the Clover Capital Acquisition, Federated is required to make contingent purchase price payments based upon growth in revenues over the five-year period following the acquisition date. The contingent purchase price payments, which could total as much as $56 million, will be recorded as additional goodwill at the time the contingency is resolved. The applicable growth targets were not met for the first two anniversary years and as such, no amounts were accrued or paid related to 2009 or 2010.

As part of the Alliance Acquisition, Federated was required to make contingent purchase price payments over a five-year period following the acquisition date. These payments were primarily calculated as a percentage of revenues less certain operating expenses directly attributed to the assets acquired. Contingent purchase price payments of $10.7 million, $13.3 million, $16.2 million, $19.8 million and $32.4 million were paid in the second quarters of 2006, 2007, 2008, 2009 and 2010, respectively. In addition, a final contingent purchase payment of $3.3 million was paid in the third quarter 2010. Contingent payments were recorded as additional goodwill at the time the related contingency was resolved.

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of Financial Condition and Results of Operations

(Rochdale Acquisition). The Rochdale Acquisition agreement provides for two forms of contingent purchase price payments that are dependent upon asset growth and fund performance through 2012. The first form of contingent payment is payable in 2010 and 2012 and could aggregate to as much as $20 million. The second form of contingent payment is payable on a semi-annual basis over the five-year period following the acquisition closing date based on certain revenue earned by Federated from the Federated InterContinental Fund. As of December 31, 2010, $3.0 million was paid in semi-annual contingent purchase price payments, $0.3 million was accrued related to future semi-annual contingent purchase price payments and $1.1 million was paid in the fourth quarter 2010 with regard to the first form of contingent payment. The future semi-annual contingent purchase price payment was accrued in Other current liabilities and recorded as goodwill. Contingent payments are recorded as additional goodwill at the time the related contingency is resolved.

As part of the 2006 acquisition of MDTA LLC (MDTA), Federated was required to make annual contingent purchase price payments based upon growth in MDTA net revenues over a three-year period. The first two contingent purchase price payments of $43.3 million and $40.9 million were paid in the third quarters of 2007 and 2008, respectively, and were recorded as goodwill. The applicable growth targets were not met for the final payment related to the anniversary year ended in July 2009. As such, no further payments are required.

In addition to the $29.5 million of employee-related commitments to be paid in 2011, Federated may be required to make certain incentive compensation-related payments in connection with various significant employment arrangements. The employment contracts expire on various dates through the year 2014 with payments possible through 2018. As of December 31, 2010, the maximum bonus payable over the remaining terms of the contracts approximates $73 million, of which approximately $5 million would be payable in 2011 if the necessary performance targets are met and the employees continue to be employed as of the relevant payment dates. In addition, certain employees have incentive compensation opportunities related to the Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on asset levels at December 31, 2010, $0.2 million would be paid in 2011 as the first Fund Bonus payment. Management is unable to reasonably estimate a range of possible bonus payments for the Fund Bonus for subsequent years due to the wide range of possible growth-rate scenarios.

Past Mutual Fund Trading Issues and Related Legal Proceedings. During the fourth quarter 2005, Federated entered into settlement agreements with the Securities and Exchange Commission (SEC) and New York State Attorney General (NYAG) to resolve the past mutual fund trading issues. Under the terms of the settlements, Federated paid for the benefit of fund shareholders a total of $80.0 million. In addition, Federated agreed to reduce the investment advisory fees on certain Federated Funds by $4.0 million per year for the five-year period beginning January 1, 2006, based upon effective fee rates and assets under management as of September 30, 2005. These mandatory fee waiver reductions expired on December 31, 2010. Depending upon the level of assets under management in the funds subject to these fee waivers during the five-year period, the actual investment advisory fee reduction could have been greater or less than $4.0 million per year. For each of the years ended December 31, 2010, 2009 and 2008, these fee reductions were approximately $3 million.

Since October 2003, Federated has been named as a defendant in twenty-three cases filed in various federal district courts and state courts involving allegations relating to market timing, late trading and excessive fees. One market timing/late trading case was voluntarily dismissed by the plaintiff without prejudice. 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. Without admitting the validity of any claim, Federated reached a settlement with the plaintiffs in these pending cases. The settlement was accrued in a prior period and the accrual was not material to the Consolidated Financial Statements. A hearing to address final approval of the settlement was held on October 21 and October 22, 2010. The Court entered an order granting final approval of the settlement on October 25, 2010.

The seven excessive fee cases were originally filed in five different federal courts and one state court. All six of the federal cases are now consolidated and 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.

The plaintiffs in the excessive fee cases seek compensatory damages reflecting a return of all advisory fees earned by Federated in connection with the management of the Federated Kaufmann Fund since June 28, 2003, as well as attorneys’ fees and expenses. Federated is defending this litigation and a trial date has been set for April 12, 2011. The potential impact of these lawsuits and similar suits against third parties, as well as the timing of settlements, judgments or other resolution of these matters, is uncertain. An unfavorable determination could cause a material adverse impact on Federated’s financial position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.

The Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008 reflect $9.2 million, $10.6 million and $7.5 million, respectively, for costs associated with various legal, regulatory and compliance matters, including costs incurred on behalf of the funds, costs incurred and estimated to complete the distribution of Federated’s regulatory settlement, costs related to certain other undertakings of these settlement agreements, and costs incurred and estimated to resolve certain of the above-mentioned ongoing legal proceedings. Accruals for these estimates represent management’s best estimate of probable losses at this time. Actual

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of Financial Condition and Results of Operations

losses may differ from these estimates, and such differences may have a material impact on Federated’s consolidated results of operations, financial position or cash flows.

Other Legal Proceedings. Federated has other claims asserted and threatened against it in the ordinary course of business. As of December 31, 2010, Federated does not believe that a material loss related to these claims is reasonably estimable. These claims are subject to inherent uncertainties. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s reputation, financial position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.

Variable Interest Entities

Federated is involved with various entities in the normal course of business that may be deemed to be variable interest entities (VIEs). Federated determined that it was the primary beneficiary of certain investment-fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (6) to the Consolidated Financial Statements for more information.

Recent Accounting Pronouncements

On January 1, 2010, Federated adopted the Financial Accounting Standards Board’s new rules governing the consolidation of VIEs, as amended in February 2010 to defer the effective date of the new rules for a reporting entity’s interests in certain investment funds. The new rules prescribe a qualitative model for identifying whether a company has a controlling financial interest in a VIE and eliminates the quantitative model previously prescribed. The new rules identify two primary characteristics of a controlling financial interest: (1) the power to direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or provide rights to receive benefits from the VIE. Under the new accounting standard, a company is required to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. The adoption of the new standard did not have a material impact on Federated’s Consolidated Financial Statements.

For a complete list of new accounting standards recently adopted by Federated and new accounting standards issued, but not yet adopted by Federated, see Note (2) to the Consolidated Financial Statements.

Critical Accounting Policies

Federated’s Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). 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. Management continually evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general, management’s estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management and those differences may be significant.

Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its policies regarding accounting for VIE consolidation, intangible assets, the acquisition-related future consideration liability, income taxes and loss contingencies involve a higher degree of judgment and complexity.

Variable Interest Entity Consolidation. From time to time, Federated enters into transactions with entities that may be VIEs. Federated makes judgments and estimates regarding the sufficiency of equity at risk, the rights of various holders of the entity to exercise control and the rights and obligations of holders to receive returns or absorb losses of the entity in order to determine whether these entities are VIEs. Whether at the time of Federated’s initial involvement with a VIE or as a result of a reconsideration event, Federated performs qualitative and quantitative analysis of a VIE to determine whether Federated is the primary beneficiary and therefore, must consolidate the VIE. In performing these analyses, Federated makes judgments and estimates regarding the future performance of the assets held by the VIE, taking into account estimates of credit risk, timing of cash flows and other significant factors, and the likelihood of various outcomes. With respect to a mutual fund that meets the definition of a VIE, reconsideration events occur frequently (e.g. as shares are issued or redeemed from the fund) but the risk of consolidation by Federated is typically low once the fund is well established. For CDOs that qualify as VIEs, reconsideration events are typically infrequent.

Accounting for Intangible Assets. Three aspects of accounting for intangible assets require significant management estimates and judgment: (1) valuation in connection with the initial purchase price allocation; (2) ongoing evaluation for impairment and (3) the determination of the useful life or whether the life is indefinite. The process of determining the fair value of identifiable intangible assets at the date of acquisition requires management estimates and judgment as to expectations for earnings on the related managed assets acquired, redemption rates for such managed assets, growth from sales efforts and the effects of market conditions. Management often utilizes an independent valuation expert to help with this process. If actual changes in the related managed assets or the projected useful life of the intangible asset, among other assumptions, differ significantly from the estimates and judgments used in determining the initial fair value, the intangible asset amounts recorded in the financial statements could be subject to possible

2010 Annual Report 21

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

impairment or could require an acceleration in amortization expense that could have a material adverse effect on Federated’s consolidated financial position and results of operations.

The level, if any, of impairment of customer-relationship intangible assets is highly dependent upon the remaining level of managed assets acquired in connection with an acquisition. Management monitors changes in the level of these managed assets for potential indicators of impairment. The recoverability of a finite-lived customer relationship intangible asset is assessed using an undiscounted cash flow model that considers various factors to project future cash flows expected to be generated from the respective asset. The fair value of indefinite-lived renewable investment advisory rights are also highly dependent upon the level of managed assets associated with the advisory rights. The indefinite-lived intangible assets are tested for impairment annually and/or when events or changes in circumstances indicate the assets may be impaired. Impairment is indicated when the carrying value of the intangible asset exceeds its fair value. In estimating the fair value of the indefinite-lived intangible assets, Federated considers the results of various valuation techniques including an income approach where future cash flows are discounted.

In developing cash flow estimates, management considers the following: (1) an estimated rate of change for underlying managed assets; (2) expected revenue per managed asset; (3) identifiable incremental operating expenses; (4) useful life of the acquired asset; and, for indefinite-lived intangible assets; (5) the 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, average market participant data and historical experience.

At December 31, 2010, Federated had $66.4 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets. The indefinite-lived intangible assets related primarily to renewable investment advisory rights acquired in connection with the Prudent Bear Acquisition, for which the underlying managed assets have experienced growth since the acquisition date in excess of the assumptions included in the initial valuation, and the recently completed SunTrust Acquisition. Based on testing performed in 2010, it was determined that no impairment existed for these assets.

For certain finite-lived intangible assets related to quantitative investment products, additional impairment charges were recorded in 2010 to write the assets down to a fair value of $2.8 million as of December 31, 2010. The undiscounted cash flows associated with the new fair value estimate exceed the carrying amount of the assets by more than 80%. The undiscounted cash flows were estimated using probability-weighted scenarios which assumed assets under management annualized growth rates ranging from -100% to 9%. The different scenarios were developed after taking into consideration uncertain market conditions, the timing and pace of a forecasted recovery and the likelihood and potential impact of prolonged periods of underperformance of the quantitative products compared to peers and indices. As of December 31, 2010, declines in assets under management related to these intangible assets in excess of 20% over the subsequent twelve months could cause the assets to be considered for further impairment.

For the remaining $16.3 million in finite-lived intangible assets, no indicators of impairment existed as of December 31, 2010 and no impairments were recorded during 2010.

Actual changes in the underlying managed assets and other assumptions could cause the projected cash flows to vary significantly, which may cause impairment of the related identifiable intangible asset. The actual amount of an impairment charge, if any, would depend on the estimated fair value of the intangible asset at that time, which will be determined based on the actual level of managed assets, the then-current projections of future changes in managed assets, estimated earnings and the discount rate.

Accounting for the SunTrust Acquisition-Related Future Consideration Liability. Federated is required to carry its liability for future consideration payments related to the SunTrust Acquisition at fair value each period end with changes in fair value recorded in earnings. As of December 31, 2010, a $20.1 million liability was recorded. Future consideration will be calculated as a percentage of revenue less operating expenses directly attributed to certain eligible assets. The process of estimating the fair value of the related liability requires management estimates and judgment as to expectations for the amount of net revenue to be earned on the applicable assets under management, net flow rates for such assets under management and the discount rate. Expected net revenue per managed asset is generally based on contract terms and historical experience. Net flow rates are estimated by evaluating historical net flow rates in similar money market funds and recent trends in the eligible assets under management. The discount rate is estimated as the current market rate of return.

With the help of an independent valuation expert, management is performing a valuation to estimate the fair value of the liability as of the acquisition date. Preliminary results of such valuation are reflected in the Consolidated Financial Statements and the related footnotes as of and for the year ended December 31, 2010. Final valuation results may require adjustments to this preliminary valuation and such adjustments may be material. In addition, if management’s estimates and judgment regarding changes in the related managed assets, revenue earned from the managed assets or the discount rate, among other assumptions, differ significantly at a period-end date as compared to the estimates and judgments used in determining the fair value as of the prior period-end date, the adjustment to record the change in the fair value of the liability could result in a significant favorable or unfavorable adjustment to earnings which could have a material effect on Federated’s consolidated financial position and results of operations.

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of Financial Condition and Results of Operations

Accounting for Income Taxes. Significant management judgment is required in developing Federated’s provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. As of December 31, 2010, Federated had not recorded a valuation allowance on $2.3 million of its deferred tax assets relating to capital losses (recognized for tax purposes) and write-downs of Federated’s CDO investments (unrecognized for tax purposes). Federated considered various factors in connection with its evaluation of the partial realizability of these assets including: (1) for the preponderance of these assets, the five-year carry-forward period for capital losses has not yet begun and (2) Federated has invested available cash with the intent to generate capital gains and has historically generated capital gains in times of favorable market conditions. Based on these factors, management believes it is more likely than not that Federated will be able to utilize a portion of these losses in the future. In the event that Federated’s strategies do not materialize, Federated may be required to record an additional valuation allowance of as much as $2.3 million for these deferred tax assets.

Significant management judgment is required to account for uncertainty in income taxes. The processes of determining (1) whether it is more likely than not that a position will be sustained upon examination and (2) the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority require management estimates and judgment as to expectations of the amounts and probabilities of the outcomes that could be realized. Management considers the facts and circumstances available as of the reporting date in order to determine the appropriate tax benefit to recognize including tax legislation and statutes, legislative intent, regulations, rulings and case law. Significant differences could exist between the ultimate outcome of the examination of a tax position and management’s estimate. These differences could have a material impact on Federated’s effective tax rate, results of operations, financial position and/or cash flows.

Accounting for Loss Contingencies. Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings when it is probable that a loss 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 and/or cash flows.

Risk Factors

Potential Adverse Effects of a Material Concentration in Revenue. For 2010, approximately 50% of Federated’s total revenue was attributable to money market assets as compared to 65% and 61% for 2009 and 2008, respectively. A significant change in Federated’s money market business or a significant decline in money market assets due to regulatory changes, changes in the financial markets including significant increases in interest rates over a short period of time, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

Potential Adverse Effects of Historically Low Interest Rates. In December 2008, the Federal Reserve cut the federal funds target rate, a benchmark used by banks to set rates paid on many types of consumer and business loans, to a range between 0% and 0.25%. This action by the Federal Reserve negatively impacts the yields of money market funds, in particular treasury and government agency money market funds. Money market fund yields reflect the return on short-term investments (e.g. Treasury bills), less fund expenses. With short-term interest rates at or near zero, money market funds may not be able to maintain positive yields for shareholders. Federated voluntarily waives certain fees or assumes expenses of the funds for competitive reasons such as to maintain positive or zero net yields, which has and could continue to cause material adverse effects on Federated’s results of operations. Federated, however, is not obligated to make such fee waivers or to assume such fund expenses.

Federated began waiving fees during the fourth quarter 2008 in order for certain funds to maintain positive or zero net yields. During 2010, fee waivers to maintain positive or zero net yields totaled $241.6 million and were partially offset by a related reduction in distribution expenses of $186.6 million such that the net impact to Federated was $55.0 million in reduced operating income. The impact of these fee waivers for 2010 was significantly more than the impact for 2009 with $120.6 million in waived fees, $86.4 million in reduced distribution expenses and a net impact on operating income of $34.2 million and the impact for 2008 with $3.6 million in waived fees, $1.9 million in reduced distribution expenses and a net impact on operating income of $1.7 million. (See Note (24) to the Consolidated Financial Statements for information regarding the quarterly operating income impact of the fee waivers.) Management expects the fee waivers and the related reduction in distribution expense will continue into 2011 and will likely be material. Management does not expect the quarterly operating income impact from these waivers for the first quarter of 2011 to change materially from the $12.3 million experienced in the fourth quarter 2010. These fee waivers are expected to decrease over time as the market begins to factor in the potential for increases in short-term interest rates and then again when the Federal Reserve begins to increase interest rates. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the operating income impact of these waivers by about one-third from the current levels and a 25-basis-point increase would reduce the impact by about two-thirds. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve

2010 Annual Report 23

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

and the U.S. Department of the Treasury, changes in expenses of the money market funds, changes in the mix of money market customer assets and Federated’s willingness to continue the fee waivers.

Potential Adverse Effects of Rising Interest Rates. In a rising short-term interest rate environment, certain investors using money market products and other short-term duration fixed-income products for cash management purposes may shift these investments to direct investments in comparable instruments in order to realize higher yields than those available in money market and other fund products holding lower-yielding instruments. In addition, rising interest rates will tend to reduce the market value of securities held in various investment portfolios and other products. Thus, increases in interest rates could have an adverse effect on Federated’s revenue from money market products and from other fixed-income products.

Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market downturns, including disruptions in securities and credit markets, may adversely affect the profitability and performance of, demand for and investor confidence in Federated’s investment products and services. The ability of Federated to compete and sustain asset and revenue growth is dependent, in part, on the relative attractiveness of the types of investment products Federated offers and its investment performance and strategies under prevailing market conditions. In the event of extreme circumstances, including economic, political, or business crises, Federated’s products may suffer significant net redemptions in assets under management causing severe liquidity issues in its short-term sponsored investment products and declines in the value of and returns on assets under management, all of which could cause material adverse effects on Federated’s reputation, financial position, results of operations or liquidity.

Likewise, a service provider or vendor of Federated, including the major banks that provide custody and portfolio accounting services for Federated’s investment products, could also be adversely affected by the adverse market conditions described above. It is not possible to predict with certainty the extent to which the services or products Federated receives from such service provider or vendor would be interrupted or affected by such situations. Accordingly, there can be no assurance that potential service interruption or Federated’s ability to find a suitable replacement would not have a material adverse effect on Federated’s reputation, financial position, results of operations or liquidity.

Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business. Federated and its investment management business are subject to extensive regulation in the United States and abroad. Federated and the Federated Funds are subject to Federal securities laws, principally the Securities Act of 1933, the Investment Company Act of 1940 (Investment Company Act) and the Investment Advisers Act of 1940, state laws regarding securities fraud, and regulations promulgated by various regulatory authorities, including the SEC, the Financial Industry Regulatory Authority (FINRA), and the New York Stock Exchange (the NYSE). Federated is also affected by the regulations governing banks and other financial institutions and, to the extent operations take place outside the United States, by foreign laws and regulatory authorities. Changes in laws, regulations or governmental policies, and the costs associated with compliance, could materially and adversely affect the business and operations of Federated.

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of Financial Condition and Results of Operations

redemptions and describes the advantages and disadvantages of a variety of policy options that could reduce the risk of such rapid redemptions. The Report suggests that the FSOC examine these options as part of its implementation of the Dodd-Frank Act. At this time, it is difficult to assess what impact, if any, the Report’s recommendations will have on Federated.

Over the past few years, various service industries, including mutual fund service providers, have been the subject of changes in tax policy that impact their state and local tax liability. Changes that have been adopted or proposed include (1) an expansion of the nature of a service company’s activities that subject it to tax in a jurisdiction, (2) a change in the methodology by which multi-state companies apportion their income between jurisdictions, and (3) a requirement that affiliated companies calculate their state tax as one combined entity. As adopted changes become effective and additional jurisdictions effect similar changes, there could be a material adverse effect on Federated’s tax liability and effective tax rate and, as a result, net income.

Potential Adverse Effect of Providing Financial Support to Investment Products. Federated may, at its sole discretion, from time to time elect to provide financial support to its sponsored investment products. Providing such support utilizes capital that would otherwise be available for other corporate purposes. Losses on such support, or failure to have or devote sufficient capital to support products, could have a material adverse effect on Federated’s reputation, financial position, results of operations or liquidity.

Risk of Federated’s Money Market Products’ Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 50% of Federated’s total revenue for 2010 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation. Although money market funds seek to preserve an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated devotes substantial resources including significant credit analysis to the management of its products. Federated money market funds have always maintained a $1.00 NAV; however, there is no guarantee that such results will be achieved in the future. Market conditions could lead to severe liquidity issues and/or prolonged periods of historically low yields in money market products which could impact their NAVs. If the NAV of a Federated money market fund were to decline to less than $1.00 per share, Federated money market funds would likely experience significant redemptions in assets under management, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated’s financial position, results of operations or liquidity.

No Assurance of Access to Sufficient Liquidity. From time to time, Federated’s operations may require more cash than is then available from operations. In these circumstances, it may be necessary to borrow from lending facilities or to raise capital by securing new debt or by selling shares of Federated equity or debt securities. Federated’s ability to raise additional capital in the future will be affected by several factors including Federated’s creditworthiness, the market value of Federated’s common stock, as well as general market conditions. There can be no assurance that Federated will be able to obtain these funds and financing on acceptable terms, if at all.

Retaining and Recruiting Key Personnel. Federated’s ability to locate and retain quality personnel has contributed significantly to its growth and success and is important to attracting and retaining customers. The market for qualified executives, investment managers, analysts, traders, sales representatives and other key personnel is extremely competitive. There can be no assurance that Federated will be successful in its efforts to recruit and retain the required personnel. Federated has encouraged the continued retention of its executives and other key personnel through measures such as providing competitive compensation arrangements and in certain cases employment agreements. The loss of any such personnel could have an adverse effect on Federated. In certain circumstances, the departure of key employees could cause higher redemption rates for certain assets under management or the loss of client accounts. Moreover, since certain of Federated’s products contribute significantly to its revenues and earnings, the loss of even a small number of key personnel associated with these products could have a disproportionate impact on Federated’s business.

Various executives, investment, sales and other key personnel own restricted stock and hold stock options subject to vesting periods of up to ten years from the date acquired or awarded and to provisions that require resale or forfeiture to Federated in certain circumstances upon termination of employment. In addition, certain of these employees are employed under contracts which require periodic review of compensation and contain restrictive covenants with regard to divulging confidential information and engaging in competitive activities.

Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment management business is highly competitive. Federated competes in the management and distribution of mutual funds and Separate Accounts with other fund management companies, national and regional broker/dealers, commercial banks, insurance companies and other institutions. Many of these competitors have substantially greater resources and brand recognition than Federated. Competition is based on various factors, including business reputation, investment performance, quality of service, the strength and continuity of management and selling relationships, distribution services offered, the range of products offered and fees charged.

Many of Federated’s products are designed for use by institutions such as banks, insurance companies and other corporations. A large portion of Federated’s managed assets, particularly money market and fixed-income assets are held by institutional investors. Because most institutional investment vehicles are sold without sales commissions at either the time of purchase or the time of redemption, institutional investors may be more inclined to transfer their assets among various institutional funds than investors in retail mutual funds.

2010 Annual Report 25

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

A significant portion of Federated’s revenue is derived from providing mutual funds to the wealth management and trust market, comprising approximately 1,500 banks and other financial institutions. Future profitability of Federated will be affected by its ability to retain its share of this market, and could also be adversely affected by consolidations occurring in the banking industry, as well as regulatory changes.

Potential Adverse Effects of Changes in Federated’s Distribution Channels. Federated acts as a wholesaler of investment products to financial intermediaries including banks, broker/dealers, registered investment advisers and other financial planners. Federated also sells investment products directly to corporations and institutions. Approximately 12% of Federated’s total revenue for 2010 was derived from services provided to one intermediary customer, the Bank of New York Mellon Corporation (including its Pershing subsidiary). If this financial intermediary were to cease operations or limit or otherwise end the distribution of Federated’s investment products, it could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income. There can be no assurance that Federated will continue to have access to the financial intermediaries that currently distribute Federated products or that Federated’s relationship with such intermediaries will continue over time. In addition, Federated has experienced increases in the cost of distribution as a percentage of total revenue over the years and expects such costs to continue to increase due to asset growth and the competitive nature of the mutual fund business, exclusive of decreases related to maintaining positive or zero net yields. Higher distribution costs reduce Federated’s operating and net income.

Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets Under Management. A significant portion of Federated’s revenue is derived from investment advisory fees, which are based on the value of managed assets and vary with the type of asset being managed, with higher fees generally earned on equity products than on fixed-income and money market products and liquidation portfolios. Likewise, mutual fund products generally have a higher management fee than Separate Accounts. Similarly, traditional separate accounts typically have a higher fee rate than liquidation portfolios. Additionally, certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Consequently, significant fluctuations in the market value of securities held by, or the level of redemptions from, the funds or other products advised by Federated may materially affect the amount of managed assets and thus Federated’s revenue, profitability and ability to grow. Similarly, changes in Federated’s average asset mix across both asset and product types have a direct impact on Federated’s revenue and profitability. Federated generally pays out a larger portion of the revenue earned from assets in money market funds than assets in equity or fixed-income funds. Substantially all of Federated’s managed assets are in investment products that permit investors to redeem their investment at any time. Additionally, changing market conditions may continue to cause a shift in Federated’s asset mix towards money market and fixed-income products which may cause a decline in Federated’s revenue and net income.

Adverse Effects of Poor Investment Performance. Success in the investment management business is largely dependent on investment performance relative to market conditions and the performance of competing products. Good performance generally assists retention and growth of assets, resulting in additional revenues. Conversely, poor performance tends to result in decreased sales and increased redemptions with corresponding decreases in revenues to Federated. Poor performance could, therefore, have a material adverse effect on Federated’s business, results of operations or business prospects. In terms of revenue concentration by product, approximately 12% of Federated’s total revenue for 2010 was derived from services provided to one sponsored fund (Federated Kaufmann Fund). A significant and prolonged decline in the assets under management in this fund could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to distribution expenses associated with this fund.

Operational Risks. Operational risks include, but are not limited to, improper or unauthorized execution and processing of transactions, deficiencies in operating systems, business disruptions, inadequacies or breaches in Federated’s internal control processes and noncompliance with regulatory requirements. Management relies on its employees and systems to comply with established procedures, controls and regulatory requirements. Breakdown or improper use of systems, human error or improper action by employees, or noncompliance with regulatory rules could cause material adverse effects on Federated’s reputation, financial position, results of operations and/or liquidity.

No Assurance of Successful Future Acquisitions. Federated’s business strategy contemplates the acquisition of other investment management companies as well as investment assets. There can be no assurance that Federated will find suitable acquisition candidates at acceptable prices, have sufficient capital resources to realize its acquisition strategy, be successful in entering into definitive agreements for desired acquisitions, or successfully integrate acquired companies into Federated, or that any such acquisitions, if consummated, will prove to be advantageous to Federated.

Impairment Risk. At December 31, 2010, Federated had intangible assets including goodwill totaling $720.8 million on its Consolidated Balance Sheet, the vast majority of which represent assets capitalized in connection with Federated’s acquisitions and business combinations. Accounting for intangible assets requires significant management estimates and judgment. Federated may not realize the value of these intangible assets. Management performs an annual review of the carrying values of goodwill and indefinite-lived intangible assets and periodic reviews of the carrying values of all other intangible assets to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of an intangible asset to become impaired. Should a review indicate impairment, a write-down of the carrying value of the intangible asset would occur, resulting in a non-cash charge which would adversely affect Federated’s results of operations for the period.

26 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Systems and Technology Risks. Federated utilizes software and related technologies throughout its businesses including both proprietary systems and those provided by outside vendors. Unanticipated issues could occur and it is not possible to predict with certainty all of the adverse effects that could result from a failure of a third party to address computer system problems. Accordingly, there can be no assurance that potential system interruptions or the cost necessary to rectify the problems would not have a material adverse effect on Federated’s business, financial condition, results of operations or business prospects. In addition, Federated cannot predict the impact to its business and/or the costs to rectify situations involving unauthorized system access, computer theft and computer viruses.

Adverse Effects of Rising Costs of Risk Management. Since 2001, expenses related to risk management have increased and management expects these costs to be significant going forward. As a result of a heightened regulatory environment, management anticipates that expenditures for risk management personnel, risk management systems and related professional and consulting fees may continue to increase. Insurance coverage for significant risks may not be available or may only be available at prohibitive costs. Renewals of insurance policies may expose Federated to additional cost through the assumption of higher deductibles, and co-insurance liability and/or lower coverage levels. Higher insurance costs, incurred deductibles and lower coverage levels may reduce Federated’s operating and net income.

Potential Adverse Effects Related to Past Mutual Fund Trading Issues and Related Legal Proceedings. In the fourth quarter 2005, Federated entered into settlement agreements with the SEC and NYAG to resolve the past mutual fund trading issues. Since October 2003, Federated has been named as a defendant in twenty-three cases filed in various federal district courts and state courts involving allegations relating to market timing, late trading and excessive fees. The plaintiffs in the excessive fee cases seek compensatory damages reflecting a return of all advisory fees earned by Federated in connection with the management of the Federated Kaufmann Fund since June 28, 2003, as well as attorneys’ fees and expenses. The remaining lawsuits seek unquantified damages, attorneys’ fees and expenses. Federated is defending this litigation. The potential impact of these lawsuits and similar suits against third parties is uncertain. It is possible that an unfavorable determination will cause a material adverse impact to Federated’s reputation, financial position, results of operations and/or liquidity. Responding to future requests from regulatory authorities, defending pending litigation and addressing the undertakings required by the settlement agreements will increase Federated’s operating expenses or may reduce Federated’s revenue and could have other material adverse effects on Federated’s business.

Potential Adverse Effects of Reputational Harm. Any material losses in client or shareholder confidence in Federated or in the mutual fund industry as a result of pending litigation, previously settled governmental inquiries, economic or financial market downturns or disruptions, material errors in public news reports, misconduct, rumors on the internet or other matters could increase redemptions from and reduce sales of Federated Funds and other investment management services, resulting in a decrease in future revenues.

Adverse Effects of Termination or Failure to Renew Fund Agreements. A substantial majority of Federated’s revenues are derived from investment management agreements with sponsored funds that, as required by law, are terminable upon 60 days notice. In addition, each such investment management agreement must be approved and renewed annually by each fund’s board of directors or trustees, including disinterested members of the board, or its shareholders, as required by law. Failure to renew, changes resulting in lower fees, or termination of a significant number of these agreements could have a material adverse impact on Federated. As required by the Investment Company Act, each investment advisory agreement with a mutual fund automatically terminates upon its assignment, although new investment advisory agreements may be approved by the mutual fund’s directors or trustees and shareholders. A sale of a sufficient number of shares of Federated’s voting securities to transfer control of Federated could be deemed an assignment in certain circumstances. An assignment, actual or constructive, will trigger these termination provisions and may adversely affect Federated’s ability to realize the value of these agreements.

Under the terms of the settlement agreement with the SEC and NYAG, a Federated investment advisory subsidiary may not serve as investment adviser to any registered investment company unless: (1) at least 75% of the fund’s directors are independent of Federated; (2) the chairman of each such fund is independent of Federated; (3) no action may be taken by the fund’s board of directors or trustees or any committee thereof unless approved by a majority of the independent board members of the fund or committee, respectively; and (4) the fund appoints a senior officer who reports to the independent directors or trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved.

Potential Adverse Effects of Unpredictable Events. Unpredictable events, including natural disaster, technology failure, pandemic, war and terrorist attack, could adversely impact Federated’s ability to conduct business. Such events could cause disruptions in economic conditions, system interruption, loss of life, unavailability of personnel or additional costs. As such, there can be no assurance that unpredictable events, or the costs to address such events, would not have a material adverse effect on Federated’s business, financial condition, results of operations or business prospects.

Capital Losses on Investments. Federated has and may continue to realize capital losses upon disposition of its investments. To the extent that these losses are not offset by capital gains in the year realized, there are specific rules in each tax jurisdiction (federal and state) that dictate the other tax years, if any, in which these losses may be used to offset net capital gains. The inability to utilize the

2010 Annual Report 27

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

capital loss deferred tax assets net of a valuation allowance within the prescribed timeframe may increase Federated’s federal and/or state income tax expense and, as a result, reduce net income.

28 Federated Investors, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

of Financial Condition and Results of Operations

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of its business, Federated is exposed to risk of loss due to fluctuations in the securities market and general economy. As an investment manager, Federated’s business requires that it continuously identify, assess, monitor and manage market and other risks including those risks affecting its own investment portfolio.

Federated’s investments in marketable securities expose it to various market risks. A single investment can expose Federated to multiple risks. Interest-rate risk is the risk that unplanned fluctuations in earnings will result from interest-rate volatility while credit risk is the risk that an issuer of debt securities may default on its obligations. At December 31, 2010, Federated was exposed to interest-rate risk as a result of holding investments in fixed-income sponsored funds ($60.0 million) and investments in debt securities held by certain sponsored products ($16.2 million). At December 31, 2009, Federated was exposed to interest-rate risk as a result of holding investments in fixed-income sponsored funds ($6.1 million) and investments in debt securities held by certain sponsored products ($5.3 million). At December 31, 2010 and 2009, management considered a hypothetical 100- and 200-basis-point fluctuation in interest rates, respectively, and determined that the impact of such fluctuations on these investments would not have a material effect on Federated’s financial condition or results of operations.

These investments also exposed Federated to credit risk at December 31, 2010 and 2009. At December 31, 2010 and 2009, management considered a hypothetical 50-basis-point fluctuation in credit spreads and determined that the impact of such fluctuations on these investments would not have a material effect on Federated’s financial condition or results of operations.

In the second quarter 2010, Federated entered into a new Term Loan and a Swap (see Business Developments – Amended and Restated Term Loan and Interest Rate Swap). Federated entered into the Swap to convert the variable rate on its Term Loan to a fixed rate thereby mitigating its exposure to interest-rate risk. As of December 31, 2010, Federated’s fair value on the Swap was a liability of $11.7 million. The fair value of the Swap is recognized in earnings as a component of Federated’s interest rate which is fixed at 4.396% over the term of the loan. Near-term reductions in the fair value of the Swap are reasonably possible as a result of changes in projected interest rates. Management performed a sensitivity analysis of the fair value of the Swap and considered hypothetical six- and twelve-month forward shifts in the assumed yield curve. The analysis showed that a six- and twelve-month forward shift in the current yield curve would lead to a further decrease in the fair value of the Swap of approximately $5 million and $8 million, respectively. The Swap does not subject Federated to income statement risk due to interest rate movements because gains and losses in the fair value of the Swap are recorded in Accumulated other comprehensive (loss) income, net of tax on the Consolidated Balance Sheet.

Price risk is the risk that the market price of an investment will decline and ultimately result in the recognition of a loss for Federated. Federated was exposed to price risk as a result of its $57.1 million investment in sponsored equity products at December 31, 2010. Federated’s investment in these products represents its maximum exposure to loss. At December 31, 2010, management considered a hypothetical 20% fluctuation in market value and determined that the impact of such fluctuations on these investments could impact Federated’s financial condition and results of operations by approximately $11.4 million.

At December 31, 2009, Federated was exposed to price risk as a result of its $11.4 million investment primarily in sponsored fluctuating-value mutual funds. Federated’s investment in these products represented its maximum exposure to loss. At December 31, 2009, management considered a hypothetical 20% fluctuation in market value and determined that the impact of such fluctuations on these investments, individually and in the aggregate, would not have a material effect on Federated’s financial condition or results of operations.

Foreign exchange risk is the risk that an investment’s value will change due to changes in currency exchange rates. Federated was exposed to foreign exchange risk as a result of its investments in sponsored fluctuating-value mutual funds holding foreign-denominated securities ($22.0 million) as of December 31, 2010. These investments primarily exposed Federated to risk of changes in the Euro, the Norwegian Krone, the Danish Krone and the British pound. At December 31, 2010, management considered a hypothetical 20% fluctuation in these currency exchange rates and determined that the impact of such fluctuations on these investments could impact Federated’s financial condition or results of operations by approximately $4.4 million.

In addition to market risks attributable to Federated’s investments and Swap, a significant portion of Federated’s revenue is based on the market value of managed assets. Declines in the market values of these assets as a result of changes in the market or other conditions will negatively impact revenue and net income. For further discussion of managed assets and factors that impact Federated’s revenue, see the sections entitled General, Asset Highlights, Contractual Obligations and Contingent Liabilities and Risk Factors herein as well as the section entitled Regulatory Matters in Federated’s Annual Report on Form 10-K for the year ended December 31, 2010 on file with the SEC.

2010 Annual Report 29

MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING

Federated Investors, Inc.’s (Federated) management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements in this annual report. These consolidated financial statements and notes have been prepared in conformity with U.S. generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated’s operations and financial position. The consolidated financial statements include amounts based on management’s best estimates and judgments considering currently available information and management’s view of current conditions and circumstances.

Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the effectiveness of Federated’s internal control over financial reporting as of December 31, 2010, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2010, Federated’s internal controls over financial reporting were effective. Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated financial statements included in this annual report and has issued an attestation report on Federated’s internal control over financial reporting.


Federated Investors, Inc.

/s/ J. Christopher Donahue				/s/ Thomas R. Donahue
J. Christopher Donahue				Thomas R. Donahue
President and Chief Executive Officer				Chief Financial Officer

February 22, 2011

2010 Annual Report 30

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Shareholders

Federated Investors, Inc.

We have audited the accompanying consolidated balance sheets of Federated Investors, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of Federated Investors, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federated Investors, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federated Investors, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2011, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 22, 2011

31 Federated Investors, Inc.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders

Federated Investors, Inc.

We have audited Federated Investors, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Federated Investors, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Federated Investors, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federated Investors, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2010, of Federated Investors, Inc., and our report dated February 22, 2011, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 22, 2011

32 Federated Investors, Inc.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


December 31,	2010			2009
ASSETS
Current Assets
Cash and cash equivalents	$	198,756		$	90,452
Investments		134,885			31,538
Receivables—affiliates		11,651			11,490
Receivables—other, net of reserve of $60 and $200, respectively		9,577			8,144
Prepaid expenses		15,861			27,090
Current deferred tax asset, net		1,129			11,166
Other current assets		1,311			4,907

Total current assets		373,170			184,787

Long-Term Assets
Goodwill		635,313			581,673
Renewable investment advisory rights		64,500			37,800
Other intangible assets, net of accumulated amortization of $112,502 and $107,642, respectively		21,012			43,523
Deferred sales commissions, net of accumulated amortization of $57,480 and $50,018, respectively		10,317			15,318
Property and equipment, net of accumulated depreciation of $41,981 and $35,541, respectively		38,516			40,027
Other long-term assets		10,676			9,305

Total long-term assets		780,334			727,646

Total assets	$	1,153,504		$	912,433

LIABILITIES
Current Liabilities
Short-term debt—recourse	$	42,500		$	21,000
Accounts payable and accrued expenses		86,191			50,404
Accrued compensation and benefits		61,129			64,387
Other current liabilities		24,532			61,207

Total current liabilities		214,352			196,998

Long-Term Liabilities
Long-term debt—recourse		361,250			105,000
Long-term debt—nonrecourse		4,436			13,556
Long-term deferred tax liability, net		51,380			39,234
Other long-term liabilities		28,371			14,917

Total long-term liabilities		445,437			172,707

Total liabilities		659,789			369,705

Commitments and contingencies (Note (22))
TEMPORARY EQUITY
Redeemable noncontrolling interest in subsidiaries		1,543			13,913

PERMANENT EQUITY
Federated Investors shareholders’ equity
Common stock:
Class A, no par value, 20,000 shares authorized, 9,000 shares issued and outstanding		189			189
Class B, no par value, 900,000,000 shares authorized, 129,505,456 shares issued		237,208			216,820
Additional paid-in capital from treasury stock transactions		135			0
Retained earnings		1,036,571			1,105,073
Treasury stock, at cost, 25,841,365 and 26,571,219 shares Class B common stock, respectively		(778,609	)		(795,389	)
Accumulated other comprehensive (loss) income, net of tax		(3,695	)		1,514

Total Federated Investors shareholders’ equity		491,799			528,207
Nonredeemable noncontrolling interest in subsidiary		373			608

Total permanent equity		492,172			528,815

Total liabilities, temporary equity and permanent equity	$	1,153,504		$	912,433

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

20 10 Annual Report 33

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)


Years Ended December 31,	2010			2009			2008
Revenue
Investment advisory fees, net—affiliates	$	579,159		$	691,170		$	711,914
Investment advisory fees, net—other		60,245			58,653			63,467
Administrative service fees, net—affiliates		215,643			261,610			218,735
Other service fees, net—affiliates		82,476			148,586			213,914
Other service fees, net—other		11,559			10,413			7,413
Other, net		2,861			5,518			8,237

Total revenue		951,943			1,175,950			1,223,680

Operating Expenses
Distribution		259,210			410,019			442,228
Compensation and related		242,853			254,428			237,186
Office and occupancy		22,958			24,509			24,342
Systems and communications		22,828			23,470			21,737
Professional service fees		18,980			38,133			40,301
Travel and related		11,461			11,374			14,048
Advertising and promotional		10,110			11,085			14,819
Amortization of deferred sales commissions		12,197			18,462			31,376
Intangible asset amortization and impairment		22,511			32,574			18,388
Other		19,044			22,669			18,080

Total operating expenses		642,152			846,723			862,505

Operating income		309,791			329,227			361,175

Nonoperating Income (Expenses)
Gain (loss) on securities, net		3,542			2,271			(3,242	)
Investment income, net		3,330			1,037			4,492
Debt expense—recourse		(15,049	)		(4,345	)		(2,425	)
Debt expense—nonrecourse		(475	)		(1,366	)		(2,750	)
Other, net		(19	)		(6	)		(457	)

Total nonoperating expenses, net		(8,671	)		(2,409	)		(4,382	)

Income from continuing operations before income taxes		301,120			326,818			356,793
Income tax provision		111,957			118,278			128,168

Income from continuing operations including noncontrolling interest in subsidiaries		189,163			208,540			228,625
Discontinued operations, net of tax		0			0			2,808

Net income including noncontrolling interest in subsidiaries		189,163			208,540			231,433
Less: Net income attributable to the noncontrolling interest in subsidiaries		10,049			11,248			7,116

Net income	$	179,114		$	197,292		$	224,317

Amounts attributable to Federated Investors, Inc.
Income from continuing operations	$	179,114		$	197,292		$	221,509
Discontinued operations, net of tax		0			0			2,808

Net income	$	179,114		$	197,292		$	224,317

Earnings Per Share—Basic
Income from continuing operations	$	1.73		$	1.93		$	2.17
Income from discontinued operations		0.00			0.00			0.03

Net income	$	1.73		$	1.93		$	2.20

Earnings Per Share—Diluted
Income from continuing operations	$	1.73		$	1.92		$	2.15
Income from discontinued operations		0.00			0.00			0.03

Net income	$	1.73		$	1.92		$	2.18

Cash dividends per share	$	2.22		$	0.96		$	3.69

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

34 Federated Investors, Inc .

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands)


	Shares
	Class A		Class B			Treasury
Balance at January 1, 2008		9,000		101,749,570			27,755,886
Net income		0		0			0
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale, net of reclassification adjustment		0		0			0
Foreign currency translation loss		0		0			0

Comprehensive income
Subscriptions – redeemable noncontrolling interest holders		0		0			0
Deconsolidation		0		0			0
Stock award activity		0		758,551			(758,551	)
Dividends declared/Distributions to noncontrolling interest in subsidiaries		0		0			0
Exercise of stock options		0		1,052,343			(1,052,343	)
Purchase of treasury stock		0		(1,297,720	)		1,297,720

Balance at December 31, 2008		9,000		102,262,744			27,242,712
Net income		0		0			0
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale, net of reclassification adjustment		0		0			0
Foreign currency translation gain		0		0			0

Comprehensive income
Subscriptions – redeemable noncontrolling interest holders		0		0			0
Deconsolidation		0		0			0
Stock award activity		0		1,155,136			(1,155,136	)
Dividends declared/Distributions to noncontrolling interest in subsidiaries		0		0			0
Exercise of stock options		0		345,275			(345,275	)
Purchase of treasury stock		0		(828,918	)		828,918

Balance at December 31, 2009		9,000		102,934,237			26,571,219
Net income		0		0			0
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale, net of reclassification adjustment		0		0			0
Unrealized loss on interest rate swap, net of reclassification adjustment		0		0			0
Foreign currency translation loss		0		0			0

Comprehensive income
Subscriptions – redeemable noncontrolling interest holders		0		0			0
Deconsolidation		0		0			0
Stock award activity		0		903,379			(903,379	)
Dividends declared/Distributions to noncontrolling interest in subsidiaries		0		0			0
Exercise of stock options		0		486,150			(486,150	)
Purchase of treasury stock		0		(659,675	)		659,675

Balance at December 31, 2010		9,000		103,664,091			25,841,365

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

2010 Annual Report 35

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands)


Federated Investors, Inc. Shareholders
Common Stock		Additional Paid-in Capital from Treasury Stock Transactions			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income, Net of Tax			Total Shareholder’s Equity			Nonredeemable Noncontrolling Interest in Subsidiary			Total Permanent Equity			Redeemable Noncontrolling Interest in Subsidiaries/ Temporary Equity
	$176,889	$	679		$	1,189,516		$	(793,948	)	$	879		$	574,015		$	333		$	574,348		$	3,239
	0		0			224,317			0			0			224,317			7,412			231,729			(296	)

	0		0			189			0			(485	)		(296	)		0			(296	)		0
	0		0			0			0			(97	)		(97	)		0			(97	)		0

															223,924			7,412			231,336

	0		0			0			0			0			0			0			0			941
	0		0			0			0			0			0			0			0			(2,772	)
	13,456		(920	)		(11,041	)		13,573			0			15,068			0			15,068			0
	0		0			(373,753	)		0			0			(373,753	)		(7,328	)		(381,081	)		(333	)
	8,285		241			(300	)		18,040			0			26,266			0			26,266			0
	0		0			0			(42,146	)		0			(42,146	)		0			(42,146	)		0

	198,630		0			1,028,928			(804,481	)		297			423,374			417			423,791			779
	0		0			197,292			0			0			197,292			9,473			206,765			1,775
	0		0			(132	)		0			734			602			0			602			0
	0		0			0			0			483			483			0			483			50

															198,377			9,473			207,850

	0		0			0			0			0			0			0			0			11,940
	0		0			0			0			0			0			0			0			(423	)
	17,772		(149	)		(20,652	)		22,754			0			19,725			0			19,725			0
	0		0			(98,230	)		0			0			(98,230	)		(9,282	)		(107,512	)		(208	)
	607		149			(2,133	)		6,440			0			5,063			0			5,063			0
	0		0			0			(20,102	)		0			(20,102	)		0			(20,102	)		0

	217,009		0			1,105,073			(795,389	)		1,514			528,207			608			528,815			13,913
	0		0			179,114			0			0			179,114			8,823			187,937			1,226
	0		0			42			0			2,840			2,882			0			2,882			0
	0		0			0			0			(7,627	)		(7,627	)		0			(7,627	)		0
	0		0			0			0			(422	)		(422	)		0			(422	)		(48	)

															173,947			8,823			182,770

	0		0			0			0			0			0			0			0			10,074
	0		0			0			0			0			0			0			0			(21,334	)
	20,118		0			(19,096	)		20,883			0			21,905			0			21,905			0
	0		0			(228,084	)		0			0			(228,084	)		(9,058	)		(237,142	)		(2,288	)
	270		135			(478	)		10,146			0			10,073			0			10,073			0
	0		0			0			(14,249	)		0			(14,249	)		0			(14,249	)		0

	$237,397	$	135		$	1,036,571		$	(778,609	)	$	(3,695	)	$	491,799		$	373		$	492,172		$	1,543

36 Federated Investors. Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


Years Ended December 31,	2010			2009			2008
Operating Activities
Net income including noncontrolling interest in subsidiaries	$	189,163		$	208,540		$	231,433
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation and other amortization		21,075			23,751			24,509
Amortization of deferred sales commissions		12,197			18,462			31,376
Impairment of assets		10,191			21,663			541
Provision for deferred income taxes		24,213			5,250			987
Share-based compensation expense		19,124			18,775			15,062
Net purchases of trading securities		(25,803	)		(13,629	)		(4,324	)
Gain on disposal of assets		(2,584	)		(47	)		(4,059	)
Excess tax benefits from share-based compensation		(3,005	)		(1,259	)		(6,734	)
Tax benefit (detriment) from share-based compensation		1,830			(41	)		8,576
Deferred sales commissions paid		(10,638	)		(11,949	)		(11,114	)
Contingent deferred sales charges received		2,275			3,399			8,080
Proceeds from sale of certain B-share related future revenue		1,223			5,296			5,878
Other changes in assets and liabilities:
(Increase) decrease in receivables, net		(2,408	)		13,932			2,979
Decrease (increase) in prepaid expenses and other assets		11,391			(15,481	)		4,382
Decrease in accounts payable and accrued expenses		(14,249	)		(10,800	)		(5,180	)
(Decrease) increase in income taxes payable		(1,086	)		1,007			429
(Decrease) increase in other liabilities		(16,962	)		7,720			8,134

Net cash provided by operating activities		215,947			274,589			310,955

Investing Activities
Cash paid for business acquisitions		(49,561	)		(24,332	)		(133,863	)
Cash paid for purchased loans		(47,178	)		0			0
Proceeds from sale of purchased loans		1,044			0			0
Purchases of securities available for sale		(99,284	)		(1,388	)		(16	)
Proceeds from redemptions of securities available for sale		55,121			363			11,036
Cash paid for property and equipment		(7,870	)		(26,210	)		(10,307	)
Proceeds from disposal of property and equipment		3,298			0			4,800

Net cash used by investing activities		(144,430	)		(51,567	)		(128,350	)

Financing Activities
Dividends paid		(228,651	)		(98,499	)		(375,651	)
Purchases of treasury stock		(13,462	)		(20,102	)		(42,146	)
Distributions to noncontrolling interest in subsidiaries		(11,347	)		(9,490	)		(7,649	)
Contributions from noncontrolling interest in subsidiaries		10,074			11,521			502
Proceeds from shareholders for share-based compensation		11,590			6,409			19,592
Excess tax benefits from share-based compensation		3,005			1,259			6,734
Proceeds from new borrowings—recourse		407,000			54,800			262,400
Payments on debt—recourse		(129,250	)		(105,871	)		(85,489	)
Payments on debt—nonrecourse		(9,577	)		(19,198	)		(37,100	)
Other financing activities		(2,595	)		1,163			1,290

Net cash provided (used) by financing activities		36,787			(178,008	)		(257,517	)

Net increase (decrease) in cash and cash equivalents		108,304			45,014			(74,912	)
Cash and cash equivalents, beginning of year		90,452			45,438			120,350

Cash and cash equivalents, end of year	$	198,756		$	90,452		$	45,438

Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Income taxes	$	77,072		$	126,837		$	117,448
Interest	$	12,941		$	4,351		$	1,232

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

2010 Annual Report 37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(December 31, 2010, 2009 and 2008)

(1) Summary of Significant Accounting Policies

(a) Nature of Operations

Federated Investors, Inc. and its subsidiaries (collectively, Federated) provide investment advisory, administrative, distribution and other services primarily to Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. For presentation purposes in the Consolidated Financial Statements, the Federated-sponsored mutual funds are considered to be affiliates of Federated.

The majority of Federated’s revenue is derived from investment advisory services provided to Federated mutual funds and Separate Accounts through various subsidiaries pursuant to investment advisory contracts. These subsidiaries are registered as investment advisers under the Investment Advisers Act of 1940 and with certain states.

Federated mutual funds are distributed by a wholly owned subsidiary, which is a registered broker/dealer under the Securities Exchange Act of 1934 and under applicable state laws. Federated’s investment products are primarily distributed within the wealth management and trust, broker/dealer and global institutional markets.

(b) Basis of Presentation

The Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). 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 those estimates, and such differences may be material to the Consolidated Financial Statements.

(c) Reclassification of Prior Period Financial Statements

Certain items previously reported have been reclassified to conform with the current year’s presentation.

(d) Principles of Consolidation

The Consolidated Financial Statements include the accounts of Federated Investors, Inc. and entities or sponsored products in which Federated holds a controlling financial interest. A controlling financial interest is determined by the extent of Federated’s (1) decision-making ability through voting interests, (2) decision-making ability and rights/obligations to benefits/losses through variable interest or (3) participation in the economic risks and rewards of the entity through variable interests. To the extent Federated’s controlling financial interest in a consolidated subsidiary represents less than 100% of the subsidiary’s equity, Federated recognizes noncontrolling interests in subsidiaries. In the case of consolidated sponsored products (see Note (6)(b)), the noncontrolling interests represent equity which is redeemable or convertible for cash or other assets at the option of the equity holder. As such, these noncontrolling interests are deemed to represent temporary equity and are classified as redeemable noncontrolling interests in subsidiaries in the mezzanine section of the Consolidated Balance Sheets. All other noncontrolling interests in subsidiaries are classified as permanent equity. All significant intercompany accounts and transactions have been eliminated.

Beginning on January 1, 2010, Federated adopted the provisions of the Financial Accounting Standards Board’s (FASB) new consolidation model for variable interest entities (VIEs). As a result, Federated applies two different approaches to consider VIEs for possible consolidation. For non-investment fund entities, Federated considers a qualitative model for identifying whether its interest in a VIE is a controlling financial interest. The qualitative model considers whether Federated has: (1) the ability to direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or to provide rights to receive benefits from the VIE that could potentially be significant to the VIE. Federated reevaluates the need for consolidation under this qualitative approach on an ongoing basis.

For Federated’s interests in certain investment funds that meet the definition of VIEs, Federated evaluates the extent of Federated’s participation in the economic risks and rewards of the entity based on a quantitative model to determine whether consolidation is necessary. In cases where the results of the quantitative model indicate that Federated’s interest in such an entity absorbs the majority of the variability in the entity’s net assets, Federated is deemed to be the primary beneficiary and thus consolidates the entity.

The equity method of accounting is used to account for investments in entities in which Federated’s equity investment gives it the ability to exercise significant influence over the operating and financial policies of the investee. Equity investments are carried at Federated’s share of net assets and are included in either Investments or Other long-term assets on the Consolidated Balance Sheets dependent upon management’s ability and intent to sell the investment. The proportionate share of income or loss is included in Nonoperating income (expenses) – other, net in the Consolidated Statements of Income.

(e) Business Combinations

Beginning in 2009, business combinations are accounted for under the acquisition method of accounting. Results of operations of an acquired business are included from the date of acquisition. Management estimates the fair value of the acquired assets, including identifiable intangible assets, and assumed liabilities based on their estimated fair values as of the date of acquisition. Any excess fair value of the acquired net assets over the acquisition-date fair value of the consideration transferred, including the fair value of any contingent consideration, is recorded as Goodwill on the Consolidated Balance Sheets. The fair value of contingent consideration is recorded as a liability in Other current liabilities and Other long-term liabilities on the Consolidated Balance Sheets as of the

2010 Annual Report 38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

acquisition date. This liability is remeasured at fair value each period end with changes in fair value recognized in the Consolidated Statements of Income. For a discussion regarding the approach used to estimate the fair value of the liability, see Note (7)(a).

(f) Cash and Cash Equivalents

Cash and cash equivalents include money market accounts and deposits with banks.

(g) Investments

Investments include trading and available-for-sale securities held by Federated. Federated’s trading securities primarily represent investments in stocks of large- and mid-cap U.S. and international companies and domestic and foreign debt instruments held by certain sponsored equity and fixed-income products which are consolidated by Federated as a result of Federated’s relationship as the primary beneficiary of the product (see Note (6)). Trading securities are carried at fair value based on quoted market prices. Federated’s trading securities held at December 31, 2010 and 2009 are classified as current and are included in Investments on the Consolidated Balance Sheets. Changes in the fair values of trading securities are recognized in Gain (loss) on securities, net in the Consolidated Statements of Income. Federated’s available-for-sale securities include investments in fluctuating-value mutual funds and asset-backed securities. These investments are carried at fair value based on quoted market prices or, in the absence of quoted market prices, discounted cash flows. These investments may be classified as current or long-term assets and are included in Investments or Other long-term assets, respectively, on the Consolidated Balance Sheets based on management’s ability or intention to sell the investment. The unrealized gains or losses on securities available-for-sale are included net of tax in Accumulated other comprehensive (loss) income, net of tax on the Consolidated Balance Sheets. Realized gains and losses on these securities are computed on a specific-identification basis and recognized in Gain (loss) on securities, net in the Consolidated Statements of Income. There were no material investments classified as long-term assets at December 31, 2010 or 2009.

Investments are generally carried at fair value based on quoted market prices in active markets for identical instruments. If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. In the absence of observable market data inputs and/or value drivers, internally generated valuation techniques may be utilized in which one or more significant inputs or significant value drivers are unobservable in the market place. On a periodic basis, management evaluates the carrying value of investments for impairment. With respect to its investments in fluctuating-value mutual funds, management considers various criteria, including the duration and extent of a decline in fair value, the ability and intent of management to retain the investment for a period of time sufficient to allow the value to recover and the financial condition and near-term prospects of the fund and the underlying investments of the fund, to determine whether a decline in fair value is other than temporary. If, after considering these criteria, management believes that a decline is other than temporary, the carrying value of the security is written down to fair value through the Consolidated Statements of Income. With respect to Federated’s investments in asset-backed securities, estimates of future cash flows are updated each quarter based on actual defaults, changes in anticipated default rates or other portfolio changes. The carrying values of these investments are written down to fair value at that time, as appropriate. Impairment adjustments are recognized in Gain (loss) on securities, net in the Consolidated Statements of Income.

(h) Derivatives

From time to time, Federated may consolidate a sponsored investment product that holds freestanding derivative financial instruments for trading purposes. Federated reports derivative instruments at fair value and records the changes in fair value in Gain (loss) on securities, net on the Consolidated Statements of Income. Federated may also enter into derivative financial instruments to hedge price or interest-rate exposures with respect to variable-rate loan facilities, seed investments in sponsored products or to hedge foreign-currency exchange risk.

Federated holds an interest rate swap that qualifies for cash flow hedge accounting. Upon inception of a hedging relationship, Federated formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the nature of the risk being hedged. To qualify for hedge accounting, the derivative must be deemed to be highly effective in offsetting the designated changes in the cash flows of the hedged item. The effective portions of the change in the fair value of the derivative are reported as a component of Accumulated other comprehensive (loss) income, net of tax on the Consolidated Balance Sheets and subsequently reclassified to earnings in the period or periods during which the hedged transaction affects earnings. The change in fair value of the ineffective portion of the derivative, if any, is recognized immediately in earnings. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued. If hedge accounting is discontinued because it is no longer probable that a forecasted transaction will occur, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings, and the gains and losses in Accumulated other comprehensive (loss) income, net of tax will be recognized immediately into earnings. If hedge accounting is discontinued because the hedging instrument is sold, terminated or no longer designated, the amount reported in Accumulated other comprehensive (loss) income, net of tax up to the date of sale, termination or de-designation continues to be reported in Accumulated other comprehensive (loss) income, net of tax until the forecasted transaction affects earnings. See Note (7) and Note (12) for additional information on the fair value of the interest rate swap at December 31, 2010.

2010 Annual Report 39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(i) Purchased Loans

For a period of time in 2010, Federated held investments in various purchased loans. Purchased loans, consisting primarily of syndicated, commercial, US dollar-denominated, floating-rate term loans, were recorded at fair value and included in Other current assets on the Consolidated Balance Sheets. Fair value of a purchased loan was determined using an independent, third-party pricing service that determined fair value based upon obtaining bid and ask prices from potential buyers and sellers. During 2010, Federated was holding the purchased loans as an investment for current income and elected to use fair-value accounting as of the purchase date of the loans in order to account for the purchased loans in a manner similar to its accounting for trading securities. Interest income, which was calculated based on actual days elapsed in a 360-day year, was recorded in Investment income, net in the Consolidated Statements of Income. Changes in the fair values of purchased loans were recognized in Gain (loss) on securities, net in the Consolidated Statements of Income. There were no purchased loans held at December 31, 2010 or 2009. See Note (21) for additional information on Federated’s investment in purchased loans.

(j) Property and Equipment

Property and equipment are initially recorded at cost and are depreciated using the straight-line method over their estimated useful lives ranging from 1 to 12 years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or their respective lease terms. As property and equipment are taken out of service, the cost and related accumulated depreciation and amortization are removed. The write-off of any material residual net book value is reflected as a loss in Operating expenses – Other in the Consolidated Statements of Income.

Management reviews the remaining useful lives and carrying values of property and equipment 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 decrease in the market price of the asset, an accumulation of costs significantly in excess of the amount originally expected in the acquisition or development of the asset, historical and projected cash flows associated with the asset and an expectation that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Should there be an indication of a change in the useful life or an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value which is determined based on prices of similar assets if available or discounted cash flows. Impairment adjustments are recognized in Operating Expenses – Other in the Consolidated Statements of Income.

(k) Costs of Computer Software Developed or Obtained for Internal Use

Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized. These capitalized costs are included in Property and equipment, net on the Consolidated Balance Sheets and are amortized using the straight-line method over the shorter of the estimated useful life of the software or four years. These assets are subject to the impairment test used for other categories of property and equipment described in Note (1)(j).

(l) Intangible Assets

Intangible assets, consisting primarily of goodwill, customer relationship intangible assets, renewable investment advisory contracts and noncompete 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 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, average market participant data and historical experience. The discount rate is estimated at the current market rate of return. After the fair value of all separately identifiable assets has been estimated, goodwill is recorded to the extent the consideration paid for the acquisition exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities.

Federated amortizes finite-lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise used. 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 3 to 11 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 underlying operating cash flows. Should there be an indication of a change in the useful life or impairment in value of the finite-lived intangible assets, 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

40 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

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.

Federated has determined that certain acquired assets, specifically, certain renewable investment advisory contracts, have indefinite useful lives. In reaching this conclusion, management considered the legal, regulatory and contractual provisions of the investment advisory contract that enable the renewal of the contract, the level of cost and effort required in renewing the investment advisory contract, and the effects of obsolescence, demand, competition and other economic factors that could impact the funds’ projected performance and existence. The contracts generally renew annually and the value of these acquired assets assumes renewal. These indefinite-lived intangible assets are reviewed for impairment annually or whenever events or 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 of the renewable investment advisory contracts and reductions in underlying operating cash flows. Should there be an indication of a change in the useful life or impairment in the value of the indefinite-lived intangible assets, Federated estimates the fair value of the asset and compares it to the asset’s remaining book value to determine whether an impairment charge is necessary.

Federated tests goodwill for impairment at least annually or when indicators of potential impairment exist. Goodwill is evaluated at the reporting unit level. Federated has determined that it has a single reporting unit consistent with its single operating segment based on the fact that Federated’s operations are managed as a single business: investment management. Federated does not have multiple operating segments or business components for which discrete financial information is prepared. Federated uses a two-step process to test for and measure impairment which begins with an estimation of the fair value of its reporting unit by considering Federated’s market capitalization. If Federated’s market capitalization falls to a level below its recorded book value of net assets, Federated’s goodwill would be considered for possible impairment.

(m) 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 certain 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 pay both a distribution fee and CDSC, excluding B-shares, Federated generally capitalizes 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 of one year. Distribution 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 pay both a distribution fee and CDSC, Federated expenses the cost of the upfront commission as incurred in Distribution expense in the Consolidated Statements of Income and credits Distribution expense for any CDSCs collected.

Federated began self-funding the payment of sales commissions upon the sale of Class B shares of its sponsored mutual funds in March 2010. Federated capitalizes the upfront commissions related to these B-share sales as deferred sales commissions. The deferred sales commission asset is amortized over the estimated period of benefit of up to eight years. Distribution and shareholder service fees earned are recognized in Other service fees, net-affiliates on 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. As of December 31, 2010, Federated had funded $5.0 million in B-share deferred sales commissions.

Prior to March 2010, funding of the payments made by Federated of upfront commissions paid upon the sales of Class B shares of sponsored mutual funds was made through arrangements with an independent third party by selling the rights to all related future distribution fees, servicing fees and CDSCs.

From March 2007 to February 2010, the terms of the funding arrangement did not include any recourse provisions that required Federated to indemnify the purchaser for any action initiated unilaterally by the fund board or others that would result in the termination of the revenue stream sold to the purchaser. Accordingly, Federated accounted for these sales of its rights to future distribution fees and CDSCs related to Class B shares of sponsored funds occurring between March 2007 and February 2010 as sales. The sales of Federated’s rights to future shareholder service fees were accounted for as financings due to Federated’s ongoing involvement in performing shareholder-servicing activities. Accordingly, nonrecourse debt was recorded.

Sales occurring prior to March 2007 were treated as financings. As a result, Federated capitalized all of the upfront commissions as deferred sales commissions and recognized B-share-related distribution fees and servicing fees in the Consolidated Statements of Income even though legal title to these fees had been transferred to the third party. In addition, Federated recorded 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 were imputed based on current market conditions at the time of funding. The deferred sales commission asset and

2010 Annual Report 41

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

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 nonrecourse debt and deferred sales commission asset.

Federated reviews the carrying value of B-share-related deferred sales commission assets on a periodic basis to determine whether a significant long-term decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may have occurred. Should there be an indication of an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted cash flows from the sold future revenue streams over the remaining life of the underlying B-share fund asset to determine whether an impairment has occurred. Management adjusts these asset and debt balances to fair value when reasonably estimable expected future cash flows are not expected to be sufficient to fully amortize the remaining deferred sales commission asset and nonrecourse debt balance.

(n) Foreign Currency Translation

The balance sheets of certain wholly owned foreign subsidiaries of Federated are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from these translations are excluded from income and are recorded in Accumulated other comprehensive (loss) income, net of tax on the Consolidated Balance Sheets. Foreign currency transaction gains and losses are reflected in Operating Expenses – Other in the Consolidated Statements of Income.

(o) Treasury Stock

Federated accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated Investors shareholders’ equity on the Consolidated Balance Sheets. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a specific-identification basis. Additional paid-in capital from treasury stock transactions is increased as Federated reissues treasury stock for more than the cost of the shares. If Federated issues treasury stock for less than its cost, Additional paid-in capital from treasury stock transactions is reduced to no less than zero. Once this account is at zero, any further required reductions are recorded to Retained earnings on the Consolidated Balance Sheets. At December 31, 2010 there was $0.1 million in Additional paid-in capital from treasury stock transactions. At December 31, 2009, there was no balance in Additional paid-in capital from treasury stock transactions.

(p) Revenue Recognition

Revenue from providing investment advisory, administrative and other services (including distribution, shareholder servicing and retirement plan recordkeeping) is recognized during the period in which the services are performed. Investment advisory, administrative and the majority of other service fees are generally calculated as a percentage of total net assets of the investment portfolios that are managed by Federated. The fair value of the investment portfolios is primarily determined using quoted market prices or independent third-party broker or dealer price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a pricing source. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored products. For the periods presented, a de minimus amount of assets under management were priced by Federated management. Federated may waive certain fees for competitive reasons such as to maintain positive or zero net yields, to meet regulatory requirements (including settlement-related (see Note (22)(c))) or to meet contractual requirements. Federated waived fees of $653.1 million, $645.5 million and $470.0 million for the years ended December 31, 2010, 2009 and 2008, respectively, nearly all of which was for competitive reasons. The increase in fee waivers for the year ended December 31, 2010 as compared to the same period of 2009 was primarily due to a $121.0 million increase in fee waivers to maintain positive or zero net yields and a $15.5 million increase in fee waivers due to increased fixed income and equity assets partially offset by a $120.4 million decrease in waivers due to decreased money market assets. Fee waivers may continue to increase in order to maintain positive or zero net yields in addition to other competitive reasons. Fee waivers to maintain positive or zero net yields are partially offset by a related reduction to distribution expense (see Note (5) for additional information on the net impact of these waivers).

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. Management’s 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, distribution fees and certain other service fees are recorded gross of payments made to third parties.

42 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(q) Share-Based Compensation

Federated recognizes compensation costs based on grant-date fair value for all share-based awards granted, modified or settled after January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which requisite service has not yet been provided.

Federated issues shares for share-based awards from treasury stock. For restricted stock awards, the fair value of the award is calculated as the difference between the closing market value of Federated’s Class B common stock on the date of grant and the purchase price paid by the employee, if any. Federated estimates the grant-date fair value of stock options using the Black-Scholes option-pricing model. Federated’s awards are generally subject to graded vesting schedules. Compensation expense is adjusted for estimated forfeitures and is recognized on a straight-line or modified straight-line basis over the requisite service period of the award. Compensation expense also includes dividends paid on forfeited awards. Forfeiture assumptions are evaluated on a quarterly basis and updated as necessary.

For awards granted prior to January 1, 2006 with provisions that allow for accelerated vesting upon retirement, Federated recognizes expense over the vesting period of the awards, regardless of the employee’s attainment of retirement age. Beginning January 1, 2006, for all newly granted awards with provisions that allow for accelerated vesting upon retirement, Federated recognizes expense over the shorter of the vesting period or the period between grant date and the date on which the employee meets the minimum age requirement for retirement.

(r) Leases

Federated classifies leases as operating in accordance with the provisions of lease accounting. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. Build-out allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned, which generally coincides with the effective date of the lease. The current portion of unamortized deferred lease costs and build-out allowances is included in Other current liabilities and the long-term portion is included in Other long-term liabilities on the Consolidated Balance Sheets.

(s) Advertising Costs

Federated generally expenses the cost of all advertising and promotional activities as incurred. Certain printed matter, however, such as sales brochures, are accounted for as prepaid supplies and are included in Other current assets on the Consolidated Balance Sheets until they no longer are owned or expected to be used, at which time their costs are expensed. These amounts were not material for 2010, 2009 or 2008.

(t) Income Taxes

Federated accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Federated recognizes a valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Regarding the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, Federated follows a two-step process prescribed by GAAP. The first step for evaluating a tax position involves first determining whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities. The second step then requires a company to measure the tax position benefit as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Federated classifies any interest and penalties on tax liabilities on the Consolidated Statements of Income as components of Nonoperating Income (Expenses) – Other, net and Operating Expenses – Other, respectively.

(u) Earnings Per Share

Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, Federated’s unvested restricted stock awards with nonforfeitable rights to dividends are considered participating securities and are included in the computation of earnings per share.

(v) Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income is reported in the Consolidated Balance Sheets and the Consolidated Statements of Changes in Equity and includes net of tax, the unrealized gains and losses on securities available for sale, foreign currency translation adjustments and the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge.

(w) Loss Contingencies

Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings when it is probable that a loss has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least quarterly and are adjusted to

2010 Annual Report 43

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

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 and/or cash flows. Recoveries of losses are recognized in the Consolidated Statements of Income when receipt is deemed probable.

(x) Business Segments

Business or operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.

Federated does not have multiple operating segments or business components for which discrete financial information is prepared. Federated operates in one operating segment, the investment management business. Federated’s Chief Executive Officer (CEO) is Federated’s chief operating decision maker. Federated’s CEO utilizes a consolidated approach to assess performance and allocate resources.

(2) Recent Accounting Pronouncements

(a) Fair Value

On January 1, 2010, Federated adopted the new requirements for expanded fair-value disclosures as issued by the FASB. The new literature requires disclosures about transfers into and out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. These new rules impact disclosures only and had no impact on Federated’s financial position or results of operations. The new rules also require additional disclosures regarding Level 3 fair value measurements which are effective for reporting periods beginning after December 15, 2010.

(b) Consolidation of VIEs

On January 1, 2010, Federated adopted the FASB’s new rules governing the consolidation of VIEs, as amended in February 2010 to defer the effective date of the new rules for a reporting entity’s interests in certain investment funds. The new rules prescribe a qualitative model for identifying whether a company has a controlling financial interest in a VIE and eliminates the quantitative model previously prescribed. The new rules identify two primary characteristics of a controlling financial interest: (1) the power to direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or provide rights to receive benefits from the VIE. Under the new accounting standard, a company is required to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. The adoption of the new standard did not have a material impact on Federated’s Consolidated Financial Statements.

(c) Transfers of Financial Assets

On January 1, 2010, Federated adopted a new accounting standard regarding accounting for transfers of financial assets that removes the concept of a qualifying special-purpose entity from authoritative guidance and also removes the exception previously under GAAP. This new accounting standard also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this new accounting standard did not have a material impact on its Consolidated Financial Statements as Federated was not involved with any transactions to transfer financial assets at the time of adoption.

(d) Noncontrolling Interests

On January 6, 2010, the FASB issued an update to clarify the scope of the decrease-in-ownership provisions of the accounting rules relating to noncontrolling interests. In addition, the update expanded the disclosures required upon deconsolidation of a subsidiary. The adoption of the new standard did not have a material impact on Federated’s Consolidated Financial Statements.

(e) Subsequent Events

On February 24, 2010, the FASB issued an update to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures. Effective upon its issuance, the update exempts Securities and Exchange Commission (SEC) filers from disclosing the date through which subsequent events have been evaluated. As the update affected disclosure only, the adoption of the update did not have an impact on Federated’s Consolidated Financial Statements.

(3) Business Combinations and Acquisitions

SunTrust. On September 20, 2010, Federated acquired the money market management business of SunTrust Banks, Inc. (SunTrust Acquisition). Pursuant to the definitive agreement signed on July 16, 2010, $14.1 billion of money market assets transitioned to Federated during the third and fourth quarters of 2010. Money market mutual fund assets in nine money market mutual funds managed by SunTrust’s RidgeWorth Capital Management were transitioned into eight existing Federated money market mutual funds with similar investment objectives in connection with a series of closings during the third and fourth quarters of 2010, the first, and most significant of which, occurred on September 20, 2010.

44 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

The SunTrust Acquisition included upfront cash payments that totaled $6.6 million. The transaction also includes 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 certain eligible assets. At December 31, 2010, management estimated contingent payments could total $27 million over five years, however, the actual amount of the contingent payments will vary based on asset levels and related net revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the extent of reasonably possible flow-rate volatility for the assets under management. The preliminary estimate of fair value of the total consideration is $26.7 million. As of December 31, 2010, a liability of $20.1 million representing the fair value of future consideration payments was recorded in Other current liabilities ($5.3 million) and Other long-term liabilities ($14.8 million) (see Note (7)(a) for a discussion regarding the valuation methodology). This liability is remeasured at each reporting date with changes in the fair value recognized in the Consolidated Statements of Income.

The results of operations for the SunTrust Acquisition were included in Federated’s Consolidated Financial Statements beginning in September 2010 based on the date of the acquisition. The following table summarizes unaudited pro forma financial information assuming the SunTrust Acquisition occurred at the beginning of the years presented. This pro forma financial information is for informational purposes only and is not indicative of future results. In addition, the following pro forma financial information has not been adjusted to reflect lower current levels of assets under management:


in millions, except per share data for the years ended,	2010		2009
Revenue	$	980.7	$	1,226.8
Net income attributable to Federated Investors, Inc.	$	186.6	$	211.5

Earnings per share – Basic and Diluted
Net income attributable to Federated Investors, Inc.	$	1.80	$	2.06

The pro forma results include adjustments for the effect of acquisition-related expenses including accretion of interest on the contingent consideration liability, income tax expense and transaction expenses.

Prudent Bear Funds. In 2008, Federated completed the acquisition of certain assets of David W. Tice & Associates LLC that relate to the management of the Prudent Bear Fund and the Prudent Global Income Fund (collectively, the Prudent Bear Funds) with $1.1 billion and $0.4 billion in assets under management, respectively, as of December 5, 2008 (Prudent Bear Acquisition). In connection with the acquisition, the assets in the Prudent Bear Funds were transitioned into the Federated Prudent Bear Fund and the Federated Prudent DollarBear Fund. The addition of the Prudent Bear Funds complements Federated’s existing alternative investment products as well as other core offerings as part of an investor’s overall investment strategy. The acquisition was accounted for under the purchase method of accounting. The initial purchase price for the transaction was $43 million and Federated incurred $0.9 million in transaction costs directly attributable to the acquisition of the Prudent Bear Funds. See Note (22)(a) for information on contingent payments related to this acquisition.

Clover Capital. In 2008, Federated completed the acquisition of certain assets of Clover Capital Management, Inc. (Clover Capital), a Rochester, New York-based investment manager that specializes in value investing (Clover Capital Acquisition). Clover Capital managed approximately $2.1 billion in assets as of December 1, 2008, consisting primarily of separately managed accounts. The addition of Clover Capital results in a suite of traditional value investment offerings for Federated’s clients. The acquisition was accounted for under the purchase method of accounting. The initial purchase price for the transaction was $30 million and Federated incurred $0.5 million in transaction costs directly attributable to the acquisition of Clover Capital. See Note (22)(a) for information on contingent payments related to this acquisition.

The valuation results of the identifiable intangible assets associated with the Prudent Bear and Clover Capital Acquisitions included in the Consolidated Balance Sheet as of December 31, 2009 and the related Consolidated Statements of Income for the year ended December 31, 2009 included certain adjustments to revise the December 31, 2008 estimates of fair value. The final valuations resulted in purchase price allocations of $11.7 million to identifiable intangible assets with a weighted-average useful life of 9 years, $36.7 million to intangible assets with indefinite lives and $26.1 million to goodwill, all of which is deductible for tax purposes.

2010 Annual Report 45

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisitions’ closing dates.


Purchase Price Allocations in millions	Clover Capital			Prudent Bear
Intangible assets
Renewable investment advisory contract (indefinite life)	$	0		$	34.8
Customer relationships (10-year weighted-average useful life) ¹		8.7			0
Noncompete (5-year weighted-average useful life) ²		0.5			2.5
Trade name (indefinite life)		0.6			1.3
Goodwill		20.6			5.5
Other long-term assets		0.3			0

Total assets acquired		30.7			44.1


Liabilities		(0.2	)		(0.2	)


Total purchase price	$	30.5		$	43.9

1	The customer relationship intangible assets are amortized on a straight-line basis over their respective useful lives.

2	The noncompete assets are amortized on an accelerated basis over their respective useful lives in a manner that best matches the benefit received.

The results of operations for both the Prudent Bear and Clover Capital Acquisitions were included in Federated’s Consolidated Financial Statements beginning in December 2008 based on the date of each respective acquisition. The following table summarizes unaudited pro forma financial information assuming both the Prudent Bear Acquisition and the Clover Capital Acquisition occurred at the beginning of the year presented. This pro forma financial information is for informational purposes only and is not indicative of actual results that would have occurred had these acquisitions been completed on the assumed dates and it is not indicative of future results. In addition, the following pro forma financial information has not been adjusted to reflect any operating efficiencies that may have been realized as a result of the acquisitions.


in millions, except per share data for the year ended,	2008
Revenue	$	1,254.6
Income from continuing operations attributable to Federated Investors, Inc.	$	227.4
Net income attributable to Federated Investors, Inc.	$	230.2

Earnings per share – Basic
Income from continuing operations attributable to Federated Investors, Inc.	$	2.23
Net income attributable to Federated Investors, Inc.	$	2.26

Earnings per share – Diluted
Income from continuing operations attributable to Federated Investors, Inc.	$	2.21
Net income attributable to Federated Investors, Inc.	$	2.24

The pro forma results include adjustments for the effect of acquisition-related expenses including compensation and related, depreciation and amortization, interest and income tax expense.

(4) Discontinued Operations

In the third quarter 2006, an indirect, wholly owned subsidiary of Federated completed the sale of certain assets associated with its Trust Connect ^® mutual fund processing business (the Clearing Business) to Matrix Settlement and Clearance Services, LLC (Matrix). The sale was completed over a series of closings during 2006.

In connection with the sale, Federated earned and accrued contingent consideration of $4.8 million in 2008, which was calculated as a percentage of Matrix’s second quarter 2008 net revenue above a specific threshold directly attributed to the Clearing Business. This contingent consideration was included, net of tax, as income from discontinued operations for the year ended December 31, 2008.

(5) Concentration Risk

46 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

During 2010, fee waivers to maintain positive or zero net yields totaled $241.6 million and were partially offset by a related reduction in distribution expenses of $186.6 million such that the net impact to Federated was $55.0 million in reduced operating income. The impact of these fee waivers for 2010 was significantly more than the impact for 2009 with $120.6 million in waived fees, $86.4 million in reduced distribution expenses and a net impact on operating income of $34.2 million and the impact for 2008 with $3.6 million in waived fees, $1.9 million in reduced distribution expenses and a net impact on operating income of $1.7 million. (See Note (24) for information regarding the quarterly operating income impact of the fee waivers.) Management expects the fee waivers and the related reduction in distribution expense will continue into 2011 and will likely be material. Management does not expect the quarterly operating income impact from these waivers for the first quarter of 2011 to change materially from the $12.3 million experienced in the fourth quarter 2010. These fee waivers are expected to decrease over time as the market begins to factor in the potential for increases in short-term interest rates and then again when the Federal Reserve begins to increase interest rates. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the operating income impact of these waivers by about one-third from the current levels and a 25-basis-point increase would reduce the impact by about two-thirds. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in expenses of the money market funds, changes in the mix of money market customer assets and Federated’s willingness to continue the fee waivers.

A listing of Federated’s risk factors is included herein under the section entitled Risk Factors in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(6) Consolidation

Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities or VIEs. In accordance with Federated’s consolidation accounting policy, Federated first determines whether the entity being evaluated is a voting rights entity or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether or not to consolidate the entity. The disclosures below represent the results of such evaluations pertaining to 2010 and 2009.

(a) Consolidated Voting Interest Entities

Federated has a majority interest (50.5%) and acts as the general partner in Passport Research Ltd., a limited partnership. Edward Jones is the limited partner with a 49.5% interest. The partnership acts as investment adviser to two sponsored funds. Noncontrolling interests in this subsidiary are included in Nonredeemable noncontrolling interest in subsidiary on the Consolidated Balance Sheets.

(b) Consolidated Variable Interest Entities

Most of Federated’s sponsored mutual funds meet the definition of a VIE primarily due to the fact that given Federated’s typical series fund structure, the shareholders of each participating portfolio underlying the series fund generally lack the ability as an individual group to make decisions through voting rights regarding the board of directors/trustees of the fund. From time to time, Federated invests in certain of these products for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash thereby allowing the product to establish a performance history. Federated’s investment in these products represents its maximum exposure to loss. As of December 31, 2010 and 2009, Federated was the sole or majority investor in certain of these products and was deemed to be the primary beneficiary since Federated’s majority interest would absorb the majority of the variability of the net assets of the VIE. At December 31, 2010, the aggregate assets and liabilities of such entities that Federated consolidated were $27.1 million and $0.2 million, respectively, and Federated recorded $1.5 million to Redeemable noncontrolling interest in subsidiaries on Federated’s Consolidated Balance Sheets. At December 31, 2009, the aggregate assets and liabilities of such

2010 Annual Report 47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

entities that Federated consolidated were $22.6 million and $0.5 million, respectively, and Federated recorded $13.9 million to Redeemable noncontrolling interest in subsidiaries on Federated’s Consolidated Balance Sheets. The assets of the products are primarily classified as Investments on Federated’s Consolidated Balance Sheets and are restricted for use by the products only. The liabilities of the products are primarily classified as Accounts payable and accrued expenses on Federated’s Consolidated Balance Sheets and primarily represent operating liabilities of the entities.

Federated’s conclusion to consolidate a sponsored fund may vary from period to period based on changes in Federated’s percentage interest in the product resulting from changes in the number of fund shares held by either Federated or third parties. Given that the products follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated. During 2010, Federated deconsolidated a sponsored mutual fund based on a determination that it no longer was the primary beneficiary of the fund as a result of new subscriptions in fund shares by unrelated third parties. Accordingly, Federated deconsolidated $22.0 million in Investments and $21.3 million in Redeemable noncontrolling interest in subsidiaries on the Consolidated Balance Sheet as of the date of deconsolidation. There was no impact to the Consolidated Statements of Income in 2010, 2009 or 2008 from entities that were deconsolidated.

Neither creditors nor equity investors in the products have any recourse to Federated’s general credit. In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of these products for competitive, regulatory or contractual reasons (see Note (1)(p) for information regarding fee waivers). Federated has not provided financial support to any of these products outside the ordinary course of business.

(c) Non-Consolidated Variable Interest Entities

At December 31, 2010 and 2009, Federated was involved with certain VIEs in which it held a significant variable interest or was the sponsor that held a variable interest, but for which it was not the primary beneficiary. The assets and liabilities of these unconsolidated VIEs and Federated’s maximum risk of loss related thereto were as follows at December 31:


	2010						2009
in millions	Unconsolidated VIE assets		Unconsolidated VIE Liabilities		Total remaining carrying value of investment and maximum risk of loss		Unconsolidated VIE assets		Unconsolidated VIE Liabilities		Total remaining carrying value of investment and maximum risk of loss
Sponsored investment funds ¹	$	275,365.1	$	—	$	297.0	$	305,652.4	$	—	$	89.2
CDOs ²	$	12.8	$	121.6	$	0	$	31.1	$	127.3	$	0
Equity investment	$	6.4	$	2.4	$	7.4	$	9.0	$	4.9	$	7.6

The unconsolidated VIE assets for the sponsored investment funds represent total net assets under management for the related products. Of Federated’s $297.0 million invested in these products at December 31, 2010, $191.2 million represents investments in money market products included in Cash and cash equivalents, with the remaining $105.8 million included in Investments on the Consolidated Balance Sheets. Of Federated’s $89.2 million invested in these products at December 31, 2009, $81.6 million represents investments in money market products included in Cash and cash equivalents, with the remaining $7.6 million included in Investments on the Consolidated Balance Sheets.

2	The risk of loss does not include the potential loss associated with related deferred tax assets expiring unutilized.

Sponsored Investment Funds – Federated acts as the investment manager for certain investment funds that are deemed to be VIEs, as disclosed above. In addition to Federated’s involvement as the investment manager, Federated may also hold investments in these products. Federated is not the primary beneficiary of these VIEs since Federated’s involvement is limited to that of service provider or represents a minority interest in the fund’s assets under management, or both. As a result, Federated’s variable interest is not deemed to absorb the majority of the variability of the entity’s net assets and therefore Federated has not consolidated these entities.

In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of these products for competitive, regulatory or contractual reasons (see Note (1)(p) for information regarding fee waivers). Federated has not provided financial support to any of these products outside the ordinary course of business.

Collateralized Debt Obligations (CDOs) – At December 31, 2010, Federated acted as the investment manager for two CDOs with assets under management of $12.8 million that meet the definition of a VIE due primarily to the lack of unilateral decision making authority of the equity holders. These CDOs were not consolidated at December 31, 2010. The CDOs are alternative investment vehicles created 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. The notes issued by the CDOs are partially collateralized by high yield bonds and had original expected maturities of ten to twelve years. Federated’s variable interests in the CDOs are limited to a 25% equity interest and a fixed, asset-based management fee earned prospectively as services are provided. As an equity holder, Federated participates in all rights and obligations to income and expected losses of the CDOs on a proportionate basis with all other equity holders. In its role as investment

48 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

manager, Federated is not entitled to any additional residual return nor is it obligated to absorb any expected losses of the entities. Federated has not provided financial support to the CDOs.

Federated is not the primary beneficiary of these VIEs at December 31, 2010. Upon consideration of the new qualitative model prescribed by the FASB, Federated determined that as of January 1, 2010 and December 31, 2010, neither its equity interest nor its management fee potential could result in Federated receiving benefits or absorbing losses that could potentially be significant to either of these entities. Therefore Federated has not consolidated these entities.

Equity Investment – Federated holds a 12% non-voting, noncontrolling interest in both Dix Hills Partners, LLC, a registered investment adviser and commodity trading adviser, and its affiliate, Dix Hills Associates, LLC (collectively, Dix Hills). Dix Hills is based in Jericho, New York and manages over $1 billion in both absolute return and enhanced fixed-income mandates, including a hedge fund strategy and an enhanced cash strategy. Due primarily to the nature of the voting rights of the equity holders, Dix Hills meets the definition of a VIE, however, with its non-voting 12% interest, Federated is not deemed to have power to direct the activities of Dix Hills and therefore is not the primary beneficiary. Federated has not provided financial support to Dix Hills. Federated’s investment in Dix Hills is included in Other long-term assets on the Consolidated Balance Sheets.

(7) Fair Value Measurements

The FASB defines fair value as the price that would be received to sell an asset or the price paid to transfer a liability on the measurement date. As defined, fair value focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants. The FASB established a fair value reporting hierarchy to maximize the use of observable inputs and defines the three levels of inputs as follows:

Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets and liabilities may include debt securities and equity securities that are traded in an active exchange market.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs may include observable market data such as closing market prices provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. In addition, pricing services may determine the fair value of equity securities traded principally in foreign markets when it has been determined that there has been a significant trend in the U.S. equity markets or in index futures trading. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.

2010 Annual Report 49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(a) Fair Value Measurements on a Recurring Basis

Fair value measurements for classes of Federated’s financial assets and liabilities measured at fair value on a recurring basis consisted of the following at December 31:


	2010 Fair Value Measurements Using								2009 Fair Value Measurements Using
in thousands	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents	$	198,756	$	0	$	0	$	198,756	$	90,452	$	0	$	0	$	90,452
Available-for-sale equity securities ¹		105,724		0		0		105,724		7,591		0		0		7,591
Trading securities – equity ¹		6,937		4,431		0		11,368		4,536		12,966		0		17,502
Trading securities – debt ¹		10,016		7,777		0		17,793		267		6,178		0		6,445
Foreign currency forward contract ²		0		68		0		68		0		0		0		0

Total financial assets	$	321,433	$	12,276	$	0	$	333,709	$	102,846	$	19,144	$	0	$	121,990

Financial Liabilities
Interest rate swap ³	$	0	$	11,734	$	0	$	11,734	$	0	$	0	$	0	$	0
SunTrust Acquisition future consideration payments liability		0		0		20,058		20,058		0		0		0		0
Foreign currency forward contract ⁴		0		0		0		0		0		154		0		154

Total financial liabilities	$	0	$	11,734	$	20,058	$	31,792	$	0	$	154	$	0	$	154

1	Amount included in Investments on the Consolidated Balance Sheets.

2	Amount included in Receivables – other on the Consolidated Balance Sheets. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward points (based on the spot rate and currency interest rate differentials), which are all observable inputs.

Amount included in Other current liabilities on the Consolidated Balance Sheets. Pricing is determined based on a third-party, model-derived valuation in which all significant inputs are observable in active markets including the Eurodollar future rate and yields for three- and thirty-year Treasury securities. See Note (12) for more information regarding the swap.

4	Amount included in Other current liabilities on the Consolidated Balance Sheets. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward points (based on the spot rate and currency interest rate differentials), which are all observable inputs.

The liability for future consideration payments related to the SunTrust Acquisition is recorded at fair value in Other current liabilities ($5.3 million) and Other long-term liabilities ($14.8 million) on the Consolidated Balance Sheet as of December 31, 2010. Management estimated the fair value of future consideration payments related to the SunTrust Acquisition based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3). Such inputs included (1) an estimated rate of change for underlying assets under management based on estimated net redemptions or sales; (2) expected net revenue per managed asset based generally on contract terms; and (3) a discount rate estimated at the current market rate of return. No material changes in the fair value of the liability were recognized in 2010.

Between December 31, 2009 and December 31, 2010, there were no significant transfers between Level 1 and Level 2. From time to time, transfers between Levels 1 and 2 occur reflecting a change in whether pricing services were used to determine the fair value of equity securities traded principally in foreign markets based upon a determination by management that there had been a significant trend in the U.S. equity markets or in index futures trading after the foreign markets closed or if quoted market prices were used to determine fair values of these equity securities. Transfers into and out of Levels 1 and 2 of the fair value hierarchy are reported at fair values as of the beginning of the period in which the transfers occur.

With the exception of the aircraft that was classified as held for sale as of December 31, 2009 (and further discussed below), Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at December 31, 2010 or December 31, 2009.

(b) Fair Value Measurements on a Nonrecurring Basis

50 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

carrying values were not fully recoverable. Cash flow projections at June 30 and December 31 were lower than previous projections prepared in connection with recoverability testing as a result of actual and projected declines in assets under management in excess of prior estimates. Management estimated the fair value of these intangible assets at June 30 and December 31 based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3). Such inputs included (1) an estimated rate of change for underlying assets under management; (2) expected revenue per managed asset; (3) direct operating expenses; and (4) a discount rate. Management estimates a rate of change for underlying assets under management 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 and direct operating expenses are generally based on contract terms, average market participant data and historical experience. The discount rate is estimated at the current market rate of return. In addition, because of the subjective nature of the projected discounted cash flows, management considered several scenarios and used probability weighting to calculate the expected future cash flows attributable to the intangible assets. The probability-weighted scenarios assumed growth rates in assets under management ranging from -100% to 9% over the cash-flow projection period. As a result of these fair value analyses, Federated recorded a $10.2 million impairment charge on the Consolidated Statements of Income in 2010, $8.2 million of which was included in Intangible asset amortization and impairment with the remainder in Other operating expenses. The related customer relationship intangible assets were written down to $2.0 million, the noncompete agreement included in Other intangible assets was written down to $0.8 million and the related fixed assets were written down to $0.7 million as of December 31, 2010. Intangible asset amortization expense for the succeeding 5 years were reduced as a result of this impairment. Given the uncertainties regarding future market conditions, the timing and pace of a forecasted recovery and possible prolonged periods of underperformance of the quantitative products compared to peers and indices and the significance of these factors to assets under management, management cannot be certain of the outcome of future undiscounted cash flow analyses.

As a result of deterioration in the resale market for used aircraft in 2008 and 2009 and management’s intent to sell its aircraft before the end of its previously estimated useful life, Federated recognized impairment charges totaling $5.2 million to write down the carrying value of one of Federated’s aircraft in 2009. Based upon independent valuation and market data for similar assets (Level 2), management estimated the value of this aircraft less expected costs to sell to be $3.4 million at December 31, 2009. The impairment charges of $3.7 million, $1.0 million and $0.5 million were recorded as operating expense in Other on the Consolidated Statements of Income for the first, third and fourth quarters of 2009, respectively. As a result of adopting a plan to sell this aircraft late in 2009, this aircraft was included in Other current assets on the Consolidated Balance Sheets as of December 31, 2009. In the first quarter 2010, this aircraft was sold for net proceeds of $3.3 million. The loss on sale was recorded as an operating expense in Other on the Consolidated Statements of Income in the first quarter of 2010.

(c) Fair Value Measurements of Other Financial Instruments

The fair value of Federated’s nonrecourse debt is estimated based on estimated annual redemption and market appreciation rates of the underlying B-share fund assets (see Note (1)(m) and Note (13)). Based on this estimate, the carrying value of nonrecourse debt appearing on the Consolidated Balance Sheets approximates fair value.

The fair value of Federated’s recourse debt is estimated based on the current market rate for debt with similar remaining maturities. Based on this fair value estimate, the carrying value of recourse debt appearing on the Consolidated Balance Sheets approximates fair value.

(8) Investments

Investments on the Consolidated Balance Sheets as of December 31, 2010 and 2009 included available-for-sale and trading securities. At December 31, 2010 and 2009, Federated held investments totaling $105.7 million and $7.6 million, respectively, in fluctuating-value mutual funds that were classified as available-for-sale securities. Federated’s trading securities totaled $29.2 million and $23.9 million at December 31, 2010 and 2009, respectively. Federated consolidates certain sponsored funds into its Consolidated Financial Statements as a result of Federated’s controlling financial interest in the products (see Note (6)). As a result, all investments held by these sponsored funds were included in Federated’s Consolidated Balance Sheets as of December 31, 2010 and 2009 as trading securities. Federated’s trading investments primarily represented stocks of large- and mid-cap U.S. and international companies and domestic and foreign debt securities.

2010 Annual Report 51

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

Available-for-sale securities (see Note (1)(g)) consisted of the following at December 31:


	2010									2009
			Gross Unrealized					Estimated Market Value				Gross Unrealized					Estimated Market Value
in thousands	Cost ¹		Gains		(Losses)			Estimated Market Value		Cost		Gains		(Losses)			Estimated Market Value
Equity mutual funds	$	41,879	$	5,200	$	(24	)	$	47,055	$	2,301	$	343	$	0		$	2,644
Fixed-income mutual funds		58,143		662		(136	)		58,669		4,620		332		(5	)		4,947

Total fluctuating-value mutual funds	$	100,022	$	5,862	$	(160	)	$	105,724	$	6,921	$	675	$	(5	)	$	7,591

1	During 2010, Federated invested available cash in various sponsored equity and fixed-income mutual funds.

Gains and losses recognized in Gain (loss) on securities, net on the Consolidated Statements of Income in connection with investments consisted of the following for the years ended December 31:


in thousands	2010			2009			2008
Unrealized gain (loss) on trading securities	$	731		$	2,806		$	(1,673	)
Realized gains ^1,3		4,682			1,256			282
Realized losses ^2,3		(1,871	)		(1,405	)		(1,353	)
Impairments		0			(386	)		(498	)

Gain (loss) on securities, net	$	3,542		$	2,271		$	(3,242	)

Realized gains of $2,045, $810 and $114 related to the disposal of trading securities in 2010, 2009 and 2008, respectively. Realized gains of $1,239, $118 and $168 related to the disposal of available-for-sale securities in 2010, 2009 and 2008, respectively. Realized gains of $720 and $328 related to the settlement of economic derivatives held by certain consolidated sponsored products in 2010 and 2009, respectively. Realized gains of $678 related to the transfer of purchased loans in 2010 (see Note (21) for additional information).

Realized losses of $958, $1,405 and $1,353 related to the disposal of trading securities in 2010, 2009 and 2008, respectively. Realized losses of $907 related to the settlement of economic derivatives held by certain consolidated sponsored products in 2010. Realized losses of $6 related to the disposal of available-for-sale securities in 2010.

3	Realized gains and losses are computed on a specific-identification basis.

(9) Intangible Assets and Goodwill

Federated’s identifiable intangible assets and goodwill consisted of the following at December 31:


	2010							2009
in thousands	Cost		Accumulated Amortization			Carrying Value		Cost		Accumulated Amortization			Carrying Value
Finite-lived intangible assets:
Customer relationships ¹	$	119,472	$	(103,552	)	$	15,920	$	134,869	$	(100,710	)	$	34,159
Noncompete agreements ²		12,142		(8,950	)		3,192		14,396		(6,932	)		7,464

Total finite-lived intangible assets ³		131,614		(112,502	)		19,112		149,265		(107,642	)		41,623
Indefinite-lived intangible assets:
Renewable investment advisory rights		64,500		N/A			64,500		37,800		N/A			37,800
Trade names		1,900		N/A			1,900		1,900		N/A			1,900

Total indefinite-lived intangible assets		66,400		N/A			66,400		39,700		N/A			39,700
Goodwill		635,313		N/A			635,313		581,673		N/A			581,673

Total identifiable intangible assets and goodwill	$	833,327	$	(112,502	)	$	720,825	$	770,638	$	(107,642	)	$	662,996

1	Weighted average amortization period of 9.6 years at December 31, 2010

2	Weighted average amortization period of 6.9 years at December 31, 2010

3	Weighted average amortization period of 9.3 years at December 31, 2010

The decrease of $17.7 million in the cost of the total finite-lived intangible assets at December 31, 2010 as compared to December 31, 2009 primarily relates to a $9.2 million write-off of a fully amortized customer relationship intangible asset relating to a prior year acquisition and $8.2 million in impairment charges recorded in 2010. See Note (7)(b) for additional information on the impairments.

The increase of $26.7 million in the cost of the renewable investment advisory rights indefinite-lived intangible assets at December 31, 2010, as compared to December 31, 2009, reflects assets acquired in connection with the SunTrust Acquisition. See Note (3) for additional information.

52 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

Amortization expense for identifiable intangible assets was $14.3 million, $16.6 million and $18.4 million in 2010, 2009 and 2008, respectively. This expense was included in Intangible asset amortization and impairment on the Consolidated Statements of Income for each period. See Note (7)(b) for information regarding the intangible asset impairments.

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:


in millions	For the years ending December 31,
2011	$	7.0
2012	$	3.4
2013	$	2.6
2014	$	2.0
2015	$	1.4

Goodwill at December 31, 2010 and 2009 was $635.3 million and $581.7 million, respectively. During 2010, Federated recorded goodwill primarily in connection with contingent purchase price payments and accruals related to the Prudent Bear Acquisition ($44.7 million) and the 2005 acquisition of the cash management business of Alliance Capital Management L.P. (Alliance Acquisition) ($6.8 million). Both of these acquisitions were accounted for under the purchase method of accounting and therefore goodwill was recorded at the time the contingencies lapsed. See Note (22)(a) for additional information.

(10) Property and Equipment

Property and equipment consisted of the following at December 31:


in thousands	Estimated Useful Life		2010			2009
Computer software and hardware		2 to 7 years	$	40,642		$	35,693
Transportation equipment		12 years		17,875			17,833
Leasehold improvements		Up to term of lease		15,853			15,574
Office furniture and equipment		5 to 10 years		6,127			6,468

Total cost				80,497			75,568
Accumulated depreciation and amortization				(41,981	)		(35,541	)

Property and equipment, net			$	38,516		$	40,027

Depreciation and amortization expense from continuing operations was $7.5 million, $7.5 million and $6.2 million for the years ended December 31, 2010, 2009 and 2008, respectively, and included the depreciation of assets recorded under capital lease arrangements in 2009 and 2008.

(11) Other Current Liabilities

Federated’s Other current liabilities at December 31, 2010 included an accrual of $11.7 million related to the interest rate swap (see Note (12) for additional information) and $5.3 million for the short-term portion of the SunTrust Acquisition future consideration payments liability (see Note (3) for additional information).

Federated’s Other current liabilities at December 31, 2009 included an accrual of $28.9 million related to the contingent purchase price payments for the Alliance Acquisition which was paid in April 2010. The final payment for the Alliance Acquisition of $3.3 million was paid in July 2010. Also included in Other current liabilities at December 31, 2009 was $20.8 million related to insurance proceeds for claims submitted to cover costs associated with the government investigations into past mutual fund trading practices and related legal proceedings (see Note (22)(c)). The retention of these advance insurance payments was contingent upon final approval of the claim by the insurance carrier. In the event that all or a portion of the claim was denied, Federated would have been required to repay all or a portion of these advance payments. During the second quarter 2010, Federated received an additional $4.2 million in related insurance proceeds and received final approvals by the insurance carrier for $25 million of claims. Accordingly, $25 million of proceeds were recognized on the Consolidated Statements of Income for the second quarter 2010 as reductions to the operating expense line items originally charged in prior periods, primarily Professional service fees.

2010 Annual Report 53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(12) Recourse Debt and Interest Rate Swap

Recourse debt at December 31 consisted of the following:


dollars in thousands	Weighted - Average Interest Rates at December 31,						Maturity Date	2010		2009
dollars in thousands	2010 ¹			2009 ²			Maturity Date	2010		2009
Term Loan		4.396	%		1.717	%	April 1, 2015	$	403,750	$	126,000
Less: Short-term debt – recourse									42,500		21,000

Long-term debt – recourse								$	361,250	$	105,000

1	See additional information below regarding the interest rate fixed at 4.396% in connection with the interest rate swap.

2	The term of this agreement allowed up to eight separate borrowing tranches each for the purpose of setting different interest rates and maturities. The rate is the weighted-average rate of several loan tranches which matured on various dates through February 2, 2010.

In the second quarter 2010, Federated entered into a five-year $425 million amended and restated term loan credit agreement by and among Federated, certain of its subsidiaries and a syndicate of 22 banks led by PNC Capital Markets LLC as sole bookrunner and joint lead arranger and Citigroup Global Markets, Inc. as joint lead arranger (Term Loan).

The Term Loan amended and restated Federated’s $140 million term loan dated August 19, 2008. The Term Loan requires principal payments of $10.6 million per quarter for the first four years and $63.8 million per quarter for the fifth year with the final payment due on April 1, 2015. Proceeds from the Term Loan were used to refinance and repay the then-existing debt and are being used for general corporate purposes. The Term Loan qualified for modification accounting treatment. Accordingly, closing costs of $2.8 million were capitalized in the second quarter 2010 and are being amortized over the 5-year term of the loan.

During the first quarter 2010, Federated entered into an interest rate swap to hedge its interest rate risk associated with the $425 million Term Loan (the Swap). The Swap, which became effective in the second quarter 2010, had an initial notional amount of $425 million that declines in accordance with the scheduled principal payments associated with the Term Loan. Under the Swap, which expires on April 1, 2015, Federated receives payments based on the London Interbank Offering Rate (LIBOR) plus a spread and makes payments based on an annual fixed rate of 4.396%. The Swap requires monthly cash settlements of interest paid or received. The differential between the interest paid or interest received from the monthly settlements will be recorded as adjustments to Debt expense – recourse on the Consolidated Statements of Income. The Swap is accounted for as a cash flow hedge and has been determined to be highly effective. Federated evaluates effectiveness using the long-haul method. Changes in the fair value of the Swap will likely be offset by an equal and opposite change in the fair value of the hedged item, therefore very little, if any, net impact on reported earnings is expected. The fair value of the Swap agreement at December 31, 2010 was a liability of $11.7 million which was recorded in Other current liabilities on the Consolidated Balance Sheet. The entire amount of this loss in fair value was recorded in Accumulated other comprehensive (loss) income, net of tax on the Consolidated Balance Sheet at December 31, 2010. During the next twelve months management expects to charge $7.9 million of this after-tax loss to Debt expense – recourse on the Consolidated Statements of Income as a component of Federated’s fixed interest rate of 4.396%. This amount could differ from amounts actually recognized due to changes in interest rates subsequent to December 31, 2010 and will not affect the amount of interest expense recognized in total on the Term Loan for any period presented. During 2010, $6.5 million was charged to Debt expense – recourse on the Consolidated Statement of Income as a component of Federated’s fixed interest rate of 4.396% and was included in cash provided by operating activities on the Consolidated Statements of Cash Flows.

Federated has a $200 million revolving credit facility (Revolving Credit Facility) that expires on October 31, 2011. Federated pays an annual facility fee, currently 7.5 basis points, based on its credit rating. Borrowings on the Revolving Credit Facility bear interest similar to that under the Term Loan except the LIBOR spread is currently 22.5 basis points. As of December 31, 2010 and 2009, all of Federated’s $200 million Revolving Credit Facility was available for borrowings.

For the Revolving Credit Facility, the LIBOR spreads are dependent upon Federated’s credit rating. Under the Revolving Credit Facility, Federated can make cash payments for stock repurchases or shareholder dividend payments as long as cash, cash equivalents or unused borrowing from the Revolving Credit Facility of no less than $10 million is maintained during the payment period and certain other covenants are maintained. For both the Term Loan and the Revolving Credit Facility (collectively, the Credit Facilities), certain subsidiaries entered into Continuing Agreements of Guaranty and Suretyship whereby these subsidiaries guarantee payment of all obligations incurred through the Credit Facilities. The Credit Facilities include customary financial and non-financial covenants. Federated was in compliance with all such covenants at and during the year ended December 31, 2010.

54 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(13) Deferred Sales Commissions and Nonrecourse Debt

Deferred sales commissions consisted of the following at December 31:


in thousands	2010		2009
Deferred sales commissions on B-shares, net	$	8,376	$	12,585
Other deferred sales commissions, net		1,941		2,733

Deferred sales commissions, net	$	10,317	$	15,318

Federated began self-funding the sale of Class B shares of its sponsored mutual funds in March 2010. As of December 31, 2010, Federated has funded $5.0 million in B-share deferred sales commissions. Amortization expense for the year ended December 31, 2010 for the related deferred sales commissions was $0.4 million.

From 1997 to February 2010, Federated has funded sales commissions paid for Class B shares of sponsored mutual funds under various arrangements with independent third parties by selling its right to future cash flow streams associated with the B-share deferred sales commissions. As a result of these funding arrangements, Federated has recorded nonrecourse debt, which comprised the following at December 31:


dollars in thousands	Weighted-Average Interest Rates at December 31,						Maximum Remaining Amortization Period at December 31, 2010 (in years)		2010		2009
dollars in thousands	2010			2009					2010		2009
Financings between January 2004 and February 2007		7.10	%		7.09	%		4.3	$	2,592	$	11,007
Financings between March 2007 and February 2010		4.21	%		4.56	%		7.3		1,844		2,549

Total debt—nonrecourse									$	4,436	$	13,556

Federated’s nonrecourse debt does not contain a contractual maturity but is amortized up to eight years dependent upon the cash flows of the related B-share fund assets, which are applied first to interest and then principal. Interest rates are imputed based on current market conditions at the time of issuance.

Management performs recoverability analyses of the deferred sales commission assets and nonrecourse debt related to B-share financings to determine if future cash flows related to financings will be sufficient to fully amortize the related asset and debt balances. There were no B-share-related adjustments recorded during 2010 or 2009.

(14) Employee Benefit Plans

(a) 401(k)/Profit Sharing Plan

Federated offers a 401(k) plan covering substantially all employees. Under the 401(k) plan, employees can make salary deferral contributions at a rate of 1% to 50% of their annual compensation (as defined in the 401(k) plan), subject to Internal Revenue Code limitations. Federated makes a matching contribution in an amount equal to 100% of the first 2% that each participant defers and 50% of the next 4% of deferral contributions. Forfeitures of unvested matching contributions are used to offset future matching contributions.

Matching contributions to the 401(k) plan recognized in Compensation and related expense amounted to $3.9 million, $3.9 million and $3.5 million for 2010, 2009 and 2008, respectively.

Vesting in Federated’s matching contributions commences once a participant in the 401(k) plan has been employed at least two years and worked at least 1,000 hours per year. Upon completion of two years of service, 20% of Federated’s contribution included in a participant’s account vests and 20% vests for each of the following four years if the participant works at least 1,000 hours per year. Employees are immediately vested in their 401(k) salary deferral contributions.

A Federated employee becomes eligible to participate in the profit sharing plan if employed on the last day of the year and has worked at least 500 hours for the year. The profit sharing plan is a defined contribution plan to which Federated may contribute amounts as authorized by its board of directors. No contributions have been made to the profit sharing plan in 2010, 2009 or 2008. At December 31, 2010, the profit sharing plan held 0.7 million shares of Federated Class B common stock.

(b) Employee Stock Purchase Plan

Federated offers an employee stock purchase plan that 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 purchased under this plan may be newly issued shares, treasury shares or shares purchased on the open market. As of December 31, 2010, 117,380 shares were purchased by employees in this plan on the open market since the plan’s inception in 1998.

2010 Annual Report 55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(15) Share-Based Compensation Plans

Federated’s long-term stock-incentive compensation has been provided for under the Stock Incentive Plan (the Plan), as amended and subsequently approved by shareholders in April 2002, April 2006 and April 2010. Share-based awards are granted to reward Federated’s employees and non-management directors who have contributed to the success of Federated and to provide incentive to increase their efforts on behalf of Federated. Since the Plan’s inception, a total of 23.6 million shares of Class B common stock have been authorized for granting share-based awards in the form of restricted stock, stock options or other share-based awards. As of December 31, 2010, 1.8 million shares are available under the Plan.

Share-based compensation expense was $19.1 million, $18.8 million and $15.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. The associated tax benefits recorded in connection with share-based compensation expense was $7.2 million, $7.1 million and $5.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. At December 31, 2010, the maximum remaining unrecognized compensation expense related to share-based awards approximated $67 million which is expected to be recognized over a weighted-average period of approximately 7 years.

(a) Restricted Stock

Federated’s restricted stock awards represent shares of Federated Class B common stock that may be sold by the awardee only once the restrictions lapse, as dictated by the terms of the award. The awards are generally subject to graded vesting schedules that vary in length from three to ten years with a portion of the award vesting each year, as dictated by the terms of the award. For an award with a ten-year vesting period, the restrictions on the vested portion of the award typically lapse on approximately the award’s fifth- and tenth-year anniversaries. Certain restricted stock awards granted pursuant to a key employee bonus program have a three-year graded vesting schedule with restrictions lapsing at each vesting date. During the period of restriction, the recipient receives dividends on all shares awarded, regardless of their vesting status.

The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2010:


	Restricted Shares			Weighted- Average Grant- Date Fair Value
Non-vested at January 1, 2010		3,200,835		$	24.80
Granted ¹		897,379		$	22.97
Vested		(535,213	)	$	26.02
Forfeited		(59,675	)	$	25.41

Non-vested at December 31, 2010		3,503,326		$	24.14

During the first quarter of 2010, Federated awarded 352,879 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 Plan. This restricted stock, which was granted on the bonus payment date and issued out of treasury, generally vests over a three-year period. During the fourth quarter of 2010, Federated awarded 544,500 shares of restricted Federated Class B common stock to certain key employees. The restricted stock award generally vests over a ten-year period with restrictions on the vested portion of the award lapsing on approximately the awards’ fifth- and tenth-year anniversaries.

Federated awarded 897,379 shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of $22.97 to employees during 2010; awarded 1,155,136 shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of $20.41 to employees during 2009; and awarded 758,551 shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of $23.53 to employees during 2008.

The total fair value of restricted stock vested during 2010, 2009 and 2008 was $12.2 million, $6.8 million and $10.1 million, respectively.

(b) Stock Options

The outstanding stock options were granted with exercise prices that equaled or exceeded the market price of Federated’s Class B common stock on the grant date. The options generally have graded vesting schedules that vary in length up to ten years and in certain cases, may contain accelerated vesting provisions based upon the attainment of specific performance criteria. The stated exercise period is typically a one-year period following the date on which the entire award becomes fully vested. Each vested option may be exercised for the purchase of one share of Class B common stock at the exercise price. In some cases, Federated awarded stock options with no requisite service requirement. These options, which were fully vested on the date of grant, were immediately exercisable and expire no later than ten years after the grant date.

56 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

The following table summarizes the status of and changes in Federated’s stock option program for the year ended December 31, 2010:


	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2010		3,705,082		$	27.59
Granted		0			N/A
Exercised		(486,150	)	$	20.48
Forfeited		(3,500	)	$	30.13

Outstanding at December 31, 2010		3,215,432		$	28.67		0.7	$	1.6

Vested at December 31, 2010		3,133,757		$	28.61		0.7	$	1.6

Exercisable at December 31, 2010		3,058,182		$	28.55		0.6	$	1.6

Total options exercised during 2010, 2009 and 2008 were 486,150, 345,275 and 1,052,343, respectively. The total intrinsic value of stock options exercised during 2010, 2009 and 2008 was $2.3 million, $4.0 million and $17.7 million, respectively.

There were no stock options granted in 2010. Federated granted 12,000 stock options to non-management directors with a weighted-average grant-date fair value of $3.38 and $4.05 during each of the second quarters of 2009 and 2008, respectively. Federated estimated the grant-date fair value using the Black-Scholes option-pricing model with the following weighted-average assumptions for options granted in 2009 and 2008, respectively: dividend yields based on latest annualized dividend of 4.07% and 2.84%; expected volatility factors based on historical volatility of 24.9% and 15.2%; risk-free interest rates based on the U.S. Treasury strip rate for the expected life of the option of 1.89% and 3.09%; and an expected life of 5 years for each grant in 2009 and 2008. The expected life is based on the assumption that these options will be exercised evenly over the life of the option.

All awards granted in 2009 and 2008 were granted with an exercise price that was equal to the market price on the date of grant.

(16) Common Stock

The Class A common stockholder has the entire voting rights of Federated; however, without the consent of the majority of the holders of the Class B common stock, the Class A common stockholder cannot alter Federated’s structure, dispose of all or substantially all of Federated’s assets, amend the Articles of Incorporation or Bylaws of Federated to adversely affect the Class B common stockholders, or liquidate or dissolve Federated. With respect to dividends, distributions and liquidation rights, the Class A common stock and Class B common stock have equal preferences and rights.

(a) Dividends

Cash dividends of $228.7 million, $98.5 million and $375.7 million were paid in 2010, 2009 and 2008, respectively, to holders of common stock. In the first quarter 2010, Federated paid $1.26 per share or $129.8 million for a special dividend in addition to the regular quarterly cash dividends paid throughout 2010. In the third quarter 2008, Federated paid $2.76 per share or $281.2 million for a special cash dividend in addition to the regular quarterly cash dividends paid throughout the course of 2008. All dividends are considered ordinary dividends for tax purposes.

(b) Treasury Stock Repurchase

During 2008, the board of directors authorized a share repurchase program that allows Federated to buy back as many as 5 million shares of Class B common stock following the December 31, 2008 expiration of the previous board-approved share repurchase program. The current program has no stated expiration date. No other programs existed as of December 31, 2010. The program authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities. During the year ended December 31, 2010, Federated repurchased 0.7 million shares of common stock for $14.2 million, the majority of which were repurchased in the open market and the remaining shares were repurchased in connection with employee separations and are not counted against the board-approved share repurchase program. At December 31, 2010, approximately 3.6 million shares remain available to be purchased under the current buyback program.

Under the Revolving Credit Facility, certain covenants are maintained including one that allows Federated to make cash payments for stock repurchases or shareholder dividends as long as liquidity of no less than $10 million is maintained during the payment period.

2010 Annual Report 57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(17) Leases

The following is a schedule by year of future minimum payments required under the operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2010:


in millions
2011	$	12.3
2012		11.7
2013		11.5
2014		11.4
2015		3.3
2016 and thereafter		7.0

Total minimum lease payments	$	57.2

Federated held a material operating lease at December 31, 2010 for its corporate headquarters building in Pittsburgh, Pennsylvania. This lease expires in 2014 and has renewal options for two successive terms of five years each. This lease includes provisions for leasehold improvement incentives, rent escalation and certain penalties for early termination. In addition, at December 31, 2010, Federated had various other operating lease agreements primarily involving additional facilities. These leases are noncancelable and expire on various dates through the year 2019. Most leases include renewal options and, in certain leases, escalation clauses.

Rental expenses related to continuing operations were $10.6 million, $11.1 million and $11.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.

(18) Income Taxes

Federated files a consolidated federal income tax return. Financial statement tax expense is determined under the liability method.

Income tax expense (benefit), net from continuing operations consisted of the following components for the years ended December 31:


in thousands	2010			2009			2008
Current:
Federal	$	79,273		$	101,649		$	117,210
State		8,504			11,082			9,160
Foreign		(33	)		297			811

		87,744			113,028			127,181
Deferred:
Federal		20,997			8,269			1,655
State		3,210			(3,399	)		(166	)
Foreign		6			380			(502	)

Total	$	111,957		$	118,278		$	128,168

The federal net tax effects of timing differences exceeding 5% of pretax income at the statutory federal income tax rate included in Income tax provision on the Consolidated Statements of Income were ($11.8 million), ($6.8 million) and ($9.1 million) for amortization and impairments of intangible assets in 2010, 2009 and 2008, respectively, and ($7.3 million), $1.3 million and $2.2 million for insurance proceeds in 2010, 2009 and 2008, respectively.

The reconciliation between the statutory income tax rate and the effective tax rate attributable to continuing operations consisted of the following for the years ended December 31:


	2010			2009			2008
Expected statutory income tax rate		35.0	%		35.0	%		35.0	%
Increase/(decrease):
State and local income taxes, net of Federal benefit		2.5			1.5			1.6
Capital loss valuation allowance		0.1			1.2			0.1
Other		0.9			(0.2	)		0.0

Effective tax rate (excluding noncontrolling interests)		38.5			37.5			36.7
Income attributable to noncontrolling interests		(1.3	)		(1.3	)		(0.8	)

Effective tax rate per Consolidated Statements of Income		37.2	%		36.2	%		35.9	%

58 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

During 2010, state and local taxes increased as a result of the combination of changing apportionment factors and the full year impact of prior year tax law changes.

During 2009, changes to the New York City corporate tax rules were enacted. These changes, some of which were retroactive to the beginning of 2009, resulted in a net favorable adjustment of $2.1 million, comprised of a deferred tax benefit of approximately $3.4 million and a current tax detriment of approximately $1.3 million.

During 2009, Federated recognized a $1.6 million deferred tax asset relating to a net operating loss carryforward acquired in connection with a prior period acquisition. Management concluded its evaluation of the availability of the loss carryforward for use by Federated as the acquirer and believes it is more likely than not that Federated will be able to realize the net operating loss carryforwards to partially offset post-acquisition federal taxable income.

During 2009, Federated recorded an additional $3.7 million valuation allowance related to certain deferred tax assets primarily generated by charges recorded in prior years to write down the value of Federated’s investments to certain managed CDOs. After reassessing the viability and timing of certain tax-planning strategies in light of current market conditions, management believes it is more likely than not that Federated will not be able to realize the full benefit of these deferred tax assets once the capital losses are recognized for tax purposes.

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of the following at December 31:


in thousands	2010			2009
Deferred Tax Assets
Tax net operating losses	$	17,885		$	18,766
Share-based compensation		8,274			8,105
Write-down of CDO investments		6,317			6,240
Capital losses		458			898
Deferred income		0			7,274
Other		6,918			5,202

Total deferred tax assets		39,852			46,485

Valuation allowance		(20,774	)		(20,806	)

Total deferred tax asset, net of valuation allowance	$	19,078		$	25,679

Deferred Tax Liabilities
Intangible assets	$	54,734		$	42,892
Property and equipment		4,376			4,426
State taxes		3,087			1,279
Deferred sales commissions		2,838			2,141
Costs of internal-use software		2,566			1,546
Other		1,728			1,462

Total gross deferred tax liability	$	69,329		$	53,746

Net deferred tax liability	$	50,251		$	28,067

At December 31, 2010, the company had deferred tax assets related to tax net operating loss carryforwards accumulated in certain taxing jurisdictions in the aggregate of $16.2 million, which will expire over the period 2011 through 2026. A valuation allowance has been recognized for $1.8 million (or 94%) of the deferred tax asset for foreign tax net operating losses, and for all but $0.3 million (or 2%) of the deferred tax asset for state tax net operating losses. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated will not realize the full benefit of these net operating losses. No valuation allowance has been recorded with regard to the federal tax net operating loss acquired in connection with a prior period acquisition.

In addition, at December 31, 2010, Federated recognized deferred tax assets as a result of the recognition in prior years of capital losses on investments and the write down in prior years in the value of its investment in certain managed CDOs. The carry-forward period for recognized capital losses is five years. Management currently believes it is more likely than not that Federated will not fully realize these deferred tax assets in the future and therefore has recognized a related valuation allowance for $4.8 million.

The company and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in certain foreign jurisdictions. Based upon its review of these filings, there were no material unrecognized tax benefits as of December 31, 2010 or 2009. Therefore, there were no material changes during 2010, and no reasonable possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.

2010 Annual Report 59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(19) Earnings Per Share Attributable to Federated Investors, Inc. Shareholders

The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated Investors, Inc. for the years ended December 31:


in thousands, except per share data	2010			2009			2008
Numerator – Basic
Income from continuing operations attributable to Federated Investors, Inc.	$	179,114		$	197,292		$	221,509
Less: Total income available to participating unvested restricted shareholders ¹		(6,443	)		(4,917	)		(5,169	)

Total income from continuing operations attributable to Federated Common Stock ²	$	172,671		$	192,375		$	216,340


Income from discontinued operations attributable to Federated Investors, Inc.	$	0		$	0		$	2,808
Less: Total income available to participating unvested restricted shareholders ¹		0			0			(65	)

Total income from discontinued operations attributable to Federated Common Stock ²	$	0		$	0		$	2,743


Net income attributable to Federated Common Stock ²	$	172,671		$	192,375		$	219,083


Numerator – Diluted
Income from continuing operations attributable to Federated Investors, Inc.	$	179,114		$	197,292		$	221,509
Less: Total income available to participating unvested restricted shareholders ¹		(6,443	)		(4,913	)		(5,169	)

Total income from continuing operations attributable to Federated Common Stock ²	$	172,671		$	192,379		$	216,340


Income from discontinued operations attributable to Federated Investors, Inc.	$	0		$	0		$	2,808
Less: Total income available to participating unvested restricted shareholders ¹		0			0			(65	)

Total income from discontinued operations attributable to Federated Common Stock ²	$	0		$	0		$	2,743


Net income attributable to Federated Common Stock ²	$	172,671		$	192,379		$	219,083


Denominator
Basic weighted-average common shares outstanding		99,925			99,923			99,605
Dilutive potential shares from stock options		68			133			790

Diluted weighted-average common shares outstanding		99,993			100,056			100,395


Earnings per share – Basic
Income from continuing operations attributable to Federated Common Stock ²	$	1.73		$	1.93		$	2.17
Income from discontinued operations attributable to Federated Common Stock ²		0.00			0.00			0.03

Net income attributable to Federated Common Stock ²	$	1.73		$	1.93		$	2.20


Earnings per share – Diluted
Income from continuing operations attributable to Federated Common Stock ²	$	1.73		$	1.92		$	2.15
Income from discontinued operations attributable to Federated Common Stock ²		0.00			0.00			0.03

Net income attributable to Federated Common Stock ²	$	1.73		$	1.92		$	2.18

1	Income available to participating restricted shareholders includes dividends paid to unvested restricted shareholders, net of forfeited dividends, and their proportionate share of undistributed earnings.

2	Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.

For the years ended December 31, 2010, 2009 and 2008, 3.0 million, 2.7 million and 1.3 million stock option awards, respectively, were outstanding but not included in the computation of diluted earnings per share for each year because the exercise price was greater than the average market price of Federated Class B common stock for each respective year. In the event the awards become dilutive, these shares would be included in the calculation of diluted earnings per share and would result in additional dilution.

60 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(20) Accumulated Other Comprehensive (Loss) Income attributable to Federated Shareholders

The components of accumulated other comprehensive (loss) income, net of tax, attributable to Federated shareholders are as follows:


in thousands	Unrealized Loss on Interest Rate Swap			Unrealized Gain (Loss) on Securities Available for Sale			Foreign Currency Translation Gain (Loss)			Total
Balance at January 1, 2008	$	0		$	175		$	704		$	879
Change in market value ¹		0			(675	)		0			(675	)
Reclassification adjustment ²		0			190			0			190
Loss on currency conversion ³		0			0			(97	)		(97	)

Balance at December 31, 2008		0			(310	)		607			297
Change in market value ¹		0			483			0			483
Reclassification adjustment ²		0			251			0			251
Gain on currency conversion ³		0			0			483			483

Balance at December 31, 2009		0			424			1,090			1,514
Change in market value ¹		(11,828	)		3,642			0			(8,186	)
Reclassification adjustment ²		4,201			(802	)		0			3,399
Loss on currency conversion ³		0			0			(422	)		(422	)

Balance at December 31, 2010	$	(7,627	)	$	3,264		$	668		$	(3,695	)

1	The tax related to the change in market value of the interest rate swap was $6,369 for 2010. The tax related to the change in market value of securities available for sale was ($2,640), ($277) and $364 for 2010, 2009 and 2008, respectively.

2	The tax related to the reclassification adjustment for the interest rate swap was ($2,262) for 2010. The tax related to the reclassification adjustments for securities available for sale was $431, ($134) and ($102) for 2010, 2009 and 2008, respectively.

3	The tax related to the foreign currency translation gain/loss was $227, ($260) and $52 for 2010, 2009 and 2008, respectively.

(21) Transfers of Purchased Loans

During the second quarter 2010, Federated began investing in purchased loans, consisting primarily of syndicated, commercial, US dollar-denominated, floating-rate term loans. The purchased loans were recorded at fair value and included in Other current assets on the Consolidated Balance Sheet. During 2010, Federated transferred $46.2 million in purchased loans and $4.3 million in cash into a new Federated-sponsored fund in exchange for shares of the fund. This transfer of assets was recorded as a sale for accounting purposes given that the loans were legally isolated from Federated, the Federated-sponsored fund has the right to pledge or exchange the loans and Federated has not maintained effective control over the transferred loans. Federated recorded $0.7 million in Gain (loss) on securities, net on the Consolidated Statement of Income as a result of the sale of these loans. As of December 31, 2010, there were no remaining purchased loans included in Other current assets on the Consolidated Balance Sheet.

(22) Commitments and Contingencies

(a) Contractual

Federated is obligated to make certain future payments under various agreements to which it is a party, including operating leases (see Note (17)). The following table summarizes minimum noncancelable payments contractually due under Federated’s significant service contracts and employment arrangements:


	Payments due in
in millions	2011		2012		2013		2014		2015		After 2015		Total
Purchase obligations ¹	$	9.2	$	3.6	$	2.0	$	0.8	$	0.6	$	0.8	$	17.0
Employment-related commitments ²		29.5		10.2		8.3		7.6		0		0		55.6

Total	$	38.7	$	13.8	$	10.3	$	8.4	$	0.6	$	0.8	$	72.6

2	Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation payments. These contracts expire on various dates through the year 2014.

2010 Annual Report 61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

expenses directly attributed to certain eligible assets. At December 31, 2010, management estimated contingent payments could total $27 million over five years, however, the actual amount of the contingent payments will vary based on asset levels and related net revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the extent of reasonably possible flow-rate volatility for the assets under management. As of December 31, 2010, a liability of $20.1 million representing the fair value of future consideration payments was recorded in Other current liabilities ($5.3 million) and Other long-term liabilities ($14.8 million) (see Note (7)(a) for a discussion regarding the valuation methodology). This liability is remeasured at each reporting date with changes in the fair value recognized in Intangible asset amortization and impairment in the Consolidated Statements of Income.

As part of the Prudent Bear Acquisition, Federated is required to make contingent purchase price payments based upon certain revenue growth targets over the four-year period following the acquisition date. The contingent purchase price payments will be recorded as additional goodwill at the time the contingency is resolved. The first contingent purchase price payment of $5.1 million was paid in the first quarter 2010. As of December 31, 2010, $44.7 million was accrued in Accounts payable and accrued expenses on the Consolidated Balance Sheets for the second anniversary year payment and was paid in January 2011. The remaining contingent purchase price payments could total as much as $49.0 million.

As part of the Alliance Acquisition, Federated was required to make contingent purchase price payments over a five-year period following the acquisition date. These payments were primarily calculated as a percentage of revenues less certain operating expenses directly attributed to the assets acquired. Contingent purchase price payments of $10.7 million, $13.3 million, $16.2 million, $19.8 million and $32.4 million were paid in the second quarters of 2006, 2007, 2008, 2009, and 2010, respectively. In addition, a final contingent purchase price payment of $3.3 million was paid in the third quarter 2010. Contingent payments were recorded as additional goodwill at the time the related contingency was resolved.

In the third quarter 2007, Federated completed a transaction with Rochdale Investment Management LLC to acquire certain assets relating to its business of providing investment advisory and investment management services to the Rochdale Atlas Portfolio (Rochdale Acquisition). The Rochdale Acquisition agreement provides for two forms of contingent purchase price payments that are dependent upon asset growth and fund performance through 2012. The first form of contingent payment is payable in 2010 and 2012 and could aggregate to as much as $20 million. The second form of contingent payment is payable on a semi-annual basis over the five-year period following the acquisition closing date based on certain revenue earned by Federated from the Federated InterContinental Fund. As of December 31, 2010, $3.0 million was paid in semi-annual contingent purchase price payments, $0.3 million was accrued related to future semi-annual contingent purchase price payments and $1.1 million was paid in the fourth quarter 2010 with regard to the first form of contingent payment. The future semi-annual contingent purchase price payment was accrued in Other current liabilities and recorded as goodwill. Contingent payments are recorded as additional goodwill at the time the related contingency is resolved.

(b) Guarantees and Indemnifications

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

62 Federated Investors, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

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) Past Mutual Fund Trading Issues and Related Legal Proceedings

During the fourth quarter 2005, Federated entered into settlement agreements with the SEC and New York State Attorney General to resolve the past mutual fund trading issues. Under the terms of the settlements, Federated paid for the benefit of fund shareholders a total of $80.0 million. In addition, Federated agreed to reduce the investment advisory fees on certain Federated funds by $4.0 million per year for the five-year period beginning January 1, 2006, based upon effective fee rates and assets under management as of September 30, 2005. These mandatory fee waiver reductions expired on December 31, 2010. Depending upon the level of assets under management in the funds subject to these fee waivers during the five-year period, the actual investment advisory fee reduction could have been greater or less than $4.0 million per year. For each of the years ended December 31, 2010, 2009 and 2008, these fee reductions were approximately $3 million.

(d) Other Legal Proceedings

Federated has other claims asserted and threatened against it in the ordinary course of business. As of December 31, 2010, Federated does not believe that a material loss related to these claims is reasonably estimable. These claims are subject to inherent uncertainties. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s reputation, financial position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.

(23) Subsequent Events

On January 27, 2011, the board of directors declared a $0.24 per share dividend to shareholders of record as of February 8, 2011, which was paid on February 15, 2011. In addition, on January 27, 2011, the board of directors, subject to shareholder approval, authorized an additional 3.5 million shares of Class B common stock to be available for granting share-based awards under the Plan.

2010 Annual Report 63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(December 31, 2010, 2009 and 2008)

(24) Supplementary Quarterly Financial Data (Unaudited)


in thousands, except per share data, for the quarters ended	March 31,		June 30,		September 30,		December 31,
2010
Revenue ^{1, 5}	$	232,970	$	231,484	$	242,173	$	245,317
Operating income ^{1, 2}		71,810		83,861		75,088		79,032
Net income including noncontrolling interest in subsidiaries ^{1, 2}		44,195		48,275		48,063		48,631
Amounts attributable to Federated Investors, Inc.
Net income ^{1, 2}		42,007		47,650		43,056		46,401
Earnings per share – Basic and Diluted ^{1, 2}		0.38		0.46		0.42		0.45
Cash dividends per share ³		1.50		0.24		0.24		0.24
Stock price per share ⁴
High		28.14		27.32		23.54		27.02
Low		23.85		20.67		20.01		22.76

2009
Revenue ¹	$	310,643	$	306,894	$	293,603	$	264,810
Operating income ^{1, 2}		60,049		88,065		94,733		86,381
Net income including noncontrolling interest in subsidiaries ^{1, 2}		37,469		56,083		60,287		54,700
Amounts attributable to Federated Investors, Inc.
Net income ^{1, 2}		35,135		53,274		56,986		51,897
Earnings per share – Basic and Diluted ^{1, 2}		0.34		0.52		0.56		0.51
Cash dividends per share		0.24		0.24		0.24		0.24
Stock price per share ⁴
High		23.21		26.85		27.50		28.31
Low		16.10		21.08		22.35		24.76

During the first, second, third and fourth quarters of 2010, fee waivers to maintain positive or zero net yields totaled $69.5 million, $58.2 million, $53.8 million and $60.0 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $51.2 million, $45.0 million, $42.6 million and $47.7 million such that the net impact to Federated was $18.3 million, $13.2 million, $11.2 million, and $12.3 million in reduced operating income for the first, second, third and fourth quarters of 2010, respectively. During the first, second, third and fourth quarters of 2009, fee waivers to maintain positive or zero net yields totaled $9.7 million, $17.0 million, $36.5 million and $57.5 million, respectively. These fee waivers were partially offset by related reductions in marketing and distribution expenses of $4.6 million, $11.4 million, $27.9 million and $42.6 million such that the net impact to Federated was $5.1 million, $5.6 million, $8.6 million and $14.9 million in reduced operating income for the first, second, third and fourth quarters of 2009, respectively.

Federated recorded impairment charges of $7.0 million and $3.2 million related to intangible and fixed assets in the second and fourth quarters of 2010, respectively. Federated recorded impairments totaling $21.7 million primarily related to intangible and fixed assets in the first quarter 2009. See Note (7) for additional information.

3	For the quarter ended March 31, 2010, Federated paid $1.26 per share for a special cash dividend. This payment was in addition to the $0.24 per share dividend paid in that quarter. All dividends are considered ordinary dividends for tax purposes.

4	Federated’s common stock is traded on the New York Stock Exchange under the symbol FII.

5	As a result of the SunTrust Acquisition, revenue for the fourth quarter included $7.4 million related to the acquired assets under management. See Note (3) for additional information.

The approximate number of beneficial shareholders of Federated’s Class A and Class B common stock as of February 8, 2011, was 1 and 40,727, respectively.

2010 Annual Report 64

EXHIBIT 21.01

SIGNIFICANT SUBSIDIARIES OF FEDERATED INVESTORS, INC.:

Edgewood Services, Inc., a New York corporation

Federated Administrative Services, a Delaware statutory trust

Federated Administrative Services, Inc., a Pennsylvania corporation

Federated Advisory Services Company, a Delaware statutory trust

Federated Asset Management GmbH, a German company

Federated Equity Management Company of Pennsylvania, Delaware statutory trust

Federated Funding 1997-1, Inc., a Delaware corporation

Federated Global Investment Management Corp., a Delaware corporation

Federated International – Europe GmbH, a German company

Federated International Holdings B.V., a Netherlands company

Federated International Management Limited, an Ireland company

Federated Investment Counseling, a Delaware statutory trust

Federated Investment Management Company, a Delaware statutory trust

Federated Investors Management Company, a Pennsylvania corporation

Federated Investors Trust Company, a Pennsylvania trust company

Federated Investors (UK) Ltd., an United Kingdom company

Federated MDTA LLC, a Delaware limited liability company

Federated MDTA Trust, a Massachusetts business trust

Federated Private Asset Management, Inc., a Delaware corporation

Federated Securities Corp., a Pennsylvania corporation

Federated Services Company, a Pennsylvania corporation

Federated Shareholder Services Company, a Delaware statutory trust

FII Holdings, Inc., a Delaware corporation

HBSS Acquisition Company, a Delaware corporation

Retirement Plan Service Company of America, a Delaware statutory trust, doing business as “Federated Retirement Plan Services

Company” and “Federated Retirement Solutions”

Passport Research Ltd., a Pennsylvania limited partnership

Southpointe Distribution Services Inc., a Pennsylvania corporation

EXHIBIT 23.01

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-136081) pertaining to the Federated Investors, Inc. 1998 Stock Incentive Plan of our reports dated February 22, 2011, with respect to the consolidated financial statements of Federated Investors, Inc., and the effectiveness of internal control over financial reporting of Federated Investors, Inc., incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2010.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 22, 2011

EXHIBIT 31.01

CERTIFICATIONS

I, J. Christopher Donahue, certify that:

1.	I have reviewed this annual report on Form 10-K of Federated Investors, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 31.02

CERTIFICATIONS

I, Thomas R. Donahue, certify that:

1.	I have reviewed this annual report on Form 10-K of Federated Investors, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Federated Investors, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date February 22, 2011	By:	/s/ J. Christopher Donahue
		J. Christopher Donahue
		President and
		Chief Executive Officer

Date February 22, 2011	By:	/s/ Thomas R. Donahue
		Thomas R. Donahue
		Chief Financial Officer