FEDERATED INVESTORS INC /PA/, S-1/A, 1998-05-08

FEDERATED INVESTORS INC /PA/
S-1/A, 1998-05-08
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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-48405
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------

AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------
FEDERATED INVESTORS, INC.
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 6722 25-1111467
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
(412) 288-1900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

JOHN W. MCGONIGLE
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
(412) 288-1900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
With Copies To:

MICHAEL C. MCLEAN
KIRKPATRICK & LOCKHART LLP
1500 OLIVER BUILDING
PITTSBURGH, PENNSYLVANIA 15222-2312
(412) 355-6500

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

EXHIBIT INDEX IS ON PAGE II-3.
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<PAGE>

EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be used
in connection with the initial public offering of Class B Common Stock in the
United States and Canada (the "U.S. Prospectus") and one to be used in
connection with the concurrent initial public offering of Class B Common Stock
outside the United States and Canada (the "International Prospectus"). The
form of U.S. Prospectus is included herein and is followed by those pages that
differ from those in the U.S. Prospectus (each marked "Alternate Page for
International Prospectus") and which are to be used in the International
Prospectus.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 7, 1998

PROSPECTUS

16,290,235 SHARES
LOGO
Federated
World-Class
Investment Manager
FEDERATED INVESTORS, INC.

CLASS B COMMON STOCK
(NON-VOTING)

----------

Of the 16,290,235 shares of Class B Common Stock ("Class B Common Stock")
offered hereby, 13,032,190 shares are being offered in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering") and 3,258,045 shares are
being offered concurrently outside the United States and Canada by the
International Underwriters (the "International Offering"). Such offerings are
collectively referred to as the "Offering." The offering price and underwriting
discount in the U.S. Offering and the International Offering are identical. See
"Underwriting."

Of the 16,290,235 shares of Class B Common Stock offered hereby, 2,610,000
shares will be issued and sold by Federated Investors, Inc., a Pennsylvania
corporation (the "Company" or "Federated"), and 13,680,235 shares will be sold
by certain selling shareholders (the "Selling Shareholders"). See "Selling
Shareholders." The Company will not receive any proceeds from the sale of the
shares by the Selling Shareholders.

The Company has two classes of authorized Common Stock consisting of Class A
Common Stock and Class B Common Stock. Except as provided in the Restated
Articles of the Company or by applicable law, the entire voting power of the
Company is vested in the holders of Class A Common Stock. Until the occurrence
of a specified future event (the "Agreement Date" as defined in the Restated
Articles), the holders of Class B Common Stock shall have no voting rights,
except as otherwise required by law. With the exception of voting rights and
except as otherwise required by applicable law or otherwise provided in the
Restated Articles of the Company, each share of Class A Common Stock has
identical powers, preferences and rights, including rights in liquidation. See
"Description of Securities."

Prior to this Offering, there has been no public market for the Class B
Common Stock. It is currently estimated that the initial public offering price
will be between $18.00 and $20.00 per share of Class B Common Stock. For a
discussion of the factors which will be considered in determining the initial
public offering price, see "Underwriting." For a description of the terms of
the Company's Class B Common Stock, see "Description of Securities."

The Offering is conditioned upon the consummation of a concurrent merger of
Federated Investors, a Delaware business trust, into its wholly owned
subsidiary, the Company (the "Merger"). Unless otherwise stated, this
Prospectus assumes consummation of the Merger. See "Federated--Merger."

Application has been made to list Class B Common Stock on the New York Stock
Exchange.

FOR INFORMATION CONCERNING RISK FACTORS RELATING TO THIS OFFERING, SEE "RISK
FACTORS" ON PAGE 13 IMMEDIATELY FOLLOWING THE SUMMARY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS (2)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- -------------------------------------------------------------------------------------
Total (3)............... $ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $ , of which
$ will be paid by the Company and $ will be paid by the Selling
Shareholders.
(3) The Company and the Selling Shareholders have granted the U.S. Underwriters
30 day options to purchase up to 312,000 and 1,642,828 additional shares of
Class B Common Stock, respectively, and have granted the International
Underwriters 30 day options to purchase up to 78,000 and 410,707 additional
shares of Class B Common Stock, respectively, solely to cover over-
allotments, if any. If such options are exercised in full, the total price
to public, underwriting discount, proceeds to the Company and proceeds to
the Selling Shareholders will be $ , $ , $ , and $ , respectively.
See "Underwriting."

The Class B Common Stock is offered by the several Underwriters, subject to
prior sale, when, as and if issued or sold to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of shares of the Class B Common Stock will be made in
New York, New York on or about May , 1998.

----------
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
----------

The date of this Prospectus is May , 1998.
<PAGE>

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERAGE TRANSACTIONS OR THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of Class B Common Stock offered hereby (the
"Offering"). This Prospectus, which is a part of the Registration Statement,
is complete in material respects but does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and the shares of
Class B Common Stock, reference is hereby made to such Registration Statement
and the exhibits and schedules thereto, copies of which may be inspected
without charge at the public reference facilities maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and at the Northwest Atrium Center, 500
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained from the public reference section of the Commission upon
payment of the fees prescribed by the Commission. In addition, registration
statements and certain other documents filed with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are
publicly available through the Commission's site on the World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR. The summaries in this Prospectus of additional information
included in the Registration Statement or any exhibit thereto are qualified in
their entirety by reference to such information or exhibit.

The Company has also filed with the Commission a Registration Statement on
Form S-4 under the Securities Act with respect to the proposed merger of
Federated Investors, a Delaware business trust which currently owns all of the
outstanding capital stock of the Company, into the Company (the "Merger"). The
Merger is conditioned, among other matters, upon the consummation of the
Offering.

As a result of the Offering, the Company will become subject to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file periodic reports, proxy statements and other
information with the Commission. After the Offering, such reports, statements
and other information may also be obtained from the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005. The Company intends to
furnish its shareholders with annual reports containing audited consolidated
financial statements and an opinion thereon expressed by independent public
accountants and with quarterly reports containing unaudited consolidated
financial information for the first three quarters of each fiscal year.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements under "Summary;" "Risk Factors;" "Management's Discussion
and Analysis of Financial Condition and Results of Operations;" "Business;"
and elsewhere in this Prospectus 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
the Company, 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. Such factors include, among others, those
listed under "Risk Factors" and elsewhere in this Prospectus. As a result of
the foregoing and other factors, no assurance can be given as to future
results, levels of activity, or achievements, and neither the Company nor any
other person assumes responsibility for the accuracy and completeness of such
statements.

2
<PAGE>

SUMMARY

The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this summary is qualified in its entirety
by the more detailed information and financial statements (including the notes
thereto) appearing elsewhere in this Prospectus and the Appendices hereto. All
share references reflect the one for one stock dividend paid in December 1996,
the one for one stock dividend paid on April 15, 1998, and the one for two
stock dividend paid on April 30, 1998. Unless otherwise indicated, the
information in the Prospectus assumes (i) the consummation of the Merger and
(ii) no exercise of the Underwriters' over-allotment options. Shareholders are
urged to read this Prospectus and the Appendices hereto in their entirety.

FEDERATED

Federated is a leading provider of investment management products and related
financial services. Federated sponsors, markets and provides investment
advisory, distribution and administrative services primarily to mutual funds.
Federated has been in the mutual fund business for over 40 years and is one of
the ten largest mutual fund managers in the United States based on assets under
management. Federated's assets under management at December 31, 1997 were $92.5
billion, primarily in funds managed, distributed and administered by Federated
and in other non-fund products ("Managed Assets"), of which $2.1 billion were
in separately managed accounts. In addition, at year end 1997 Federated
provided administrative services to mutual funds sponsored by third parties,
primarily banks, having $47.0 billion in assets ("Administered Assets").

Federated manages assets across a wide spectrum of asset categories including
substantial participation in fast-growing areas such as equity and
international investments. Many of Federated's products are ranked highly by
recognized industry sources based on investment performance relative to peer
funds. At December 31, 1997, Federated had 80 managed funds eligible for
Morningstar, Inc. ratings. Of these funds, 73 (or 91%) are rated "three,"
"four" or "five" stars, and 39 (or 49%) are rated "four" or "five" stars,
placing Federated among the leaders in the mutual fund industry for percentage
of top-rated funds.

Federated has built a national reputation as a high quality provider of a
broad range of investment management products and related financial services.
Federated distributes its products through a diversified network of financial
intermediaries such as banks, brokers and other investment advisers who use
them to meet the needs of their customers; these customers include retail
investors, corporations, and retirement plans. Federated employs one of the
largest sales forces directed to financial intermediaries and institutions in
the industry with more than 175 sales representatives and managers across the
United States. Through substantial investments in distribution over the last 20
years, Federated has developed an extensive network of over 3,500 financial
institutions which sell Federated's products to their customers. Federated also
directly sells its products to more than 500 institutions such as corporations
and government entities.

Federated believes that the diversification in its products and distribution
channels allows it to accumulate assets in different market cycles, thereby
reducing earnings volatility. Federated's mix of products is designed to
include products that serve individuals at different stages of their life and
earnings cycle and to include products that will be in demand under a variety
of economic and market conditions. Similarly, Federated reaches customers
through a variety of distribution channels which allow it access to many
segments of the marketplace and lessen the dependence on any one source of
assets.

3
<PAGE>

international, aggressive growth, and small capitalization equity products.
Federated established a New York-based investment management unit to develop
global and international investment products. Within Federated's Managed Asset
categories, equity fund assets have been the fastest growing class. In 1997,
Federated's equity fund assets increased by 54% compared to 37% for the overall
industry according to Investment Company Institute ("ICI") data. Equity fund
assets have grown at a 49% compound annual rate over the past two years versus
38% for the overall industry according to ICI data.

In late 1996, Federated initiated a comprehensive review and reengineering of
its products, markets and operations ("Federated First"). Federated First
generated major initiatives to improve profitability, accelerate growth in
assets under management and enhance customer service. These initiatives include
(1) refocusing Federated's service activities to emphasize the growth of
Managed Assets and Administered Assets rather than selling individual services
such as transfer agency, portfolio accounting, and technology solutions as
stand-alone products, (2) standardizing retirement plan record keeping
products, (3) reengineering various shareholder servicing activities, (4)
entering into an agreement in the fourth quarter of 1997 with State Street
Corporation ("State Street") to provide portfolio accounting services to both
Federated and third party administered funds and (5) accelerating Federated's
investment in the development of an improved management information system and
decision support resources. The financial results of the initiatives undertaken
by management during this period have been positive. In 1997, operating income
increased $58.0 million and net income increased $38.0 million over 1996, and
in the first quarter of 1998 operating income increased $18.4 million and net
income increased $12.0 million over the first quarter of 1997. See "Recent
Developments."

BUSINESS STRATEGY

Federated pursues a multi-faceted business strategy to expand assets under
management and increase profitability:

. BROADEN RECOGNITION AS A WORLD CLASS INVESTMENT MANAGEMENT COMPANY.
Throughout its history, Federated has generated highly competitive
investment performance across various asset classes. However, Federated
believes that as a result of its historical concentration on fixed income
and money market funds and its emphasis on the bank trust distribution
channel, it does not enjoy the level of name recognition of companies
historically focused on equity products sold to retail investors. Federated
has undertaken a national advertising campaign designated to promote brand
awareness and enhance its ability to take full advantage of its broad
product line and competitive historical investment performance. More
importantly, Federated intends to continue to invest in its investment
management operation in order to seek to continue its record of highly-
ranked investment performance.

. USE ITS EXTENSIVE DISTRIBUTION NETWORK TO EXPAND MARKET PENETRATION,
PARTICULARLY OF THE EQUITY AND INTERNATIONAL FUND BUSINESS. Equity and
international investments, which generally produce higher fee revenue than
money market and fixed income investments, have experienced substantial
growth. Federated believes that its substantial money market fund business,
which provides a revenue base that is generally stable and recurring, will
provide a platform from which to achieve this expansion. Federated believes
that its investment performance combined with the size and quality of its
distribution network will enable it to continue to expand its business in
these key areas.

. PROFITABLY EXPAND ITS CUSTOMER RELATIONSHIPS THROUGH SUPERIOR CUSTOMER
SERVICES. Federated intends to use its experience and expertise to expand
its relationships with financial intermediaries by offering value-added
services designed to support the growth of Managed Assets and Administered
Assets. Federated believes that the quality of its services activities, as
evidenced by various awards from Dalbar, Inc. based on its widely recognized
surveys of financial intermediaries, differentiates Federated from many of
its competitors.

4
<PAGE>

. CONTINUE THE IMPLEMENTATION OF FEDERATED FIRST INITIATIVES. Federated
believes that the continued implementation of Federated First will provide
ongoing opportunities to improve its profitability and accelerate earnings
growth.

. ACTIVELY PURSUE ACQUISITIONS AND ALLIANCES. Federated will seek to identify
acquisitions and alliances that will enhance shareholder value by adding
assets, complementary investment management expertise or distribution
capabilities. Federated has completed three acquisitions since November 1996
which together resulted in an increase of approximately $4.8 billion in
Managed Assets. Federated believes its disciplined investment management
style, broad product line, competitive fund performance, strong customer
support and proven operational capabilities offer a compelling package that
addresses key concerns of sellers. Federated also believes that its
substantial distribution capabilities appeal to sellers who have developed
attractive products but have been unable to make the ongoing investments
necessary for successful product distribution.

Federated believes that its broad product line, highly competitive investment
performance, distribution strength and strategy will position it to take
advantage of favorable economic and demographic trends affecting the asset
management industry. These trends include the need for the aging baby boom
generation to increase savings and investment, lower public confidence in the
adequacy of government and employee sponsored retirement benefits, longer life
expectancies and rising health care costs. According to U.S. Census Bureau
projections, the number of Americans between the ages of 45 and 65 will grow
from 53.7 million in 1996 to 71.1 million in 2005, making this pre-retirement
age group the fastest growing segment of the U.S. population. The Company also
believes that it benefits from a developing industry trend toward "intermediary
assisted sales"--sales of mutual fund products through a financial
intermediary--driven by the array of options now available to investors and the
need for financial planning advice that has resulted from the recent increase
in the average household's financial assets. According to the ICI, intermediary
assisted sales for the year ended December 31, 1997 constituted 61.9% of the
total dollar value of mutual fund sales, a figure that has grown from 54.9% in
1994.

CONCURRENT MERGER AND OFFERING

Pursuant to the merger of Federated Investors, a Delaware business trust (the
"Trust"), into the Company, a Pennsylvania corporation and currently the wholly
owned subsidiary of the Trust (the "Merger"), the Company as the surviving
corporation, through its subsidiaries and affiliates, will continue to provide
the same investment management products and related financial services. The
holders of Trust Class A Common Shares and Trust Class B Common Shares will
become holders of Class A Common Stock and Class B Common Stock, respectively,
of the Company, having the relative rights as set forth in the Restated
Articles of the Company, and will hold the same proportionate beneficial
ownership interest in the Company as such holders held in the Trust. A special
meeting of the shareholders of the Trust will be held on May 15, 1998 to
approve and adopt the Agreement and Plan of Merger between the Trust and the
Company. The Merger is conditioned upon, among other matters, the consummation
by the Company of this Offering. See "Federated--Merger."

After the Offering, the executive officers and directors of the Company will
own approximately 31.6% of the outstanding shares of Class B Common Stock
(approximately 31.5% if the Underwriters' over-allotment options are exercised
in full) and all of the outstanding Class A Common Stock will continue to be
owned by a trust, the trustees of which are John F. Donahue, Chairman of the
Company, his wife, and his son, J. Christopher Donahue, President and Chief
Executive Officer of the Company (the "Voting Trust"). The entire voting power
of the Company's capital stock shall be vested in the holders of Class A Common
Stock, except as provided in the Restated Articles of Incorporation of the
Company ("Restated Articles") or as otherwise required by applicable law.

5
<PAGE>

The Company is a Pennsylvania corporation, with its principal executive
offices located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779, and its telephone number is (412) 288-1900. Unless the context otherwise
requires,"Federated" or the "Company" refers to Federated Investors, Inc., a
Pennsylvania corporation, after giving effect to the concurrent merger of
Federated Investors, a Delaware business trust which currently owns all of the
outstanding capital stock of the Company, into the Company. References to
"Common Stock" are to the Class A Common Stock and the Class B Common Stock of
the Company.

ORGANIZATIONAL STRUCTURE

Set forth below is an organizational chart which illustrates, as of the
consummation of the Merger of the Trust into the Company (its wholly owned
subsidiary) and the Offering, the ownership of the Company and its directly and
indirectly owned subsidiaries and affiliates:

LOGO
This amendment includes an organizational chart of the Company. The chart
shows that (1) the Company is a wholly-owned subsidiary of the Trust, (2) the
Trust is merging with and into the Company, (3) the stock of the Company, upon
consummation of the Merger and the Offering, will be owned as follows: Class A
Common Stock by the Voting Trust and Class B Common Stock by the existing and
public shareholders, (4) the Company owns various wholly-owned investment
management subsidiaries, distribution subsidiaries, services subsidiaries, and
other subsidiaries, and (5) the Company owns a 50.5% interest in a limited
partnership, which is one of the Company's investment management subsidiaries.

- --------
*All direct and indirect subsidiaries of the Company are wholly owned, except
for one 50.5% owned limited partnership with a broker/dealer which shares
income and expenses from two funds. See "Business--Distribution--Broker/Dealer
Market."

6
<PAGE>

THE OFFERING

Class B Common Stock offered by the
Company:
U.S. Offering..................... 2,088,000 Shares
International Offering............ 522,000 Shares
------
Total........................... 2,610,000 Shares
------
------

Class B Common Stock offered by the
Selling Shareholders:
U.S. Offering..................... 10,944,190 Shares
International Offering............ 2,736,045 Shares
-------
Total........................... 13,680,235 Shares
-------
-------

The 13,680,235 shares consist of
6,394,500 shares held by certain
institutions and 7,285,735 shares
owned in the aggregate by certain
other shareholders, including
members of management, Federated's
Profit Sharing Trust and other
shareholders. See "Principal and
Selling Shareholders."

Common Shares Outstanding After
Offering:
Class A (voting).................. 6,000 shares
Class B (non voting).............. 86,037,000 shares (without giving
effect to the Underwriters'
exercise of the over-allotment
options)

Preferred Shares Outstanding After None
Offering:..........................

Control by Class A Common The entire voting power of the
Shareholders:...................... Company's capital stock shall be
vested in the holders of Class A
Common Stock until the first date
on which the Company shall execute
and deliver, and enter into, a
legally binding and enforceable
agreement providing for the issue
by the Company of shares of Class B
Common Stock in a transaction
constituting a
business combination which, for
financial reporting purposes, shall
be accounted for as a pooling of
interests in accordance with
generally accepted accounting
principles (the "Agreement Date").
Except as otherwise provided in the
Restated Articles or by applicable
law, the holders of the outstanding
shares of Class B Common Stock
shall have no voting rights.

7
<PAGE>

holder, and every holder of the
outstanding shares of the Class B
Common Stock shall be entitled to
cast one vote for each share of
Class B Common Stock held of record
by such holder. Notwithstanding the
foregoing, from and after the
Agreement Date the holders of the
Class A Common Stock, voting
separately as a class with each
holder of the outstanding shares of
Class A Common Stock being entitled
to one vote in person or by proxy
for each share of the Class A
Common Stock held of record by such
holder, shall have the right to
elect that number of directors so
that four-tenths (4/10) (calculated
to the next highest whole number)
of the total number of directors of
the Company fixed from time to time
by, or in the manner provided for
in, the Bylaws of the Company,
shall have been elected by the
holders of the Class A Common Stock
separately. Neither holders of the
Class A Common Stock nor holders of
the Class B Common Stock shall be
entitled to cumulate their votes
for election of directors of the
Company. See "Description of
Securities." The Voting Trust,
controlled by John F. Donahue, his
wife and J. Christopher Donahue,
holds all of the issued and
outstanding Class A Common Stock
and, as a result, will be able to
continue to exercise significant
control over the affairs of the
Company in such event. See
"Principal and Selling
Shareholders."

Relative Rights of Class A and
Class B Common Stock:............
Except as otherwise required by
applicable law or otherwise
provided in the Restated Articles,
each share of Class A Common Stock
and each share of Class B Common
Stock shall have identical powers,
preferences and rights, including
rights in liquidation. Upon
liquidation of the Company, holders
of Class A Common Stock and holders
of Class B Common Stock are
entitled to share ratably in the
assets thereof that may be
available for distribution after
satisfaction of creditors. In
addition, the holders of the Class
A Common Stock and the Class B
Common Stock shall receive the same
amount of consideration per share,
notwithstanding any differences in
voting rights, in connection with
(A) the acquisition of the Company
by another entity by means of any
transaction or series of related
transactions (including, without
limitation, any reorganization,
merger, consolidation or stock
purchase) or (B) a sale of all or
substantially all of the assets of
the Company. The holders of the
Class B Common Stock

8
<PAGE>

shall have no preemptive rights to
subscribe for any shares of any
class of stock of the Company,
whether now or hereafter
authorized. The holders of the
Class A Common Stock have certain
preemptive rights more fully set
forth under "Description of
Securities."

Dividend Policy:.................... The Company currently intends to
pay a quarterly dividend of $.038
per share on its Class A Common
Stock and a quarterly dividend of
$.038 per share on its Class B
Common Stock (Class A Common Stock
together with Class B Common Stock
shall be collectively referred to
herein as "Common Stock") Common
Stock. However, the declaration and
payment by the Company of any
future dividends on its Common
Shares and the amount thereof will
depend upon the Company's results
of operations, financial condition,
cash requirements, restrictions
imposed by lenders, future
prospects and other factors deemed
relevant by the Company's Board of
Directors. See "Dividend Policy."

Use of Proceeds:.................... The net proceeds to be received by
the Company from the sale of the
Class B Common Stock offered hereby
is estimated at $46.2 million,
assuming an offering price of
$19.00 per share, after deducting
the underwriting discount and
estimated offering expenses to be
paid by the Company.

The net proceeds received by the
Company will be used for working
capital and other general corporate
purposes. The Company will receive
no proceeds from the sale of Class
B Common Stock by the Selling
Shareholders. See "Use of
Proceeds."

NYSE Listing:....................... Application has been made to list
Class B Common Stock on The New
York Stock Exchange.

NYSE Symbol:........................
FII

SUMMARY RISK FACTORS

Prospective Purchasers of the Class B Common Stock offered hereby should
consider the factors set forth under "Risk Factors" as well as the other
information set forth in this Prospectus, including potential adverse effects
of increased competition in the investment management business, potential
adverse effects of a decline in securities market, potential adverse effects on
money market funds resulting from increases in interest rates, adverse effects
of poor fund performance, adverse effects of termination or failure to renew
fund agreements on the Company's revenues and profitability, potential adverse
effects of changes in laws and regulations on the Company's investment
management business, no assurance of successful future acquisitions, no
assurance of dividends; holding company structure, year 2000 risks, no
assurance of success in retaining and recruiting key personnel and sales force,
concentration of voting power in Class A Common Stock, anti-takeover
provisions, absence of a prior public market, volatility of stock price,
potential adverse impact on market price due to future sale or distribution of
shares of Common Stock, and immediate and substantial dilution to prospective
purchasers.

9
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue..................... $265,977 $271,190 $279,831 $321,793 $403,719
-------- -------- -------- -------- --------
Operating Expenses:
Compensation and related......... 81,542 90,003 101,534 126,966 139,373
Other operating.................. 91,936 115,077 104,885 134,308 141,004
Amortization and revaluation of
intangible assets............... 30,823 105,868 10,445 8,886 13,715
-------- -------- -------- -------- --------
Total Operating Expenses........ 204,301 310,948 216,864 270,160 294,092
-------- -------- -------- -------- --------
Operating income (loss)........... $ 61,676 $(39,758) $ 62,967 $ 51,633 $109,627
======== ======== ======== ======== ========
Net income (loss)................. $ 31,216 $(39,336) $ 28,531 $ 12,619 $ 50,577
Dividends on preferred shares(1).. 8,176 6,108 6,000 3,025 0
-------- -------- -------- -------- --------
Net income (loss) applicable to
Common Shares.................... $ 23,040 $(45,444) $ 22,531 $ 9,594 $ 50,577
======== ======== ======== ======== ========
Cash dividends per Common
Share(2)......................... $ 0.00 $ 0.00 $ 0.1667 $ 0.0417 $ 0.0583
======== ======== ======== ======== ========
Earnings (loss) per Common Share--
basic
Income before extraordinary
item(2)......................... $ 0.27 $ (0.53) $ 0.25 $ 0.13 $ 0.62
======== ======== ======== ======== ========
Earnings (loss) per Common Share--
assuming dilution
Income before extraordinary
item(2)......................... $ 0.27 $ (0.53) $ 0.24 $ 0.13 $ 0.61
======== ======== ======== ======== ========
BALANCE SHEET DATA AT PERIOD END:
Intangible assets, net........... $165,560 $ 74,413 $ 63,703 $ 69,105 $ 67,880
Total assets..................... 286,304 178,150 185,402 247,377 337,156
Long-term debt--Recourse......... 135,394 88,690 68,062 244,125 98,950
Long-term debt--Nonrecourse(3)... 0 0 0 0 185,388
Total liabilities................ 222,251 156,284 155,883 333,485 377,800
Shareholders' equity............. 63,700 20,733 28,692 (86,922) (41,110)
MANAGED AND ADMINISTERED ASSETS
AT PERIOD END (IN MILLIONS):
Money Market Funds............... $ 31,856 $ 31,528 $ 40,610 $ 51,163 $ 63,622
Fixed Income Funds............... 19,967 14,106 14,330 14,109 15,067
Equity Funds..................... 4,244 3,927 5,287 7,594 11,710
Separate Accounts................ 1,137 1,257 1,486 1,976 2,141
-------- -------- -------- -------- --------
Total Managed Assets............ $ 57,204 $ 50,818 $ 61,713 $ 74,842 $ 92,540
======== ======== ======== ======== ========
Total Administered Assets....... $ 19,505 $ 21,304 $ 22,089 $ 35,574 $ 46,999
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Termination dividend paid in January 1996 in connection with the conversion
of all outstanding Trust Series A Preferred Shares into Trust Class B
Common Shares and the repurchase of the converted shares by the Trust. See
Note 10 to the Consolidated Financial Statements.

(2) Reflects the one for one stock dividend paid in 1996, the one for one stock
dividend paid on April 15, 1998 and the one for two stock dividend paid on
April 30, 1998.
(3) See Note 6 to the Consolidated Financial Statements for information
concerning nonrecourse debt.

10
<PAGE>

RECENT DEVELOPMENTS

Results for the First Quarter Ended March 31, 1998. Federated's consolidated
net income increased to $20.8 million ($0.25 per diluted Common Share) for the
first quarter of 1998, up $12.0 million ($0.14 per diluted Common Share) or
135.6% from the first quarter of 1997 results of $8.8 million ($0.11 per
diluted Common Share).

Consolidated revenues for the first quarter 1998 totaled $122.6 million, up
$31.0 million or 33.8% from $91.6 million for the same period of 1997. The
increase is primarily the result of higher fees generated on average Managed
Assets which were up 23.4% to $95.1 billion for the first quarter of 1998 as
compared to $77.1 billion for the first quarter of 1997. Average Managed Asset
increases include a 56.2% increase in equity products, a 22.6% increase in
money market products, a 9.2% increase in fixed income products and a 10.9%
increase in separate account assets. Revenues also increased as a result of a
one time payment of $2.5 million resulting from a buyout of a servicing
contract for a bank sponsored mutual fund complex. The reduction to future
revenue as a result of the loss of this bank client is approximately $0.5
million per quarter.

Consolidated operating expenses for the first quarter of 1998 totaled $82.7
million, an increase of $12.6 million or 17.9% over the first quarter of 1997
operating expenses of $70.1 million. The increase in operating expenses was due
principally to increases in variable based compensation of $4.0 million as a
result of increased sales and profitability, a $2.7 million increase in
advertising and promotional expenses attributable to increased Managed Assets
and a $0.8 million increase in amortization of intangible assets as a result of
an acquisition occurring in the second quarter of 1997.

The tables below compare summary unaudited financial and statistical results:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
----------------------
SELECTED OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA) 1997 1998
- ------------------------------------------------------- ---------- -----------
<S> <C> <C>
Total Revenue............................................ $ 91,627 $ 122,592
Operating Expenses....................................... 70,137 82,699
---------- -----------
Operating Income......................................... 21,490 39,893
Nonoperating Expenses and Minority Interest.............. 6,983 8,148
---------- -----------
Income Before Income Taxes............................... 14,507 31,745
Income Tax Provision..................................... 5,664 10,908
---------- -----------
Net Income............................................... $ 8,843 $ 20,837
========== ===========
Earnings per Basic Common Share.......................... $0.11 $0.25
Earnings per Diluted Common Share........................ $0.11 $0.25
<CAPTION>
MARCH 31,
----------------------
MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) 1997 1998
- --------------------------------------------- ---------- -----------
<S> <C> <C>
Money Market Funds....................................... $ 53,086 $ 64,215
Fixed Income Funds....................................... 13,788 15,601
Equity Funds............................................. 8,000 13,843
Separate Accounts........................................ 2,069 2,389
---------- -----------
Total Managed Assets................................... $ 76,943 $ 96,048
========== ===========
Total Administered Assets.............................. $ 38,860 $ 51,651
========== ===========
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
----------------------
AVERAGE MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) 1997 1998
- ----------------------------------------------------- ---------- -----------
<S> <C> <C>
Managed Assets........................................... $77,087 $ 95,102
Administered Assets...................................... 39,228 49,946
</TABLE>

11
<PAGE>

Assets Under Management. Federated's Managed Assets were $96.0 billion at
March 31, 1998, an increase of $3.5 billion from December 31, 1997. Managed
Assets increased in each asset class. International and global Managed Assets
increased approximately $241 million from $1.2 billion to $1.4 billion.
Administered Assets were $51.7 billion at March 31, 1998, an increase of $4.7
billion from December 31, 1997.

Sales and net sales of both equity and fixed income managed funds contributed
positively to these asset changes in the first quarter of 1998. Sales of equity
funds totaled $1.4 billion and net sales (sales minus redemptions) were $759
million. Sales of fixed income funds totaled $1.6 billion and net sales were
$514 million. Most of the remaining asset increase was due to the impact of
favorable securities market conditions in the first quarter of 1998. The S&P
500 index rose nearly 14% in the first quarter of 1998, and most other
investment indices showed substantial increases. In addition to creating
favorable sales conditions, market appreciation increased the value of Managed
Assets. Under different market conditions, the Company's performance could
differ substantially. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Economic and Market Conditions."

The tables below compare Federated's Managed and Administered Assets by
Market as of:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1997 1998
--------- ------------ ---------
<S> <C> <C> <C>
(IN MILLIONS)
MANAGED ASSETS BY MARKET
- ------------------------
Bank Trust Market............................ $40,982 $49,662 $49,741
Broker/Dealer Market......................... 23,368 28,256 31,662
Institutional Market......................... 9,755 11,343 11,266
Other Markets................................ 2,838 3,279 3,379
------- ------- -------
Total Managed Assets by Market............ $76,943 $92,540 $96,048
======= ======= =======
MANAGED ASSETS BY BANK TRUST MARKET
- -----------------------------------
Money Market Funds/Cash Equivalent........... $32,933 $40,897 $40,391
Fixed Income Funds........................... 5,163 5,070 5,047
Equity Funds................................. 2,886 3,695 4,303
------- ------- -------
Total Managed Assets by Bank Trust Market. $40,982 $49,662 $49,741
======= ======= =======
MANAGED ASSETS BY BROKER/DEALER MARKET
- --------------------------------------
Money Market Funds/Cash Equivalent........... $13,608 $15,293 $17,103
Fixed Income Funds........................... 5,614 6,566 6,956
Equity Funds................................. 4,128 6,376 7,582
Separate Accounts............................ 18 21 21
------- ------- -------
Total Managed Assets by Broker/Dealer
Market................................... $23,368 $28,256 $31,662
======= ======= =======
MANAGED ASSETS BY INSTITUTIONAL MARKET
- --------------------------------------
Money Market Funds/Cash Equivalent........... $ 5,744 $ 6,698 $ 5,973
Fixed Income Funds........................... 1,474 1,825 2,018
Equity Funds................................. 501 749 964
Separate Accounts............................ 2,036 2,071 2,311
------- ------- -------
Total Managed Assets by Institutional
Market................................... $ 9,755 $11,343 $11,266
======= ======= =======
</TABLE>

12
<PAGE>

RISK FACTORS

Prospective investors should consider carefully the following risk factors,
in addition to the other information contained in this Prospectus, in
evaluating an investment in the Class B Common Stock offered hereby.

POTENTIAL ADVERSE EFFECTS OF INCREASED COMPETITION IN THE INVESTMENT
MANAGEMENT BUSINESS

The investment management business is highly competitive and is undergoing
consolidation. Many organizations are attempting to market to and service the
same clients as the Company, not only with mutual fund investments and
services but with a wide range of other financial products and services.

The Company competes in the distribution of mutual funds with other
independent 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
the Company. Competition is based on various factors, including business
reputation; the investment performance of funds managed or administered by the
Company; quality of service; the strength and continuity of management and
selling relationships; marketing and distribution services offered; the range
of products offered; and fees charged. See "Business--Competition."

Many of the Company's fund products are designed for use by institutions
such as banks, insurance companies and other corporations. A large portion of
the Company's Managed Assets, particularly money market and fixed income
Managed Assets, are held by institutional investors. Because most
institutional mutual funds are sold without sales commissions at either the
time of purchase or the time of redemption, institutional investors may be
more inclined to move their assets among various institutional funds than
investors in retail mutual funds. Of the Company's 124 managed funds, 92 are
sold without sales commission. Institutions are sensitive to fund investment
performance, consistent adherence to investment objectives, quality of service
and pricing. The Company believes that competitive pressures in the
institutional mutual fund market are increasing as a result of (i) the entry
of well known managers from the retail investment industry and of low-fee
investment managers, (ii) mergers and consolidation occurring in the banking
industry, (iii) increased offering of proprietary funds by institutional
investors such as banks, and (iv) regulatory changes affecting banks and other
financial service firms.

A significant portion of the Company's revenue is derived from providing
mutual funds to its bank trust market (as described under "Business"),
comprising over 1,400 banks. Future profitability of the Company will be
affected by its ability to retain its share of this market, and could also be
adversely affected by the general consolidation which is occurring in the
banking industry as well as by proposed legislative and regulatory changes. In
addition, bank consolidation trends could not only cause changes in the
Company's customer mix, but could also affect the scope of services provided
and fees received by the Company, depending upon the degree to which banks
internalize administrative functions attendant to proprietary mutual funds.

POTENTIAL ADVERSE EFFECTS OF A DECLINE IN SECURITIES MARKETS

In recent years, the United States securities markets have produced
favorable performance. Market performance has benefited the Company by
increasing the value of its Managed Assets, specifically equity and fixed
income assets, and by producing a favorable environment for sales of mutual
funds.

Changes in economic or market conditions may adversely affect the
profitability and performance of and demand for the Company's investment
products and services. The ability of the Company to compete and grow is
dependent, in part, on the relative attractiveness of the types of investment
products the Company offers and its investment philosophies and strategies
under prevailing market conditions. A significant portion of the Company'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, for example, generally earned on equity and

13
<PAGE>

fixed income funds than on money market funds. Consequently, significant
fluctuations in the prices of securities held by, or the level of redemptions
from, the funds advised by the Company may affect materially the amount of
Managed Assets and thus the Company's revenue, profitability and ability to
grow. Substantially all of the Company's Managed Assets are in open end funds,
which permit investors to redeem their investments at any time.

POTENTIAL ADVERSE EFFECTS ON MONEY MARKET FUNDS RESULTING FROM INCREASES IN
INTEREST RATES

Approximately 37% of the Company's revenue in 1997 was from managed money
market funds. Assets in these funds are largely from institutional investors.
In a period of rapidly rising interest rates, institutional investors may
redeem shares in money market funds to invest directly in market issues
offering higher yields. These redemptions would reduce Managed Assets, thereby
reducing the Company's advisory fee revenue. The Company has been actively
diversifying its products to expand its Managed Assets in equity mutual funds
which may be less sensitive to interest rate increases. There can be no
assurance that the Company will continue to be successful in these
diversification efforts.

ADVERSE EFFECTS OF POOR FUND PERFORMANCE

Success in the investment management and mutual fund businesses is largely
dependent on the funds' investment performance relative to market conditions
and performance of competing funds. Good performance generally stimulates
sales of the funds' shares and tends to keep redemptions low. Sales of funds
generate higher revenues (which are largely based on assets of the funds).
Good performance also attracts private institutional accounts to the Company.
Conversely, relatively poor performance tends to result in decreased sales,
increased redemptions of the funds' shares, and the loss of private
institutional accounts, with corresponding decreases in revenues to the
Company. Failure of the funds to perform well could, therefore, have a
material adverse effect on the Company.

ADVERSE EFFECTS OF TERMINATION OR FAILURE TO RENEW FUND AGREEMENTS

ON THE COMPANY'S REVENUES AND PROFITABILITY

A substantial majority of the Company's revenues are derived from investment
management agreements with the funds that, as required by law, are terminable
on 60 days' notice. In addition, each such investment management agreement
must be approved and renewed annually by each fund's board, including
disinterested members of the board, or its shareholders, as required by law.
Generally, the Company's administrative servicing agreements with bank
proprietary fund customers have a initial term of five years with a provision
for automatic renewal unless notice is otherwise given and provide for
termination for cause. Any failure to renew or termination of a significant
number of these agreements would have a material adverse impact on the
Company. In addition, as required by the Investment Company Act of 1940 (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 the Company's
voting securities to transfer control of the Company could be deemed an
"assignment" in certain circumstances. An assignment, actual or constructive,
will trigger these termination provisions and may adversely affect the
Company's ability to realize the value of these assets. No mutual fund advised
by the Company currently accounts for more than 10% of the Company's
investment advisory fees or administrative service fees.

POTENTIAL ADVERSE EFFECTS OF CHANGES IN LAWS AND REGULATIONS

ON THE COMPANY'S INVESTMENT MANAGEMENT BUSINESS

The Company's investment management business is subject to extensive
regulation in the United States, primarily at the Federal level, including
regulation by the Commission particularly, under the Investment Company Act of
1940 and the Investment Advisers Act of 1940 as well as rules of the National
Association of Securities Dealers and all states. The Company is also affected
by regulations governing banks and other financial institutions. Changes in
laws or regulations or in governmental policies could materially and adversely
affect the business and operations of the Company.

14
<PAGE>

NO ASSURANCE OF SUCCESSFUL FUTURE ACQUISITIONS

The Company's business strategy contemplates the acquisition of other
investment management companies as well as investment assets. There can be no
assurance that the Company 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 the
Company, or that any such acquisitions, if consummated, will prove to be
advantageous to the Company.

NO ASSURANCE OF DIVIDENDS; HOLDING COMPANY STRUCTURE

The Company's Board of Directors intends to declare quarterly dividends on
both the Class A Common Stock and the Class B Common Stock. A first quarter
dividend of $0.0208 per share was paid on January 31, 1998 and a cash dividend
of $0.038 per share was declared on April 14, 1998 to shareholders of record
on April 20, 1998 for payment on April 30, 1998. The declaration and payment
of dividends by the Company are subject to the discretion of its Board of
Directors. Any determination as to the payment of dividends, as well as the
level of such dividends, will depend on, among other things, general economic
and business conditions, the strategic plans of the Company, the Company's
financial results and condition, contractual, legal, and regulatory
restrictions on the payment of dividends by the Company or its subsidiaries,
and such other factors as the Board of Directors of the Company may consider
to be relevant. The Company is a holding company, and, as such, its ability to
pay dividends is subject to the ability of the subsidiaries of the Company to
provide cash to the Company. Under the Trust's existing debt agreements which
will be assumed by the Company under the terms of the Merger, the Company will
have no additional dividend paying capacity for the year 1998 after making the
cash dividend payments on April 30, 1998, unless such restriction is modified
or waived by the lenders. The Company will seek to amend its existing debt
agreements to permit the payment of regular quarterly cash dividends at a
level comparable to that paid in the second quarter of 1998. There can be no
assurance that the current quarterly dividend level will be maintained or that
any dividends will be paid by the Company in any future period.

YEAR 2000 RISKS

Federated utilizes software and related technologies throughout its
businesses including both proprietary systems as well as those provided by
outside vendors. As the century date change occurs, certain date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may cause systems to process
critical financial and operational information incorrectly. Federated's
assessment of internal systems is substantially complete and plans are in
place for all proprietary applications within Federated to be renovated or
replaced. Completion of renovation or replacement and the subsequent testing
and implementation are scheduled for 1998, with 1999 being reserved for
industry-wide, cooperative testing. In addition, the Company and the funds
have relationships with third parties that have computer systems that may not
be year 2000 compliant. Based on management's identification of resource
requirements for both plan implementation and overall project management, it
is anticipated that the Year 2000 costs will be, at a minimum, $10 million for
internal systems but do not reflect the impact of outside vendors to become
year 2000 compliant. Accordingly, there can be no assurance that potential
systems interruptions or the cost necessary to update software would not have
a material adverse effect on the Company's business, financial condition,
results of operations or business prospects.

NO ASSURANCE OF SUCCESS IN RETAINING AND RECRUITING KEY PERSONNEL AND SALES
FORCE

The Company'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 fund managers, investment
analysts, and financial advisers is extremely competitive and has grown more
so in recent periods as the mutual fund management industry has experienced
growth. The Company anticipates that it will be necessary for it to add fund
managers and investment analysts. There can be no assurance, however, that the
Company will be successful in its efforts to recruit and retain the required
personnel. The Company has encouraged the

15
<PAGE>

continued retention of its executives and other key personnel through measures
such as providing competitive compensation arrangements and in certain cases
employment agreements. However, there can be no assurance that the Company
will be successful in retaining all of its key personnel. Loss of a
significant number of key personnel could have an adverse effect on the
Company. See "Management--Compensation Pursuant to Plans."

Various investment personnel, sales representatives and service employees
now 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 the Company in certain circumstances upon
termination of employment. Sales representatives, who are salaried rather than
commissioned, are employed under contracts which require periodic review of
compensation and contain restrictive covenants with regard to divulging
confidential information and engaging in competitive enterprises.

RISKS ASSOCIATED WITH CONCENTRATION OF VOTING POWER IN CLASS A COMMON STOCK

All of the issued and outstanding shares of Class A Common Stock are owned
by the Voting Trust, the trustees of which are John F. Donahue, Chairman of
the Company, his wife, and his son, J. Christopher Donahue, President and
Chief Executive Officer of the Company. Except under certain circumstances
more fully described in "Description of Securities," the entire voting power
of the Company's capital is vested in the holders of Class A Common Stock. As
a result, the trustees of the Voting Trust will be able to exercise control
over the affairs of the Company. In the event that the Company enters into a
definitive agreement with respect to a business combination in which the Class
B Common Stock would be issued in a transaction intended to be treated as a
"pooling of interests" for accounting purposes, the holders of the Class B
Common Stock will be permitted to vote in the election of a majority of the
Board of Directors, together with the holders of the Class A Common Stock
voting as a single class. The holders of the Class A Common Stock will be
entitled to elect at least 40% of the directors. Following consummation of the
sale of the Class B Common Stock offered hereby, the executive officers and
directors of the Company will own approximately 31.6% of the outstanding Class
B Common Stock (approximately 31.5% if the Underwriters' over-allotment
options are exercised in full). See "Principal Shareholders" and "Selling
Shareholders."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Restated Articles and the Bylaws of the Company
("Company Bylaws") and Pennsylvania law could, together or separately,
discourage potential acquisition proposals, delay or prevent a change in
control of the Company, hinder the removal of incumbent directors, and limit
the price that certain investors might be willing to pay in the future for
share of the Common Stock, all of which may not be beneficial to the interests
of the shareholders under certain circumstances. These provisions include the
issuance, without further shareholder approval, of preferred stock with rights
and privileges which could be senior to the Common Stock. The Company also is
subject to "anti-takeover" provisions in the Pennsylvania Business Corporation
Law ("PBCL") which, among other things, prohibit a Pennsylvania corporation
from engaging in certain business combinations with an "interested person"
unless certain conditions are satisfied or an exemption is applicable. See
"Description of Securities--Anti-Takeover Provisions".

ABSENCE OF A PRIOR PUBLIC MARKET

Prior to the Offering there has been no public market for the Class B Common
Stock. Application will be made to list the Class B Common Stock on the New
York Stock Exchange. However, there can be no assurance that a significant
public market for the Company's Class B Common Stock will develop or be
sustained after the Offering. The offering price has been determined through
negotiations among the Company, the Selling Shareholders and the
Representatives of the Underwriters and may not be indicative of the market
price of the Class B Common Stock after the Offering. After the Offering the
market price of the Class B Common Stock may be more or less than the initial
offering price. See "Underwriting."

16
<PAGE>

VOLATILITY OF STOCK PRICE

The market price for the Class B Common Stock may be highly volatile. The
Company believes that factors such as announcements by the Company, or by its
competitors, of quarterly variances in financial results could cause the
market price of the Class B Common Stock to fluctuate substantially. In
addition, the stock market may experience extreme price and volume
fluctuations, which often are unrelated to the operating performance of
specific companies which could have a direct adverse effect on the market
price of the Class B Common Stock and which could also adversely affect the
Company's Managed Assets and, therefore, the result of the Company's
operations. Market fluctuations or perceptions regarding the Company's
industry, as well as general economic or political conditions, may adversely
affect the market price of the Class B Common Stock.

POTENTIAL ADVERSE IMPACT ON MARKET PRICE DUE TO FUTURE SALE
OR DISTRIBUTION OF SHARES OF COMMON STOCK

Upon completion of this Offering, the Company will have 86,037,000 shares of
Class B Common Stock outstanding (86,427,000, if the Underwriters' over-
allotment options are exercised in full). Of those shares, 69,746,765 shares
cannot be sold in the absence of registration under the Securities Act, unless
sold pursuant to an exemption from the Securities Act, such as that provided
by Rule 144. The sale of any substantial number of shares could have a
material adverse impact on the market price of the Class B Common Stock. The
Company, its officers and directors and certain other shareholders have
entered into "lock-up" agreements pursuant to which they have agreed, during
the period of 180 days from the date of this Prospectus, without the prior
written consent of the designated representative of the Underwriters, not to
offer, pledge, sell or otherwise, transfer or dispose of any Class B Common
Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, subject to certain agreed exceptions. See "Shares Eligible
for Future Sale" and "Underwriting."

In addition, all shareholders of the Company (other than purchasers of Class
B Common Stock offered hereby) are subject to Company Bylaw restrictions on
transfer in connection with this Offering pursuant to which no such
shareholders, during the period of seven days prior to and 180 days after the
date when the Registration Statement becomes effective, shall sell, transfer
or otherwise dispose of shares of Common Stock.

IMMEDIATE AND SUBSTANTIAL DILUTION TO PROSPECTIVE PURCHASERS

Purchasers of Class B Common Stock offered hereby will experience immediate
and substantial dilution in net tangible book value per share of Class B
Common Stock from the initial offering price. The net tangible book value of
the Company of $(1.31) per share at December 31, 1997 reflects the effect of
the purchase into treasury of certain outstanding Trust Class B Common Shares
in early 1996. See "Dilution."

17
<PAGE>

FEDERATED

Overview. Federated is a leading provider of investment management products
and related financial services. Federated sponsors, markets and provides
investment advisory, distribution and administrative services primarily to
mutual funds. Federated has been in the mutual fund business for over 40 years
and is one of the ten largest mutual fund managers in the United States based
on assets under management. Federated's assets under management at December
31, 1997 were $92.5 billion, primarily in funds managed, distributed and
administered by Federated and in other non-fund products ("Managed Assets"),
of which $2.1 billion were in separately managed accounts. In addition, at
year end 1997 Federated provided administrative services to mutual funds
sponsored by third parties, primarily banks, having $47.0 billion in assets
("Administered Assets").

Federated manages assets across a wide spectrum of asset categories
including substantial participation in fast-growing areas such as equity and
international investments. Many of Federated's products are ranked highly by
recognized industry sources based on investment performance relative to peer
funds. As of December 31, 1997, Federated had 80 managed funds eligible for
Morningstar, Inc. ratings. Of these funds, 73 (or 91%) are rated "three,"
"four" or "five" stars, and 39 (or 49%) are rated "four" or "five" stars,
placing Federated among the leaders in the mutual fund industry for percentage
of top-rated funds.

Federated has built a national reputation as a high quality provider of a
broad range of investment management products and related financial services.
Federated distributes its products through a diversified network of financial
intermediaries such as banks, brokers and other investment advisers who use
them to meet the needs of their customers; these customers include retail
investors, corporations, and retirement plans. Federated employs one of the
largest sales forces directed to financial intermediaries and institutions in
the industry with more than 175 sales representatives and managers across the
United States. Through substantial investments in distribution over the last
20 years, Federated has developed an extensive network of over 3,500 financial
institutions which sell Federated's products to their customers. Federated
also directly sells its products to more than 500 institutions such as
corporations and government entities.

Historically, Federated's mix of Managed Assets has been dominated by money
market and other fixed income assets where Federated continues to be among the
leading mutual fund managers based on assets under management. More recently,
in response to market demand and to diversify its Managed Assets, Federated
has emphasized growth of its equity fund business and has broadened its range
of equity products to include international, aggressive growth, and small
capitalization equity products. Federated established a New York-based
investment management unit to develop global and international investment
products. Within Federated's Managed Asset categories, equity fund assets have
been the fastest growing class. In 1997, Federated's equity fund assets
increased by 54% compared to 37% for the overall industry according to
Investment Company Institute ("ICI") data. Equity fund assets have grown at a
49% compound annual rate over the past two years versus 38% for the overall
industry according to ICI data.

18
<PAGE>

The Company also believes that it benefits from a developing industry trend
toward "intermediary assisted sales"--sales of mutual fund products through a
financial intermediary--driven by the array of options now available to
investors and the need for financial planning advice that has resulted from
the recent increase in the average household's financial assets. According to
the ICI, intermediary assisted sales for the year ended December 31, 1997
constituted 61.9% of the total dollar value of mutual fund sales, a figure
that has grown from 54.9% in 1994.

Background. Federated and its predecessors, founded by John F. Donahue and
Richard B. Fisher, have engaged in the mutual fund business since 1955. The
Company was a publicly-traded company until 1982, when an affiliate of Aetna
Life & Casualty Company ("Aetna") acquired the Company. In 1989 the Trust was
formed as a Delaware business trust and acquired the business of the Company
from Aetna for cash and 1,000 Series A Preferred Shares of the Trust. In
January 1996 Federated entered into an agreement with Aetna to convert all
1,000 Series A Preferred Shares into Trust Class B Common Shares and to sell
the converted shares back to Federated at a mutually agreed upon price. These
share repurchases were financed with borrowings under the Trust's current
credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 10 to the Consolidated Financial
Statements.

Merger. On February 20, 1998, the Board of Trustees of the Trust unanimously
determined that the Merger of the Trust into the Company, its wholly owned
subsidiary, is in the best interests of the Trust and its holders and approved
the Merger Agreement and recommended approval and adoption of the Merger
Agreement and the transactions contemplated thereby to the holders of the
Trust. The purpose of the Merger is to convert the organization of Federated
from a Delaware business trust into a Pennsylvania corporation in order to
streamline the organizational structure by eliminating the parent holding
company and by utilizing a corporate entity, where the rights and liabilities
of the equity holders are well established and where corporate equity
securities may be used in connection with possible future acquisitions.
Federated was organized as a Delaware business trust in 1989 in order to
facilitate the acquisition of all of the outstanding stock of the Company and
the assets of the Federated Research Division from an affiliate of Aetna.
Aetna retained approximately a 27% interest in Federated until 1996, at which
time all of the outstanding shares of Federated held by Aetna were
repurchased. As a consequence of this repurchase, the Board of Trustees has
determined that the continuation of the business trust as the parent of the
Company no longer serves an essential business purpose.

The Board of Trustees of the Trust also believes that, as a result of the
Merger, the Company will be able to pursue more effectively opportunities for
growth through acquisitions. As a corporate entity, the Company's equity
securities, including "blank check" preferred stock and Class B Common Stock,
can be used in connection with possible future acquisitions and in capital
raising activities to promote growth. The provisions in the Restated Articles
to permit the holders of Class B Common Stock to vote in the election of a
majority of the Board of Directors in the event the Company enters into a
definitive agreement with respect to a business combination in which Class B
Common Stock would be issued in a transaction to be treated as a "pooling of
interests" for accounting purposes, are also intended to facilitate growth by
acquisition. See "Description of Securities."

Pursuant to the Merger Agreement, each outstanding Class A Common Share and
Class B Common Share of the Trust will be converted into the right to receive
one share of Class A Common Stock and Class B Common Stock, respectively, of
the Company and will have the relative rights and terms set forth in the
Restated Articles of the Company. The consummation of the Merger is subject to
several conditions, including the affirmative vote of the holders of a
majority of the Trust Class A Common Shares and the holders of a majority of
the Trust Class B Common Shares then outstanding, each voting as a separate
class.

As of April 21, 1998, the Voting Trust was the beneficial owner of all of
the outstanding Trust Class A Common Shares. As of such date, the trustees and
executive officers of the Trust were the beneficial owners of Trust Class B
Common Shares representing approximately 44.3% of the outstanding Trust Class
B Common

19
<PAGE>

Shares which are entitled to vote upon the Merger Agreement. They have advised
that they intend to vote in favor of the proposal to approve and adopt the
Merger Agreement. In addition, the trustees of the Voting Trust have advised
that the Voting Trust intends to vote all the Class A Common Shares in favor
of the proposal to approve and adopt the Merger Agreement.

The Merger is also conditioned upon the consummation of this Offering. As a
result of this Offering, the Company's Class B Common Stock will be publicly
traded and is expected to be listed on the New York Stock Exchange. This will
provide access to public equity and debt capital markets for the Company as
well as provide a trading market and liquidity for the Company's shareholders.

The Company is a Pennsylvania corporation, with its principal executive
offices located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779, and its telephone number is (412) 288-1900.

20
<PAGE>

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Class B
Common Stock offered hereby is estimated at $46.2 million, assuming an
offering price of $19.00 per share, after deducting the underwriting discount
and estimated offering expenses to be paid by the Company.

The net proceeds received by the Company will be used for working capital
and other general corporate purposes and will serve to enhance the Company's
liquidity by providing increased capital resources. The Company will receive
no proceeds from the sale of Class B Common Stock by the Selling Shareholders.

DILUTION

Purchasers of the Class B Common Stock offered hereby will purchase the
shares at a price substantially higher than the price paid by holders of Class
B Common Stock who purchased shares in connection with the Acquisition in 1989
and prior to this Offering. In addition, the public offering price of the
Class B Common Stock exceeds the net tangible book value per share of Common
Stock after the Offering, resulting in an immediate dilution to purchasers in
this Offering of $19.73 per share of Common Stock.

The net tangible book value of the Company as of December 31, 1997 was
$(109.0) million, or $(1.31) per share of Common Stock. "Net tangible book
value" is defined as common shareholders' equity of the Company less
intangible assets. "Net tangible book value per share of Common Stock" is
determined by dividing the net tangible book value of the Company by the
number of outstanding shares of Common Stock, treating one share of Class A
Common Stock equally with one share of Class B Common Stock. Net tangible book
value reflects the repurchases into treasury of outstanding Trust Class B
Common Shares from Aetna and other shareholders at an aggregate cost of
approximately $123.7 million. See Note 10 to Consolidated Financial
Statements.

After giving effect to the sale of Class B Common Stock offered hereby (at
an assumed offering price of $19.00 per share and after deducting the
estimated underwriting discount and offering expenses to be paid by the
Company), the Company's pro forma net tangible book value as of December 31,
1997 would have been $(62.8) million or $(0.73) per share of Class B Common
Stock. This represents an immediate increase in net tangible book value of
$0.58 per share of Common Stock to the existing holders of Class B Common
Stock of the Company, and an immediate dilution of $19.73 per share of Common
Stock to investors who purchase shares of Class B Common Stock in this
Offering. "Dilution" is the difference between the offering price per share of
Common Stock and pro forma net tangible book value per share of Common Stock
as adjusted for the Offering.

Intangible assets consist of customer relationships, employment contracts,
computer software, goodwill and organization expenses. Management believes the
intangible assets have a demonstrable and significant value. Such assets are
carried on the balance sheet of the Company (net of accumulated amortization)
in the amount of $67.9 million at December 31, 1997. Net book value per share
of Common Stock, which includes the carrying values attributable to intangible
assets, was $(0.49) at December 31, 1997. On a pro forma basis, net book value
per share of Common Stock as of December 31, 1997 would have been $0.06,
resulting in an immediate dilution of $18.94 to investors who purchase shares
of Class B Common Stock in this Offering.

The following table illustrates the dilution per share of Common Stock as of
December 31, 1997, which is determined by subtracting the net tangible book
value per share of Common Stock after the Offering from the price paid by a
new investor:

<TABLE>
<CAPTION>
NET TANGIBLE
BOOK VALUE
------------
<S> <C>
Assumed public offering per share of Class B Common Stock (1)...... $19.00
------
Net tangible book value per share of Common Stock before the Of-
fering........................................................... (1.31)
Increase per share attributable to payments made by new investors
(2).............................................................. 0.58
------
Pro forma net tangible book value per share of Common Stock after
the Offering...................................................... (0.73)
------
Dilution per share of Class B Common Stock to new investors........ $19.73
======
</TABLE>
- --------
(1) Before deducting the estimated underwriting discount and offering expenses
payable by the Company.
(2) After deducting the estimated underwriting discount and offering expenses
payable by the Company.

21
<PAGE>

DIVIDEND POLICY

The Company's Board of Directors intends to declare quarterly cash dividends
on both the Class A Common Stock and the Class B Common Stock. The Class A
Common Stock and the Class B Common Stock will share equally in any cash
dividend, subject to any preferential rights of any outstanding Preferred
Stock. A cash dividend of $0.0208 per share was paid on January 31, 1998 and a
cash dividend of $0.038 per share was paid on April 30, 1998.

The declaration and payment of dividends by the Company are subject to the
discretion of its Board of Directors. Any determination as to the payment of
dividends, including the level of dividends, will depend on, among other
things, general economic and business conditions, the strategic plans of the
Company, the Company's financial results and condition, contractual, legal,
and regulatory restrictions on the payment of dividends by the Company or its
subsidiaries, and such other factors as the Board of Directors of the Company
may consider to be relevant. The Company is a holding company and, as such,
its ability to pay dividends is subject to the ability of the subsidiaries of
the Company to provide cash to the Company. Under the Trust's existing debt
agreements which will be assumed by the Company under the terms of the Merger,
the Company will have no additional dividend paying capacity for the year 1998
after making the cash dividend payments on April 30, 1998, unless such
restriction is modified or waived by the lenders. The Company will seek to
amend these provisions to permit the payment of regular quarterly cash
dividends at a level comparable to that paid in the second quarter of 1998. In
addition, a one for one stock dividend was paid in 1996, a one for one stock
dividend was paid on April 15, 1998, and a one for two stock dividend was paid
on April 30, 1998. All cash dividend per share amounts included in the
Consolidated Financial Statements reflect the effects of these stock
dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital Resources and Liquidity--Debt Facilities"
and Note 10 to the Consolidated Financial Statements.

22
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and as adjusted to give effect to the sale of
2,610,000 shares of the Class B Common Stock offered hereby by the Company (at
an assumed initial public offering price of $19.00 per share and after
deducting the estimated underwriting discount and offering expenses to be paid
by the Company) and the application of the net proceeds therefrom (estimated
to be $46.2 million) as described under "Use of Proceeds."

<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt-recourse.............. $ 280 $ 280
-------- --------
Long-term debt (less current portion):(1)
Recourse debt
Bank loans(2)........................................... 0 0
7.96% Notes............................................. 98,000 98,000
Other debt.............................................. 950 950
-------- --------
Total long-term debt-recourse......................... 98,950 98,950
-------- --------
Non-recourse debt(1).................................... 185,388 185,388
-------- --------
Total long-term debt.................................. 284,338 284,338
-------- --------
Minority Interest........................................ 466 466
-------- --------
Shareholders' equity:
PREFERRED STOCK: no par value per share, 100,000,000
shares authorized, no shares issued and outstanding.... 0 0
COMMON STOCK:(3)
Class A (voting), no par value per share, 20,000
shares authorized, 6,000 shares issued and
outstanding and as adjusted........................... 195 195
Class B (non-voting), no par value per share,
900,000,000 shares authorized, 83,427,000 shares
issued and outstanding; 86,037,000 shares issued and
outstanding as adjusted(4)............................ 29,286 75,486
Retained earnings....................................... (68,234) (68,234)
Other equity adjustments(5)............................. (2,357) (2,357)
-------- --------
Total shareholders' equity............................ (41,110) 5,090
-------- --------
Total capitalization.................................. $243,974 $290,174
======== ========
</TABLE>
- --------

(1) See Notes 5 and 6 to the Consolidated Financial Statements for additional
information concerning long-term debt and information concerning
restructuring of debt as a result of the B share financing in October
1997 under which the Company entered into a transaction with a third
party to market the rights to the future revenue stream associated with
the 12b-1, shareholder service and contingent deferred sales charge
("CDSC") fees of the B shares of various mutual funds managed by the
Company.

(2) No amounts are currently outstanding; approximately $148,961,000 is
available to be borrowed.

(3) Adjusted for the one for one stock dividend paid on April 15, 1998 and
the one for two stock dividend paid on April 30, 1998.

(4) Excludes shares of Class B Common Stock issuable under the Company's
Stock Incentive Plan or under prior stock plans of the Trust assumed by
the Company under the Merger described under "Management--Compensation
Pursuant to Plans."

(5) Includes equity adjustments for unrealized gain on marketable securities
net of tax, employee restricted stock plan, and equity adjustment for
foreign currency translation.

23
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data below should be read in conjunction
with Federated's Consolidated Financial Statements and notes thereto. The
selected consolidated financial data (except Managed and Administered Assets)
of Federated for the five years ended December 31, 1997 have been derived from
the audited Consolidated Financial Statements of Federated. See "Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total Revenue........... $265,977 $271,190 $279,831 $321,793 $403,719
-------- -------- -------- -------- --------
Operating Expenses:
Compensation and
related............... 81,542 90,003 101,534 126,966 139,373
Other operating........ 91,936 115,077 104,885 134,308 141,004
Amortization and
revaluation of
intangible assets..... 30,823 105,868 10,445 8,886 13,715
-------- -------- -------- -------- --------
Total Operating
Expenses............ 204,301 310,948 216,864 270,160 294,092
-------- -------- -------- -------- --------
Operating income (loss). 61,676 (39,758) 62,967 51,633 109,627
Non-operating expenses.. 11,441 10,116 9,826 20,287 20,060
Minority interest....... 4,656 4,070 5,801 6,811 7,584
Income tax provision
(benefit).............. 14,363 (14,608) 18,809 10,930 30,957
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... 31,216 (39,336) 28,531 13,605 51,026
Extraordinary item, net
of tax................. 0 0 0 986 449
-------- -------- -------- -------- --------
Net income (loss)....... 31,216 (39,336) 28,531 12,619 50,577
Dividends on Preferred
Shares(1).............. 8,176 6,108 6,000 3,025 0
-------- -------- -------- -------- --------
Net income (loss)
applicable to Common
Shares................. $ 23,040 $(45,444) $ 22,531 $ 9,594 $ 50,577
======== ======== ======== ======== ========
Cash dividends per
Common Share(2)........ $ 0.00 $ 0.00 $ 0.1667 $ 0.0417 $ 0.0583
======== ======== ======== ======== ========
Earnings (loss) per
Common Share--basic
Income before
extraordinary item(2). $ 0.27 $ (0.53) $ 0.25 $ 0.13 $ 0.62
Earnings (loss) per
Common Share--assuming
dilution
Income before
extraordinary item(2). $ 0.27 $ (0.53) $ 0.24 $ 0.13 $ 0.61
BALANCE SHEET DATA AT
PERIOD END:
Intangible assets, net. $165,560 $ 74,413 $ 63,703 $ 69,105 $ 67,880
Total assets........... 286,304 178,150 185,402 247,377 337,156
Long-term debt--
Recourse.............. 135,394 88,690 68,062 244,125 98,950
Long-term debt--
Nonrecourse(3)........ 0 0 0 0 185,388
Total liabilities...... 222,251 156,284 155,883 333,485 377,800
Shareholders' equity... 63,700 20,733 28,692 (86,922) (41,110)
BOOK VALUE PER COMMON
SHARE.................. $ 0.73 $ 0.23 $ 0.32 $ (1.04) $ (0.49)
MANAGED AND ADMINISTERED
ASSETS AT PERIOD END
(IN MILLIONS):
Money Market Funds..... $ 31,856 $ 31,528 $ 40,610 $ 51,163 $ 63,622
Fixed Income Funds..... 19,967 14,106 14,330 14,109 15,067
Equity Funds........... 4,244 3,927 5,287 7,594 11,710
Separate Accounts...... 1,137 1,257 1,486 1,976 2,141
-------- -------- -------- -------- --------
Total Managed Assets.. $ 57,204 $ 50,818 $ 61,713 $ 74,842 $ 92,540
======== ======== ======== ======== ========
Total Administered
Assets............... $ 19,505 $ 21,304 $ 22,089 $ 35,574 $ 46,999
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Termination dividend paid in January 1996 in connection with the
conversion of all outstanding Trust Series A Preferred Shares into Trust
Class B Common Shares and the repurchase of the converted shares by the
Trust. See Note 10 to Consolidated Financial Statements.

(2) Reflects the one for one stock dividend paid in 1996, the one for one
stock dividend paid on April 15, 1998 and the one for two stock dividend
paid on April 30, 1998.
(3) See Note 6 to the Consolidated Financial Statements for information
concerning nonrecourse debt.

24
<PAGE>

RECENT DEVELOPMENTS

Consolidated operating expenses for the first quarter of 1998 totaled $82.7
million, an increase of $12.6 million or 17.9% over the first quarter of 1997
operating expenses of $70.1 million. The increase in operating expenses was
due principally to increases in variable based compensation of $4.0 million as
a result of increased sales and profitability, a $2.7 million increase in
advertising and promotional expenses attributable to increased Managed Assets
and a $0.8 million increase in amortization of intangible assets as a result
of an acquisition occurring in the second quarter of 1997.

The tables below compare summary unaudited financial and statistical
results:

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
----------------------
SELECTED OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA) 1997 1998
- ------------------------------------------------------- ---------- -----------
<S> <C> <C>
Total Revenue............................................ $ 91,627 $ 122,592
Operating Expenses....................................... 70,137 82,699
---------- -----------
Operating Income......................................... 21,490 39,893
Nonoperating Expenses and Minority Interest.............. 6,983 8,148
---------- -----------
Income Before Income Taxes............................... 14,507 31,745
Income Tax Provision..................................... 5,664 10,908
---------- -----------
Net Income............................................... $ 8,843 $ 20,837
========== ===========
Earnings per Basic Common Share.......................... $0.11 $0.25
Earnings per Diluted Common Share........................ $0.11 $0.25
<CAPTION>
MARCH 31,
----------------------
MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) 1997 1998
- --------------------------------------------- ---------- -----------
<S> <C> <C>
Money Market Funds....................................... $ 53,086 $ 64,215
Fixed Income Funds....................................... 13,788 15,601
Equity Funds............................................. 8,000 13,843
Separate Accounts........................................ 2,069 2,389
---------- -----------
Total Managed Assets................................... $ 76,943 $ 96,048
========== ===========
Total Administered Assets.............................. $ 38,860 $ 51,651
========== ===========
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
----------------------
AVERAGE MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) 1997 1998
- ----------------------------------------------------- ---------- -----------
<S> <C> <C>
Managed Assets........................................... $77,087 $ 95,102
Administered Assets...................................... 39,228 49,946
</TABLE>

25
<PAGE>

Sales and net sales of both equity and fixed income managed funds
contributed positively to these asset changes in the first quarter of 1998.
Sales of equity funds totaled $1.4 billion and net sales (sales minus
redemptions) were $759 million. Sales of fixed income funds totaled $1.6
billion and net sales were $514 million. Most of the remaining asset increase
was due to the impact of favorable securities market conditions in the first
quarter of 1998. The S&P 500 index rose nearly 14% in the first quarter of
1998, and most other investment indices showed substantial increases. In
addition to creating favorable sales conditions, market appreciation increased
the value of Managed Assets. Under different market conditions, the Company's
performance could differ substantially. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Economic and Market
Conditions."

The tables below compare Federated's Managed and Administered Assets by
Market as of:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1997 1998
--------- ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C>
MANAGED ASSETS BY MARKET
- ------------------------
Bank Trust Market............................. $40,982 $49,662 $49,741
Broker/Dealer Market.......................... 23,368 28,256 31,662
Institutional Market.......................... 9,755 11,343 11,266
Other Markets................................. 2,838 3,279 3,379
------- ------- -------
Total Managed Assets by Market.............. $76,943 $92,540 $96,048
======= ======= =======
MANAGED ASSETS BY BANK TRUST MARKET
- -----------------------------------
Money Market Funds/Cash Equivalent............ $32,933 $40,897 $40,391
Fixed Income Funds............................ 5,163 5,070 5,047
Equity Funds.................................. 2,886 3,695 4,303
------- ------- -------
Total Managed Assets by Bank Trust Market... $40,982 $49,662 $49,741
======= ======= =======
MANAGED ASSETS BY BROKER/DEALER MARKET
- --------------------------------------
Money Market Funds/Cash Equivalent............ $13,608 $15,293 $17,103
Fixed Income Funds............................ 5,614 6,566 6,956
Equity Funds.................................. 4,128 6,376 7,582
Separate Accounts............................. 18 21 21
------- ------- -------
Total Managed Assets by Broker/Dealer
Market..................................... $23,368 $28,256 $31,662
======= ======= =======
MANAGED ASSETS BY INSTITUTIONAL MARKET
- --------------------------------------
Money Market Funds/Cash Equivalent............ $ 5,744 $ 6,698 $ 5,973
Fixed Income Funds............................ 1,474 1,825 2,018
Equity Funds.................................. 501 749 964
Separate Accounts............................. 2,036 2,071 2,311
------- ------- -------
Total Managed Assets by Institutional
Market..................................... $ 9,755 $11,343 $11,266
======= ======= =======
</TABLE>

26
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of Federated and the related notes thereto
included in this Prospectus.

OVERVIEW

Federated, through its direct and indirect subsidiaries, is a leading
provider of investment management products and related financial services.
Federated sponsors, markets and provides investment advisory, distribution and
administrative services primarily to mutual funds.

Managed Assets at December 31, 1997 were $92.5 billion, primarily in funds
managed, distributed and administered by Federated and in other non-fund
products, of which $2.1 billion were in separately managed accounts. Federated
provided investment advisory services to 61 pooled investment entities,
primarily registered investment companies with 124 funds and 238 share
classes. In addition, at year end 1997 Federated provided administration
services to mutual funds sponsored by third parties, primarily banks, having
$47.0 billion of assets. These Administered Assets were held in 59 registered
investment companies with 206 funds and 267 share classes.

FEDERATED FIRST

In late 1996, Federated initiated a comprehensive review of its business
strategies in order to position itself for increased profitability, long term
sustainable growth and enhanced shareholder value ("Federated First"). This
review includes the products, markets and operations of Federated. The
financial results of the initiatives undertaken by management during this
period have been positive. Net income increased by $38.0 million or 300.8%
when comparing 1997 results to 1996 in substantial part as a result of these
initiatives. Managed Assets have increased from $74.8 billion at the end of
1996 to $92.5 billion at the end of 1997, an increase of 23.6%. Administered
Assets increased by $11.4 billion in this same period, an increase of 32.1%.
However, due to the relatively lower revenues, changes in the amount of
Administered Assets generally have less impact on Federated's results of
operations than changes in the amount of Managed Assets.

The business review generated major initiatives to more rapidly grow assets
under management while maintaining or further enhancing the service levels to
customers in a manner which increases the profitability of Federated and
reaffirmed Federated's commitment to its equity and international fund
strategy. These major initiatives include (1) refocusing the marketing of
Federated's service capabilities to emphasize fund administration and
strategic marketing which support the growth of Administered Assets rather
than selling individual services such as transfer agent and fund accounting as
stand alone products, (2) an increase in the fee structure coupled with
improved efficiency as a result of a more standardized product offering
related to the retirement plan recordkeeping unit, (3) a reengineering of the
shareholder servicing activities to provide more effective, efficient and
seamless service to fund shareholders, (4) an agreement entered into in the
fourth quarter of 1997 with State Street Corporation ("State Street") to
provide portfolio accounting services to both Federated and third party
administered funds, (5) a continued emphasis on equity and international fund
management including the further development of its international management
unit in New York City and expanding marketing efforts including an advertising
campaign to enhance the awareness of the "Federated" brand name, (6)
increasing assets under management through acquisitions, (7) acceleration of
Federated's investment in the development of an improved management
information system and support resources to improve its ability to analyze
customer, product and market profitability, and (8) utilizing the capital
markets as a means to fund advance commissions paid to broker/dealers on the B
share class of funds, increasing liquidity as well as removing the risks and
uncertainties associated with the recapture of these commission assets.

27
<PAGE>

PROFITABILITY TREND SUMMARY

This discussion on "Profitability Trend Summary" should be read in
conjunction with the tables presented below.

MANAGED AND ADMINISTERED ASSETS, PERCENTAGE OF REVENUE AND KEY RATIOS

MANAGED AND ADMINISTERED ASSETS (DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Money Market Funds..................... $31,856 $31,528 $40,610 $51,163 $63,622
Fixed Income Funds..................... 19,967 14,106 14,330 14,109 15,067
Equity Funds........................... 4,244 3,927 5,287 7,594 11,710
Separate Accounts...................... 1,137 1,257 1,486 1,976 2,141
------- ------- ------- ------- -------
Total Managed Assets................. $57,204 $50,818 $61,713 $74,842 $92,540
======= ======= ======= ======= =======
Total Administered Assets............ $19,505 $21,304 $22,089 $35,574 $46,999
======= ======= ======= ======= =======
</TABLE>

AVERAGE MANAGED AND ADMINISTERED ASSETS (DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Managed Assets.......................... $55,513 $54,011 $55,847 $66,138 $81,580
Administered Assets..................... 16,104 20,405 23,284 26,197 42,965
</TABLE>

MANAGED ASSETS (PERCENTAGE OF TOTAL)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Money Market Funds........................... 55.7% 62.0% 65.8% 68.4% 68.8%
Fixed Income Funds........................... 34.9 27.8 23.2 18.9 16.3
Equity Funds................................. 7.4 7.7 8.6 10.1 12.6
Separate Accounts............................ 2.0 2.5 2.4 2.6 2.3
------ ------ ------ ------ ------
Total Managed Assets....................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>

28
<PAGE>

PERCENTAGE OF REVENUE

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Managed Assets........................ 90% 84% 82% 86% 86%
Administered Assets................... 9 13 15 11 12
Other Income.......................... 1 3 3 3 2
------ ------ ------ ------ ------
Total Revenue....................... 100 100 100 100 100
------ ------ ------ ------ ------
Compensation and Related Expenses..... 31 33 36 39 35
Amortization of Deferred Sales 5 6 3 4 5
Commissions..........................
Amortization and Revaluation of 11 39 4 3 3
Intangible Assets....................
Other Operating Expenses.............. 30 37 34 38 30
------ ------ ------ ------ ------
Total Operating Expenses............ 77 115 77 84 73
------ ------ ------ ------ ------
Operating Income (Loss)........... 23% (15)% 23% 16% 27%
====== ====== ====== ====== ======
</TABLE>

KEY RATIOS

<TABLE>
<S> <C> <C> <C> <C> <C>
Total Federated Managed Product Fees as a
Percentage of
Average Managed Assets......................... 0.43% 0.42% 0.41% 0.42% 0.43%
Non-Federated Fund Administrative and Other
Service Fees as a
Percentage of Average Administered Assets...... 0.15% 0.17% 0.18% 0.14% 0.11%
</TABLE>

Managed Assets. For the period from December 31, 1993 through December 31,
1997, total Managed Assets increased $35.3 billion, or 61.8%. The increase in
Managed Assets is attributed primarily to the $31.8 billion (99.7%) increase
in money market funds and a $7.5 billion (175.9%) increase in equity funds
offset by a $4.9 billion (24.5%) decrease in fixed income funds.

The increase in money market assets is largely due to Federated's expansion
of its distribution of cash management products for both institutional and
retail applications. The changes in the equity and fixed income managed asset
mix are primarily due to changes in market demand for mutual funds, market
conditions, and Federated's investment management and distribution efforts.

Market demand for mutual fund products has shifted, reflecting a strong
preference for equity funds. At the end of 1993, total industry assets
(excluding money market funds) were approximately 50% equity and 50% fixed
income. By the end of 1997, this mix had shifted to 71% equity and 29% fixed
income. Market conditions contributed to this shift as relatively higher
returns in the equity markets created a favorable sales environment and led to
net asset value appreciation in equity funds. Conversely, in 1994 rapidly
rising interest rates led to reduced returns and reduced net asset values of
most fixed income mutual funds.

Driven by these patterns, Federated has increased its efforts to raise
equity fund Managed Assets by developing new products, increasing investments
in distribution, and by expanding its investment management capabilities, most
notably by forming a New York-based global investment management group in
1995.

Federated's managed product fees per dollar of average Managed Assets during
this period reflect these trends. These fees decreased from 0.43% of average
Managed Assets in 1993 to 0.41% in 1995 due largely to the decrease in fixed
income fund Managed Assets. Since 1995, these fees have increased back to
0.43% due principally to the growth of equity fund Managed Assets.

Administered Assets. For the period from December 31, 1993 through December
31, 1997, total Administered Assets increased $27.5 billion, or 141.0%. During
this period, Federated developed its service

29
<PAGE>

businesses to provide administration, transfer agency, portfolio accounting,
retirement plan recordkeeping and administration, and other services to third
party funds, retirement plans and other customers. While the level of assets
has increased over the period discussed, competition has forced the fees
realized from these service lines downward over the past few years. In
addition, some third-party mutual fund sponsors have developed the ability to
internalize fund administration functions. Internalization of certain of these
services has resulted in reductions in the level of services provided by
Federated to certain customers. The combination of price competition and
reduced service levels has resulted in overall lower fees per dollar
administered. Recently, Federated has received notice from a client for which
it provides limited administrative services that the client has decided to
internalize such services and therefore will end its service arrangement with
Federated in mid-1998. This client had administered assets of $17.4 billion as
of December 31, 1997; however, due to the limited administrative services
provided, revenues associated with such assets represented less than 0.5% of
Federated's 1997 total revenue.

RESULTS OF OPERATIONS

General

Federated derives nearly all of its revenue through advising, distributing
and servicing of proprietary and third party mutual funds, separately managed
accounts and other related products. Investment advisory fees are the largest
source of revenue and are derived by providing investment advice to the
various proprietary funds and other products. Distribution related fees are
earned as a result of marketing the funds through Federated's bank trust
department, broker/dealer, institutional and other sales channels. Servicing
fees include administration services, portfolio accounting and shareholder
servicing of the funds. In addition to services provided for the funds and
separate accounts, Federated also provides recordkeeping and administration to
retirement plans as well as clearing services to bank trust departments for
their investments in registered investment companies.

Investment advisory, distribution and the majority of the servicing fees are
based on the net asset value of the investment portfolios managed or
administered by Federated. As such, these revenues are dependent upon factors
including market conditions and the ability to attract and maintain assets.
Accordingly, revenues will fluctuate with changes in the total value and
composition of the assets under management or administration. Investment
advisory and administration related service fees are generally paid daily,
while distribution fees are paid to Federated on a monthly basis. Portfolio
accounting related service fees are also generally asset based, however they
incorporate certain flat fees for additional share classes. Transfer agency
related service fees are based principally on the level of shareholder
accounts maintained by each of the funds. Both portfolio accounting and
transfer agency fees are paid on a monthly basis.

Federated's expenses are largely centered around employee and related office
support expenditures, marketing related costs, the amortization of deferred
sales commissions and the amortization of intangible assets. Federated's
largest operating expenses are employee related. These expenses include
employee salaries, incentives, benefits, travel and related entertainment,
office space, and office related services and supplies. These expenses
generally rise and fall in relative proportion to the number of employees
retained by Federated. Marketing costs generally vary based on the type and
level of marketing or sales programs in operation. Amortization of deferred
sales commissions will fluctuate based on the overall level of sales of
certain shares of funds in which Federated advances a commission to brokers,
while amortization of intangible assets will vary based on the overall level
of intangible assets recorded and their estimated useful life.

Over the past five years, investments have been made in new products and
services which have resulted in a steady increase in the number of Federated
employees. These investments include new fund offerings, in particular equity
and international funds, the expansion of sales efforts in the broker/dealer
and institutional markets, the increased investment in advisory personnel, and
the expansion or introduction of transfer agency, portfolio accounting,
retirement plan recordkeeping and administration, and clearing services.

As part of management's review of the business strategies and resulting
initiatives, in November 1997, Federated entered into an agreement with State
Street, the largest provider of portfolio accounting services to the mutual
fund industry, to provide portfolio accounting and financial information
analysis services for both the

30
<PAGE>

Federated sponsored and third party funds on a sub-contracted basis. Federated
will continue to directly provide tax and certain treasury functions to the
funds. This agreement is part of Federated's strategy to focus resources on
its core business of asset management and enables Federated to (1) benefit by
partnering with a firm that is committed to the future investments required to
continue providing outstanding portfolio accounting services, (2) reduce the
risk associated with providing portfolio accounting services, and (3) improve
cost management. This alliance is not anticipated to materially alter
Federated's revenues or expenses; however, Federated has significantly reduced
the number of its employees engaged in these services.

The amortization of deferred sales commissions to brokers is a result of a
marketing program in which Federated pays a commission to unaffiliated
securities broker/dealers at the time they generate a sale into certain
classes of funds managed by Federated. The upfront payment to the broker is
based on a percentage of the original purchase into the mutual fund. These
payments are capitalized and recorded as deferred sales commissions and are
amortized on a straight line basis over estimated periods of benefit not to
exceed contingent deferred sales charge periods. If shares are redeemed before
a certain time period, the shareholder is normally required to pay to
Federated a contingent deferred sales charge ("CDSC") based on a percentage of
assets at the time of redemption, which diminishes over a recovery schedule
not to exceed six years. Upon receipt, CDSCs are treated as a reduction of the
related deferred sales commissions asset. In the fourth quarter 1997,
Federated sold its rights to certain future revenue streams associated with
its existing B share advance commissions. Federated received $191.3 million
which was utilized to repay the outstanding balance of a revolving line of
credit and bank term debt, providing an increase in liquidity in the form of
credit availability from approximately $44 million prior to the transaction to
approximately $149 million. The agreement also provides for Federated to sell,
in regular intervals, the rights to such future revenue streams during a three
year contract period.

Amortization of intangible assets is primarily the result of Federated's
acquiring 100% of the outstanding stock of the Company and certain assets from
Aetna in August 1989 as well as the acquisition of customer relationships from
other fund companies in 1996 and 1997.

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

Net Income. Federated's consolidated net income applicable to Common Stock
for the year ended December 31, 1997 was $50.6 million ($0.60 per diluted
Common Share) as compared to 1996 of $9.6 million ($0.12 per diluted Common
Share), an increase of $41.0 million ($0.48 per diluted Common Share) or
427.2%. The improved performance was the result of revenue growth of $81.9
million, largely generated from higher levels of managed and administered
assets, coupled with expense management.

Revenue. Federated's consolidated revenue for the year ended December 31,
1997 was $403.7 million as compared to the year ended December 31, 1996 of
$321.8 million, an increase of $81.9 million or 25.5%. The primary reason
behind the overall increase in revenue was the enhanced revenue generated by
the management and servicing of the Federated funds and other products which
accounted for $71.9 million, or 87.7% of the total increase. This was
principally the result of an increase in average managed assets of $15.5
billion (23.3%) from $66.1 billion for the year ended December 31, 1996 to
$81.6 billion for 1997. In addition, asset composition changed from 18.9%
fixed income funds and 10.1% equity funds at December 31, 1996 to 16.3% fixed
income funds and 12.6% equity funds at December 31, 1997. Generally equity
funds produce higher revenues as a percentage of assets than fixed income
funds. An increase in average administered assets of $16.8 billion (64.0%)
accounted for the additional servicing revenue of $9.0 million, or 10.9% of
the total increase in revenue. Managed assets increased due principally to new
assets from customers and increases in the market value of existing assets
under management. The increase in average administered assets was due
principally to the full year impact of Federated's obtaining in late 1996
administration, sub-administration and distribution agreements and increases
in the assets of existing customers.

Operating Expenses. Total operating expenses increased from $270.2 million
for the year ended December 31, 1996 to $294.1 million for 1997, an increase
of $23.9 million or 8.9%.

31
<PAGE>

Compensation and related expenses for the year ended December 31, 1997 were
$139.4 million as compared to 1996 of $127.0 million, an increase of $12.4
million or 9.8%. This increase was primarily due to the average number of
employees increasing between these two periods by 141 or 7.4%, as well as an
increase in incentive compensation expense as a result of increased sales and
favorable investment performance as compared to benchmarks and improved
financial performance of Federated. This change does not reflect the reduction
in the number of employees due to the strategic alliance with State Street.
Staff growth was experienced in the areas of investment research, with
continued emphasis in domestic and global portfolio management, and in various
service areas.

Amortization of deferred sales commissions was $20.9 million for the year
ended December 31, 1997, an increase of $8.6 million (69.1%) over the 1996
amount of $12.3 million. This increase was due to the continued sale of shares
of funds which require Federated to advance a commission to the broker/dealer
and the related growth in the deferred sales commissions which totaled $164.6
million and $85.9 million as of December 31, 1997 and 1996, respectively.

Office and occupancy expense was $28.6 million for the year ended December
31, 1997, a decrease of $1.3 million or 4.2% as compared to the $29.9 million
recorded for the year ended December 31, 1996. This decrease was primarily due
to the reduction of rent expense as the result of the early termination of
leased space, a reduction in leasehold improvement depreciation and a
reduction in other office expenses.

Systems and communications expense increased from $22.3 million for the year
ended December 31, 1996 to $23.4 million for 1997, an increase of $1.1 million
or 4.9%. This was principally due to an increase in costs related to third
party system vendors.

Advertising and promotional expenses were $35.0 million for the year ended
December 31, 1997 as compared to $31.0 million for 1996, an increase of $4.0
million or 12.9%. The primary reason for this increase was an increase in the
level of assets of various funds, resulting in higher levels of marketing
allowances being paid to brokers and bank clients for retail marketing
efforts.

Travel and related expenses decreased by $1.1 million or 6.9% from $15.9
million for the year ended December 31, 1996 to $14.8 million for the year
ended December 31, 1997. The reduction in cost was principally the result of
management's initiative to reduce discretionary spending in this expense
category by negotiating more favorable discount arrangements with travel
related vendors and improved overall expense management.

Other expense consists of corporate insurance, professional service fees
such as auditing, legal and consulting expenditures, bad debt expense and
other miscellaneous expenditures. This category experienced a decrease of $4.6
million or 20.0% from $22.9 million for the year ended December 31, 1996 to
$18.3 million for 1997. This reduction was principally the result of the
decreased utilization of professional services, the reduction of taxes other
than income taxes and the reduction of reserves for errors related to the
various service businesses.

Amortization of intangible assets increased by $4.8 million (54.3%) to $13.7
million for the year ended December 31, 1997 as compared to $8.9 million for
1996. This expense increased as a result of the purchase of several customer
relationships in late 1996 and throughout 1997 and the resulting allocation of
a portion of the purchase price to intangible assets on Federated's balance
sheet.

Nonoperating Expenses. Nonoperating expenses decreased by $227 thousand or
1.1% to $20.1 million for the year ended December 31, 1997 as compared to
$20.3 million for 1996. Interest expense increased by $299 thousand or 1.6%
from $18.6 million for the year ended December 31, 1996 to $18.9 million for
1997. Other debt expense was $1.2 million for the year ended December 31,
1997, a decrease of $526 thousand (30.5%) from the $1.7 million recorded for
the year ended December 31, 1996. The decrease was due to the early prepayment
of term debt as a result of a debt restructuring in mid-1996 as well as the
prepayment of the remaining term debt in October 1997. In both instances, the
allocable unamortized portions of the debt issuance costs related to the term
debt which was prepaid was recorded as an extraordinary item, net of tax.

32
<PAGE>

Minority Interest. The minority interest increased from $6.8 million for the
year ended December 31, 1996 to $7.6 million for 1997, an increase of $773
thousand or 11.3%. This increase was a result of a higher level of net income
of the subsidiary for which Federated acts as the general partner with a
majority interest of 50.5%.

Income Taxes. The income tax provision for the year ended December 31, 1997
was $30.9 million, an increase of $20.0 million or 183.2% as compared to the
$10.9 million recorded in 1996. This increase was due principally to the $57.4
million or 234.1% increase in the level of income before income taxes and
extraordinary item recorded for the year ended December 31, 1997 as compared
to 1996. The effective tax rate for Federated was 37.8% and 44.5% for the
years ended December 31, 1997 and 1996, respectively. The increased rate above
the statutory rate of 35% for both periods was primarily the result of the
nondeductible amortization of goodwill and the statutory limitation on the
deductibility of meals and entertainment.

Dividends on Preferred Shares. There were no dividends on preferred shares
for the year ended December 31, 1997 as compared to $3.0 million for the year
ended December 31, 1996 as a result of the purchase of Federated's preferred
shares from the shareholder in 1996.

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

Net Income. Federated's consolidated net income applicable to common stock
for the year ended December 31, 1996 was $9.6 million ($0.12 per diluted
Common Share) as compared to the year ended December 31, 1995 of $22.5 million
($0.24 per diluted Common Share), a decrease of $12.9 million ($0.12 per
diluted Common Share) or 57.4%. The decrease in net income was due principally
to reduced fees generated per administered asset by the servicing lines of
business as well as increased expense levels as described below.

Revenue. Federated's consolidated revenue for the year ended December 31,
1996 was $321.8 million as compared to the year ended December 31, 1995 of
$279.8 million, an increase of $42.0 million or 15.0%. The net increase in
revenue was due to the enhanced revenue generated by the management and
servicing of the Federated funds and other products which accounted for $45.1
million, or 107.4% of the total increase. This was principally the result of
an increase in average managed assets of $10.3 billion (18.4%) from $55.8
billion for the year ended December 31, 1995 to $66.1 billion for 1996. While
Federated experienced an increase in average administered assets of $2.9
billion or 12.5% for the year ended 1996 versus 1995, the combination of the
composition of customers, the relatively lower level of services provided to
these customers and market forces reducing fees within the servicing lines of
business resulted in a net decrease in servicing revenue to administered
assets of $3.9 million, or 9.5%. In addition, asset composition changed from
23.2% fixed income funds, 65.8% money market funds and 8.6% equity funds at
December 31, 1995 to 18.9% fixed income funds, 68.4% money market funds and
10.1% equity funds at the end of 1996. Federated product asset increases
resulted from new assets from customers, increases in the market value of
existing assets under management, and the purchase of certain customer
relationships. The increase in average administered assets was due principally
to increases in the assets of existing customers.

Operating Expenses. Total operating expenses experienced an increase from
$216.9 million for the year ended December 31, 1995 to $270.2 million for
1996, an increase of $53.3 million or 24.6%.

Compensation and related expenses for the year ended December 31, 1996 were
$126.9 million as compared to the year ended December 31, 1995 of $101.5
million, an increase of $25.4 million or 25.0%. This increase was primarily
due to the average number of employees increasing between these two periods by
197 or 11.1% as well as an increase in the average salary per employee of
11.9%. Increases in employment levels were experienced across the
organization, with emphasis in investment research and various service areas.
The average salary per employee increased principally as a result of increases
in compensation levels of certain employees for competitive purposes.

Amortization of deferred sales commissions was $12.3 million for the year
ended December 31, 1996, an increase of $2.8 million (29.3%) over the year
ended December 31, 1995 amount of $9.5 million. This increase

33
<PAGE>

was due to the continued sale of shares of funds which require Federated to
advance a commission to the broker/dealer and the related growth in the
deferred sales commissions which totaled $85.9 million and $36.8 million as of
December 31, 1996 and 1995, respectively.

Office and occupancy expense was $29.9 million for the year ended December
31, 1996, an increase of $6.6 million or 28.3% over the $23.3 million recorded
for the year ended December 31, 1995. This increase was primarily due to
increased rental costs and depreciation of leasehold improvements related to
the addition of rental property in January 1996 to accommodate the growing
retirement plan services division, depreciation expense on computer related
hardware and software purchased throughout 1995 and 1996 and the overall
increase in general office expenses related to the higher level of employment.

Systems and communications expense decreased from $22.8 million for the year
ended December 31, 1995 to $22.3 million for the year ended December 31, 1996,
a decrease of $0.5 million or 2.4%.

Advertising and promotional expenses were $31.0 million for the year ended
December 31, 1996 as compared to $21.5 million for the year ended December 31,
1995, an increase of $9.5 million or 44.3%. The primary reason for this
increase was an increase in the level of assets of various funds, resulting in
higher levels of marketing allowances being paid to brokers and bank clients
for retailing efforts of marketing these funds. Additionally, in 1996
Federated launched a nationwide campaign to increase brand recognition of the
Federated funds.

Travel and related expenses increased by $3.1 million or 24.2% from $12.8
million for the year ended December 31, 1995 to $15.9 million for the year
ended December 31, 1996. The increase was due principally to increased travel
related to the marketing and sales efforts of the various products.

Other expense experienced an increase of $8.0 million or 53.4% from $14.9
million for the year ended December 31, 1995 to $22.9 million for the year
ended December 31, 1996. This increase was principally the result of the
increased utilization of professional services in 1996, specifically in
relation to the consulting expenditures related to management's review of its
business strategies, an increase in taxes other than income taxes, the
expensing of obsolete marketing related material and an increase in bad debt
expense and the impairment of assets related to the retirement plan unit.

Amortization of intangible assets decreased by $1.5 million or 14.9% to $8.9
million for the year ended December 31, 1996 as compared to $10.4 million for
1995 as a result of certain intangible assets being fully amortized.

Nonoperating Expenses. Nonoperating expenses increased by $10.5 million or
106.5% to $20.3 million for the year ended December 31, 1996 as compared to
$9.8 million for the year ended December 31, 1995. Interest expense increased
by $9.2 million or 97.2% as a result of an increase in the average debt
outstanding from $115 million in 1995 to $249 million in 1996. This increase
was primarily due to the issuance of long term debt to fund the purchase of
Federated's stock from major shareholders and the use of a line of credit to
fund the higher levels of deferred sales commissions specifically related to
the B share class of funds. Other debt expense was $1.7 million for the year
ended December 31, 1996, an increase of $1.3 million or 317.4% from the $0.4
million recorded in 1995 due principally to the increased amortization related
to the issuance costs of the long term debt acquired in 1996.

Minority Interest. The minority interest increased from $5.8 million for the
year ended December 31, 1995 to $6.8 million for the year ended December 31,
1996, an increase of $1.0 million or 17.4%. This increase was a result of a
higher level of net income of the subsidiary for which Federated acts as the
general partner with a majority interest of 50.5%.

Income Taxes. The income tax provision for the year ended December 31, 1996
was $10.9 million, a decrease of $7.9 million or 41.9% as compared to the
$18.8 million recorded for 1995 primarily due to the $22.8

34
<PAGE>

million or 48.2% decrease in the level of income before income taxes and
extraordinary item recorded for the year ended December 31, 1996 as compared
to the year ended December 31, 1995. The effective tax rate for Federated was
44.5% and 39.7% for the years ended December 31, 1996 and 1995, respectively.
The increased rate above the statutory rate of 35% for both periods was
primarily the result of the nondeductible amortization of goodwill and the
statutory limitation on the deductibility of meals and entertainment.

Dividends on Preferred Shares. Dividends on preferred shares were $3.0
million for the year ended December 31, 1996 compared to $6.0 million for the
year ended December 31, 1995, a decrease of $3.0 million or 49.6% as a result
of the purchase of Federated's preferred shares from the shareholder in 1996.

CAPITAL RESOURCES AND LIQUIDITY

Cash Flow. Historically, Federated generally financed its business from the
cash flow generated from operating activities and through a bank line of
credit. Cash provided by operating activities totaled $15.1 million, $27.5
million and $23.7 million for the years ended December 31, 1997, 1996 and
1995, respectively. The cash flow from operating activities along with a
revolving line of credit is primarily utilized for the financing of deferred
commissions to brokers, purchases of equipment, acquisitions, dividend
payments, as well as payments on long term debt.

The recourse debt held by Federated decreased $160.6 million and increased
$129.0 million and $21.0 million for the years ended December 31, 1997, 1996
and 1995, respectively. In 1997, proceeds from the sale of certain future cash
streams related to the B shares was utilized to reduce recourse debt by $159.6
million. Federated utilized debt in 1996 to purchase a portion of its stock
from major shareholders for $123.7 million as well as to fund the growth in
deferred sales commissions.

The deferred sales commissions paid to broker/dealers on certain shares of
funds totaled $111.6 million, $69.6 million and $40.1 million for 1997, 1996
and 1995, respectively. In October 1997, Federated sold for $110.2 million the
rights to certain future revenue streams associated with the B share advance
commissions as of March 31, 1997. An agreement was entered into with a special
purpose entity whose sole purpose was to purchase Federated's future rights to
the 12b-1, CDSC and shareholder service fees of the B shares of certain funds
from the inception of the B share program through sales incurred through March
31, 1997. In order to fund this purchase from Federated, the special purpose
entity issued two debt securities, Class A and Class B, for $104.4 million and
$9.7 million, respectively. These debt securities will be repaid solely from
the 12b-1, CDSC and shareholder service fee cash flows generated by these B
share assets and there is no recourse to Federated. The Class A debt carries a
fixed interest rate of 7.44% while the Class B debt has a fixed interest rate
of 9.80%. The transaction has been accounted for as a financing and the
nonrecourse debt has been reflected in the consolidated balance sheet. Also in
the fourth quarter of 1997, Federated sold for $81.1 million the rights to
certain future revenue streams associated with the B share advance commissions
for sales from April 1, 1997 through December 15, 1997. For accounting
purposes, these transactions were treated as financings and the nonrecourse
debt has been recorded with an imputed interest rate of 7.6%. Additionally,
Federated continues to sell future revenue streams associated with the B share
advance commissions ("Revenue Streams") pursuant to a Revolving Purchase
Agreement ("Revolving Purchase Agreement"), dated as of October 24, 1997,
among Federated Funding 1997-1, Inc., a special purpose entity established by
Federated (the "Seller"), and PLT Finance, L.P. (the "Revolving Purchaser"),
an entity in which Federated holds no interest. Under the Revolving Purchase
Agreement, the Seller agrees to sell Revenue Streams, and the Revolving
Purchaser agrees to purchase such Revenue Streams, twice each month until the
Agreement terminates on October 24, 2000, or such later date as agreed to in
writing by the parties. The purchase price with respect to any future sale of
Revenue Streams will be calculated as a percentage of the value of the B share
fund sales. In addition, if the Revolving Purchaser realizes revenues in
excess of a certain threshold (as computed in accordance with the terms of the
Revolving Purchase Agreement) the Revolving Purchaser, under certain
circumstances, is obligated to remit a portion of such excess revenues to
Federated. Payments made by the special purpose entity and other payments made
with respect to related nonrecourse debt totaled $9.8 million in 1997.

35
<PAGE>

The October 1997 sales of certain future cash flows related to the advanced
commissions made by Federated through September 1997 was utilized to eliminate
bank debt held within a revolving line of credit and term debt. Under the debt
agreement with the bank, the term debt is considered prepaid and cannot be
reborrowed. The revolving line of credit will provide an increase in liquidity
for Federated in the form of credit availability of $149.0 million and is in
place through January 31, 2001.

Capital Expenditures. Capital expenditures totaled $3.1 million, $12.4
million and $7.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Capital expenditures include the investment in technology,
furniture and equipment, and leasehold improvements. Management expects
capital expenditures in 1998 to exceed $10 million, exclusive of Year 2000
project costs described under "Year 2000 Disclosure".

Dividends. Federated is a holding company and, as such, its ability to pay
dividends is subject to the ability of its subsidiaries to provide cash to the
holding company. After the Merger, the declaration and payment by Federated of
dividends on its Common Stock and the amount thereof will depend upon its
results of operations, financial condition, cash requirements, restrictions
imposed by lenders, future prospects and other factors deemed relevant by the
Board of Directors. Beginning in 1998 Federated adopted a policy to declare
and pay cash dividends on a quarterly basis. Under the Senior Secured Credit
Agreement, the most restrictive of Federated's debt facilities, at March 31,
1998, $3,260,000 was available for payment of dividends. On April 30, 1998,
cash dividends in the amount of $3,170,000 were paid. Federated is seeking to
amend the provisions of the Senior Secured Credit Agreement regarding
dividends and other distributions to permit the payment of regular quarterly
cash dividends at a level comparable to that paid in the second quarter of
1998 and to amend certain other covenants and provisions.

Under the Note Purchase Agreement the Trust is restricted from making
certain payments, including the payment of dividends, unless (1) such payments
do not exceed the sum of $5,000,000 plus 50% of the Trust's net income during
the period from January 1, 1996 to and including the date of payment and (2)
after giving effect to the payment, the Trust is not in default or potentially
in default of the Note Purchase Agreement. At March 31, 1998, $36,913,000 was
available for the payment of dividends under the provisions of the Note
Purchase Agreement. See Note 10 to the Consolidated Financial Statements.

Debt Facilities. Federated has the following recourse debt facilities:
Senior Secured Credit Agreement and Note Purchase Agreement.

Senior Credit Facility. The Senior Secured Credit Agreement dated January
31, 1996, as amended, consists of two separate facilities, the term loan and
the revolving credit facility, with a maturity date of January 31, 2001. The
outstanding balance and amount available to borrow under the Senior Secured
Credit Agreement at March 31, 1998 was zero and $149.0 million, respectively.
The term loan facility was prepaid and eliminated in October 1997 as part of
the transaction related to the B share financing. Federated continues to
maintain a $150 million line of credit which may be utilized for working
capital purposes and to fund possible acquisitions.

Any funds advanced under the Revolving Facility will bear interest at a
variable rate, based on one of three interest rate options. The Trust may
choose to pay interest on the outstanding unpaid principal at (a) the Base
Rate Option; (b) the Euro-Rate Option; or (c) the PNC Quoted Rate Option.
Funds which accrue interest on the basis of the Base Rate Option will accrue
interest at a rate equal to the greater of (a) the interest rate per annum
announced from time to time by PNC as its then prime rate, or (b) the Federal
Funds Effective Rate plus one-half percent (.05%) per annum. Funds which
accrue interest on the basis of the Euro-Rate Option will accrue interest at a
rate derived from the average of the Euro-Rates set forth on the "LIBO" page
of Reuters Monitor Monthly Rate Service plus the Euro-Rate Margin. The Euro-
Rate Margin varies according to the ratio of the Trust's debt to cash flow
from operations. Funds which accrue interest on the basis of the PNC Quoted
Rate Option will accrue interest at the interest rate offered by PNC on each
business day. Except as specifically allowed in the Senior Secured Credit
Agreement or waived by the Lenders, the Trust covenants that neither it nor
any of its subsidiaries will: (1) pay front-end marketing fees to broker-
dealers with respect to any mutual fund for which the Trust or any of its
subsidiaries serves as an advisor, an administrator, a distributor, a transfer
agent, a portfolio

36
<PAGE>

or fund accountant, or a clearing servicer; (2) execute guaranties or make
other loans and investments; (3) sell, convey, assign, lease, abandon or
otherwise dispose of any assets; (4) enter into or carry out any transaction
except upon arm's-length terms; (5) fail to satisfy the requirements of or
take any action required under ERISA or the Code; (6) rent or lease real or
personal property other than office space except under the usual and customary
terms and in the ordinary course of business, provided that aggregate rent
under such leases shall not exceed $10,000,000 in any fiscal year; (7) make
capital expenditures exceeding $15,000,000 in any fiscal year; or (8) make any
material change in the conduct or operation of business or make any change in
its fiscal year. Federated was in compliance with all such covenants at March
31, 1998 and at December 31, 1997.

In addition, the Senior Secured Credit Agreement prohibits the Trust and its
subsidiaries from dissolving, liquidating, winding-up, acquiring substantially
all of the assets or capital stock of any other person, or entering into a
merger or consolidation except under specified circumstances. The Merger of
the Trust into the Company is a permitted transaction. The Senior Secured
Credit Agreement also stipulates that the Trust shall not permit any change in
ownership except as explicitly allowed under the Senior Secured Credit
Agreement; the Senior Secured Credit Agreement allows a change in ownership in
a number of scenarios, including the issuance of Class B Common Stock in the
Offering. The consent of the lenders will be required to permit the
consummation of the Merger and the Offering.

The Senior Secured Credit Agreement also prohibits the Trust from allowing
certain financial ratios to fall below minimum thresholds established in the
Senior Secured Credit Agreement and restricts the Trust from incurring
additional debt or liens on its property or assets. The Senior Secured Credit
Agreement also restricts the Trust from making any dividend payment unless (1)
the Trust is not in default or potentially in default, as defined by the
Senior Secured Credit Agreement; (2) certain minimum financial ratios are
maintained after giving effect to the dividend payment; and (3) such dividend
payments with respect to Common Shares do not exceed $5,000,000 in any fiscal
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Capital Resources and Liquidity--Debt Facilities" and
Note 10 to the Consolidated Financial Statements.

Senior Secured Notes. Pursuant to the Note Purchase Agreement dated June 15,
1996, the Trust issued 7.96% Senior Secured Notes due June 27, 2006 to the
various Note Purchasers party to that agreement in the aggregate principal
amount of $98,000,000. The Senior Secured Note Purchase Agreement debt totaled
$98.0 million as of December 31, 1997 and is due in seven annual $14.0 million
installments beginning June 27, 2000, and maturing June 27, 2006.

Under the terms of the Note Purchase Agreement, the Trust may not (1) allow
certain indebtedness described in the Note Purchase Agreement to exceed the
greater of 50% of consolidated cash flow or $25,000,000; (2) incur or allow
any subsidiary to incur any lien other than those explicitly allowed under the
Note Purchase Agreement; (3) fail to maintain certain financial ratios; (4)
make any sale, transfer, lease, loan or other distribution of assets, except
as allowed under the Note Purchase Agreement; (5) permit any material change
in management; or (6) engage in any transactions with any affiliate except in
the ordinary course of business. In addition, the Note Purchase Agreement
prohibits the consolidation or merger of the Trust or any of its subsidiaries
into any other entity, except that (1) a subsidiary of the Trust may merge
into the Trust, or (2) the Trust may merge into another entity if the Trust is
not the surviving company, the surviving company assumes the obligations of
the Trust under the Note, and after giving effect to the merger, no event of
default shall have occurred under the Note Purchase Agreement.

Capitalized Lease Obligations. At December 31, 1997, Federated had
capitalized lease obligations totaling $1.2 million related to certain
telephone equipment. The scheduled principal payments approximate $0.2 million
per year for 1998 through 2002.

Nonrecourse Debt. Federated also has nonrecourse debt obligations,
aggregating $185.4 million at December 31, 1997, incurred in connection with
the sale of rights to certain future revenue streams associated with the B
share advance commissions. This debt will be repaid or amortized based solely
on certain cash flows related to B-share assets. See Note 6 to the
Consolidated Financial Statements.

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<PAGE>

Offering. As a condition to the consummation of the Merger, Federated is
required to complete this Offering of shares of Class B Common Stock of the
Company, including shares held by Selling Shareholders. The Company is
offering 2,610,000 shares of Class B Common Stock for sale in this Offering
(3,000,000 shares if the Underwriters' over-allotment options are exercised in
full). The net proceeds to be received by the Company will be used for working
capital and other general corporate purposes and will serve to enhance
Federated's liquidity by providing increased capital resources.

YEAR 2000 DISCLOSURE

Federated utilizes software and related technologies throughout its
businesses including both proprietary systems as well as those provided by
outside vendors. Significant functions such as portfolio
accounting/recordkeeping and shareholder services rely on systems provided by
outside vendors. It is anticipated that these systems will be affected by the
date change in the year 2000. The year 2000 issue exists because many computer
systems and applications currently use two-digit date fields to designate a
year. As the century date change occurs, certain date-sensitive systems may
recognize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the year 2000 may cause systems to process critical financial
and operational information incorrectly. Federated, like many other companies,
is expected to incur expenditures over the next two years to address this
issue.

Federated formed a team of employees in 1997 to determine the full scope and
related costs to ensure both proprietary and third party vendor systems will
be year 2000 compliant, meeting both internal needs and those of our
customers. Federated's assessment of internal systems is substantially
complete and plans are in place for all proprietary applications within
Federated to be renovated or replaced. Completion of renovation or replacement
and the subsequent testing and implementation are scheduled for 1998, with
1999 being reserved for industry-wide, cooperative testing. The assessment
process is in progress for the related infrastructure and third party desktop
software products. Based on management's identification of resource
requirements for both plan implementation and overall project management, it
is anticipated that the Year 2000 costs, which are being expensed as incurred,
will be, at a minimum, $10 million for internal systems and do not reflect the
impact of outside vendors to become year 2000 compliant. Accordingly, a final
cost estimate cannot be determined at this time.

INTEREST RATE SENSITIVITY

Federated's revenues are derived almost exclusively from fees which are
based on the values of assets managed or administered. Such values are
affected by changes in the broader financial markets which are, in part,
affected by changing interest rates. In a period of rapidly rising interest
rates, Federated's investment advisory fee revenue from fixed income funds may
be negatively impacted by reduced asset values and redemptions in those funds,
and institutional investors may redeem shares in money market funds to invest
directly in market issues offering higher yields. These redemptions would
reduce Managed Assets, thereby reducing Federated's advisory fee and certain
other revenue.

ECONOMIC AND MARKET CONDITIONS

The financial markets and the investment management industry in general have
experienced record performance and record growth in recent years. For example,
between January 1, 1995 and December 31, 1997, the S&P 500 Index appreciated
at a compound annual rate in excess of 25% while, according to the Investment
Company Institute, equity mutual fund assets under management grew at a
compound annual rate of approximately 40% for the same period. The financial
markets and businesses operating in the securities industry, however, are
highly volatile and are directly affected by, among other factors, domestic
and foreign economic conditions and general trends in business and finance,
all of which are beyond the control of Federated. There can be no assurance
that broader market performance will be favorable in the future. Any decline
in the financial markets or a lack of sustained growth may result in a
corresponding decline in performance by Federated and may adversely affect
Managed and Administered Assets and related fees.

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<PAGE>

IMPACT OF INFLATION

The major sources of revenue for Federated are based on the value of Managed
and Administered Assets. There is no predictable relationship between the rate
of inflation and the value of assets managed or administered by Federated,
except as inflation may affect interest rates. Inflation has affected the cost
of operations in the past and could continue to do so in the future. See
"Interest Rate Sensitivity".

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components.
Comprehensive income includes net income and all other changes in
shareholders' equity except those resulting from investments and distributions
to owners.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning
after December 15, 1997. This statement requires financial and descriptive
information about an entity's operating segments to be included in the annual
financial statements.

Federated believes that the impact of the adoptions of SFAS No. 130 and SFAS
No. 131 will not have a material impact on its Consolidated Financial
Statements.

39
<PAGE>

BUSINESS

OVERVIEW

Federated manages assets across a wide spectrum of asset categories
including substantial participation in fast-growing areas such as equity and
international investments. Federated ranks among the industry leaders for
money market and fixed income funds, based on assets under management and
offers one of the most comprehensive product lines in the industry. Many of
Federated's products are ranked highly by recognized industry sources based on
investment performance relative to peer funds.

Federated has built a national reputation as a high quality provider of a
broad range of investment management products and related financial services.
Federated distributes its products through financial intermediaries such as
banks, brokers and other investment advisers who use them to meet the needs of
their customers; these customers include retail investors, corporations, and
retirement plans. Federated employs one of the largest sales forces directed
to financial intermediaries and institutions in the industry with more than
175 sales representatives and managers across the United States. Through
substantial investments in distribution over the last 20 years, Federated has
developed an extensive network of over 3,500 financial institutions which sell
Federated's products to their customers. Federated also directly sells its
products to more than 500 institutions such as corporations and government
entities.

Federated pioneered the use of money market funds by institutions for cash
management purposes and ranks in the top one percent of money fund managers.
Federated believes that its substantial money market fund business provides a
revenue base that is generally stable and recurring. From this base, Federated
intends to continue to expand its Managed Assets in areas such as equities and
international investments which generally produce higher fee revenue and have
experienced substantial growth. Federated believes that its history as a
leading investment manager combined with the size and quality of the
distribution network it has developed will enable it to continue to expand its
business in these key areas. Federated also continues to actively seek
acquisitions which fit within its long range growth strategy by expanding
assets under management.

The following table shows Federated's Managed Asset composition for the past
three years:

MANAGED ASSETS
(Dollars in Millions)

<TABLE>
<CAPTION>
DECEMBER 31, GROWTH RATES
----------------------- ---------------
3 YR.
1995 1996 1997 CAGR* 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Money Market Funds/Cash Equivalents.. $40,610 $51,163 $63,622 26% 24%
Fixed Income Funds................... 14,330 14,109 15,067 2% 7%
Equity Funds......................... 5,287 7,594 11,710 44% 54%
Separate Accounts.................... 1,486 1,976 2,141 19% 8%
------- ------- -------
Total Managed Assets............... $61,713 $74,842 $92,540 22% 24%
======= ======= =======
International/Global Managed Assets
(included above).................... $ 404 $ 694 $ 1,172 35% 69%
======= ======= =======
</TABLE>

- --------
* Compound Annual Growth Rate.

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<PAGE>

The components of the changes in equity and fixed income fund managed assets
are shown in the following table:

COMPONENTS OF CHANGES IN EQUITY AND FIXED INCOME FUND MANAGED ASSETS
(Dollars in Millions)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
EQUITY FUNDS
Beginning Assets........................... $ 3,927 $ 5,287 $ 7,594
---------- ---------- ----------
Sales..................................... 1,636 2,755 4,017
Redemptions............................... (1,310) (1,672) (2,196)
---------- ---------- ----------
Net Sales................................ 326 1,083 1,821
---------- ---------- ----------
Net Exchanges............................. 38 75 128
Acquisition Related....................... 0 123 353
Other*.................................... 996 1,026 1,814
---------- ---------- ----------
Ending Assets.............................. $ 5,287 $ 7,594 $ 11,710
========== ========== ==========
FIXED INCOME FUNDS
Beginning Assets........................... $14,106 $14,330 $14,109
---------- ---------- ----------
Sales..................................... 3,256 3,856 4,584
Redemptions............................... (4,312) (4,243) (4,416)
---------- ---------- ----------
Net Sales (Redemptions).................. (1,056) (387) 168
---------- ---------- ----------
Net Exchanges............................. (6) (137) (72)
Acquisition Related....................... 0 111 175
Other*.................................... 1,286 192 687
---------- ---------- ----------
Ending Assets.............................. $14,330 $14,109 $15,067
========== ========== ==========
</TABLE>
- --------
* Primarily reinvested dividends and distributions, net investment income and
changes in the value of securities held by the funds.

Federated is also a leading provider of mutual fund administrative services
such as legal support and regulatory compliance, audit, fund accounting and
other financial services and transfer agency services. Federated provides
these services, for which it receives administration and other service fees,
to its managed funds and to funds sponsored by third parties, primarily banks
where typically the services are part of a broad customer relationship which
includes asset management. Federated had over $7.2 billion in assets under
management from its mutual fund services customers as of December 31, 1997.
Federated has refocused its service activities to emphasize the growth of
Managed Assets and Administered Assets rather than marketing individual
services such as transfer agency, portfolio accounting and technology
solutions as stand-alone products. Federated believes that this refocus will
better support the efforts of its customers to increase their assets,
resulting in an increase in Federated's revenue.

ADMINISTERED ASSETS
(Dollars in Millions)

41
<PAGE>

BUSINESS STRATEGY

Federated pursues a multi-faceted business strategy having three broad
objectives:

. To be widely recognized as a world class investment management company
that offers highly competitive performance and disciplined risk
management while consistently adhering to its investment objectives
across a broad spectrum of investment management products.

. To profitably expand Federated's market penetration by increasing its
assets under management in each market where it chooses to apply its
substantial distribution resources.

. To use its substantial experience and expertise to profitably expand its
customer relationships by providing superior services designed to support
the growth of Managed Assets and Administered Assets.

Investment Management. To achieve its investment management objectives,
Federated seeks above average returns with below average risk in multiple
asset classes across the investment spectrum and strives to consistently
following its style disciplines. 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 related to portfolio composition, risk and investment
performance. Federated follows a disciplined investment process consistent
with these requirements. Many of Federated's fund products have been ranked
among the leaders in their respective categories by recognized industry
sources.

Historically, Federated's mix of Managed Assets has been dominated by money
market and other fixed income assets where Federated continues to be among the
leading mutual fund managers based on assets under management. More recently,
in response to market demand and to diversify its managed assets, Federated
has emphasized growth of its equity fund business and has broadened its range
of equity products to include international, aggressive growth, and small
capitalization equity products. Within Federated's managed asset categories,
equity fund assets have been the fastest growing asset class. Federated has
increased its market share of equity fund managed assets by growing at a
faster rate than the overall industry as measured by growth rates over the
last three years, according to ICI data.

EQUITY FUND GROWTH RATES
THROUGH YEAR END 1997

<TABLE>
<CAPTION>
3 YR. 2 YR.
CAGR CAGR 1997
----- ----- ----
<S> <C> <C> <C>
Federated................................................ 44% 49% 54%
Industry................................................. 40% 38% 37%
</TABLE>

Distribution. Federated's distribution strategy is to provide products
geared to financial intermediaries, primarily banks, broker/dealers and
investment advisers, and directly to institutions such as corporations and
government entities. Through substantial investments in distribution over the
last 20 years, Federated has developed selling relationships with more than
3,500 institutions, including large and small banks, national and regional
broker/dealers and other financial advisors. Federated sells its product
directly to another 500 corporations and government entities. Federated
believes that these relationships in total form one of its most important
assets.

Federated seeks to expand its market penetration by committing extensive
resources to maintaining and expanding its customer relationships and to
developing mutual fund products which are responsive to market demands.
Through its large trained sales force of more than 175 sales representatives
and managers across the United States, Federated believes that it can continue
to broaden its distribution capacity both by adding new relationships and
strengthening existing relationships. Federated offers the sales
representatives of its client firms an extensive product line with attractive
pricing and compensation options, strong customer service, and marketing
support. Distribution resources are employed in areas determined by Federated
to offer the highest potential for profitable asset growth. Federated has
formed teams of dedicated sales representatives to focus on

42
<PAGE>

key financial intermediaries who have demonstrated substantial growth in sales
of Federated's products. Federated has also increased its commitment to
advertising and media relations in order to better position Federated within
its various distribution channels. To supplement its distribution channel
growth, Federated has also developed an active acquisitions effort, resulting
in the completion of three transactions since November, 1996 that added
approximately $4.8 billion in Managed Assets. See "Recent Acquisitions."

Services. Federated has long been the provider of a broad range of services
to support the operation, administration and distribution of Federated-
sponsored mutual funds. These services, for which Federated receives a fee
from the funds, include legal support and regulatory compliance, audit,
portfolio accounting and other funds financial services, transfer agency
services, and shareholder servicing and support. In 1988, in response to
demand from its important bank customer base, Federated began to offer these
services to institutions seeking to outsource all or part of their mutual fund
service and distribution functions. Through various subsidiaries, Federated
provides its depth, experience, and expertise in these areas to expand its
relationships with key financial intermediaries--primarily banks who sponsor
proprietary mutual funds.

Federated's business strategy is to use the knowledge base, service
expertise, distribution capability and products it has developed to help its
customers grow their mutual fund businesses, thereby positioning Federated as
a key partner in the mutual fund operation of the financial intermediary.
Federated receives fees from these bank-sponsored funds for providing fund
services. Typically, the services provided are part of a broad relationship
with the bank. Federated has over $7.2 billion in assets under management from
its bank services customers as of December 31, 1997. Over 90% of Federated's
bank services customers include Federated-sponsored mutual funds on the menu
of funds offered to their customers.

Recent Acquisitions. Federated has completed three acquisitions since
November, 1996 which together resulted in an increase of approximately $4.8
billion in Managed Assets. In November, 1996, Federated assumed the investment
management and distribution responsibilities from Lehman Brothers Holdings,
Inc. for nine mutual funds with approximately $4.0 billion in assets which
previously carried the Lehman Brothers brand name. Also in November 1996,
Federated assumed the investment management and distribution responsibilities
from ARM Financial Group for six mutual funds with approximately $237 million
of assets which previously carried the State Bond brand name. In May, 1997,
Federated assumed the investment management and distribution responsibilities
from the William Penn Company for seven mutual funds with approximately $548
million in assets which previously carried the William Penn brand name.

Federated believes that its disciplined investment management style, broad
product line, competitive fund performance, strong customer support and proven
operational capabilities offer an attractive package that addresses key
concerns of sellers. Federated also offers its substantial distribution
capacity to sellers who have developed attractive products but have been
unable to make the large ongoing investments necessary for successful product
distribution on a broad scale.

ORGANIZATION AND MARKETS

Federated organizes its operations into three principal functions:
investment management, distribution and services.

INVESTMENT MANAGEMENT

At December 31, 1997, Federated was ranked by Strategic Insight, a
recognized industry source, in the top one percent of money market fund
managers, in the top five percent of fixed income fund managers and in the top
six percent of equity fund managers among U.S. mutual fund managers ranked
according to fund assets managed. Federated was ranked in the top two percent
of all mutual fund managers based on total fund assets managed. Federated was
the ninth largest U.S. mutual fund manager based on fund assets as of December
31, 1997.

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<PAGE>

Federated manages assets across a wide spectrum of asset categories
including substantial participation in fast-growing areas such as equity and
international investments. Many of Federated's products are ranked highly by
recognized industry sources based on investment performance relative to peer
funds. As of December 31, 1997, Federated had 80 managed funds eligible for
Morningstar, Inc. ratings. Of these funds, 73 (or 91%) are rated "three,"
"four" or "five" stars, and 39 (or 49%) are rated "four" or "five" stars,
placing Federated among the leaders in the mutual fund industry for percentage
of top-rated funds.

Federated's principal source of revenue is investment advisory fees earned
by various subsidiaries and affiliates pursuant to investment advisory
contracts with the funds. These subsidiaries and affiliates are registered as
investment advisers under the Advisers Act. Investment advisers are
compensated for their services in the form of investment advisory fees. Each
fund has a contractual gross maximum investment advisory fee. In order to meet
the funds' expense cap, the adviser may waive a portion or all of its
investment advisory fee.

Federated provided investment advisory services to 124 funds as of December
31, 1997. Each of Federated's funds (with the exception of a collective
investment trust) is registered under the Investment Company Act and under
other applicable federal and state laws. Each of the funds enters into an
advisory agreement subject to periodic review by the directors or trustees of
the respective funds. A significant portion of Federated's revenue is derived
from advisory agreements with mutual funds that are terminable generally upon
60 days' notice.

Of these 124 funds, Federated's investment advisory subsidiaries managed 51
money market funds (and cash equivalents) totaling $63.6 billion in assets, 43
fixed income funds with $15.1 billion in assets and 30 equity funds with $11.7
billion in assets.

Due to the importance of investment performance to the mutual fund investor,
and to support its sophisticated and systematic research process, Federated
seeks to identify and retain high quality, experienced portfolio managers. The
portfolio management staff of more than 80 professionals includes more than 35
Chartered Financial Analysts. Federated's fund portfolio managers have an
average of 10 years of experience in investment management. The Company has
structured its salary and incentive compensation programs to be competitive
with market pay programs as measured by recognized industry sources. In 1995,
Federated made a major commitment to expanding its investment management
capability by establishing a New York-based global investment management unit
to focus, in particular, on the development of new global and international
equity and fixed income investment products. As of December 31, 1997, this
unit employed 19 investment professionals and managed approximately $1.2
billion in assets as compared to approximately $424 million at the inception
of the group in 1995.

Equity. Historically, Federated's mix of Managed Assets has been dominated
by money market and other fixed income assets where the Company continues to
be among the leading mutual fund managers based on assets under management.
More recently, in response to market demand and to diversify its managed
assets, Federated has emphasized growth of its equity fund business. Equity
fund assets comprised 44% of Federated's non-money market fund Managed Assets
at the end of 1997, as compared to 18% at year end 1993.

Federated has broadened its range of equity products to include
international, aggressive growth, and small capitalization funds. The number
of equity funds managed by Federated has increased from 18 at year end 1993 to
30 at year end 1997. Federated has made significant investments to increase
the size of its portfolio management staff, in particular by forming its
Global Research Division.

Within Federated's Managed Asset categories, equity fund assets have been
the fastest growing asset class. In 1997, Federated's equity fund assets
increased 54% compared to an industry growth rate of 37%, based on ICI data.
Since 1994, Federated's equity fund compound annual growth rate has been 44%,
compared to industry growth rate of 40%. In this period, Federated's equity
fund assets nearly tripled, increasing from $3.9 billion to $11.7 billion.
Approximately 40% of this increase was from net new sales (sales minus
redemptions), and 9% was from net fund exchanges and an acquisition while
market appreciation accounted for most of the remaining increase. The
composition of Federated's growth in this period includes a greater percentage
of net sales (40%)

44
<PAGE>

than the industry composition (36%). In 1997, 44% of Federated's managed
equity fund asset growth was from net new sales compared to an overall
industry average of 34%. Federated believes that the quality and consistency
of its equity fund management style, its expanded menu of equity fund
products, and its substantial distribution capabilities have enabled it to
gain market share of equity fund managed assets.

In the equity management area, Federated's core style can be characterized
as a value style. Federated has also developed expertise in other sectors such
as growth, small-capitalization, and equity income. Federated combines first-
hand market knowledge with a highly structured, computer-assisted composite
equity selection and modeling system. Federated uses a team of portfolio
managers led by a senior portfolio manager for each fund. Federated's
investment research process combines disciplined quantitative screening along
with rigorous fundamental analysis to identify attractive securities.
Portfolios are continually reevaluated with respect to valuation, price and
earnings estimate momentum, company fundamentals, market factors, economic
conditions and risk controls in order to achieve specific investment
objectives.

As of December 31, 1997, Federated managed approximately $4.6 billion in
value-based securities, $3.8 billion in equity income/utility portfolios, $1.1
billion in growth products, $727 million in international equity portfolios,
$677 million in asset allocation funds, and $1.7 billion in indexed products
that target key sectors of the stock market through max-cap, mid-cap, and
mini-cap strategies.

International. Assets invested in international and global funds have
increased substantially in recent years. According to the ICI, assets of
international and global equity and bond funds totaled $388 billion at the end
of 1997, up 69% from 1995. Federated believes that these investments will
continue to increase as investors continue to diversify portions of their
portfolios into non-U.S. securities. International products have become
increasingly important products for financial intermediaries to employ in
meeting the needs of their customers.

To address these trends, in 1995 Federated made a substantial commitment to
developing international investment products by starting its New York-based
unit to manage international equity and fixed-income assets. Prior to the
inception of this unit, Federated employed a subadvisor to assist in the
management of approximately $400 million in assets in two international funds.
Since the inception of this unit, as of December 31, 1997, international and
global Managed Assets have increased to approximately $1.2 billion; of this
amount international equities totaled approximately $725 million while
international and global fixed income assets were approximately $430 million.

Federated's international equity fund offerings cover the spectrum of
investments from developed to emerging markets and from large to small
capitalization stocks. Federated's international equity management style can
be characterized as a combination of growth and value. In the international
fixed income area, Federated manages both yield-oriented and total return
oriented funds. Federated's portfolio managers make extensive use of
quantitative techniques in the management of these funds and they travel
extensively around the world in both developed and emerging nations. These
portfolio managers average over 13 years of investment management experience.

Risk is managed through a combination of diversification across markets,
industries and currencies. Portfolios are actively managed through security
and country selection. Although currency hedging may be used on an occasional
basis, currency risk is not hedged under normal market conditions, and hedging
techniques are not used for speculative purposes.

Money Market Funds. Federated is the third largest U.S. manager of money
market funds with over $63 billion in assets under management as of December
31, 1997. The Company 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 twenty years and created the first
institutional money market fund in 1976. Federated also manages retail money
market fund products which are typically distributed through broker dealers.

45
<PAGE>

Federated manages money market fund assets in a variety of asset classes
including government ($35.5 billion), prime ($16.7 billion), and tax-free
($10.9 billion). Federated offers 16 state specific tax-free money market
funds, the largest number in the industry.

Money market funds have grown steadily over the past three years. For the
three years 1995 through 1997, industry money market fund assets as measured
by the ICI have increased from $611 billion to $1.1 trillion, a compound
annual growth rate of approximately 20%. In this period, Federated's money
market fund managed assets have grown faster than the industry rate,
increasing at more than 26% compounded annually. Federated's managed money
market fund assets more than doubled in this period, increasing from $31.5
billion to $63.6 billion.

Federated attributes its growth to multiple factors, including growth in the
number of customers, asset growth from existing customers, the acquisition of
money market fund assets, and an increase in retail money market fund assets
due largely to Federated's success at incorporating its retail money market
funds into the product line of many of its broker/dealer distributors.

Federated believes that its substantial money market fund business provides
a revenue base that is generally stable and recurring. In allocating
investments across various asset classes, institutional investors typically
maintain a portion of their portfolios in cash or cash equivalents, including
money market funds, irrespective of trends in stock or bond markets.
Therefore, Federated believes that money market funds are generally less
vulnerable to volatility in the capital markets than are equity and fixed
income funds.

Management of large scale money market assets has become highly concentrated
and is subject to intense fee competition. Federated has developed its money
market fund operations and infrastructure over many years and believes that
its structure will enable it to continue to compete effectively for this
business.

Fixed Income. Federated managed over $15 billion in fixed income funds as of
December 31, 1997. These assets are managed in a wide range of sectors across
the fixed income investment spectrum including mortgage-backed ($5.9 billion),
high yield ($3.1 billion), tax-free ($2.1 billion), general investment grade
($1.8 billion), government ($1.5 billion) and international ($260 million).

Federated's fixed income funds offer fiduciaries and others a broad range of
highly defined products designed to meet many of their investment needs and
requirements. Fiduciaries typically have stringent requirements related to
portfolio composition, risk and investment performance. Federated follows a
disciplined investment process to produce highly defined products consistent
with these requirements. Many of the fixed income funds managed by Federated
are constrained by narrowly defined effective average maturity or duration
bands within specific yield curves. These funds are limited to investments in
specific areas such as municipal, government/government agency,
corporate/asset-backed or mortgage-backed securities. For example, the
Federated U.S. Government Securities Fund: 1-3 Years is constrained to direct
government and certain government agency debt issues with an average portfolio
maturity of 1.5-2 years.

In other funds, debt securities from various areas are combined to form
mixed category funds. For example, the Federated Bond Fund and Federated
Strategic Income Fund combines debt securities from the mortgage-backed,
domestic high quality, U.S. high yield corporate, and international bonds from
both emerging and developed countries. In general, these funds are also
constrained by an effective average maturity or duration range applied to the
blended portfolio. Through these funds, Federated offers products that provide
the benefit of diversification across fixed income areas while maintaining the
average maturities and duration ranges that are particularly important to
fiduciaries.

In the fixed income fund area, the mutual fund industry has experienced a
shift in demand for products. According to the ICI, at the end of 1993, total
industry assets in fixed income funds was $761 billion, as compared to $749
billion in equity funds. Through 1997, equity fund assets have increased by
220% to $2.4 trillion while fixed income bond and income funds have increased
35% to $1.0 trillion. Within the broad category

46
<PAGE>

of fixed income funds, certain asset categories have experienced substantial
asset decreases while others have grown. Generally, funds invested in
government bonds and mortgage-backed securities decreased in assets while high
yield, corporate, and mixed-category funds increased. In 1993, Federated asset
mix within fixed-income was weighted towards the government and mortgage
categories, which together comprised nearly 77% of managed fixed income fund
assets.

In response to these substantial changes in demand driven by unprecedented
bond market conditions, Federated diversified its fixed income offerings by
adding new mixed category products such as the Federated Strategic Income Fund
(rated "four" stars by Morningstar, Inc.), and by emphasizing its high yield
products such as Federated High Yield Trust and Federated High Income Bond
(each rated "five" stars by Morningstar, Inc.) where Federated has built a
long-term record of competitive returns since 1977. Federated has
substantially increased its assets under management in these areas, thereby
diversifying its fixed income fund Managed Assets. Since 1993, Federated's
Managed Assets in high yield, corporate and mixed fixed income fund categories
have increased 267% from $1.4 billion to $5.0 billion, while Managed Assets in
government and mortgage-backed fixed income fund products decreased 53% from
$15.4 billion to $7.2 billion.

Fund Performance. Although past performance is not necessarily indicative of
future results, among the most important factors affecting the marketability
of a mutual fund is its past performance. While consistently strong investment
performance may not be sufficient by itself to achieve marketing success in
the mutual fund industry, consistently poor performance would make it
difficult to increase or maintain market share.

Federated's managed funds have attained many favorable rankings by
independent evaluators of mutual fund performance. Funds in the growth and
income, equity income, high yield, international, mixed bond, municipal,
government and corporate bond areas have been ranked among the top performing
funds in their respective categories by recognized industry sources. Many of
Federated's institutional money market and fixed income funds have received
the highest ratings given by national rating agencies. As of December 31,
1997, Federated had 80 managed funds eligible for Morningstar, Inc. ratings.
Of these funds, 73 (or 91%) are rated "three," "four" or "five" stars, and 39
(or 49%) are rated "four" or "five" stars, placing Federated among the leaders
in the mutual fund industry for percentage of top-rated funds.

DISTRIBUTION

Federated's distribution strategy is to provide products geared to financial
intermediaries, primarily banks, brokers/dealers and other investment
advisers, and directly to institutions such as corporations and government
entities. Through substantial investments in distribution over the last twenty
years, Federated has developed selling relationships with more than 3,500
institutions, including large and small banks, national and regional
brokers/dealers and other financial advisors. Federated sells its products
directly to another 500 corporations and government entities. Federated
believes that these relationships in total form one of its most important
assets.

Federated seeks to expand its market penetration by committing extensive
resources to maintaining and expanding its institutional customer
relationships and to developing mutual fund products which are responsive to
market demands. Through its large trained sales force of more than 175 sales
representatives and managers throughout the United States, Federated believes
that it can continue to increase its distribution capacity by both adding new
relationships and strengthening existing relationships. Federated offers the
sales representatives of its client firms an extensive product line with
attractive pricing and compensation options, strong customer service, and
marketing support. Distribution resources are employed in areas determined by
Federated to offer the highest potential for profitable asset growth.

Shares of the portfolios or classes of shares under management (or
administration) by Federated and its subsidiaries are distributed principally
by Federated Securities Corporation ("FSC"), a wholly-owned subsidiary of
Federated, which is registered as a broker/dealer under the Exchange Act and
under applicable state laws.

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<PAGE>

Federated's investment products are distributed within three principal
markets: the bank trust market, the broker/dealer market, and the
institutional market. The following chart shows Federated's Managed Assets by
market for the dates indicated:

MANAGED ASSETS BY MARKET
(Dollars in Millions)
<TABLE>
<CAPTION>
DECEMBER 31, GROWTH RATES
----------------------- ---------------
3 YR.
1995 1996 1997 CAGR 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Bank Trust Market..................... $32,430 $40,123 $49,662 20% 24%
Broker/Dealer Market.................. 19,992 22,098 28,256 24% 28%
Institutional Market.................. 5,910 9,750 11,343 44% 16%
Other Markets......................... 3,381 2,871 3,279 0% 14%
------- ------- -------
Total Managed Assets by Market...... $61,713 $74,842 $92,540 22% 24%
======= ======= =======
</TABLE>

BANK TRUST MARKET. As of December 31, 1997, Federated managed nearly $50.0
billion in assets for over 1,400 bank trust customers. Although primarily
composed of bank trust departments, Federated includes its savings and loan
and credit union customers in this market. The following table shows the
amount of Managed Assets by type of fund in the bank trust market for the
dates indicated:

BANK TRUST MARKET
(Dollars in Millions)
<TABLE>
<CAPTION>
DECEMBER 31, GROWTH RATES
----------------------- ----------------
3 YR.
1995 1996 1997 CAGR 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Money Market Funds/Cash
Equivalent............... $24,717 $31,944 $40,897 25% 28%
Fixed Income Funds........ 5,748 5,336 5,070 (6%) (5%)
Equity Funds.............. 1,965 2,843 3,695 33% 30%
------- ------- -------
Total Bank Trust Market. $32,430 $40,123 $49,662 20% 24%
======= ======= =======
</TABLE>

Federated pioneered the concept of providing cash management to bank trust
departments through mutual funds. In 1982, Federated initiated a strategy of
providing a broad range of non-money market funds, termed MultiTrust(TM), to
meet the evolving needs of bank trust departments.

Federated's bank trust customers invest the assets subject to their control,
or upon direction from their customers, in one or more funds managed by
Federated's subsidiaries. These funds are invested in securities that broadly
cover the investment spectrum. The bank trust department can make asset
allocation decisions among equity, fixed income and money market funds. In
addition to personal trust assets, bank trust departments control significant
pension-related assets enabling Federated's products to be applied in this
important area.

Money market funds contain the majority of Federated's Managed Assets in the
bank trust market. 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. Therefore, Federated believes that money market funds are
generally less vulnerable to volatility in the capital markets than are fixed
income and equity funds. However, management of large scale money market
assets has become highly concentrated and is subject to intense fee
competition. Federated also offers an extensive menu of equity and fixed
income mutual funds structured for use in the bank trust market. Assets in
these funds totaled over $8.7 billion as of December 31, 1997.

Federated's nationwide customer base includes nearly all of the largest bank
trust companies in the United States. Federated maintains a national sales
staff and regional administrative teams which work together to assist

48
<PAGE>

bank trust departments in establishing and maintaining the administrative,
legal and computer systems required to utilize fully Federated's complete line
of services.

In addition to a broad menu of competitive mutual fund products suitable for
use by fiduciaries, Federated believes that providing value-added services in
key areas such as sales and marketing, operational, and legal support
differentiates Federated from many of its competitors in this market and is a
significant competitive advantage.

Sales and Marketing. Federated employs a dedicated sales force backed by a
staff of support personnel to facilitate the sales efforts of its bank trust
customers through services such as providing sales literature and product
comparisons, conducting seminars, offering mutual fund sales training and by
providing access to portfolio managers.

Systems and Technology. Federated has a long history of employing technology
to facilitate trust department operations. To facilitate the flow of account
information between Federated and its customers, Federated has developed its
EDGE(TM) computer system. The system, originally developed in 1982, enables
customers to conduct all trading and obtain current information on all
accounts and funds. Customers use the EDGE(TM) network to engage in over $2.5
billion in daily transactions with Federated.

In addition to the EDGE(TM) system, Federated has recently developed its
TrustConnect(TM) trade execution and clearing system through its wholly-owned
subsidiary Edgewood Services Company. This product provides highly automated
trade execution and settlement services ("clearing") for bank trust
departments through electronic links from bank trust recordkeeping systems to
the National Securities Settlement Corporation's FundServ and Networking
Services. By utilizing this system, the bank trust department can conduct
mutual fund trading activity on an automated basis with over 135 fund
companies and have access to over 4,000 mutual funds. The system is linked to
most of the major trust accounting systems used by banks, thereby automating
the process of recording trade information to the bank's customer accounts.
This process results in significant efficiencies for the bank trust department
through automation of a complex manual process. Depending on the fund chosen
by the trust department, Federated receives either a transaction fee or an
asset-based fee for providing these services.

Legal. Federated has assisted bank trust departments in complying with the
complex regulations that govern trust departments. Federated played a
significant role in causing legislation to be enacted on a state-by-state
basis that deemed mutual funds to be equivalent to their underlying securities
from the perspective of the bank trust fiduciary.

Federated believes that these types of operational and legal solutions
differentiate Federated from its competitors by offering value-added services
in addition to its fund products and that these services are a competitive
advantage that enable Federated to strengthen and protect its customer
relationships.

Consolidation in the banking industry has affected the bank trust market in
recent years. Federated believes that it will be able to continue to increase
its Managed Assets in this market as consolidation continues because of the
composition of its customer base which includes nearly all of the largest U.S.
bank trust institutions, the strength of its reputation as a long standing
provider of excellent products and services, and the strength of its long-
standing customer relationships in this market. However, there can be no
assurance that future bank consolidation activity will not negatively impact
Federated.

BROKER/DEALER MARKET. Growth of assets in the broker/dealer market has been
and continues to be a major strategic initiative for Federated. Federated
distributes its products in this market through a large diversified group of
approximately 2,000 national, regional, independent, and bank broker/dealers.
Federated maintains a sales staff dedicated to this market. These sales
representatives develop and maintain relationships with both the management
and registered representatives of the broker/dealer. Over 30,000 of these
registered representatives have sold shares to investors in one or more of
Federated's managed funds in 1997. Brokers/dealers use Federated's products to
meet the needs of their customers, who are typically retail investors.

49
<PAGE>

Brokers also may place fund products into retirement plan applications,
including defined contribution programs such as 401(k) plans. To meet these
needs, Federated offers a broad range of equity, fixed income and money market
fund products in this market.

The following table shows the amount of Managed Assets by type of fund in
the broker/dealer market for the dates indicated:

BROKER/DEALER MARKET
(Dollars in Millions)

<TABLE>
<CAPTION>
DECEMBER 31, GROWTH RATES
----------------------- ---------------
3 YR.
1995 1996 1997 CAGR 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Money Market Funds/Cash Equivalent.... $11,700 $12,618 $15,293 26% 21%
Fixed Income Funds.................... 5,727 5,628 6,566 7% 17%
Equity Funds.......................... 2,565 3,834 6,376 51% 66%
Separate Accounts..................... 0 18 21 -- 17%
------- ------- -------
Total Broker/Dealer Market.......... $19,992 $22,098 $28,256 24% 28%
======= ======= =======
</TABLE>

Within the broker/dealer market, Federated maintains a dedicated sales staff
for bank broker/dealers. Managed Assets from bank broker/dealers totalled
approximately $6.7 billion at December 31, 1997.

Although Federated has developed an extensive broker/dealer distribution
network, certain relationships are of particular significance. Federated has
had a long standing relationship with Edward Jones and maintains a dedicated
sales and broker support team to service brokers from Edward Jones.
Approximately 29% of the assets in this market are from retail customers of
Edward Jones. In addition, Federated participates in a limited partnership
(sharing income and expenses from two funds) with Edward Jones. Approximately
7% of the assets in this market are from retail customers of Merrill Lynch &
Co. through another long standing relationship. Federated employs dedicated
sales and broker support resources to service brokers from Merrill Lynch & Co.
Both of these firms, along with most other large broker/dealer firms, have
established or have the capability to establish their own proprietary mutual
funds.

Federated believes that brokers and other financial intermediaries choose
mutual fund products and providers for their customers based on certain key
criteria including fund performance, consistency of management style,
compensation structures offered, and brand image and quality of the fund
company, including level and quality of support services. Federated has
developed successful relationships with broker/dealers by offering funds with
competitive performance, attractive pricing and broker compensation features
and extensive sales and marketing support and allowances. Federated made a
substantial commitment to advertising and media relations in 1997 and plans to
continue this program. The purpose of this program is to better position
Federated in its various distribution channels. Federated has won numerous
awards from recognized industry sources for the quality of the sales and
support services it provides to financial intermediaries.

Federated offers products with a variety of commission structures that
enable brokers to offer their customers a choice of pricing options. During
August 1994, Federated added a new broker/dealer B shares product to its
mutual fund product line. In order to provide an incentive to the retail
brokers to sell Federated's funds, while at the same time minimizing the
front-end load to the broker's customers, Federated pays an advance commission
to the broker and will receive a back-end fee from the proceeds if such shares
are redeemed prior to six years from the date of investment (contingent
deferred sales charge or "CDSC"). Initially added as new share classes to
three funds, B shares have been expanded to 28 funds as of December 31, 1997.
Assets in these share classes were $4.1 billion at December 31, 1997. See Note
6 to the Consolidated Financial Statements for a description of the financing
arrangement related to B-share sales.

50
<PAGE>

INSTITUTIONAL MARKET. In 1993, Federated established a dedicated sales force
to expand its presence in the direct institutional market. Federated's
strategy is to focus on the distribution of its mutual fund and separate
account management expertise to a wide variety of users: corporations,
corporate and public pension funds, insurance companies, government entities,
foundations, endowments, hospitals, investment advisors, and non-Federated
investment companies. Federated seeks to leverage its customer relationships
and reputation in the market for short-term asset management products to
expand its share of both separate accounts and longer-term equity and fixed
income mutual fund products.

At the inception of this effort in 1993, Federated managed $2.8 billion in
assets from existing customers in that market. Assets have risen to over $11.3
billion at December 31, 1997. The following table shows Managed Assets by type
of fund in the institutional market for the dates indicated.

INSTITUTIONAL MARKET
(Dollars in Millions)

<TABLE>
<CAPTION>
DECEMBER 31, GROWTH RATES
--------------------- ---------------
3 YR.
1995 1996 1997 CAGR 1997
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Money Market Funds/Cash Equivalent...... $2,968 $5,807 $ 6,698 67% 15%
Fixed Income Funds...................... 1,094 1,545 1,825 28% 18%
Equity Funds............................ 387 455 749 53% 65%
Separate Accounts....................... 1,461 1,943 2,071 18% 7%
------ ------ -------
Total Institutional Market............ $5,910 $9,750 $11,343 44% 16%
====== ====== =======
</TABLE>

Within this market, Federated maintains a dedicated sales staff to focus on
independent investment advisers. Independent investment advisers use
Federated's products to meet the needs of their customers who are typically
retail investors. Federated has developed successful relationships with
investment advisers by offering funds with competitive performance, by
providing sales and marketing support, and by making its funds available in
the major "supermarket" mutual fund marketplaces used by investment advisers.
Assets from investment advisers nearly doubled, increasing from approximately
$1.4 billion in at December 31, 1995 to $2.8 billion at December 31, 1997.

A separate sales staff focuses on providing short-term cash management and
separate account management for general account assets, and sub-advisory
services for multi-manager variable annuity products. Federated maintains a
sales staff dedicated to this segment. Assets under management within this
segment were approximately $2.9 billion at December 31, 1997, up from
approximately $1.2 billion at year end 1995.

Short-term fixed income investment management services are also marketed to
corporations and government entities through a dedicated sales force in this
market. These services include money market funds and other low duration fixed
income products for the management of operating funds. Assets managed in this
segment totaled over $4.0 billion at December 31, 1997.

As part of Federated's overall retirement asset management strategy, pension
plan assets are the focus of a dedicated unit within the institutional
distribution channel. While retirement plan assets are pursued through
intermediaries in the bank trust and broker/dealer markets, the pension plan
group in this channel sells investment advisory services directly to
corporations and other sponsors of defined contribution and defined benefit
pension plans. Federated markets bundled and unbundled pension plan services
including investment products and recordkeeping services to corporate and
public pension plan sponsors. Investment advisory services in these
applications may be in the form of separate accounts or mutual fund or other
pooled products, depending upon the specific requirements of the plan sponsor.
Managed Assets in this segment totaled $1.7 billion at December 31, 1997.

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<PAGE>

OTHER MARKETS. Other markets includes primarily affinity group assets from
an historical arrangement with a large affinity group to provide a money
market fund for its members and miscellaneous assets which resulted from
marketing efforts earlier from Federated's history or from acquisitions which
resulted in the management of retail assets. Assets in these categories were
approximately $3.3 billion at December 31, 1997.

SERVICES

Federated has long been the provider of a broad range of services to support
the operation, administration and distribution of Federated-sponsored mutual
funds. These services, for which Federated receives a fee from the funds,
include legal support and regulatory compliance, audit, fund accounting and
other funds financial services, transfer agency services, and shareholder
servicing and support. In 1988, in response to demand from its important bank
customer base, Federated began to offer these services to institutions seeking
to outsource all or part of their mutual fund service and distribution
functions. In 1997, Federated refocused its service capabilities to emphasize
the growth of Managed Assets and Administered Assets, rather than selling
individual services such as transfer agency, portfolio accounting and
technology solutions as stand-alone products.

Federated's business strategy is to use the knowledge base, service
expertise, distribution capability, and products it has developed to help its
customers grow their mutual fund businesses, thereby positioning Federated as
a key partner in the mutual fund operation of the financial intermediary.
Federated receives fees from these third party-sponsored funds for providing
fund services. Typically, the services provided are part of a broad customer
relationship. Federated had over $7.2 billion in assets under management from
its mutual fund services customers as of December 31, 1997. Over 90% of
Federated's fund services customers include Federated-sponsored mutual funds
on the menu of funds offered to their customers.

Service revenues are generated primarily from providing fund administration,
shareholder servicing, trade execution and settlement, retirement plan
services, and information technology support.

Fund Administration Services. Federated offers a complete menu of services
necessary to operate and conduct the day-to-day business operation of a mutual
fund complex. The services include legal administration and compliance,
internal audit, marketing support, information management, product development
and business administration. Federated provides portfolio accounting services
under an agreement with State Street, the industry leader in this area.
Historically, most of Federated's customers have contracted for the complete
administrative services package offered by Federated. Some banks have chosen
to internalize certain fund administration services or purchase individual
service pieces from different vendors, thereby reducing or eliminating the
need to purchase those services from Federated.

Shareholder Services. Through its subsidiary which is a registered transfer
agent, Federated provides mutual fund shareholder recordkeeping and customer
service, including the processing of purchase and redemption orders, entering
trades into the shareholder recordkeeping system, providing trade information
to the portfolio managers and fund accountants, and issuing shareholder
statements and tax forms. These services are provided to investment companies,
retirement plan sponsors, brokers, registered investment advisers, and retail
shareholders.

Trade Execution and Settlement. Federated provides highly automated trade
execution and settlement services ("clearing") for bank trust departments.
Utilizing Federated's TrustConnect(TM) system, bank trust departments can link
their recordkeeping systems to the National Securities Settlement
Corporation's FundSERV(TM) and NETWORKING(TM) systems. This process
facilitates automated mutual funds trading and settlement, trade confirmation
and account position reconciliation.

Retirement Plan Services. Federated provides customers with a full range of
retirement plan services, including integrated recordkeeping and
administrative services and access to Federated's broad menu of funds suitable
for use in retirement plans. As of December 31, 1997, Federated provided
retirement plan services to

52
<PAGE>

more than 600 plans and more than 120,000 participants. In 1997, Federated
restructured its retirement plan recordkeeping product for greater efficiency
by developing a more standardized product offering and by focusing on plans
where funds managed by Federated are used.

Federated believes that it has adopted a prudent approach in the areas of
risk management and technological infrastructure related to its provision of
mutual fund services. For example, in the portfolio accounting area Federated
has entered into an agreement with State Street to provide these services for
both the Federated sponsored funds and third party funds administered by
Federated, which has allowed Federated to reduce the number of employees
required to provide such services. Federated believes that this model provides
for quality service delivery while minimizing potential liability and exposure
to the funds. For transfer agency services and systems, Federated has
positioned itself to provide value added services while leveraging the
capabilities of the DST recordkeeping system. This model enables Federated to
focus its resources on providing customer services without the significant
burden and cost of developing and maintaining a proprietary recordkeeping
system.

Other. Federated Bank & Trust, a state-chartered bank and a wholly-owned
subsidiary of Federated, acts as trustee for a collective investment fund and
for certain plans that use Federated's retirement plan services.

COMPETITION

The mutual fund industry is highly competitive. According to the ICI, at the
end of 1997, there were over 6,800 registered open-end investment companies,
of varying sizes and investment policies, whose shares are currently being
offered to the public both on a load and no-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 and other financial
institutions.

Competition for sales of mutual fund shares is influenced by various
factors, including investment performance in terms of attaining the stated
objectives of the particular funds and in terms of fund yields and total
returns; advertising and sales promotional efforts; and type and quality of
services. Competition is especially strong for cash management products.

Changes in the mix of proprietary fund customers and the array of services
provided to them are expected to continue. Competition for fund administration
services is extremely high. In addition to competing with other service
providers, banks sponsoring mutual funds may choose to internalize certain
service functions. Consolidation within the banking industry also impacts the
fund administration business as merging bank funds typically choose a single
fund administration provider. Due to the relatively lower revenues, changes in
the amount of Administered Assets generally have less impact on Federated's
results of operations than changes in the amount of Managed Assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

REGULATORY MATTERS

Substantially all aspects of Federated's business are subject to federal and
state regulation which, depending upon the nature of any non-compliance, may
result in the suspension or revocation of licenses or registration, including
broker/dealer licenses and registrations and transfer agent 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. Federated's advisory companies are registered with the Commission
under the Advisers Act and with certain states. All of the mutual funds
managed, distributed, and administered by Federated are registered with the
Commission under the Investment Company Act. Certain wholly owned subsidiaries
of Federated, are registered as broker-dealers with the Commission under the
Exchange Act and with various states and are members of the NASD. Their
activities are regulated by the Commission, the NASD, and the various states
in which they are registered. These subsidiaries are required to meet capital
requirements established by the Commission pursuant to the Exchange Act. Two
other subsidiaries are registered with the Commission as transfer agents.
Federated Bank & Trust is regulated by the State of New Jersey. Federated
believes that it and

53
<PAGE>

its subsidiaries are in substantial compliance with all applicable laws and
regulations. Amendments to current laws and regulations or newly-promulgated
laws and regulations governing Federated's operations could have a material
adverse impact on Federated.

Substantially all aspects of Federated's business are subject to various
federal and state laws and regulations. These laws and regulations 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, revocation of
broker/dealer licenses and registrations and transfer agent registrations,
censure and fines.

EMPLOYEES

At December 31, 1997, Federated employed approximately 2,037 persons, which
number has since been reduced as a result of an agreement with State Street.
Federated considers its relationships with its employees to be satisfactory.

FACILITIES

Federated's facilities are concentrated in Pittsburgh, Pennsylvania where it
leases space sufficient to meet its operating needs. Federated's headquarters
is located in the Federated Investors Tower, where Federated occupies
approximately 368,000 square feet. Federated leases approximately 110,000
square feet at Centre City Tower, 60,000 square feet at the Pittsburgh Office
and Research Park and an aggregate of 50,000 square feet at other locations in
Pittsburgh. Federated maintains office space for a portion of its servicing
business in Rockland, Massachusetts; in Dublin, Ireland, where administrative
offices for offshore funds are maintained; in New York, New York, where
Federated Global Research Corp. conducts its business; and in Gibbsboro, New
Jersey, where Federated Bank and Trust is located. Additional offices in
Naples, Florida and Wilmington, Delaware are subleased by Federated.

LEGAL PROCEEDINGS

There is currently no pending litigation of a material nature involving
Federated or its subsidiaries.

54
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names, ages and positions of the directors and executive officers of the
Company as of the consummation of the Merger and the Offering are set forth
below. After the Offering, the Board of Directors of the Company also intends
to select at least two persons to serve as independent directors of the
Company.

<TABLE>
<CAPTION>
YEARS OF
COMPANY
NAME POSITION AGE SERVICE
---- -------- --- --------
<C> <S> <C> <C>
John F. Donahue Chairman and Director 73 42
J. Christopher Donahue President, Chief Executive Officer and 49 25
Director
John W. McGonigle Executive Vice President, Secretary and 59 31
Director
Arthur L. Cherry President, Federated Services Company 44 1
and Director
James F. Getz President--Retail Sales Division of 51 13
Federated Securities Corp. and Director
William D. Dawson III Executive Vice President and Chief 49 22
Investment Officer--Fixed Income of
Federated Advisory Companies*
Thomas R. Donahue Vice President, Chief Financial Officer 39 5
and Director
John B. Fisher President--Institutional Sales Division 41 18
of Federated Securities Corp. and
Director
Richard B. Fisher Executive Vice President 74 42
Henry A. Frantzen Executive Vice President and Chief 55 3
Investment Officer--Global Equity and
Fixed Income of Federated Advisory
Companies*
J. Thomas Madden Executive Vice President and Chief 51 20
Investment Officer--Equity, High Yield
and Asset Allocation of Federated
Advisory Companies*
Eugene F. Maloney Executive Vice President, Federated 53 25
Investors Management Company and
Director
</TABLE>
- --------
* Federated Advisory Companies include the following subsidiaries of the
Company: Federated Advisers, Federated Global Research Corp., Passport
Research Limited, Federated Management, Federated Research, and Federated
Research Corp.

Mr. John F. Donahue has been Chairman and Chief Executive Officer of
Federated and a trustee of the Trust since 1989 and will continue as Chairman
of the Company after consummation of the Merger. He served as President of
Federated from 1989 until 1993 and was a founder of the predecessor to
Federated. Mr. Donahue is chief executive officer and a director or trustee of
the investment companies managed by subsidiaries of the Company. Mr. Donahue
was a member of the Board of Directors of Aetna until April 1995. He is the
father of J. Christopher Donahue and Thomas R. Donahue, each of whom serves as
an executive officer and director of the Company. Mr. Donahue is a graduate of
the U.S. Military Academy, West Point, New York.

Mr. J. Christopher Donahue has been President and Chief Operating Officer of
Federated since 1993 and was previously Vice President. He became President
and Chief Executive Officer on April 20, 1998 and will continue in such
capacities with the Company after the consummation of the Merger. Mr. Donahue
has been a trustee of the Trust since 1989. He is President or Executive Vice
President of the funds and a director, trustee, or managing general partner of
some of the funds. Mr. Donahue is the son of John F. Donahue and the brother
of Thomas R. Donahue. Mr. Donahue is a graduate of Princeton University and
the University of Pittsburgh School of Law.

Mr. John W. McGonigle has been Executive Vice President of Federated since
August 1995. He has served as Vice President, Secretary and General Counsel of
Federated and has been a trustee of the Trust since 1989.

55
<PAGE>

He is Executive Vice President and Secretary of the funds. Mr. McGonigle is a
graduate of Duquesne University and Duquesne University School of Law.

Mr. Arthur L. Cherry is President of Federated Services Company. He has been
a trustee of the Trust since 1997. Prior to joining Federated in January 1997,
he was a managing partner of AT&T Solutions and former president of Scudder
Services Corporation. He also served as managing director of Scudder, Stevens
and Clark from 1984 to 1994. In addition, he has worked in various capacities
with The Boston Company, Boston Financial Data Services and EDS Consulting.
Mr. Cherry is a graduate of Northeastern University.

Mr. James F. Getz serves as President--Retail Sales Division of Federated
Securities Corp. and is responsible for the marketing and sales efforts in the
trust and broker/dealer markets. Mr. Getz is a graduate of King's College and
received his M.A. from Villanova University and his doctorate from Temple
University. Mr. Getz is also a Chartered Financial Analyst.

Mr. William D. Dawson, III serves as an Executive Vice President and Chief
Investment Officer--Fixed Income of Federated Advisory Companies. He has
served as a portfolio manager and held various other positions in the advisory
companies. He is responsible for the investment policy and management of
domestic fixed income funds. Mr. Dawson is a graduate of Union College with a
Masters in Business Administration from the University of Pittsburgh. He is
also a Chartered Financial Analyst.

Mr. Thomas R. Donahue has been Vice President of Federated since 1993 and a
trustee of the Trust since 1995. He currently serves as Vice President and
Chief Financial Officer of Federated. Prior to joining Federated, Mr. Donahue
was in the venture capital business, and from 1983 to 1987 was employed by PNC
Bank in its Investment Banking Division. Mr. Donahue is the son of John F.
Donahue and the brother of J. Christopher Donahue. Mr. Donahue is a graduate
of Boston University and the J.L. Kellogg Graduate School of Management at
Northwestern University.

Mr. John B. Fisher is President--Institutional Sales Division of Federated
Securities Corp. and is responsible for the distribution of the Company's
products and services to investment advisors, insurance companies, retirement
plans and corporations. He is the son of Richard B. Fisher, Executive Vice
President of Federated. Mr. Fisher is a graduate of the College of the Holy
Cross.

Mr. Richard B. Fisher has been Executive Vice President of Federated and a
trustee of the Trust since 1989 and was a founder of the predecessor to
Federated. Mr. Fisher is primarily responsible for developing and marketing
fund products in the broker/dealer market and for distributing some of the
funds. Mr. Fisher is President or Vice President of the funds and director or
trustee of some of the funds. Mr. Fisher is the father of John B. Fisher, an
officer of the Company. Mr. Fisher is a graduate of the College of the Holy
Cross.

Mr. Henry A. Frantzen serves as Executive Vice President and Chief
Investment Officer--Global Equity and Fixed Income of Federated Advisory
Companies and the institutional management division of Federated Investment
Counseling. Mr. Frantzen is primarily responsible for the management of global
equity and fixed income funds. Prior to joining Federated, Mr. Frantzen was
Managing Director of International Equities for Brown Brothers Harriman
Investment Management Ltd. and Manager and International Equity Chief
Investment Officer of Brown Brothers Harriman and Co., from 1992 to 1995.
Prior thereto he served in executive capacities for various investment
management companies, including Oppenheimer Management Corp., Yamaichi Capital
Management and CREF. Mr. Frantzen is a graduate of the University of North
Dakota.

Mr. J. Thomas Madden serves as Executive Vice President and Chief Investment
Officer--Equity, High Yield and Asset Allocation of Federated Advisory
Companies. Mr. Madden oversees the portfolio management in the domestic
equity, high yield, and asset allocation areas. Mr. Madden holds a B.A. from
Columbia University and an M.B.A. from Colgate Darden School of Business
Administration, University of Virginia. He is also a Chartered Financial
Analyst.

56
<PAGE>

Mr. Eugene F. Maloney serves as the Executive Vice President of Federated
Investors Management Company and has been a trustee of the Trust since 1989.
He 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.
Maloney is an adjunct Professor of Law at Boston University School of Law. Mr.
Maloney is a graduate of Holy Cross College and Fordham Law School.

ELECTION OF DIRECTORS

Each director of the Company serves a term from the date of such director's
election until the next annual meeting of the shareholders. Officers of the
Company are elected by, and serve at the discretion of, the Board of
Directors. Within three months of the Merger and the Offering, the Company
expects to have 10 directors.

No director currently receives compensation for serving as a director of the
Company or as trustee of the Trust. Directors who are not employees of the
Company will receive options to purchase shares of Class B Common Stock under
the Stock Incentive Plan described below. Under the terms of the Merger, the
Company will assume the rights and obligations of the Trust regarding the
Trust's existing Restricted Stock Plan, Stock Appreciation Rights Plan and
Stock Incentive Plan. See "Compensation Pursuant to Plans--Stock Incentive
Plan" below.

The Company Bylaws provides for indemnification of officers and directors
consistent with the provisions of the Pennsylvania Business Corporation Law.
The Company is also authorized under the Company Bylaws to purchase and
maintain insurance for purposes of providing indemnification to officers,
directors, employees and agents of the Company, whether or not such
indemnification is provided for by the Pennsylvania Business Corporation Law.
The Company believes that these provisions are necessary for the Company to
continue to attract and retain qualified persons as directors and officers.

AUDIT COMMITTEE

After the Offering, an Audit Committee will be formed and consist of at
least two directors, who will not be employees or officers (or former
employees or officers) of the Company or its subsidiaries. The Audit
Committee's duties will include reviewing internal financial information,
monitoring cash flow, budget variances and credit arrangements, reviewing the
audit program of the Company, reviewing with the Company's accountants the
results of all audits upon their completion, annually selecting and
recommending independent public accountants, overseeing the quarterly
unaudited reporting process and taking such other action as may be necessary
to assure the adequacy and integrity of all financial information distributed
by the Company.

COMPENSATION COMMITTEE

After the Offering, a Compensation Committee will be formed and consist of
at least three directors, a majority of whom will not be officers or employees
(or former officers or employees) of the Company. The Committee will recommend
compensation levels of senior management, work with senior management on
benefit and compensation programs for Company employees and monitor local and
national compensation trends to ensure the Company's compensation program is
competitive within the mutual fund industry.

EXECUTIVE COMPENSATION

Summary Compensation Table

Prior to the Merger, the executive officers of the Company did not receive
cash compensation in respect of their services to the Company alone but rather
received compensation for services rendered to the Trust and its subsidiaries,
including the Company. The following table sets forth the cash compensation
paid to the Chief Executive Officer and each of the other four most highly
compensated executive officers of the Trust, as of December 31, 1997, whose
cash compensation exceeded $100,000, for services rendered to the Trust and
its subsidiaries during the fiscal year ended December 31, 1997.

57
<PAGE>

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------------------------
OTHER SECURITIES
NAME AND ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) STOCK AWARD($) OPTIONS/SARS(#) COMPENSATION($)(2)
- ------------------ --------- -------- ------------------ -------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John F. Donahue, 1,600,000 800,000 83,894 -- -- 9,760
Chairman and Chief
Executive Officer
J. Christopher Donahue, 830,000 415,000 53,695 -- -- 13,432
President and Chief
Operating Officer
John W. McGonigle, 750,000 250,000 -- -- -- 15,102
Executive Vice
President and Secretary
Arthur L. Cherry, 600,000 300,000 73,924 197,500(3) 360,000(4) 1,350
President, Federated
Services Company
James F. Getz, 350,000 550,000 -- --(3) 60,000(4) 8,920
President,
Retail Sales Division
of Federated Securities
Corp.
</TABLE>
- --------
(1) In accordance with the applicable rules, the amounts set forth in this
column do not include perquisites and other personal benefits received by
the named executive officer unless the aggregate value thereof exceeded
the lesser of $50,000 or 10% of the base salary and bonus reported for
such officer. Included in Mr. John F. Donahue's annual compensation are
perquisites and other personal benefits in fiscal year 1997, including
$36,885 for the use of Federated's corporate aircraft valued on the basis
of incremental cost to Federated. Included in Mr. J. Christopher
Donahue's annual compensation are perquisites and other personal benefits
in fiscal year 1997, including $23,435 for the use of Federated's
corporate aircraft valued on the basis of incremental cost to Federated.
Included in Mr. Cherry's annual compensation are perquisites and other
personal benefits in fiscal year 1997, including $72,924 in relocation
expenses.

(2) Includes matching contributions under Federated's 401(k) Plan of $6,400
for Mr. John F. Donahue, $6,400 for Mr. J. Christopher Donahue, $6,400
for Mr. McGonigle and $6,400 for Mr. Getz; and the present value of the
economic benefit to the executive of the corporate premiums paid to
purchase split dollar life insurance contracts of $1,212 for Mr. J.
Christopher Donahue, and $2,882 for Mr. McGonigle. In addition, Federated
paid annual premiums for life insurance with respect to Mr. John F.
Donahue of $3,360, Mr. J. Christopher Donahue of $5,820, Mr. McGonigle of
$5,820, Mr. Cherry of $1,350 and Mr. Getz of $2,520 in 1997. The split
dollar life insurance contract for Mr. John F. Donahue is fully paid and
the Company is entitled to recover all of the premiums paid by it through
the cash surrender value of such policy.

(3) Based on the latest available independent valuation on the date of grant
in the case of Mr. Cherry with respect to the grant of 75,000 Trust Class
B Common Shares (after giving effect to the two 1998 stock dividends),
which was fully vested in January 1998. No other restricted shares were
held by any of the named executive officers as of December 31, 1997,
except for an aggregate of 450,000 Trust Class B Common Shares (after
giving effect to the two 1998 stock dividends) awarded to Mr. Getz in
1990 and 1993. All restricted shares held by Messrs. Cherry and Getz had
an aggregate value of $3,150,000 as of the latest available independent
valuation.

(4) In the case of each Mr. Cherry and Mr. Getz, includes 60,000 Trust Class
B Common Shares (after giving effect to the two 1998 stock dividends)
subject to options which are not currently exercisable.

58
<PAGE>

COMPENSATION PURSUANT TO PLANS

Employees' Profit Sharing Plan. The Trust has adopted a Profit Sharing Plan,
qualified under Section 401(a) of the Internal Revenue Code, for its employees
and employees of related entities who have completed four months of service.
The Profit Sharing Plan consists of a discretionary profit sharing plan
feature, and a cash or deferred feature qualified under Section 401(k) of the
Internal Revenue Code ("401(k) Plan") with an employer matching contribution
feature. The Plan is administered by a committee of employees. Distributions
are made upon termination of employment in the form of a lump sum cash
distribution. If a participant dies before termination of employment, the
entire value of the participant's account is paid to the beneficiary
designated by the participant.

The Trust may contribute to the Profit Sharing Plan in any year an amount up
to 15% of the eligible compensation of plan participants. The Trust has not
made discretionary Profit Sharing Plan contributions since 1990. Employees
become fully vested in their separate benefits after completing seven
consecutive years of service with the Trust or related entity, by a graduated
partial vesting in 20% increments, beginning on completion of three years of
service and continuing until completion of seven years of service. Profit
Sharing Plan assets are collectively invested by the Trustee, an officer of
the Company. Among other assets, as of the date of this Prospectus, the Profit
Sharing Plan owned 2,700,000 shares of Class B Common Stock, after giving
effect to the Merger. Benefits are provided at death, disability, and
termination of employment (including retirement). Participants' benefits are
equal to the total contributions for the participant, plus the participant's
share of any forfeitures and plus or minus associated investment gains or
losses, multiplied by the participant's vesting percentage.

A Participant in the 401(k) Plan may elect to reduce his compensation from
the Company by any whole percentage from 1% to and including 15% and have that
amount contributed to the 401(k) Plan before deduction of federal income tax
("Salary Reduction Contributions"). The Trust will contribute on behalf of
each Participant an amount defined by the Company from time to time.
Currently, the matching contribution is equal to the first 2% contributed by
the Participant plus 50% of the next 4% contributed by the Participant
("Matching Contributions"). The maximum amount that a Participant may
contribute by salary reduction is limited by the Internal Revenue Code. For
1997 the maximum amount was $9,800. Participants are always 100% vested in
their Salary Reduction Contributions. Matching Contributions become fully
vested in accordance with the same schedule as the Profit Sharing
Contribution. Each Participant may choose the investments for his Salary
Reduction Contributions and Matching Contributions. The available investment
options are various mutual funds from Federated funds, chosen to provide a
range of investment alternatives with materially different risk and return
characteristics.

Stock Incentive Plan. Long-term incentive compensation for executives has
been provided under the Company's Stock Incentive Plan (the "Stock Incentive
Plan"), adopted as of February 20, 1998. All key employees of the Company and
its affiliates are eligible to participate in the Stock Incentive Plan. The
Stock Incentive Plan will continue in effect until terminated by its terms or
until terminated by the Board of Directors of the Company.

The Stock Incentive Plan permits the granting of any or all of the following
types of awards: (1) performance shares conditioned upon meeting performance
criteria; (2) restricted stock; (3) stock options, including nonqualified
stock options ("NSOs") and incentive stock options ("ISOs"); (4) stock
appreciation rights ("SARs"), in tandem with stock options or freestanding;
and (5) other awards valued in whole or in part by reference to, or otherwise
based on, Class B Common Shares. In connection with any award, payment
representing dividends or interest or their equivalent may be made to Stock
Incentive Plan participants. In addition, the Stock Incentive Plan provides
for automatic grants of stock options to trustees of the Trust who are not
employees of the Company or its subsidiaries.

59
<PAGE>

Shares Subject to Stock Incentive Plan

A total of 13,500,000 shares of Class B Common Stock may be issued under the
Stock Incentive Plan. All of the shares are available for the grant of ISOs.
No participant shall receive awards in respect of more than 600,000 shares of
Class B Common Stock in any calendar year. The aggregate fair market value
(determined on the date of the grant) of shares of Class B Common Stock with
respect to which ISOs granted to a participant become exercisable for the
first time in any single calendar year will not exceed $100,000. In addition,
shares issued by the Company as a result of the assumption or substitution of
outstanding grants of an acquired company or entity (other than as a result of
the Merger, as described below) will not reduce the shares available for grant
under the Stock Incentive Plan. The shares of stock deliverable under the
Stock Incentive Plan may consist, in whole or in part, of authorized and
unissued shares, treasury shares, or any combination thereof. If any shares
subject to any award are forfeited, or the award is terminated without
issuance of shares or other consideration, the shares subject to such awards
will again be available for grant under the Stock Incentive Plan.

Under the terms of the Merger, the Company will assume the rights and
obligations of the Trust regarding the Trust's existing Restricted Stock Plan,
Stock Appreciation Rights Plan and Stock Incentive Plan (the "Prior Stock
Plans"). The Company will treat as having been issued under its Stock
Incentive Plan all shares of restricted stock, SARs and stock options issued
under the Prior Stock Plans. This will include, based on the number of
restricted shares, SARs and stock options outstanding under the Prior Stock
Plans on April 21, 1998 (after giving effect to the stock dividend paid on
April 15, 1998 and the stock dividend paid on April 30, 1998), 4,233,000
restricted shares of Class B Common Stock and SARs and stock options relating
to 3,975,600 shares of Class B Common Stock.

After giving effect to the assumption of the Prior Stock Plans, as of April
21, 1998 (after giving effect to the stock dividend paid on April 15, 1998 and
the stock dividend paid on April 30, 1998), the Company had 5,291,400 shares
of Class B Common Stock reserved for future issuance under its Stock Incentive
Plan.

Option Grants

The following table sets forth as to persons named in the Summary
Compensation Table additional information with respect to stock options
granted during 1997:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE PER GRANT DATE
OPTIONS EMPLOYEES SHARE EXPIRATION PRESENT
GRANTED(1) IN 1997 ($/SHARE)(2) DATE VALUE($)(3)
---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Arthur L. Cherry........ 300,000 17.8% 3.10 03/01/07 254,000
60,000 3.6% 6.00 12/01/07 113,600
James F. Getz........... 60,000 3.6% 6.00 12/01/07 113,600
</TABLE>
- --------

(1) Reflects the one for one stock dividend paid on April 15, 1998 and the
one for two stock dividend paid on April 30, 1998.

(2) The exercise price per share, as adjusted for the 1998 stock dividends,
was based on the latest available independent valuation on the date of
grant.

(3) The Minimum Value option pricing model was used to determine the grant
date present value. The information in the table is provided in
accordance with the rules of the Securities and Exchange Commission
regarding the disclosure of compensation of executive officers, and is
not intended to forecast possible future stock price appreciation, if
any. See Note 8(e) to the Consolidated Financial Statements for further
information.

60
<PAGE>

Administration

The Stock Incentive Plan is administered by a committee of the Board of
Directors (the "Board Committee"). The Board Committee is constituted such
that awards under the Stock Incentive Plan will, to the extent practicable,
qualify for exemption under Rule 16b-3 of the Commission and as performance-
based compensation under Section 162(m) of the Internal Revenue Code. The
Board Committee may delegate some or all of its authority and responsibility
under the Stock Incentive Plan with respect to awards to participants who are
not subject to Section 16(b) of the Exchange Act to the Chief Executive
Officer of the Company. The Board Committee has the authority to select
employees to whom awards are granted, to determine the types of awards and the
number of shares subject thereto, and to set the terms, conditions and
provisions of such awards. The Board Committee is authorized to interpret the
Stock Incentive Plan, to establish, amend and rescind any rules and
regulations relating to the Stock Incentive Plan, to determine the terms and
provisions of any agreements entered into under the Stock Incentive Plan, and
to make all other determinations which may be necessary or advisable for the
administration of the Stock Incentive Plan.

Performance Awards

Performance awards are grants of shares of Class B Common Stock subject to
the attainment of performance goals established by the Board Committee in
connection with such grants and such other terms and conditions as the Board
Committee shall determine. Except as otherwise determined by the Board
Committee, recipients of performance awards will not be required to provide
consideration other than the rendering of services. Subject to the provisions
of the applicable award agreement, during the performance period dividends and
other distributions with respect to shares covered by a performance award
shall, in the discretion of the Board Committee, either be paid to the
recipient or held in escrow by the Company and paid when the performance award
is earned.

Restricted Stock

Restricted stock may not be disposed of by the recipient until the lapse of
certain restrictions established by the Board Committee. Upon termination of
employment of the participant during the restriction period, all restricted
stock not then vested will be forfeited, subject to such exceptions, if any,
authorized by the Board Committee. Except as otherwise determined by the Board
Committee, recipients of restricted stock are not required to provide
consideration other than the rendering of services. Recipients will have, with
respect to restricted stock, all of the rights of a shareholder of the Company
including the right to receive any dividends to the extent permitted by
applicable law, unless the Board Committee determines otherwise.

Stock Options

The exercise price per share of Class B Common Stock of stock options
granted to a participant is determined by the Board Committee as of the date
of grant; provided, however, that (i) in the case of ISOs granted to a
participant who on the grant date is not a more than 10% stockholder of the
Company ("Ten Percent Holder"), such price shall not be less than 100% of the
fair market value of a share of a Class B Common Share on the grant date, (ii)
in the case of an ISO granted to a participant who on the grant date is a Ten
Percent Holder, such price shall be not less than 110% of the fair market
value of a share of Class B Common Stock on the grant date, and (iii) in the
case of NSOs such price shall be not less than 85% of the fair market value of
a share of Class B Common Stock on the grant date. The term of each such
option, the time or times when it may be exercised, and the other applicable
terms and conditions will be fixed by the Board Committee. Options may be
exercised by payment of the purchase price in cash or, at the discretion of
the Board Committee, in shares of Class B Common Stock having a fair market
value on the date the option is exercised equal to the option exercise price
or in such other manner as the Board Committee may approve.

61
<PAGE>

Stock Appreciation Rights

An SAR may be granted in connection with an option or independent of an
option. Upon exercise of an SAR, the holder thereof is entitled to receive the
excess of the fair market value of the shares for which the right will be
exercised over the grant price of the SAR. The grant price (which will not be
less than 100% of the fair market value of the shares on the date of grant)
and other terms of the SAR will be determined by the Board Committee. Payment
by the Company upon such exercise will be in cash.

Other Stock-Based Awards

In order to enable the Company to respond quickly to significant legislative
and regulatory developments and to trends in executive compensation practices,
the Board Committee will also be authorized to grant to participants, either
alone or in addition to other awards granted under the Stock Incentive Plan,
awards of stock and other awards that are valued in whole or in part by
reference to, or are otherwise based on, shares of Class B Common Stock
("other stock-based awards"). Other stock-based awards may be paid in shares
of Class B Common Stock or other securities of the Company, cash or any other
form of property as determined by the Board Committee.

The Board Committee will determine the employees to whom other stock-based
awards are to be made, the times at which such awards are to be made, the
number of shares to be granted pursuant to such awards and all other
conditions of such awards. The provisions of such awards need not be the same
with respect to each recipient. Securities granted pursuant to other stock-
based awards may be issued for no cash consideration or for such minimum
consideration as may be required by applicable law. If purchase rights are
granted pursuant to other stock-based awards, the Board Committee will
determine the purchase price of stock, which price will not be less than the
fair market value of such stock on the date of grant.

Directors' Stock Options

The Stock Incentive Plan provides that directors of the Company who are not
employees of the Company shall receive options to purchase shares of Class B
Common Stock. Such directors will receive options with respect to 4,500 shares
upon their initial election to the Board of Directors and with respect to
1,500 shares annually thereafter.

All such options will be NSOs and will have a term of 10 years and an
exercise price equal to 100% of the fair market value of the underlying shares
on the date of grant. The initial grants of options to a director vest in
equal installments over a three year period. The annual grants are fully
vested as of the date of grant. In the event of a director's death, the
options which are exercisable at the date of death will be exercisable for the
next succeeding twelve months. Except as set forth below under "Adjustments,"
neither the Board of Directors of the Company nor the Board Committee will
have any discretion with respect to options granted to such directors pursuant
to the Stock Incentive Plan.

Nonassignability of Awards

The Stock Incentive Plan provides that no award granted under the Stock
Incentive Plan may be sold, assigned, transferred, pledged or otherwise
encumbered by a participant, otherwise than by will or by the laws of descent
and distribution or, if authorized by the Board Committee in limited
circumstances, by gift. Each award will be exercisable, during the
participant's lifetime, only by the participant, or if permissible under
applicable law, by the participant's agent, guardian or attorney-in-fact.

Adjustments

The Stock Incentive Plan provides that, in the event of any change affecting
the Class B Common Stock by reason of any stock dividend or split,
recapitalization, reorganization, merger, consolidation, combination or

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<PAGE>

exchange of shares, spin-off or any other change in corporate structure such
that Class B Common Stock are changed into or exchangeable for a larger or
smaller number of shares, the Board Committee will make such substitution or
adjustment in the aggregate number or class of shares which may be distributed
under the Stock Incentive Plan and in the number, class and option price or
other price of shares subject to the outstanding awards granted under the
Stock Incentive Plan as it deems to be appropriate in order to maintain the
purpose of the original grant.

The Board Committee will be authorized to make adjustments in performance
award criteria or in the terms and conditions of other awards in recognition
of unusual or non-recurring events affecting the Company or its financial
statements or changes in applicable laws, regulations or accounting
principles, provided no such adjustment shall impair the rights of any
participant without his consent. The Board Committee will be able to correct
any defect, supply any omission or reconcile any inconsistency in the Stock
Incentive Plan or any award in the manner and to the extent it shall deem
desirable to carry it into effect.

Federal Income Tax Aspects of the Stock Incentive Plan

The following is a summary of the federal tax consequences generally arising
with respect to awards to be granted under the Stock Incentive Plan.

The grant of an ISO has no tax consequences to the Company or to the
participant. In addition, the participant recognizes no taxable income at the
time of exercise of an ISO. However, upon exercise, the difference between the
fair market value of the shares of Class B Common Stock and the exercise price
of the ISO is includable in the participant's income for alternative minimum
tax purposes. If the participant holds the shares acquired upon exercise of an
ISO for at least two years from the date of the grant of the ISO and at least
one year from the date of exercise, he or she will recognize taxable long-term
capital gain or long-term capital loss upon a subsequent sale of the shares at
a price different from the option exercise price. In either of these events,
no deduction would be allowed to the Company for federal income tax purposes.

If the participant disposes of the shares acquired upon exercise of an ISO
within either of the holding periods described above (i) the participant will
recognize taxable ordinary income in the year of such disposition in an amount
equal to the fair market value of the shares on the exercise date minus the
exercise price of the ISO, provided that if the disposition is a sale or
exchange with an unrelated party, then the ordinary income will be limited to
the excess of the amount realized upon the sale or exchange of the shares over
the exercise price; (ii) the Company will be entitled to a deduction for such
year equal to the amount of taxable ordinary income recognized by the
participant; (iii) the participant will recognize capital gain or loss, short-
term or long-term, as the case may be, in an amount equal to the difference
between (a) the amount realized by the participant upon such sale or exchange
of the shares and (b) the option exercise price paid by the participant
increased by the amount of ordinary income, if any, recognized by the
participant upon such disposition.

The grant of an NSO has no tax consequences to the Company or to the
participant. Upon exercise of an NSO, however, the participant will recognize
taxable ordinary income in the amount of the excess of the fair market value
on the date of exercise of the shares of the Class B Common Stock acquired
over the exercise price of the NSO, and such amount will be deductible for
federal income tax purposes by the Company. The holder of such shares will,
upon a subsequent disposition of the shares, recognize short-term or long-term
capital gain or loss, depending on the holding period of the shares.

In general, a grant of restricted stock has no tax consequences to the
Company or the participant. Except as discussed below, the then fair market
value of the shares of Class B Common Stock issued as restricted stock will be
taxed as ordinary income to the participant as the restrictions on the stock
lapse. The Company will receive a corresponding tax deduction at the same
time. Dividends received by the participant during the restriction period are
treated as compensation income and therefore are taxed as ordinary income to
the participant and are deductible by the Company. Any gain realized upon a
taxable sale or exchange of the stock will be recognized as short-term or
long-term capital gain or loss, depending on the holding period of the shares

63
<PAGE>

after the restrictions lapse. The Company receives no additional deduction at
the time of disposition of the stock by the participant.

The participant may, under Section 83(b) of the Internal Revenue Code, elect
to report the current fair market value of restricted stock as ordinary income
in the year the award is made, even though the stock is subject to
restrictions. In such a case, the Company will receive an immediate tax
deduction for such fair market value of the shares in the year of grant, but
will receive no deduction for any subsequent appreciation during or after the
restriction period. In addition, dividends paid during or after the
restriction period would be treated as dividends rather than compensation
income to the participant and, therefore, would not be deductible by the
Company. If a Section 83(b) election is made, any appreciation in the value of
the stock after the date of grant will not be recognized as capital gain by
the participant until such time as the participant disposes of the stock in a
taxable transaction. Any capital gain then realized will be long-term capital
gain provided that the required holding period, measured from the date of
grant, is met. If the participant forfeits the stock (i.e., because he or she
has not met the requirements for lapse of restrictions), the participant will
receive no refund or deduction on account of taxes paid in the year of grant
as a result of the Section 83(b) election.

The grant of an SAR has no tax consequences to the Company or the
participant. To the extent that an SAR is exercised, the amount paid to the
participant will be taxed to him or her as ordinary income, and the Company
will receive a corresponding deduction at the same time.

With respect to other stock-based awards granted under the Stock Incentive
Plan that are settled either in cash or in stock or other property that is
either transferable or not subject to substantial risk of forfeiture, the
participant must recognize ordinary income equal to the cash or the fair
market value of shares or other property received, and the Company will be
entitled to a deduction for the same amount. With respect to awards that are
settled in stock or other property that is restricted as to transferability
and subject to substantial risk of forfeiture, the participant must recognize
ordinary income equal to the fair market value of the shares or other property
received, at the first time the shares or other property become transferable
or not subject to substantial risk of forfeiture, whichever occurs earlier.
The Company will be entitled to a deduction for the same amount. A participant
who makes an election under Section 83(b) of the Internal Revenue Code will be
taxed on the excess of the fair market value of the stock or other property at
exercise over the purchase price. Special tax rules may apply to officers and
directors who are subject to Section 16 of the Exchange Act.

Executive Annual Incentive Plan. The Company adopted an Executive Annual
Incentive Compensation Plan (the "Incentive Compensation Plan"). Under this
Plan, a pool equal to 7.5% of the Company's consolidated operating profits (as
defined in the Plan) may be set aside each year for the payment of cash awards
to the five most highly compensated executive officers of the Company
(including the Chief Executive Officer and such other officers as the Chief
Executive Officer may designate). Shares of the pool will be allocated to
participants designated by the Chief Executive Officer. Such allocations are
intended to be made before the 90th day of the fiscal year to which the
incentive pool relates. No more than 40% of the pool will be allocated to any
participant. At any time before or after the close of the fiscal year and
prior to the payment of cash awards for the fiscal year, the Chief Executive
Officer may reduce or eliminate the incentive pool or the amount thereof
granted to any participant. Upon the death of a participant, the award will be
paid to his or her estate or beneficiary. Awards will be forfeited upon
termination of employment unless the Chief Executive Officer determines
otherwise.

The Incentive Compensation Plan may be terminated or amended at any time by
action of the Company's Board of Directors. The Incentive Compensation Plan is
intended to be an unfunded plan and as such the participants shall have no
rights with respect to amount payable under the Plan that are greater than
those of a general creditor of the Company.

For Federal income tax purposes, cash awards will be taxable to participants
as ordinary compensation income as of the date of payment of such awards, and
the Company will be entitled to a corresponding tax deduction in the year
accrued.

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<PAGE>

CERTAIN TRANSACTIONS

RELATIONSHIP WITH AETNA AND WESTINGHOUSE PENSION PLAN

Aetna. In January 1996, Federated entered into an agreement with Aetna to
convert 1,000 shares of Trust Series A Preferred Shares into Trust Class B
Common Shares and to sell the converted shares back to the Trust at a mutually
agreed upon price. Each Series A Preferred Share was converted into
approximately 5,303 Class B Common Shares (without adjusting for subsequent
stock dividends). Immediately thereafter, these shares were repurchased from
Aetna for $101,233,000. Aetna has no continuing equity interest in Federated.
See Note 10 to Consolidated Financial Statements.

Westinghouse Pension Plan. Under the Stock Purchase Agreement dated as of
August 1, 1989 (the "Stock Purchase Agreement") between the Company and
Westinghouse Credit Corporation ("Westinghouse"), Westinghouse originally
acquired 1,200,000 Trust Class B Common Shares (7,200,000 shares after giving
effect to subsequent stock dividends). On September 14, 1993, Westinghouse
transferred these shares to Mellon Bank N.A., as Trustee. Pursuant to the
terms of the Stock Purchase Agreement, the Westinghouse Pension Plan is
entitled to participate in any public offering pro rata with all other
existing holders of Class A Common Shares and Class B Common Shares to the
extent any such holders are entitled to participate in any such public
offering. See "Principal and Selling Shareholders." In addition, if the
Company offers to issue any Class A Common Shares or Class B Common Shares to
specified senior executives of the Company, Westinghouse Pension Plan is
entitled to purchase its pro rata share at the same price as such executive.
This right does not extend to shares issued under the Profit Sharing Plan or
other employee stock arrangements. Westinghouse Pension Plan's percentage
ownership of Federated is to be diluted on the same basis as the percentage
ownership of all other holders of Class A Common Shares and Class B Common
Shares in the event Federated issues any such shares to an unrelated third
party or pursuant to a public offering. Under the terms of the Stock Purchase
Agreement, Westinghouse Pension Plan cannot transfer any of its Class B Common
Shares to any direct competitor of the Company or a person owning 50% or more
of a competitor. Pursuant to the Merger, the obligations of Federated under
the Stock Purchase Agreement will be assumed by the Company.

OTHER TRANSACTIONS

Following the repurchase of Trust Class B Common Shares from Aetna described
above, in February 1996 Federated also purchased 1,180,000 (without adjusting
for subsequent stock dividends) Trust Class B Common Shares from other
existing shareholders at a comparable per share price to that paid to Aetna,
for a total purchase price of $22,420,000. See Note 10 to Consolidated
Financial Statements. Among the Trust Class B Common Shares repurchased
(without adjusting for subsequent stock dividends) were shares beneficially
owned by certain directors and executive officers of the Company, as follows:
22,000 shares ($418,000) owned by Comax Company, a limited partnership of
which Comax, Inc. is the general partner in which Mr. John F. Donahue is the
sole shareholder, as to which shares Mr. Donahue disclaims beneficial
ownership; 23,000 shares ($437,000) owned by Mr. Eugene F. Maloney; and 50,500
shares ($959,500) owned by Fairview Partners, a limited partnership of which
Mr. John W. McGonigle is the sole general partner. In addition, the Federated
Profit Sharing Plan sold 150,000 shares ($2,850,000) to Federated. Certain
entities affiliated with Merrill Lynch & Co. ("Merrill Lynch") and an
individual then employed by Merrill Lynch also sold to Federated an aggregate
of 50,000 Trust Class B Common Shares (without adjusting for subsequent stock
dividends) for $950,000. These entities are a wholly owned subsidiary engaged
in investment activities and two limited partnerships in which the corporate
general partners are indirect wholly owned subsidiaries of Merrill Lynch.
These entities and the former employee of Merrill Lynch are among the selling
shareholders in the Offering. Merrill Lynch, Pierce, Fenner & Smith
Incorporated is a representative of the U.S. Underwriters and Merrill Lynch is
a representative of the International Underwriters. See "Underwriting."
Merrill Lynch also performs brokerage services for Federated and its
affiliates and is part of Federated's broker/dealer network. See "Business--
Distribution--Broker/Dealer Market."

Investment advisory, administrative, distribution and shareholder services
are provided to the Federated group of funds pursuant to various contracts
among subsidiaries of Federated. Terms of the contracts, including fees, are
approved by the directors and trustees of the funds, including independent
directors and trustees of the funds, none of whom are officers, trustees or
employees of Federated.

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<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following tables sets forth certain information regarding the beneficial
ownership of the Company's Class A and Class B Common Stock as if the Merger
had been consummated on April 21, 1998 (after giving effect to the stock
dividend paid on April 15, 1998 as well as the one for two stock dividend paid
on April 30, 1998, but without giving effect to the Underwriters' exercise of
the over-allotment options), by (i) each person who is known by the Company to
own beneficially more than 5% of the outstanding shares of Class A or Class B
Common Stock, (ii) each of the directors of the Company, (iii) named executive
officers of the Company, (iv) all directors and executive officers of the
Company as a group, and (v) other selling shareholders.

CLASS A COMMON STOCK

All of the outstanding shares of Class A Common Stock are held by the Voting
Trust, the trustees of which are John F. Donahue, his wife and his son J.
Christopher Donahue, for the benefit of members of the family of John F.
Donahue. Under the terms of the Voting Trust, the trustees are authorized to
vote shares held by the Voting Trust and the trustees additionally may sell,
transfer or otherwise dispose of shares owned by the Voting Trust. The entire
voting power of the Company is vested in the holders of the outstanding shares
of Class A Common Stock, except as otherwise provided in the Restated Articles
or required by applicable law. See "Description of Securities."

CLASS B COMMON STOCK

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERINGS(2) AFTER OFFERINGS(2)
---------------------- ----------------------
NUMBER OF
NUMBER OF % OF CLASS SHARES TO NUMBER OF % OF CLASS
NAME(1) SHARES OUTSTANDING BE SOLD SHARES OUTSTANDING
- ------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
John F. Donahue(3)...... 10,545,534 12.6% 586,870 9,958,664 11.6%
J. Christopher
Donahue(4)............. 4,272,918 5.1 -- 4,272,918 5.0
John W. McGonigle(5).... 5,460,000 6.5 443,700 5,016,300 5.8
Arthur L. Cherry(6)..... 474,000 * -- 474,000 *
James F. Getz........... 540,000 * -- 540,000 *
William D. Dawson III... 120,000 * -- 120,000 *
Thomas R. Donahue(7).... 1,721,838 2.1 -- 1,721,838 2.0
John B. Fisher.......... 300,000 * -- 300,000 *
Richard B. Fisher(8).... 4,800,000 5.8 835,200 3,964,800 4.6
Henry A. Frantzen....... 180,000 * -- 180,000 *
J. Thomas Madden........ 150,000 * -- 150,000 *
Eugene F. Maloney(9).... 540,000 * 39,150 500,850 *
---------- --------- ----------
All directors and
executive officers as a
group (12 persons)..... 29,104,290 34.9% 1,904,920 27,199,370 31.6%
</TABLE>

66
<PAGE>

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERINGS(2) AFTER OFFERINGS(2)
--------------------- ---------------------
NUMBER OF
NUMBER OF % OF CLASS SHARES TO NUMBER OF % OF CLASS
NAME(1) SHARES OUTSTANDING BE SOLD SHARES OUTSTANDING
- ------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Principal Shareholders
and Other
Selling Shareholders
Westinghouse Pension
Plan(10)............... 7,200,000 8.6% 3,132,000 4,068,000 4.7%
James J. and Patricia D.
Dolan(11).............. 4,825,236 5.8 652,500 4,172,736 4.8
John A. Staley, IV and
Patricia D. Staley(12). 4,527,000 5.4 1,304,350 3,222,650 3.8
Glen Arden
Associates(13)......... 3,090,000 3.7 653,150 2,436,850 2.8
Merrill Lynch & Co.
affiliates(14)......... 3,300,000 4.0 1,305,000 1,995,000 2.3
Glen R. Johnson(15)..... 2,434,800 2.9 798,260 1,636,540 1.9
The Jones Financial
Companies(16).......... 2,400,000 2.9 1,957,500 442,500 *
FII Profit Sharing
Trust(17).............. 2,700,000 3.2 234,900 2,465,100 2.9
Henry J. Gailliot(18)... 2,682,000 3.2 783,000 1,899,000 2.2
Gonzales Investment
Company(19)............ 1,890,000 2.3 122,670 1,767,330 2.1
Thomas J. Donnelly(20).. 1,200,000 1.4 65,250 1,134,750 1.3
Tiger Partners,
L.P.(21)............... 1,125,000 1.4 217,500 907,500 1.1
Mary Elizabeth D. and
Richard S. Donley...... 360,000 * 31,500 328,500 *
Harry J. and Lois M.
Donahue................ 342,000 * 223,500 118,500 *
Edward Sean Donahue..... 132,000 * 27,825 104,175 *
R. Michael Donahue...... 120,000 * 26,090 93,910 *
Christopher C. Donahue.. 126,000 * 26,960 99,040 *
William J. and Janet O.
Donahue(22)............ 308,000 * 13,000 295,000 *
David and Sheila
Johnson................ 39,000 * 16,955 22,045 *
Vicki Lindgren.......... 39,000 * 15,650 23,350 *
Theresa D. and Alfonso
C. D'Orazio............ 360,000 * 62,700 297,300 *
PKM/CDM Partners(23).... 358,000 * 62,000 296,000 *
David M. Taylor(24)..... 660,000 * 26,100 633,900 *
Lori and Miles Wallace.. 39,000 * 16,955 22,045 *
</TABLE>
- --------
* Less than 1%.

(1) Except as indicated in the footnotes below, the address of each five
percent shareholder is in care of the Company at its principal executive
office. See "Management" for a description of the offices held by
directors and executive officers.

(2) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Unless stated
below, each such person has sole voting and investment power with respect
to all such shares.

(3) Includes 4,650,000 shares owned by The Beechwood Company, a limited
partnership of which Mr. Donahue and Oyster Bay Properties, Inc., of which
Mr. John F. Donahue is the sole shareholder, are general

67
<PAGE>

partners (Mr. Donahue disclaims beneficial ownership of 2,325,000 shares
owned by The Beechwood Company); 4,566,372 shares owned by Comax Company, a
limited partnership of which Comax, Inc. is the general partner; Mr.
Donahue is the sole shareholder of Comax, Inc. (Mr. Donahue disclaims
beneficial ownership of substantially all of the 4,566,372 shares owned by
Comax Company); and 1,329,162 shares owned by Shamrock Partners LP, a
limited partnership of which Mr. Donahue and Shamrock Properties, Inc., of
which Mr. Donahue is the sole shareholder, are general partners. Of the
586,870 shares to be sold, 260,870 shares will be sold by Shamrock Partners
LP and 326,000 shares will be sold by Comax Company.

(4) Includes 3,170,448 shares owned jointly with Mrs. Donahue; includes
838,890 shares for which Mr. Donahue has the power to sell, transfer or
otherwise dispose under powers of attorney; includes 263,580 shares of
which Mr. Donahue is a custodian of shares under the Uniform Trust for
Minors Act. Does not include 1,125,000 shares held by Tiger Partners, L.P.

(5) All of the shares are owned by Fairview Partners, a limited partnership of
which Mr. McGonigle is the sole general partner.

(6) Includes 300,000 shares subject to options which are currently
exercisable. Includes 34,800 shares owned by or on behalf of Mr. Cherry's
children; includes 64,200 shares owned jointly by Mr. and Mrs. Cherry.

(7) Includes 1,196,520 shares of which Mr. Donahue is a custodian of shares
under the Uniform Trust for Minors Act; includes 261,318 shares owned
jointly by Mr. and Mrs. Thomas R. Donahue.

(8) All of the shares are held by Fisher Investment Company, a limited
partnership, of which Mr. Fisher is the sole general partner.

(9) Includes 210,000 shares owned by Mrs. Maloney.

(10) The address for Westinghouse Pension Plan is c/o Mellon Equity
Associates, 500 Grant Street, Suite 3700, Pittsburgh, Pennsylvania 15258.
See "Certain Transactions--Relationships with Aetna and Westinghouse
Pension Plan."

(11) Mr. and Mrs. Dolan's address is c/o Access Data Corp., Two Chatham
Center, Pittsburgh, Pennsylvania 15219. Includes 605,610 shares owned by
Mrs. Dolan and 541,488 shares owned by Mr. Dolan. Based on information
furnished to the Company, also includes 2,806,200 shares to be registered
in Voyager One Investment Limited Partnership, a limited partnership of
which Mr. Dolan and his wife are general partners, of which 443,700
shares are being sold in this Offering. Mr. Dolan is a former executive
officer and a former trustee of the Trust.

(12) Mr. Staley's address is Staley Capital Advisers, Inc., One Oxford Centre,
Suite 3950, Pittsburgh, Pennsylvania 15219. Mr. Staley is a former
executive and a former trustee of the Trust.

(13) Glen Arden Associates is a limited partnership of which Mr. John A
Staley, IV is the sole general partner.

(14) Includes 1,485,000 shares owned by ML IBK Positions, Inc.; 825,000 shares
owned by Merrill Lynch KECALP LP 1989, a limited partnership; 825,000
shares owned by Merchant Banking L.P., a limited partnership; 165,000
shares owned by John G. Crosby, an individual formerly associated with
Merrill Lynch. In February 1996, certain of these holders sold to
Federated an aggregate of 50,000 Trust Class B Common Shares (without
adjusting for subsequent stock dividends) for $950,000. Merrill Lynch &
Co. performs brokerage services for Federated and its affiliates and is
part of Federated's broker/dealer network. See "Business--Distribution--
Broker/Dealer Market." Merrill Lynch, Pierce, Fenner & Smith Incorporated
is a representative of the U.S. Underwriters and Merrill Lynch
International is a representative of the International Underwriters. See
"Underwriting."

(15) Includes 600,000 shares owned by Family Investors, Inc., a corporation of
which Mr. Johnson is the President and sole shareholder; includes 186,000
shares of which Mr. Johnson is a custodian of shares under the Uniform
Trust for Minors Act. Mr. Johnson is a trustee of the Trust.

(16) An affiliate of the record shareholder is Edward D. Jones & Co., a
broker/dealer which participates in a limited partnership with Federated
and is part of Federated's broker/dealer network. See "Business--
Distribution--Broker/Dealer Market."

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<PAGE>

(17) Edward C. Gonzales is the trustee of the Federated Investors, Inc.
Employees Profit Sharing Plan Trust and has the power to sell, transfer
or otherwise dispose of shares owned by the Profit Sharing Plan. Certain
officers and directors of the Company are participants in the Profit
Sharing Plan, which does not by its terms allocate a fixed number of
shares to a participant's account.

(18) Includes 540,000 shares of which Mrs. Gailliot is a custodian of shares
under the Uniform Trust for Minors Act. Includes an additional 180,000
shares owned by Mrs. Gailliot. Of the 783,000 shares to be sold in the
Offering, 208,695 shares are being sold by Mrs. Gailliot as custodian of
shares held for her children under the Uniform Trust for Minors Act and
69,565 shares will be sold by Mrs. Gailliot, individually. Mr. Gailliot
is a former trustee of the Trust.

(19) Gonzales Investment Company is a limited partnership, the general
partners of which are Mr. Gonzales and his wife. Mr. Gonzales is a
trustee of the Trust and trustee of the Federated Investors, Inc.
Employees Profit Sharing Plan Trust.

(20) Mr. Donnelly is a trustee of the Trust.

(21) Tiger Partners, L.P. is a limited partnership formed for the benefit of
Mr. and Mrs. J. Christopher Donahue and their descendants. Tiger Partners
LLC, a limited liability company, through Tiger Holdings, L.P., a limited
partnership, is the sole general partner of Tiger Partners, L.P. and has
all voting and investment power with respect to the shares held by Tiger
Partners, L.P. J. Christopher Donahue has a limited partnership interest
in Tiger Partners, L.P. and does not have voting or investment power with
respect to the shares held by Tiger Partners, L.P.

(22) Includes 12,000 shares of which Mr. Donahue is a custodian of shares
under the Uniform Trust for Minors Act.

(23) The general partners are Mr. Patrick K. Moore and Mrs. Carol D. Moore.

(24) Mr. Taylor is a trustee of the Trust.

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<PAGE>

DESCRIPTION OF SECURITIES

The authorized share capital of the Company consists of 20,000 shares of
Class A Common Stock, no par value per share ("Class A Common Stock"),
900,000,000 shares of Class B Common Stock, no par value per share ("Class B
Common Stock") and 100,000,000 shares of preferred stock, no par value per
share ("Preferred Stock"). After completion of the Offering, there will be
issued and outstanding 6,000 shares of Class A Common Stock, 86,037,000 shares
of Class B Common Stock (without giving effect to the exercise in full of the
Underwriters' over-allotment options) and no shares of Preferred Stock.

CLASS A COMMON STOCK AND CLASS B COMMON STOCK

Voting Rights

The entire voting power of the Company shall be vested in the holders of the
outstanding shares of Class A Common Stock until the occurrence of the
Agreement Date (as defined below). Except as otherwise provided in the
Restated Articles or by applicable law, the holders of the outstanding Class B
Common Stock shall have no voting rights. On all matters upon which
shareholders are entitled to vote or give consent, each holder of a share of
Class A Common Stock shall be entitled to cast thereon one vote in person or
by proxy for each share of Class A Common Stock held of record by such holder.
After consummation of the Merger, the Voting Trust will have control of the
Company through its ownership of all of the outstanding shares of the Class A
Common Stock of the Company.

With respect to any proposed amendment of the Restated Articles that would
increase or decrease the number of authorized shares of either the Class A
Common Stock or the Class B Common Stock, or alter or change the powers,
preferences, relative voting power or special rights of the shares of the
Class A Common Stock or the Class B Common Stock so as to affect them
adversely, the approval of a majority of the votes entitled to be cast by the
holders of the class affected by the proposed amendment, voting separately as
a class, shall be obtained in addition to the approval of a majority of the
votes entitled to be cast by the holders of the Class A Common Stock and the
Class B Common Stock voting together as a single class as provided above.

Notwithstanding the foregoing, the Company shall not, prior to the Agreement
Date, take any of the following actions without the consent of the holders of
a majority of the then outstanding shares of Class B Common Stock:

(a) merge, consolidate with or otherwise acquire any corporation or other
business entity; provided, however, that, in a transaction (i) in which the
Company is the surviving entity and (ii) pursuant to which the Restated
Articles have not been amended, altered, repealed or superseded, the Company
may, without such consent, merge, consolidate with or otherwise acquire any
corporation or other business entity;

(b) sell, lease, exchange or otherwise dispose of all or substantially all
of the assets of the Company or any subsidiary thereof to other than a wholly
owned subsidiary of the Company; provided, however, that, (i) in any
transaction or series of related transactions not exceeding in value
$100,000,000 in the aggregate (taking into account all liabilities assumed by
the Company or its subsidiaries in any such transaction or transactions)
involving all or substantially all of the assets of any subsidiary, or (ii) in
any transaction or series of transactions involving a securitization or other
receivables sales transaction, the Company may, without such consent, sell,
lease, exchange or otherwise dispose of all or substantially all of the assets
of such subsidiary;

(c) effect any amendment to the Restated Articles or Company Bylaws that
adversely affects the rights, powers or preferences of the shares of Class B
Common Stock; or

(d) liquidate, dissolve or otherwise wind up the affairs of the Company.

The "Agreement Date" is the first date on which the Company shall execute
and deliver, and enter into, a legally binding and enforceable agreement
providing for the issue by the Company of shares of Class B Common

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<PAGE>

Stock in a transaction constituting a business combination which, for
financial reporting purposes, shall be accounted for as a pooling of interests
in accordance with generally accepted accounting principles.

From and after the Agreement Date, the holders of the outstanding shares of
Class A Common Stock and the holders of the outstanding shares of Class B
Common Stock, except as provided below, shall vote together as a single class,
and every holder of the outstanding shares of the Class A Common Stock shall
be entitled to cast 1,000 votes for each share of Class A Common Stock held of
record by such holder, and every holder of the outstanding shares of the Class
B Common Stock shall be entitled to cast one vote for each share of Class B
Common Stock held of record by such holder. Notwithstanding the foregoing,
from and after the Agreement Date the holders of the Class A Common Stock,
voting separately as a class with each holder of the outstanding shares of
Class A Common Stock being entitled to one vote in person or by proxy for each
share of the Class A Common Stock held of record by such holder, shall have
the right to elect that number of directors so that four-tenths ( 4/10)
(calculated to the next highest whole number) of the total number of directors
of the Company fixed from time to time by, or in the manner provided for in,
the Bylaws of the Company, shall have been elected by the holders of the Class
A Common Stock separately. Neither holders of the Class A Common Stock nor
holders of the Class B Common Stock shall be entitled to cumulate their votes
for election of directors of the Company.

Directors elected by the holders of the Class A Common Stock voting
separately as a class may be removed, with or without cause, only by the vote
or consent of a majority of the votes then entitled to be cast by the holders
of the Class A Common Stock, voting separately as a class. Directors elected
by the holders of the Class A Common Stock and the Class B Common Stock voting
together without regard to class, and directors filling vacancies and newly
created directorships, may be removed, with or without cause, only by the vote
or consent of a majority of the votes then entitled to be cast by the holders
of the Class A Common Stock and the Class B Common Stock, voting together
without regard to class. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors elected by holders of
the Class A Common Stock or the Class B Common Stock, as the case may be,
shall be filled by a majority vote of the remaining directors, so elected by
(x) the holders of the Class A Common Stock or (y) the holders of the Class A
Common Stock and the Class B Common Stock, as the case may be, then in office,
even though less than a quorum.

At any time, when there shall be no shares of either Class A Common Stock
but there shall be shares of Class B Common Stock outstanding, without any
action by the Board of Directors or the holders of the shares of Class B
Common Stock, the entire voting power of the Company shall then be vested in
the holders of the outstanding shares of Class B Common Stock and each of such
holders shall be entitled to cast one vote for each share of Class B Common
Stock held by such holder. In such event, the provisions of the Restated
Articles that provide for differing voting rights for the Class A Common Stock
shall be of no further effect. All shares of either the Class A Common Stock
or the Class B Common Stock that are then outstanding shall have equal and
general voting power in the election of directors and in all other matters
upon which shareholders of the Company are entitled to vote or give consent.

Dividends and Distributions

Under Pennsylvania law, the Board of Directors may authorize, and the
Company may pay, dividends or make other distributions to shareholders unless,
as a result (i) the Company would be unable to pay its debts as they become
due in the usual course of business or (ii) the total assets of the Company
would be less than the sum of its total liabilities plus the amount that would
be needed, if the Company were to be dissolved at the time of such
distribution, to satisfy the preferential rights of holders of Preferred
Stock. Dividends must be paid on both the Class A Common Stock and the Class B
Common Stock at any time that dividends are paid on either.

Shares of Class A Common Stock and shares of Class B Common Stock rank on a
parity with respect to dividends and distributions; provided, however, that in
the case of dividends or other distributions payable in stock of the Company
(other than Preferred Stock), including distributions pursuant to stock split-
ups or divisions, only shares of the Class A Common Stock shall be distributed
with respect to the Class A Common Stock, and only shares of Class B Common
Stock shall be distributed with respect to the Class B Common Stock.

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<PAGE>

At any time shares of both the Class A Common Stock and the Class B Common
Stock are outstanding, the Board of Directors may issue shares of the Class B
Common Stock in the form of a distribution or distributions pursuant to a
stock dividend on, or a split-up of, shares of the Class B Common Stock only
to the then holders of the outstanding shares of the Class B Common Stock and
in conjunction with and in the same ratio as a stock dividend on, or a split-
up of, the shares of the Class A Common Stock.

Except as otherwise required by applicable law or otherwise provided in the
Restated Articles, each share of Class A Common Stock and each share of Class
B Common Stock shall have identical powers, preferences and rights, including
rights in liquidation. Upon liquidation of the Company, holders of Class A
Common Stock and holders of Class B Common Stock are entitled to share ratably
in the assets thereof that may be available for distribution after
satisfaction of creditors. In addition, in connection with a Company Sale (as
hereinafter defined), the holders of the Class A Common Stock and the Class B
Common Stock shall receive the same amount of consideration per share,
notwithstanding any differences in voting rights. The term "Company Sale"
shall be deemed to include the following: (A) the acquisition of the Company
by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger,
consolidation or stock purchase) and (B) a sale of all or substantially all of
the assets of the Company. In any Company Sale, if the consideration received
by the Company or its stockholders, as the case may be, is other than cash,
its value, as determined in good faith by the Board of Directors will be
deemed its fair market value.

Preemptive Rights

The holders of the Class B Common Stock shall have no preemptive rights to
subscribe for any shares of any class of stock of the Company, whether now or
hereafter authorized.

Each holder of any shares of Class A Common Stock then outstanding shall be
entitled to a preemptive right to purchase or subscribe for any unissued
shares of Class A Common Stock to be issued by the Company for any reason,
including any increase of the authorized number of shares of Class A Common
Stock, or for any additional shares of any class of the capital stock of the
Company or any bonds, certificates of indebtedness, debentures or other
securities convertible into shares of Class A Common Stock, or carrying any
rights to purchase shares of Class A Common Stock, whether such shares or
bonds, certificates of indebtedness, debentures or other securities shall be
issued for cash, property or other lawful consideration.

Restrictions on Transfer

Under the Company Bylaws, a shareholder shall not sell, transfer or
otherwise dispose of the shares owned by such person, directly or indirectly,
prior to the Offering in any public sale or distribution, including a sale
under Rule 144 promulgated under the Securities Act during the period of seven
days prior to, and 180 days after, the date this registration statement
becomes effective, except as to those shares to be sold to or distributed by
the underwriters in this Offering. This bylaw provision shall not be amended
without the unanimous written consent of the shareholders of the Company.
Notwithstanding anything contained in the Company Bylaws to the contrary, the
Board of Directors of the Company may waive any restrictions set forth in this
bylaw provision as it applies to any shareholder at any time or from time to
time.

This provision does not in any way restrict resale of shares of Class B
Common Stock sold in this Offering.

PREFERRED STOCK

The Company is authorized to issue 100,000,000 shares of Preferred Stock, of
which no shares will be issued and outstanding after completion of the
Offering. The Company has no plans to issue shares of Preferred Stock but
believes that the grant of full authority to the Board of Directors of the
Company to authorize the issuance of shares of Preferred Stock into one or
more series, as described below, will enhance the financial flexibility of the
Company. The Restated Articles grant full authority (to the extent permitted
by law) to the Board of Directors of the Company to divide the shares of
Preferred Stock into one or more series, to determine

72
<PAGE>

the designation and the number of shares of any series (within the total
number of shares of the class authorized by the Restated Articles), and to
determine the voting rights (whether full, limited, multiple, fractional or no
voting rights), preferences, limitations and special rights, if any, of any
series. Such division and determination may be made by action of the Board of
Directors from time to time and shall constitute an amendment of the Restated
Articles. It is not possible to state the actual effect of the authorization
and issuance of any series of Preferred Stock upon the rights of the holders
of the Class A Common Stock and the Class B Common Stock until the Board of
Directors determines the specific terms, rights and preferences of a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on the Class A Common Stock and the Class B Common
Stock, diluting the voting power of the Class A Common Stock and the Class B
Common Stock, or impairing liquidation rights of such shares without further
action by holders of the Class A Common Stock and the Class B Common Stock. In
addition, under certain circumstances, the issuance of Preferred Stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the
Company's securities or the removal of incumbent management.

ANTI-TAKEOVER CONSIDERATIONS

The Restated Articles contain certain provisions that could make more
difficult a change in control of the Company not having approval of the Board
of Directors. The entire voting power of the Company is vested in the holders
of the outstanding Class A Common Stock until the occurrence of the Agreement
Date relating to an agreement by the Company to issue shares of Class B Common
Stock in a business combination which is intended to be treated as a "pooling
of interests" under generally accepted accounting principles. After the
Offering, the Voting Trust will control the Company through the ownership of
all of the outstanding shares of Class A Common Stock of the Company. After
the Agreement Date, holders of the Class A Common Stock, voting separately as
a class, will be entitled to elect four-tenths (calculated to the next highest
whole number) of the total number of directors of the Company.

The Restated Articles authorizes the issuance of blank check Preferred
Stock. The Board of Directors may establish voting rights, liquidation
preferences, redemption rights, conversion rights and other rights relating to
such Preferred Stock, all or some of which may be senior to the Class A Common
Stock and the Class B Common Stock, without the approval of the holders of the
Class A Common Stock and the holders of the Class B Common Stock. In some
circumstances, the Preferred Stock could be issued and have the effect of
preventing a merger, tender offer or other takeover attempt which the Board of
Directors opposes.

TRANSFER AGENT

The transfer agent of the Class B Common Stock is Boston EquiServe.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
86,037,000 shares of Class B Common Stock (assuming the Underwriters' over-
allotment options are not exercised). The shares sold in this offering will be
freely tradeable without restriction or further registration (except by
affiliates of the Company or persons acting as underwriters) under the
Securities Act. For purposes of federal securities law, the Class B Common
Stock that will be held by the Company's current shareholders will be eligible
for public sale in the United States if registered under the Securities Act or
if sold pursuant to an exemption from registration under the Securities Act,
including Rule 144 and Rule 701 promulgated thereunder.

All officers, directors and Selling Shareholders of the Company have entered
into contractual "lock-up" agreements providing that they will not during the
period of 180 days from the date of this Prospectus, without the prior written
consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole

73
<PAGE>

or in part, directly or indirectly, the economic consequence of ownership of
the Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise (collectively, the "Lock-Up"), subject to
certain limited exceptions. With respect to the Selling Shareholders, the
Lock-Up shall not apply to (A) the issuance of the securities being sold by
the Selling Shareholders in the Offering, (B) any transfer of such securities
to an affiliate of the Selling Shareholder which agrees in a writing in form
and substance reasonably satisfactory to Merrill Lynch to agree to be bound by
the provisions of the Lock-Up as if it was the Selling Shareholder, (C) any
pledge prior to the date of this Prospectus by a shareholder of the Company of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, and (D) any pledge after the date of this Prospectus by a
shareholder of the Company of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock for the purpose of securing a
bona fide loan by a financial institution to such shareholder. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rule 144 and Rule 701 promulgated under the
Securities Act, which are summarized below, shares subject to lock-up
agreements will not be saleable until the agreements expire.

The Company has agreed not to, during the period of 180 days from the date
of this Prospectus, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose, of
any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
Securities Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise (collectively, the "Lock-Up"), subject to
certain limited exceptions. With respect to the Company, the Lock-Up shall not
apply to (A) the issuance of the securities being sold by the Company in the
Offering, (B) any issuance of Common Stock by the Company upon the exercise of
an option or warrant or the conversion or exchange of a security outstanding
on the date hereof and referred to in the Prospectuses, (C) any issuance of
Common Stock, or any grant of options to purchase Common Stock, pursuant to
existing employee benefit plans of the Company referred to in the
Prospectuses, (D) any issuance of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock by the Company in
consideration of the acquisition by the Company from a third party of a
business (whether through a merger, sale of assets or securities, or
otherwise), provided that each transferee of such Common Stock or securities
agrees in a writing in form and substance reasonably satisfactory to Merrill
Lynch to agree to be bound by the provisions of the Lock-Up as if it was the
Company, or the filing by the Company of a registration statement under the
1933 Act with respect to such issuance and acquisition.

Under the Company Bylaws, an existing shareholder shall not sell, transfer
or otherwise dispose of the shares owned by such person, directly or
indirectly, prior to the Offering in any public sale or distribution,
including a sale under Rule 144 promulgated under the Securities Act during
the period of seven days prior to, and 180 days after, the date this
registration statement becomes effective, except as to those shares to be sold
to or distributed by the underwriters in this Offering. Notwithstanding
anything contained in the Company Bylaws to the contrary, the Board of
Directors of the Company may waive any restrictions set forth in this bylaw
provision as it applies to any shareholder at any time or from time to time.
This Company Bylaw provision does not restrict resales of Class B Common Stock
by purchasers of such shares in this Offering.

The 69,746,765 shares of Class B Common Stock held by existing shareholders
upon completion of this Offering will be "restricted securities" as that term
is defined in Rule 144, and may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule
144 or Rule 701. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this Prospectus, a person (or persons whose shares
are aggregated) who has beneficially owned shares for at least two years
(including the holding period of any prior owner except an "affiliate" of the
Company as that term is defined under Rule 144), is entitled to sell in
"brokers' transactions" or to market makers, within any three-month period
commencing 90 days after the completion of this Offering, a number of shares
that does not exceed the greater of: (i) 1% of the number of shares of Class B
Common Stock then outstanding (approximately 860,370 shares immediately after

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<PAGE>

the Offering without giving effect to the exercise of the Underwriters' over-
allotment options); or (ii) the average weekly trading volume of the Class B
Common Stock during the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also generally
subject to the availability of current public information about the Company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may, therefore, be sold immediately upon
the completion of this Offering. Approximately 55,997,530 shares of the Class
B Common Stock, based on facts and circumstances existing at the date of
Offering, are expected to qualify as 144(k) shares. Rule 701 provides for an
exemption from registration for the issuance of shares to employees under
employee benefit plans, such as shares issued under the Restricted Stock Plan.
Securities issued pursuant to Rule 701 are deemed to be "restricted
securities" as defined in Rule 144. However, beginning 90 days after the date
of this Prospectus, non-affiliates of the Company may resell securities issued
pursuant to Rule 701 if the securities are sold in ordinary brokers'
transactions or directly to a market maker, and affiliates may resell
securities issued pursuant to Rule 701 by complying with the requirements of
Rule 144 other than the two year holding period requirement.

Prior to this Offering, there has been no trading market for shares of Class
B Common Stock, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of a
substantial number of shares of Class B Common Stock could aversely affect
prevailing market prices.

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<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") among the Company, the Selling Shareholders and
each of the underwriters named below (the "U.S. Underwriters"), and
concurrently with the sale of Class B Common Stock to the International
Underwriters, the Company and the Selling Shareholders have agreed to sell to
the U.S. Underwriters, and each of the U.S. Underwriters severally has agreed
to purchase, the aggregate number of shares of Class B Common Stock set forth
opposite its name below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................
PaineWebber Incorporated.............................................
Smith Barney Inc.....................................................

----------
Total.............................................................. 13,032,190
==========
</TABLE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber
Incorporated, and Smith Barney Inc. are acting as representatives of the
U.S.Underwriters (in such capacity, the "U.S. Representatives").

The Company and the Selling Shareholders also have entered into a purchase
agreement (the "International Purchase Agreement") with certain underwriters
outside the United States and Canada (the "International Underwriters" and,
together with the U.S. Underwriters, the "Underwriters") for whom Merrill
Lynch International, PaineWebber International (U.K.) Ltd. and Smith Barney
Inc. are acting as representatives (the "International Representatives").
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of 13,032,190 shares of Class B
Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
the Company and the Selling Shareholders have agreed to sell to the
International Underwriters, and the International Underwriters severally have
agreed to purchase, an aggregate of 3,258,045 shares of Class B Common Stock.
The initial public offering price per share and the underwriting discount per
share are identical under the U.S. Purchase Agreement and the International
Purchase Agreement.

In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class B Common Stock being sold
pursuant to each such Purchase Agreement if any of the shares being sold
pursuant to each such Agreement are purchased. Under certain circumstances,
the commitments of non-defaulting U.S. Underwriters or International
Underwriters (as the case may be) may be increased. The closings with respect
to the sale of Class B Common Stock to the U.S. Underwriters and the
International Underwriters are conditioned upon one another.

The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") which provides
for the coordination of their activities. The Underwriters are permitted to
sell Class B Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell Class B Common Stock will offer to sell or sell
shares to persons who are United States or Canadian persons or to persons they
believe intend to resell to persons who are United States or Canadian persons,
and the International Underwriters and any dealer to whom they sell shares
will not offer to sell or sell shares to United States or Canadian persons or
to persons they believe intend to resell to United States or Canadian persons,
except, in each case, for transactions pursuant to such Agreement.

The U.S. Representatives have advised the Company and the Selling
Shareholders that the U.S. Underwriters propose initially to offer the Class B
Common Stock to the public at the initial public offering price set forth on
the cover page of this Prospectus and to certain selected dealers at such
price less a concession not in excess of $ per share. The U.S.
Underwriters may allow, and such dealers may reallow, a discount

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<PAGE>

not in excess of $ per share on sales to certain other dealers. After the
Offering, the public offering price, concession and discount may be changed.

The Company and the Selling Shareholders have granted the U.S. Underwriters
options, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 312,000 and 1,642,828 additional shares of Class
B Common Stock, respectively, and have granted the International Underwriters
options, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 78,000 and 410,707 additional shares of Class B
Common Stock, respectively, in each case, at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise these options only to cover over-
allotments, if any, made on the sale of the Class B Common Stock offered
hereby. To the extent that the U.S. Underwriters exercise their option, each
U.S. Underwriter will have a firm commitment, subject to certain conditions,
to purchase approximately the same percentage of such shares as the number of
shares of Class B Common Stock to be purchased by it as shown in the foregoing
table bears to the total number of such shares initially offered hereby.

Pursuant to the U.S. Purchase Agreement, the Company, its officers and
directors and the Selling Shareholders of the Company have agreed not to
during the period of 180 days from the date of this Prospectus, without the
prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the Securities Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
(collectively, the "Lock-Up"), subject to certain limited exceptions. With
respect to the Selling Shareholders, the Lock-Up shall not apply to (A) the
issuance of the securities being sold by the Selling Shareholders in the
Offering, (B) any transfer of such securities to an affiliate of the Selling
Shareholder which agrees in a writing in form and substance reasonably
satisfactory to Merrill Lynch to agree to be bound by the provisions of the
Lock-Up as if it was the Selling Shareholder, (C) any pledge prior to the date
of this Prospectus by a shareholder of the Company of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
and (D) any pledge after the date of this Prospectus by a shareholder of the
Company of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for the purpose of securing a bona fide loan by
a financial institution to such shareholder. With respect to the Company, the
Lock-Up shall not apply to (A) the issuance of the securities being sold by
the Company in the Offering, (B) any issuance of Common Stock by the Company
upon the exercise of an option or warrant or the conversion or exchange of a
security outstanding on the date hereof and referred to in the Prospectuses,
(C) any issuance of Common Stock, or any grant of options to purchase Common
Stock, pursuant to existing employee benefit plans of the Company referred to
in the Prospectuses, (D) any issuance of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock by the
Company in consideration of the acquisition by the Company from a third party
of a business (whether through a merger, sale of assets or securities, or
otherwise), provided that each transferee of such Common Stock or securities
agrees in a writing in form and substance reasonably satisfactory to Merrill
Lynch to agree to be bound by the provisions of the Lock-Up as if it was the
Company, or the filing by the Company of a registration statement under the
1933 Act with respect to such issuance and acquisition.

Prior to the Offering, there has been no public market for the Class B
Common Stock. The initial public offering price for Class B Common Stock
offered hereby will be determined by negotiation among the Company, the
Selling Shareholders and the U.S. Representatives and the International
Representatives. Among the factors considered in determining the initial
public offering price, in addition to prevailing market conditions, will be
certain financial information of the Company, including earnings, the history
of, and the prospects for, the Company and the industry in which it competes,
an assessment of the management of the Company, the
Company's past and present operations, the prospects for, and timing of,
future revenues and earnings of the

77
<PAGE>

Company, the present state of the Company's development and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that
an active trading market will develop for the Class B Common Stock or that the
Class B Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.

Application has been made to list the Class B Common Stock on the New York
Stock Exchange.

The Underwriters do not intend to confirm sales of the Class B Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.

In the U.S. Purchase Agreement and the International Purchase Agreement, the
Company has agreed to indemnify the several Underwriters against certain civil
liabilities which may be incurred in connection with the Offering, including
certain liabilities under the Securities Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof.

Until the distribution of the shares of Class B Common Stock to be sold in
the Offering is completed, rules of the Commission may limit the ability of
the U.S. Underwriters to bid for and purchase the shares of Class B Common
Stock. As an exception to these rules, the U.S. Underwriters are permitted to
engage in certain transactions that stabilize the price of the shares of Class
B Common Stock. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the shares of Class B
Common Stock.

If the U.S. Underwriters create a short position in the shares of Class B
Common Stock in connection with the initial resale of the shares of Class B
Common Stock to be sold in the Offering, i.e., if they sell more shares of
Class B Common Stock than are set forth on the cover page of this Prospectus,
the U.S. Underwriters may reduce such short position by purchasing shares of
Class B Common Stock in the open market. The U.S. Underwriters may also elect
to reduce any short position by exercising all or part of the overallotment
option described above.

The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Class B Common Stock in the open market to
reduce the U.S. Underwriters' short position or to stabilize the price of the
shares of Class B Common Stock, they may reclaim the amount of the selling
concession from the U.S. Underwriters and selling group members who initially
resold such shares.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.

Neither the Company nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any transaction
described above may have on the price of the shares of Class B Common Stock.
In addition, neither the Company nor any Underwriter makes any representation
that the U.S. Representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.

Certain of the Underwriters, including the U.S. Representatives, perform
brokerage services for the Company and its affiliates and investment companies
managed by them from time to time for which they receive customary
compensation. Each of the U.S. Representatives distributes the Company's
mutual fund products and provides shareholder services in connection with such
products in the ordinary course of business for which they receive customary
compensation. Affiliates of certain of the Underwriters own shares of Class B
Common Stock of the Company and intend to sell a portion of their holdings in
the Offering. See "Principal and Selling Shareholders." In February 1996,
certain affiliates of Merrill Lynch sold an aggregate of 50,000 Trust Class B
Common Shares (without taking into account subsequent stock splits) for an
aggregate consideration of $950,000. Merrill Lynch has historically provided
investment banking advisory services to the Company for which it received
customary compensation.

78
<PAGE>

PRICING OF THE OFFERING

Prior to the Offering, there has been no public market for Class B Common
Stock. The initial public offering price will be determined by negotiations
between the Company on the one hand and the U.S. Representative on the other
hand. Among the factors to be considered in determining the initial public
offering price will be the future prospects of the Company and its industry in
general, sales, earnings, and certain other financial operating information of
the Company in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the
Company. The estimated initial public offering price range set forth on the
cover page of this Prospectus is subject to change as a result of market
conditions and other factors.

DIRECTED SHARE PROGRAM

At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 750,000 shares of the Class B Common
Stock that will be offered by this Prospectus for directors, officers and
employees of the Company. All purchasers of such reserved shares will have
agreed in writing not to sell, transfer, assign, pledge or hypothecate such
shares for six months from their date of purchase. The number of shares of
Class B Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
that are not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.

LEGAL MATTERS

Certain legal matters in connection with the shares of the Class B Common
Stock offered hereby will be passed upon for the Company by Kirkpatrick &
Lockhart LLP, Pittsburgh, Pennsylvania. Certain legal matters in connection
with the sale of shares of Class B Common Stock in the Offering will be passed
on for the Underwriters by Simpson Thacher & Bartlett, New York, New York.

EXPERTS

The consolidated financial statements of Federated as of December 31, 1997
and 1996, and for each of the two years in the period ended December 31, 1997,
included in the Proxy Statement of Federated, which is referred to and made a
part of this Prospectus and Registration Statement, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

The consolidated financial statements of the Trust for the year ended
December 31, 1995, have been included herein and in the registration
statement, in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

79
<PAGE>

On October 25, 1996, a committee of the Board of Trustees of Federated
Investors approved the engagement of Ernst & Young LLP as its independent
auditors for the year ending December 31, 1996, to replace the firm of KPMG
Peat Marwick LLP who after receiving Federated Investors' notice to solicit
proposals for independent auditors, declined to stand for re-election as
auditors of Federated Investors effective August 26, 1996.

The report of KPMG Peat Marwick LLP on Federated Investors' consolidated
financial statements for the year ended December 31, 1995, did not contain an
adverse opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles.

In connection with the audit of Federated Investors' consolidated financial
statements for each of the two years ended December 31, 1995, and in the
subsequent interim period through August 26, 1996, there were no disagreements
with KPMG Peat Marwick LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which if not resolved to the satisfaction of KPMG Peat Marwick LLP would have
caused KPMG Peat Marwick LLP to make reference to the matter in their report.
Federated Investors requested KPMG Peat Marwick LLP to furnish a letter
addressed to the Commission stating whether it agrees with the above
statements. A copy of that letter dated April 14, 1998 is filed as an Exhibit
to the Registration Statement.

80
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Report of KPMG Peat Marwick LLP, Independent Auditors ..................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996............... F-4
Consolidated Statements of Income for the Three Years Ended
December 31, 1997, 1996 and 1995.......................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Three
Years Ended
December 31, 1997, 1996 and 1995.......................................... F-6
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997, 1996 and 1995.......................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Federated Investors

We have audited the consolidated balance sheets of Federated Investors and
subsidiaries (Federated Investors) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of Federated Investors' management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of Federated Investors for the year ended December 31,
1995 were audited by other auditors whose report dated January 25, 1996,
expressed an unqualified opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and subsidiaries at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Pittsburgh, Pennsylvania
April 23, 1998

F-2
<PAGE>

REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Federated Investors:

We have audited the consolidated statements of income, changes in
shareholders' equity, and cash flows of Federated Investors for the year ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Federated Investors for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Pittsburgh, Pennsylvania
January 25, 1996

F-3
<PAGE>

FEDERATED INVESTORS

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................... $ 22,912 $ 6,561
Marketable securities................................... 8,945 13,761
Receivables--Federated Funds............................ 5,772 11,276
Receivables--Other, net of reserve of $3,266 and $1,584,
respectively........................................... 26,306 13,806
Prepaid expenses........................................ 2,853 1,704
Income taxes receivable................................. 7,519 6,558
Other current assets.................................... 1,805 3,196
--------- ---------
Total Current Assets................................... 76,112 56,862
--------- ---------
Long-Term Assets:
Customer relationships, net of accumulated amortization
of $26,907 and $15,550, respectively................... 30,398 29,265
Goodwill, net of accumulated amortization of $11,512 and
$9,273, respectively................................... 37,356 39,653
Other intangible assets, net............................ 126 187
Deferred sales commissions, net......................... 164,623 85,905
Property and equipment, net............................. 22,163 29,357
Other long-term assets.................................. 6,378 6,148
--------- ---------
Total Long-Term Assets................................. 261,044 190,515
--------- ---------
Total Assets........................................ $ 337,156 $ 247,377
========= =========
Current Liabilities:
Cash overdraft.......................................... $ 7,680 $ 8,849
Current portion of long-term debt--recourse............. 280 15,659
Accrued expenses........................................ 34,939 22,138
Accounts payable........................................ 18,634 15,645
Other current liabilities............................... 2,520 8,354
--------- ---------
Total Current Liabilities.............................. 64,053 70,645
--------- ---------
Long-Term Liabilities:
Long-term debt--recourse................................ 98,950 244,125
Long-term debt--nonrecourse............................. 185,388 0
Deferred tax liability, net............................. 26,546 15,642
Other long-term liabilities............................. 2,863 3,073
--------- ---------
Total Long-Term Liabilities............................ 313,747 262,840
--------- ---------
Total Liabilities................................... 377,800 333,485
--------- ---------
Minority Interest........................................ 466 814
--------- ---------
Shareholders' Equity:
Common Stock:
Class A, $1.00 stated value, 99,000 shares authorized,
6,000 and 2,000 shares issued and outstanding,
respectively.......................................... 6 2
Class B, $.01 stated value, 149,700,000 shares
authorized, 90,094,000 and 34,476,000 shares issued
and 90,094,000 and 34,476,000 shares outstanding,
respectively.......................................... 901 345
Additional paid-in capital.............................. 28,574 29,605
Retained earnings....................................... 55,139 9,989
Unrealized (loss) gain on marketable securities, net of
tax.................................................... (85) 25
Treasury stock, at cost, 6,667,000 and 6,488,000 shares
Class B Common Stock, respectively..................... (123,373) (123,711)
Equity adjustment for foreign currency translation...... (6) (10)
Employee restricted stock plan.......................... (2,266) (3,167)
--------- ---------
Total Shareholders' Equity............................ (41,110) (86,922)
--------- ---------
Total Liabilities, Minority Interest, and
Shareholders' Equity................................ $ 337,156 $ 247,377
========= =========
</TABLE>

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

F-4
<PAGE>

FEDERATED INVESTORS

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Investment advisory fees, net--Federated Funds.. $213,361 $174,585 $155,032
Investment advisory fees, net--Other............ 5,507 4,636 3,930
Administrative service fees, net--Federated 60,934 51,239 42,736
Funds..........................................
Administrative service fees, net--Other......... 24,495 21,684 24,957
Other service fees, net--Federated Funds........ 65,432 43,998 29,375
Other service fees, net--Other.................. 21,953 15,796 16,443
Commission income (loss)--Federated Funds....... 2,641 1,535 (157)
Interest and dividends.......................... 3,032 2,160 1,109
Marketable securities gains..................... 49 2,651 1,156
Other income.................................... 6,315 3,509 5,250
-------- -------- --------
Total Revenue.................................. 403,719 321,793 279,831
-------- -------- --------
Operating Expenses:
Compensation and related........................ 139,373 126,966 101,534
Amortization of deferred sales commissions...... 20,882 12,349 9,554
Office and occupancy............................ 28,608 29,859 23,272
Systems and communications...................... 23,373 22,288 22,829
Advertising and promotional..................... 34,984 30,984 21,471
Travel and related.............................. 14,834 15,929 12,827
Other........................................... 18,323 22,899 14,932
Amortization of intangible assets............... 13,715 8,886 10,445
-------- -------- --------
Total Operating Expenses....................... 294,092 270,160 216,864
-------- -------- --------
Operating income................................. 109,627 51,633 62,967
-------- -------- --------
Nonoperating Expenses:
Interest expense................................ 18,862 18,563 9,413
Other debt expense.............................. 1,198 1,724 413
-------- -------- --------
Total Nonoperating Expenses.................... 20,060 20,287 9,826
-------- -------- --------
Income before minority interest, income taxes and 89,567 31,346 53,141
extraordinary item..............................
Minority interest................................ 7,584 6,811 5,801
-------- -------- --------
Income before income taxes and extraordinary 81,983 24,535 47,340
item............................................
Income tax provision............................. 30,957 10,930 18,809
-------- -------- --------
Income before extraordinary item................. 51,026 13,605 28,531
Extraordinary item related to debt restructuring
costs, net of tax............................... 449 986 0
-------- -------- --------
Net income....................................... 50,577 12,619 28,531
Dividends on preferred stock..................... 0 3,025 6,000
-------- -------- --------
Net income applicable to common stock............ $ 50,577 $ 9,594 $ 22,531
======== ======== ========
Earnings per common share--basic:
Income before extraordinary item................ $ 0.62 $ 0.13 $ 0.25
Extraordinary item related to debt restructuring
costs, net of tax.............................. (0.01) (0.01) 0.00
-------- -------- --------
Net income per common share..................... $ 0.61 $ 0.12 $ 0.25
======== ======== ========
Earnings per common share--assuming dilution:
Income before extraordinary item................ $ 0.61 $ 0.13 $ 0.24
Extraordinary item related to debt restructuring
costs, net of tax.............................. (0.01) (0.01) 0.00
-------- -------- --------
Net income per common share--assuming dilution.. $ 0.60 $ 0.12 $ 0.24
======== ======== ========
Cash dividends per common share.................. $ 0.0583 $ 0.0417 $ 0.1667
======== ======== ========
</TABLE>

Per share amounts have been restated to reflect the one for one stock
dividend paid in 1996, the one for one stock dividend paid on April 15, 1998
and the one for two stock dividend paid on April 30, 1998.

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

F-5
<PAGE>

FEDERATED INVESTORS

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
RETAINED ON
ADDITIONAL EARNINGS MARKETABLE FOREIGN
PREFERRED COMMON PAID-IN (ACCUMULATED SECURITIES, TREASURY CURRENCY
STOCK STOCK CAPITAL DEFICIT) NET OF TAX STOCK TRANSLATION
--------- ------ ---------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1995.......... $ 1 $152 $44,358 $(18,497) $ 0 $ 0 $ 1
Amortization of
Employee
Restricted Stock
Plan............. 0 0 0 0 0 0 0
Dividends Declared
on:
Common Stock..... 0 0 (15,160) 0 0 0 0
Preferred Stock,
$6,000
per share....... 0 0 0 (6,000) 0 0 0
Issuance of Stock
Under Employee
Restricted Stock
Plan, Net........ 0 1 88 0 0 173 0
Purchase of
Treasury Stock... 0 0 0 0 0 (231) 0
Foreign Currency
Translation...... 0 0 0 0 0 0 1
Unrealized Gain on
Marketable
Securities, Net
of Tax........... 0 0 0 0 624 0 0
Net Income........ 0 0 0 28,531 0 0 0
--- ---- ------- -------- ----- --------- ----
Balance at
December 31,
1995............. 1 153 29,286 4,034 624 (58) 2
Amortization of
Employee
Restricted Stock
Plan and
Other Compensation
Plans............ 0 0 371 0 0 0 0
Dividends Declared
on:
Common Stock..... 0 141 0 (3,639) 0 0 0
Preferred Stock,
$3,025
per share....... 0 0 0 (3,025) 0 0 0
Purchase of
Treasury Stock... 0 0 0 0 0 (123,653) 0
Conversion of
Preferred Stock
to Common Stock.. (1) 53 (52) 0 0 0 0
Foreign Currency
Translation...... 0 0 0 0 0 0 (12)
Unrealized Loss on
Marketable
Securities, Net
of Tax........... 0 0 0 0 (599) 0 0
Net Income........ 0 0 0 12,619 0 0 0
--- ---- ------- -------- ----- --------- ----
Balance at
December 31,
1996............. 0 347 29,605 9,989 25 (123,711) (10)
Amortization of
Employee
Restricted Stock
Plan and
Other Compensation
Plans............ 0 0 257 0 0 0 0
Dividends Declared
on Common Stock.. 0 560 0 (5,427) 0 0 0
Issuance of Stock
Under Employee
Restricted Stock
Plan, Net........ 0 0 (218) 0 0 440 0
Restricted Stock
Forfeitures...... 0 0 (1,070) 0 0 0 0
Purchase of
Treasury Stock... 0 0 0 0 0 (102) 0
Foreign Currency
Translation...... 0 0 0 0 0 0 4
Unrealized Loss on
Marketable
Securities, Net
of Tax........... 0 0 0 0 (110) 0 0
Net Income........ 0 0 0 50,577 0 0 0
--- ---- ------- -------- ----- --------- ----
Balance at
December 31,
1997............. $ 0 $907 $28,574 $ 55,139 $ (85) $(123,373) $ (6)
=== ==== ======= ======== ===== ========= ====
<CAPTION>
EMPLOYEE
RESTRICTED TOTAL
STOCK SHAREHOLDERS'
PLAN EQUITY
---------- -------------
<S> <C> <C>
Balance at January
1, 1995.......... $(5,282) $ 20,733
Amortization of
Employee
Restricted Stock
Plan............. 169 169
Dividends Declared
on:
Common Stock..... 0 (15,160)
Preferred Stock,
$6,000
per share....... 0 (6,000)
Issuance of Stock
Under Employee
Restricted Stock
Plan, Net........ (237) 25
Purchase of
Treasury Stock... 0 (231)
Foreign Currency
Translation...... 0 1
Unrealized Gain on
Marketable
Securities, Net
of Tax........... 0 624
Net Income........ 0 28,531
---------- -------------
Balance at
December 31,
1995............. (5,350) 28,692
Amortization of
Employee
Restricted Stock
Plan and
Other Compensation
Plans............ 2,183 2,554
Dividends Declared
on:
Common Stock..... 0 (3,498)
Preferred Stock,
$3,025
per share....... 0 (3,025)
Purchase of
Treasury Stock... 0 (123,653)
Conversion of
Preferred Stock
to Common Stock.. 0 0
Foreign Currency
Translation...... 0 (12)
Unrealized Loss on
Marketable
Securities, Net
of Tax........... 0 (599)
Net Income........ 0 12,619
---------- -------------
Balance at
December 31,
1996............. (3,167) (86,922)
Amortization of
Employee
Restricted Stock
Plan and
Other Compensation
Plans............ 28 285
Dividends Declared
on Common Stock.. 0 (4,867)
Issuance of Stock
Under Employee
Restricted Stock
Plan, Net........ (197) 25
Restricted Stock
Forfeitures...... 1,070 0
Purchase of
Treasury Stock... 0 (102)
Foreign Currency
Translation...... 0 4
Unrealized Loss on
Marketable
Securities, Net
of Tax........... 0 (110)
Net Income........ 0 50,577
---------- -------------
Balance at
December 31,
1997............. $(2,266) $ (41,110)
========== =============
</TABLE>

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

F-6
<PAGE>

FEDERATED INVESTORS

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income..................................... $ 50,577 $ 12,619 $ 28,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item related to debt
restructuring costs........................... 690 1,516 0
Amortization of intangible assets.............. 13,715 8,886 10,445
Depreciation and other amortization............ 8,674 9,398 5,106
Amortization of deferred sales commissions..... 20,882 12,349 9,554
Minority interest.............................. 7,584 6,811 5,801
Loss on sale of property and equipment......... 271 0 42
Write-off of property and equipment............ 0 403 0
Amortization of employee restricted stock and
other compensation plans...................... 285 2,554 169
Provision for deferred income taxes............ 11,117 17,088 5,153
Net realized gain on sale of marketable
securities.................................... (49) (2,651) (1,156)
Foreign currency translation................... 4 (12) 1
Deferred sales commissions..................... (111,628) (69,600) (40,050)
Contingent deferred sales charges received..... 12,027 8,191 8,634
Other changes in assets and liabilities:
Increase in receivables, net.................. (6,996) (4,561) (6,634)
Decrease (increase) in prepaid expenses and
other current assets......................... 116 684 (1,802)
Increase in income taxes receivable........... (961) (2,066) (4,566)
(Increase) decrease in other long-term assets. (1,870) (4,805) 3,526
Increase in accounts payable and accrued
expenses..................................... 15,790 17,653 2,150
(Decrease) increase in other current
liabilities.................................. (4,904) 11,485 1,011
(Decrease) increase in other long-term
liabilities.................................. (257) 1,537 (2,711)
Other......................................... 0 0 480
--------- -------- --------
Net Cash Provided by Operating Activities..... 15,067 27,479 23,684
--------- -------- --------
Investing Activities:
Proceeds from sale of property and equipment... 2,454 14 238
Additions to property and equipment............ (3,129) (12,362) (7,406)
Cash paid for acquisitions..................... (14,699) (12,128) 0
Purchases of marketable securities............. (24,531) (60,769) (27,218)
Proceeds from redemptions of marketable
securities.................................... 29,230 65,122 16,463
Other.......................................... 0 0 (35)
--------- -------- --------
Net Cash Used by Investing Activities.......... (10,675) (20,123) (17,958)
--------- -------- --------
Financing Activities:
Distributions to minority interest............. (7,932) (6,824) (6,107)
Dividends paid................................. (4,867) (6,523) (21,160)
Proceeds from issuance of common stock......... 25 0 25
Purchase of treasury stock..................... (102) (123,653) (231)
Proceeds from new borrowings--Recourse......... 15,729 234,724 63,658
Proceeds from new borrowings--Nonrecourse...... 195,156 0 0
Payments on debt--Recourse..................... (176,282) (105,700) (42,698)
Payments on debt--Nonrecourse.................. (9,768) 0 0
--------- -------- --------
Net Cash Provided (Used) by Financing
Activities.................................... 11,959 (7,976) (6,513)
--------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... 16,351 (620) (787)
Cash and Cash Equivalents, Beginning of Period.. 6,561 7,181 7,968
--------- -------- --------
Cash and Cash Equivalents, End of Period........ $ 22,912 $ 6,561 $ 7,181
========= ======== ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest....................................... $ 19,668 $ 16,758 $ 9,961
Income taxes................................... 20,495 702 18,272
</TABLE>

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

F-7
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Operations

Federated Investors and its subsidiaries ("Federated Investors") sponsor,
market and provide investment advisory, distribution and administrative
services primarily to mutual funds. Federated Investors also provides
investment advisory services and administrative services to corporations,
employee benefit plans and private investment advisory accounts. The
operations of Federated Investors are organized into three principal
functions: investment advisory, distribution and services.

A large portion of Federated Investors' revenue is derived from investment
advisory services provided to mutual funds and separately managed accounts
through various subsidiaries and affiliates pursuant to investment advisory
contracts. These subsidiaries are registered as investment advisers under the
Investment Advisers Act of 1940 and with certain states.

Shares of the portfolios or classes of shares under management or
administration by Federated Investors are distributed by indirect wholly-owned
subsidiaries which are registered broker/dealers under the Securities Exchange
Act of 1934 and under applicable state laws. Federated Investors' investment
products are primarily distributed within the bank trust, broker/dealer and
institutional markets.

Through an indirect wholly-owned subsidiary, Federated Investors provides
mutual fund services to support the operation and administration of all mutual
funds it sponsors.

(b) Basis of Presentation

The consolidated financial statements include the accounts of Federated
Investors and all of its subsidiaries including a special purpose entity
("SPE"). All significant intercompany accounts and transactions have been
eliminated.

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results will differ from those estimates, and such differences may be material
to the consolidated financial statements.

For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and investments which consist of interest-
bearing deposits with banks, overnight federal funds sold, money market
accounts, and other investments with an original maturity of less than three
months.

(d) Marketable Securities

Investments consist of equity securities which are classified as "available
for sale" and are carried at fair value. The unrealized gains or losses on
these securities are carried as a separate component of shareholders' equity,
net of tax. Realized gains and losses on these securities are computed on a
specific identification basis and recognized in the statements of income.

(e) Property and Equipment

Property and equipment are recorded at cost, or fair value if acquired in
connection with a business combination, and are depreciated using the
straight-line method over their estimated useful lives ranging from

F-8
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

(e) Property and Equipment, continued

three to ten years. Leasehold improvements are depreciated using the straight-
line method over their estimated useful lives or their respective lease terms,
whichever is shorter.

(f) Intangible Assets

Goodwill and other intangible assets are amortized on a straight-line basis
over the estimated period of benefit not to exceed twenty-five years. Customer
relationships are amortized using the straight-line method over their
estimated period of benefit (five to nine years). Federated Investors
continuously 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 Federated Investors include a decline in
the level of managed assets, changes to contractual provisions underlying
certain intangible assets and reductions in operating cash flows. Should there
be an indication of a change in the useful life or an impairment in value,
Federated Investors compares the carrying value of the asset and its related
useful life to the projected undiscounted cash flows expected to be generated
from the underlying asset over its remaining useful life to determine whether
an impairment has been triggered. If the carrying value of the asset exceeds
the undiscounted cash flows, impairment is measured based on fair value using
a discounted cash flow methodology. The discount rate utilized by Federated
Investors reflects its weighted average cost of capital. Impairment from
changes in contractual provisions is based on the carrying value of the
underlying asset, or component of the underlying asset when the restrictions
change.

Measuring impairment for the customer relationship intangible asset is
dependent upon the level of remaining managed assets for those relationships.
A decline in the remaining managed asset balance in excess of the estimated
attrition rate for those managed assets could have a considerable impact on
the underlying value of the customer relationship intangible.

(g) Deferred Sales Commissions

Certain subsidiaries of Federated Investors pay commissions to
broker/dealers ("deferred sales commissions") to promote investments in
certain mutual funds. These deferred sales commissions are capitalized and
amortized on a straight-line basis over estimated periods of benefit not to
exceed contingent deferred sales charge ("CDSC") periods and are subject to
recoverability tests. Mutual fund shareholders redeeming Class B Shares within
six full years of the purchase date will be charged a CDSC. Any CDSC will be
imposed on the lesser of the net asset value of the redeemed shares at the
time of purchase or the net asset value of the redeemed shares at the time of
redemption. The CDSC is determined in accordance with a predetermined
declining scale over the full six year period. Any CDSCs collected are used to
reduce deferred sales commissions.

(h) Foreign Currency Translation

In consolidating a foreign subsidiary, the subsidiary's financial statements
are converted to U.S. currency resulting in an equity adjustment for foreign
currency translation on the Consolidated Balance Sheets.

(i) Revenue Recognition

Revenue is recognized during the period in which the services are performed.
Federated Investors may waive certain fees for services (primarily investment
advisory fees) for competitive reasons, or to meet regulatory requirements.

F-9
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

(j) Reporting on Advertising Costs

Federated Investors reports the cost of all advertising as expenses as
incurred.

(k) Income Taxes

Federated Investors 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.

(l) Earnings per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share replaces the previous calculation of fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to SFAS 128 requirements.

(m) Stock-Based Compensation Plans

The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective
for Federated Investors' fiscal year ended December 31, 1996. SFAS 123 defines
a fair value-based method of accounting for stock-based employee compensation
plans. Under the fair value-based method, compensation cost is measured at the
grant date based upon the value of the award and is recognized over the
service period. While the standard encourages entities to adopt this method of
accounting for employee stock compensation plans, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25").
Federated Investors has elected to continue to apply APB 25 and has disclosed
the pro forma effect on earnings with SFAS 123 applied (see Note 8).

(n) Reclassification of Prior Periods' Statements

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

(o) Recent Accounting Pronouncements

Statement of Financial Standards No. 130, "Reporting Comprehensive Income,"
("SFAS 130") is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes net income and all
other changes in shareholders' equity except those resulting from investments
and distributions to owners.

Statement of Financial Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") is effective for financial
statements for periods beginning after December 15, 1997. SFAS 131 requires
financial and descriptive information about an entity's operating segments to
be included in the annual financial statements.

Federated Investors believes that the impact of the adoptions of SFAS 130
and SFAS 131 will not have a material impact on its financial statements.

F-10
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(2) MARKETABLE SECURITIES

A summary of the cost and estimated market value of marketable securities is
as follows:

<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
------------------ MARKET
COST GAINS (LOSSES) VALUE
------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Investments in fluctuating value mutual
funds
December 31, 1997..................... $ 9,075 $ 61 $ (191) $ 8,945
======= ======= ======== =======
December 31, 1996..................... $13,722 $ 115 $ (76) $13,761
======= ======= ======== =======
</TABLE>

Gross realized gains and (losses) on the sale of marketable securities were
approximately $275,000 and ($226,000); $3,126,000 and ($475,000); and
$1,169,000 and ($13,000), respectively, for the years ended December 31, 1997,
1996, and 1995.

Federated Investors enters into futures contracts to hedge against changes
in market values related to investing in mutual funds it sponsors. These
investments enable the funds to build a diversified portfolio and are redeemed
as outside investors purchase the funds. The futures contracts are carried at
fair value in Marketable Securities on the Consolidated Balance Sheets. At
December 31, 1997, the futures contracts had maturities of less than one year.

(3) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements...................................... $ 18,187 $ 18,432
Computer equipment.......................................... 32,988 31,229
Office furniture and equipment.............................. 10,508 10,706
Transportation equipment.................................... 1,851 5,699
-------- --------
63,534 66,066
Accumulated depreciation.................................. (41,371) (36,709)
-------- --------
Property and equipment, net................................. $ 22,163 $ 29,357
======== ========
</TABLE>

Depreciation expense was approximately $7,599,000, $7,961,000, and
$5,106,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

F-11
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(4) INTANGIBLE ASSETS

Intangible assets consist of customer relationships, goodwill and other
intangible assets. The other intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Employment contracts.......................................... $ 2,634 $ 2,634
Computer software............................................. 10 10
Organization expenses......................................... 1,067 1,067
------- -------
3,711 3,711
Accumulated amortization.................................... (3,585) (3,524)
------- -------
Other intangible assets, net.................................. $ 126 $ 187
======= =======
</TABLE>

In 1997, Federated Investors assumed the investment management and
distribution responsibilities for seven retail mutual funds. The acquisition
was accounted for as a purchase for which Federated Investors recorded a
customer relationship intangible and paid $13,282,000 in cash.

In 1996, Federated Investors acquired the right to advise, distribute,
administer and provide management services for fund assets for a total of
$11,280,000 in cash plus a percentage of certain assets over a two year
period. Additionally in 1996, Federated Investors acquired the right to
negotiate new administration or sub-administration and/or distribution
agreements for cash of $800,000. Both acquisitions resulted in Federated
Investors recording customer relationship intangibles.

(5) LONG-TERM DEBT--RECOURSE

Federated Investors' long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Secured Credit Agreement............................... $ 0 $160,300
Senior Secured Note Purchase Agreement........................ 98,000 98,000
Capitalized Leases............................................ 1,230 1,484
------- --------
Total Debt.................................................. 99,230 259,784
Less: Current Portion......................................... 280 15,659
------- --------
Total Long-Term Debt.......................................... $98,950 $244,125
======= ========
</TABLE>

In 1996, Federated Investors obtained a bank Senior Secured Credit Agreement
("Senior") maturing in 2001 consisting of a Revolving Credit Facility and a
Term Loan Facility. Also in 1996, Federated Investors entered into a
$98,000,000 Senior Secured Note Purchase Agreement ("Note") maturing in 2006.
Pursuant to these agreements, Federated Investors must meet certain financial
and nonfinancial covenants. At December 31, 1997 and 1996, respectively,
Federated Investors was in compliance with all such covenants.

In 1996, Federated Investors entered into an interest rate cap agreement
("Cap") to reduce the impact of increases in interest rates on the Senior. The
premium paid was amortized to interest expense until the Cap was sold in 1997
concurrent with the extinguishment of the Term Loan Facility.

F-12
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(5) LONG-TERM DEBT--RECOURSE, CONTINUED

The obligations of Federated Investors under the Senior and the Note are
secured by pledges of all the outstanding common stock or shares of beneficial
interest of all of the subsidiaries owned by Federated Investors.

(a) Senior Secured Credit Agreement

The Term Loan Facility was fully repaid as of December 31, 1997. The
Revolving Credit Facility is used for general business purposes. At December
31, 1997, the outstanding balance was $0, with availability of $148,961,000.
The $160,300,000 outstanding balance at December 31, 1996 had a weighted-
average borrowing rate of 6.90%.

(b) Senior Secured Note Purchase Agreement

The Note is due in seven equal annual installments beginning in the year
2000 and maturing in 2006. The Note carries a fixed interest rate of 7.96%.

The aggregate contractual maturities of the recourse debt for the years
following December 31, 1997 are:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.......................................................... $ 280
1999.......................................................... 238
2000.......................................................... 14,258
2001.......................................................... 14,280
2002.......................................................... 14,174
2003 and thereafter........................................... 56,000
-------
Total Recourse Debt......................................... $99,230
=======
</TABLE>

(6) SECURITIZATION OF B-SHARE ASSETS AND NONRECOURSE DEBT

Federated Investors has entered into an agreement with a third party to sell
the rights to the future revenue streams associated with the 12b-1,
shareholder service and CDSC fees of the Class B shares of various mutual
funds it manages. This agreement includes both an initial sale of existent
rights to future revenue streams as well as establishing a program to sell on
a continuous basis the future rights associated with future revenue streams
relating to the ongoing sale of B shares. For accounting purposes,
transactions executed under the agreement are reflected as financings and
nonrecourse debt has been recorded.

In the fourth quarter of 1997, Federated Investors exchanged its rights to
certain future cash flows associated with net deferred sales commission assets
with a remaining book value of $88,738,000 for $110,214,000 in cash. Two SPEs
were established for the purpose of the initial transaction. A bankruptcy
remote SPE was formed by Federated Investors to purchase the rights to the
future cash flows from a subsidiary and in turn it sold these future cash
flows to a third party's SPE. The third party's SPE funded this purchase by
issuing Class A and Class B notes.

F-13
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(6) SECURITIZATION OF B-SHARE ASSETS AND NONRECOURSE DEBT, CONTINUED

The cash flows of the B-share assets will be used by the third party SPE to
first pay trustee fees and other program related expenses. After these fees
are paid, interest and principal are paid in the following succession: Class A
interest, Class B interest, Class A principal, and Class B principal (only
upon full payment of Class A principal). Any residual cash flow after full
payment of all principal on the notes will be paid 90% to Federated Investors
and 10% to the holders of the Class B notes. This debt is nonrecourse debt to
Federated Investors in the event the future cash flows associated with the
rights sold do not cover the full obligation of the notes.

The Class A notes had an outstanding balance at December 31, 1997 of
$97,873,000 at a fixed interest rate of 7.44%. The Class B notes had an
outstanding balance at December 31, 1997 of $9,700,000 at a fixed interest
rate of 9.80%.

Also in the fourth quarter of 1997, Federated Investors exchanged additional
net deferred sales commission assets with a remaining book value of
$79,190,000 for $81,056,000 in cash. The transactions were also accounted for
as financings, and the nonrecourse debt has been recorded with an imputed
interest rate of 7.6%. Cash flows associated with these B-share assets will be
applied by the third party in the following succession: i) fees and other
program related expenses; ii) interest and iii) principal. Federated will also
participate in 49.6% of any residual cash flow after full payment of program
obligations. As of December 31, 1997, the outstanding balance of this
nonrecourse debt was $77,815,000. The nonrecourse debt does not contain a
contractual maturity but is repaid dependent upon the cash flows of the
transaction.

For a period of three years, the third party has agreed to purchase on a
semi-monthly basis the rights associated with certain future revenue streams
of B shares sold during that period.

(7) EMPLOYEE BENEFIT PLANS

The employees of Federated Investors participate in a 401(k)/Profit Sharing
Plan.

F-14
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(7) EMPLOYEE BENEFIT PLANS, CONTINUED

(a) 401(k)

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

In order to vest in Federated Investors' matching contributions, a
participant in the 401(k) plan must be employed at least three years and work
at least 1,000 hours per year. Upon completion of three years of service, 20%
of a participant's balance vests and 20% vests for each of the following four
years, if the participant works 1,000 hours per year. Employees are
immediately vested in their 401(k) salary reduction contributions.

Matching contributions to the 401(k) plan amounted to $2,537,000, $2,596,000
and $1,322,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.

(b) Profit Sharing

An employee of Federated Investors becomes eligible to participate in the
Profit Sharing plan upon the first day of employment. The Profit Sharing plan
is a defined contribution plan to which Federated Investors contributes
amounts as authorized by its Board of Trustees. An employee will receive a
portion of Federated Investors' contribution upon completion of 500 hours of
service and if employed on the last day of the plan year. No contributions
have been made to the Profit Sharing plan in 1997, 1996 and 1995.

(8) OTHER COMPENSATION PLANS

(a) Deferred Compensation Plans

(1) In 1997, a deferred compensation arrangement was established for a group
of key employees for the purpose of providing incentive to certain individuals
who contribute to the success of Federated Investors. Each annual award
provided under this program is deferred for a period of four years with the
vesting period beginning in 1997. Termination of employment for any reason
other than death, disability or retirement prior to the plan's vesting date of
the third quarter 2001 causes the participant's benefit to be forfeited. The
liability at December 31, 1997 is $73,000 and is included in Other Long-Term
Liabilities on the Consolidated Balance Sheet.

(2) A deferred compensation arrangement ("Deferred Comp") was established
for a group of employees for the purpose of providing incentive to individuals
who contribute to the success of Federated Investors by their superior
performance. A portion of the Deferred Comp award through December 31, 1991
was deferred for a period of five years. Termination of employment prior to
the five-year vesting period causes the participant's benefit to be forfeited.
The Deferred Comp terminated in 1996 and all liabilities under the plan were
paid with interest to participants by December 31, 1996. Amounts forfeited
during these periods were not significant. Amounts included in compensation
and related expense on the Consolidated Statements of Income were $0, $44,000
and $4,299,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

(b) Employee Restricted Stock Plan

Under the Employee Restricted Stock Plan, Federated Investors has sold to
certain key employees, subject to restrictions, shares of Class B Common Stock
(nonvoting). During the restricted period, the recipient receives

F-15
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(8) OTHER COMPENSATION PLANS, CONTINUED

dividends on the shares. The compensation cost to Federated Investors (the
difference between the estimated fair value of the stock and the amount paid
by the key employees at issuance) is charged to expense over the period of
employee performance during which the restrictions lapse, not to exceed ten
years. In 1997, 1996, and 1995, 75,000, 0, and 240,000 shares of Class B
Common Stock (nonvoting) were sold under the Employee Restricted Stock Plan,
respectively. Forfeitures of 612,000, 132,000, and 90,000 shares occurred in
1997, 1996 and 1995, respectively. For the years ended December 31, 1997, 1996
and 1995, compensation expense related to the Employee Restricted Stock Plan
was $28,000, $2,183,000, and $169,000, respectively.

In 1994, Federated Investors established an Employee Stock Appreciation
Rights Plan ("SARS Plan") to reward employees who have contributed to the
success of Federated Investors and to provide incentive to increase their
efforts on behalf of Federated Investors. In 1995 and 1994, 615,000 and
2,694,000 rights were issued under the SARS Plan, respectively. The SARS Plan
rights are valued over a period of up to ten years. The value at the time of
issuance and subsequent valuations to measure compensation expense is based on
an independent appraisal of the Class B Common Stock. Vesting occurs over a
period of five to ten years and is subject to the fulfillment of certain
defined criteria. The awards can be paid in cash or in shares of Class B
Common Stock at the end of the vesting period. Forfeitures of 24,000 and
240,000 rights of the 1994 SARS Plan occurred in 1996 and 1995, respectively.
At January 31, 1996, the SARS Plan rights previously issued were converted to
stock options with the exception of 48,000 rights which remained with the SARS
Plan.

(d) Stock Options

In the first quarter of 1996, 2,997,000 SARS Plan rights were converted to
stock options ("Replacement Options"). In 1997, 1,683,000 stock options ("1997
Options") were granted to a group of key employees. All options are part of a
Stock Incentive Plan offered by Federated Investors to reward employees who
have contributed to the success of Federated Investors and to provide
incentive to increase their efforts on behalf of Federated Investors. The
difference between the independent appraisal of the Class B Common Stock and
the exercise price of the options at the time of issuance is charged to
compensation expense over the vesting period. The fair value of the 1997
Options and the Replacement Options on the date of grant was $3.36 and $2.29
per option. For existing plans vesting occurs over a nine year period, a ten-
year period, or on a predetermined date and is subject to the fulfillment of
certain defined criteria. Each vested Replacement Option may be exercised for
the purchase of one share of Class B Common Stock at the exercise price.

For the year ended December 31, 1997 and 1996, compensation expense related
to the stock options was $231,000 and $365,000, respectively. At December 31,
1997, the weighted-average remaining contractual life of outstanding options
was 8 years, 1 month.

F-16
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(8) OTHER COMPENSATION PLANS, CONTINUED

The following table summarizes the changes in the stock options outstanding
during 1997:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at beginning of year...................... 2,709,000 $1.91
Granted............................................. 1,683,000 5.53
Exercised........................................... 0 --
Forfeited/Expired................................... (397,500) 1.91
---------
Outstanding at end of year............................ 3,994,500 3.43
=========
Exercisable at end of year............................ 0 --
=========
</TABLE>

(e) Pro Forma Net Income

Federated Investors accounts for stock options and employee restricted stock
in accordance with APB 25. The following pro forma information regarding net
income assumes the adoption of SFAS 123 for stock options and employee
restricted stock granted subsequent to December 31, 1994. (Disclosure is not
required for options granted prior to 1995.) The estimated fair value of the
options is amortized to expense over the option and vesting period. The fair
value was estimated at the date of grant using the Minimum Value option
pricing model with the following weighted-average assumptions for 1997: nine
and ten year risk-free interest rates of 5.69% and 5.75%, respectively; a
dividend yield of 1.6% and an expected life of nine to ten years based upon
the specific plans valued. The estimated fair value of the restricted stock is
amortized to expense over the vesting period. The fair value was estimated at
the market price on the grant date. The pro forma results are estimates of
statements of income as if compensation expense had been recognized for all
stock-based compensation plans and are not indicative of the impact on future
periods.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pro forma net income (In Thousands).................... $50,501 $12,630 $28,483
======= ======= =======
Pro forma Basic Earnings per common share.............. $ 0.61 $ 0.12 $ 0.25
======= ======= =======
Pro forma Diluted Earnings per common share............ $ 0.60 $ 0.11 $ 0.24
======= ======= =======
</TABLE>

(9) MINORITY INTEREST IN SUBSIDIARY

A subsidiary of Federated Investors has a majority interest (50.5%) and acts
as the general partner in Passport Research, Ltd., a limited partnership.
Edward D. Jones & Co. is the limited partner with a 49.5% interest. The
Partnership acts as investment adviser to two regulated investment companies.

(10) COMMON AND PREFERRED STOCK

In 1996, Federated Investors entered into an agreement to convert 1,000
shares of Series A Preferred Stock ("Series A Preferred") into 5,302,758 Class
B Common Stock and to buy the converted shares back for $19.09 per share, or
$101,233,000. In 1996, Federated Investors purchased 1,180,000 shares of Class
B Common Stock from existing shareholders at $19.00 per share for a total of
$22,420,000. The repurchased Class A and Class B shares were recorded as
treasury stock at cost.

F-17
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(10) COMMON AND PREFERRED STOCK, CONTINUED

Federated Investors has authorized 125,000 shares of no par Series B
Cumulative Nonconvertible Preferred Stock ("Series B Preferred"). The Series B
Preferred is entitled to dividends of $1,000 per share and is subject to a
mandatory redemption date of August 1, 1999. In the event of Federated
Investors' liquidation, Series B Preferred shareholders are entitled to $1,000
per share plus unpaid dividends. No Series B Preferred shares have been issued
to date. Federated Investors has also authorized 75,000 shares of no par
Series C Preferred Stock ("Series C Preferred"). The Series C Preferred is not
entitled to receive dividends as long as the Series A and Series B Preferred
are outstanding. No Series C Preferred shares have been issued to date.

The Class A Common Stock ("Class A Common") and Class B Common Stock ("Class
B Common"), (collectively "Common Shares") are entitled to receive dividends
only after all dividends on the Series A, B and C Preferred have been paid.

The holders of the Class A Common have the entire voting rights of Federated
Investors; however, without the consent of the majority of the holders of the
Class B Common, Class A Common shareholders cannot alter its structure,
dispose of all or substantially all of its assets, amend the Declaration of
Trust or Bylaws of Federated Investors to adversely affect the Class B Common,
or liquidate or dissolve Federated Investors.

Dividend payments on Common Shares may not exceed $5,000,000 in any fiscal
year nor exceed the sum of $5,000,000 plus 50% of the net income of Federated
Investors during the period from January 1, 1996 to and including the date of
payment. A cash dividend of $0.0583, $0.0417, and $0.1667 per share, or
$4,867,000, $3,498,000, and $15,160,000 was paid in 1997, 1996 and 1995,
respectively, to holders of Common Shares.

(11) LEASES

Federated Investors and its subsidiaries have various operating lease
agreements primarily involving facilities, office and computer equipment, and
vehicles. These leases are noncancellable and expire on various dates through
the year 2007.

The following is a schedule by year of future minimum rental payments
required under the operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1997:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.......................................................... $16,267
1999.......................................................... 10,183
2000.......................................................... 9,172
2001.......................................................... 8,914
2002.......................................................... 9,179
2003 and thereafter........................................... 45,636
-------
Total Minimum Lease Payments................................ $99,351
=======
</TABLE>

Rent expense was approximately $14,293,000, $14,674,000, and $12,841,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

F-18
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(12) INCOME TAXES

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

Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $19,597 $(6,672) $13,548
State............................................ 243 514 108
-------- -------- --------
19,840 (6,158) 13,656
Deferred:
Federal.......................................... 11,117 17,088 5,153
Extraordinary Item............................... (241) (530) 0
-------- -------- --------
Total.............................................. $30,716 $10,400 $18,809
======== ======== ========
</TABLE>

For the years ended December 31, 1997, 1996 and 1995, the foreign subsidiary
had net operating income (losses) of $1,449,000, $(257,000), and $(447,000),
respectively, for which no income tax expense (benefit) has been provided.

The reconciliation between the federal statutory income tax rate and
Federated Investors' effective income tax rate consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Expected statutory rate........................... 35.0% 35.0% 35.0%
Increase:
State income taxes.............................. 0.2 1.4 0.1
Amortization of goodwill........................ 1.0 3.2 1.7
Meals and entertainment limitation.............. 1.2 4.6 1.9
Other........................................... 0.4 0.3 1.0
-------- -------- --------
Total........................................... 37.8% 44.5% 39.7%
======== ======== ========
</TABLE>

F-19
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(12) INCOME TAXES, CONTINUED

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Intangible assets............................................ $14,946 $14,641
Organization costs........................................... 1,399 1,399
Deferred compensation plans.................................. 0 29
Employee restricted stock plan............................... 170 38
Reserve for rent escalation.................................. 0 126
Reserve for bad debts........................................ 1,068 0
Other........................................................ 246 1,021
------- -------
Total gross deferred tax asset............................. 17,829 17,254
Deferred tax liabilities:
Deferred sales commissions................................... 12,730 30,052
Deferred gain................................................ 29,023 0
Property and equipment depreciation.......................... 101 875
Other........................................................ 2,521 1,969
------- -------
Total gross deferred tax liability......................... 44,375 32,896
------- -------
Net deferred tax liability..................................... $26,546 $15,642
======= =======
</TABLE>

F-20
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(13) EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Income from continuing operations.................... $50,577 $12,619 $28,531
Preferred stock dividends............................ 0 3,025 6,000
------- ------- -------
Numerator for basic earnings per share for continuing
operations--
income available to common stockholders............. 50,577 9,594 22,531
Effect of dilutive securities:
Preferred stock dividends............................ 0 0 6,000
------- ------- -------
Numerator for diluted earnings per share for
continuing operations-- income available to common
stockholders after assumed conversions.............. $50,577 $ 9,594 $28,531
======= ======= =======
Denominator:
Denominator for basic earnings per share--
weighted-average shares............................. 82,392 83,159 88,995
Effect of dilutive securities:
Restricted Stock..................................... 435 117 0
Employee stock options/SARs.......................... 837 474 132
Convertible preferred stock.......................... 0 0 31,817
------- ------- -------
Dilutive potential common shares..................... 1,272 591 31,949
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed
conversions......................................... 83,664 83,750 120,944
======= ======= =======
Basic earnings per share............................... $ 0.61 $ 0.12 $ 0.25
======= ======= =======
Diluted earnings per share............................. $ 0.60 $ 0.12 $ 0.24
======= ======= =======
</TABLE>
- --------
The convertible preferred stock is antidilutive at December 31, 1996, as such,
it was excluded from the computation of diluted earnings per share.

(14) DISCLOSURES OF FAIR VALUE

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of estimated fair values
of certain on- and off-balance sheet financial instruments. The fair value
estimates, as well as the related methods and assumptions used to value each
of Federated Investors' significant financial instruments, are set forth
below.

(a) Cash, Cash Equivalents, and Marketable Securities

The carrying amount of cash and cash equivalents approximates fair value due
to the short maturities of these instruments. The fair value of marketable
securities is based on quoted market prices.

F-21
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(14) DISCLOSURES OF FAIR VALUE, CONTINUED

(b) Receivables, Accounts Payable, and Accrued Expenses

The carrying amounts of these financial instruments approximate fair value
due to the short maturities of these instruments.

As described in Note 5, the majority of Federated Investors' debt is
comprised of the Note. Because of the difficulty in obtaining quoted market
values for comparable debt with similar terms and limitations, Federated
Investors considered the maturity date, underlying collateral and borrowing
rates available to Federated Investors for loans with similar terms and
maturities. Based upon these factors, Federated Investors estimates that the
recorded amount approximates fair value.

(d) Futures Contracts

Federated Investors entered into futures contracts during 1997 and 1996 to
hedge against changes in market values related to the shares purchased of
mutual funds. Federated Investors' carrying value of $45,000 approximates the
estimated fair value at December 31, 1997.

(15) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996 1995
---- ---- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase to employee restricted stock plan, net............... $ 0 $ 0 $ 237
Sale of deferred sales commissions............................ 0 0 21,737
Payoff of the revolving credit facility....................... 0 0 21,737
</TABLE>

(16) COMMITMENTS AND CONTINGENCIES

Federated Investors is contingently liable to an insurance company for
unanticipated expenses or losses in an amount not to exceed 180% of Federated
Investors' annual premium. At December 31, 1997, this amount is secured by an
irrevocable stand-by letter of credit for $1,039,000.

Federated Investors has claims asserted against it that result from
litigation in the ordinary course of business. Management believes that the
ultimate resolution of such matters will not materially affect the financial
position or statements of income of Federated Investors.

(17) RELATED PARTY TRANSACTIONS

Federated Investors provides investment advisory, administrative,
distribution and shareholder services to the Federated group of funds
(Federated Funds). All of these services provided for the Federated Funds are
under contracts that definitively set forth the fees to be charged for these
services and are approved by the funds' independent Directors/Trustees.
Federated Investors may waive certain fees charged for these services
(primarily investment advisory fees) in order to make the funds more
competitive or to meet regulatory requirements.

In 1996, prior to the stock dividends, Federated Investors repurchased from
related parties 956,000 shares of Class B Common Stock for $19.00 per share.
During 1995, Federated Investors repurchased from an executive officer 20,000
shares of Class B Common Stock. Federated Investors paid $11.58 per share, the
estimated fair value at that date. The Class B Common Stock repurchases were
recorded as treasury stock.

F-22
<PAGE>

FEDERATED INVESTORS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995

(18) SUBSEQUENT EVENTS

On February 20, 1998, the Board of Directors declared a one for one stock
dividend payable on April 15, 1998 to stockholders of record on March 17,
1998. On April 16, 1998 the Board of Directors declared a one for two stock
dividend payable on April 30, 1998 to stockholders of record on April 21,
1998. Federated Investors has recorded these stock dividends effective
December 31, 1997.

(19) YEAR 2000 DISCLOSURE (UNAUDITED)

Federated Investors utilizes software and related technologies throughout
its businesses including both proprietary systems as well as those provided by
outside vendors. Significant functions such as portfolio accounting/-
recordkeeping and shareholder services rely on systems provided by outside
vendors. It is anticipated that these systems will be affected by the date
change in the year 2000. The year 2000 issue exists because many computer sys-
tems and applications currently use two-digit date fields to designate a year.
As the century date change occurs, certain date-sensitive systems may recog-
nize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the year 2000 may cause systems to process critical financial
and operational information incorrectly. Federated Investors, like many other
companies, is expected to incur expenditures over the next two years to ad-
dress this issue.

Federated Investors formed a team of employees in 1997 to determine the full
scope and related costs to ensure both proprietary and third party vendor
systems will be year 2000 compliant, meeting both internal needs and those of
our customers. Federated Investors' assessment of internal systems is
substantially complete and plans are in place for all proprietary applications
within Federated Investors to be renovated or replaced. Completion of
renovation or replacement and the subsequent testing and implementation are
scheduled for 1998, with 1999 being reserved for industry-wide, cooperative
testing. The assessment process is in progress for the related infrastructure
and third party desktop software products. Based on management's
identification of resource requirements for both plan implementation and
overall project management, it is anticipated that the Year 2000 costs, which
are being expensed as incurred, will be, at a minimum, $10 million for
internal systems and do not reflect the impact of outside vendors to become
Year 2000 compliant. Accordingly, a final cost estimate cannot be determined
at this time.

F-23
<PAGE>

APPENDIX A

FEDERATED FUNDS

<TABLE>
<CAPTION>
NUMBER
OF SHARE ASSETS AS OF
CLASSES DECEMBER 31,
(EFFECTIVE -------------------------------
FUND NAME 12/31/97) FUND CATEGORY 1996 1997 LOAD
- --------- ---------- ------------------------------------ --------------- --------------- ----
<S> <C> <C> <C> <C> <C>
EQUITY FUNDS:
- -------------
Federated Aggressive
Growth Fund 3 Equity Fund--Growth $ 2,742,110 $ 15,443,427 Y
Federated American
Leaders Fund Inc. 4 Equity Fund--Growth and Income 1,217,910,260 2,420,064,141 Y
Federated American
Leaders Fund II 1 Equity Fund--Growth and Income 142,224,512 305,545,226 N
Federated Asia Pacific
Growth Fund 3 International/Global 7,298,873 10,819,646 Y
Federated Capital
Appreciation Fund 3 Equity Fund--Growth 119,753,858 171,017,026 Y
Federated Emerging
Markets Commingled
Trust 1 International/Global 0 6,687,486 N
Federated Emerging
Markets Fund 3 International/Global 23,105,068 65,645,088 Y
Federated Equity Income
Fund Inc. 4 Equity 853,771,703 1,784,748,326 Y
Federated Equity Income
Fund II 1 Equity 250 32,844,161 N
Federated European
Growth Fund 3 International/Global 5,787,273 24,584,145 Y
Federated Growth
Strategies Fund 3 Equity Fund--Growth 407,637,010 535,183,400 Y
Federated Growth
Strategies Fund II 1 Equity Fund--Growth 16,974,721 47,285,644 N
Federated International
Equity Commingled Trust 1 International Equity Fund 0 15,217,125 N
Federated International
Equity Fund 3 International Equity Fund 179,760,868 169,378,474 Y
Federated International
Equity Fund II 1 International Equity Fund 17,712,105 36,632,959 N
Federated International
Growth Fund 3 International/Global 0 17,562,764* Y
Federated International
Small Company Fund 3 International/Global 41,860,221 243,457,088 Y
Federated Latin American
Growth Fund 3 International/Global 6,211,234 26,098,839 Y
Federated Managed
Aggressive Growth Fund 2 Asset Allocation Fund 83,337,894 123,008,134 N
Federated Managed Growth
and Income Fund 2 Asset Allocation Fund 201,206,202 211,069,083 N
Federated Managed Growth
Fund 2 Asset Allocation Fund 207,475,731 232,642,423 N
Federated Max-Cap Fund 3 Equity Fund--Growth and Income/Index 1,040,266,524 1,505,674,816 N
Federated Mid-Cap Fund 1 Equity Fund--Growth and Income/Index 61,762,357 76,880,645 N
Federated Mini-Cap Fund 2 Equity Fund--Growth and Income/Index 162,006,934 141,145,187 N
Federated Small Cap
Strategies Fund 3 Equity Fund--Growth 85,939,913 354,802,532 Y
Federated Stock and Bond
Fund Inc. 3 Balanced 139,607,292 175,650,186 N
Federated Stock Trust 1 Equity Fund--Growth and Income 848,901,207 1,214,033,787 N
Federated Utility Fund
Inc. 4 Equity Fund--Domestic Utility 1,602,120,398 1,591,521,530 Y
Federated Utility Fund
II 1 Equity Fund--Domestic Utility 63,622,066 104,624,536 N
Federated World Utility
Fund 4 International Equity Fund 26,902,347 50,232,042 Y
--------------- ---------------
TOTAL EQUITY FUNDS 7,565,898,931 11,709,499,866
--------------- ---------------
</TABLE>

A-1
<PAGE>

<TABLE>
<CAPTION>
NUMBER
OF SHARE ASSETS AS OF
CLASSES DECEMBER 31,
(EFFECTIVE ---------------------------
FUND NAME 12/31/97) FUND CATEGORY 1996 1997 LOAD
- --------- ---------- ------------------------------------------ ------------- ------------- ----
<S> <C> <C> <C> <C> <C>
FIXED INCOME FUNDS:
- -------------------
Capital Preservation
Fund 1 Short-Term Corporate Bond Fund--High Grade $ 342,722,431 $ 417,759,807 N
Federated Adjustable
Rate U.S. Government
Fund Inc 1 Government Bond Fund 228,691,534 186,479,811 Y
Federated Arms Fund 2 Adjustable Rate Mortgage-Backed Fund 695,179,969 578,223,937 N
Federated Bond Fund 4 Long Corporate Bond Fund--High Grade 483,784,230 728,421,452 Y
Federated Bond Index
Fund 2 General Investment Grade 15,887,339 41,762,873 N
Federated California
Municipal Income Fund 2 Municipal Bond Fund 18,562,847 24,267,134 Y
Federated Fund for
U.S. Government
Securities Inc 3 Mortgage Backed Fund 1,388,620,876 1,321,961,235 Y
Federated Fund for
U.S. Government
Securities II 1 Mortgage Backed Fund 34,564,332 62,956,566 N
Federated GNMA Trust 2 Mortgage Backed Fund 1,277,484,826 1,177,662,093 N
Federated Government
Fund 2 Mortgage Backed Fund 0 5,089,480 N
Federated Government
Income Securities Inc. 4 Mortgage Backed Fund 1,837,405,491 1,616,905,208 Y
Federated High Income
Advantage Fund 1 High Yield Fund 67,673,744 81,451,667 Y
Federated High Income
Bond Fund Inc. 3 High Yield Fund 1,139,981,699 1,721,706,367 Y
Federated High Income
Bond Fund II 1 High Yield Fund 65,943,516 155,904,138 N
Federated High Yield
Trust 1 High Yield Fund 887,295,468 1,124,796,914 N
Federated Income Trust 2 Mortgage Backed Fund 884,593,043 802,961,772 N
Federated Institutional
Short-duration Govt
Fund 1 Government Bond Fund 100,165 72,147,181 N
Federated Intermediate
Income Fund 2 General Investment Grade 124,548,822 154,924,847 N
Federated Intermediate
Municipal Trust 1 Municipal Bond Fund 220,475,382 213,573,637 N
Federated International
High Income Fund 3 International Bond Fund 9,047,897 68,091,362 Y
Federated International
Income Fund 3 International Bond Fund 218,848,630 191,743,672 Y
Federated Limited
Duration Fund 2 Mortgage Backed Fund 5,030,432 13,311,146 N
Federated Limited
Duration Government
Fund 2 Mortgage Backed Fund 0 5,044,431 N
Federated Limited Term
Fund 2 Short-Term Corporate Bond Fund--High Grade 120,548,249 100,247,491 Y
Federated Limited Term
Municipal Fund 2 Municipal Bond Fund 80,649,411 73,320,274 Y
Federated Managed Income
Fund 2 Asset Allocation Fund 92,397,617 108,328,147 N
Federated Michigan
Intermediate Municipal
Trust 1 Municipal Bond Fund 64,348,907 70,520,019 Y
Federated Municipal
Opportunities Fund Inc. 4 Municipal Bond Fund 480,900,702 449,915,918 Y
Federated Municipal
Securities Fund Inc. 3 Municipal Bond Fund 718,376,203 702,225,798 N
Federated New York
Municipal Income Fund 1 Municipal Bond Fund 22,906,380 22,229,612 Y
Federated Ohio Municipal
Income Fund 1 Municipal Bond Fund 70,022,184 75,259,449 Y
Federated Pennsylvania
Intermediate Municipal
Trust 1 Municipal Bond Fund 15,974,422 19,453,785 N
</TABLE>

A-2
<PAGE>

A-3
<PAGE>

<TABLE>
<CAPTION>
NUMBER
OF SHARE ASSETS AS OF
CLASSES DECEMBER 31,
(EFFECTIVE -------------------------------
FUND NAME 12/31/97) FUND CATEGORY 1996 1997 LOAD
- --------- ---------- ---------------------------- --------------- --------------- ----
<S> <C> <C> <C> <C> <C>
MONEY MARKET FUNDS:
- -------------------
Alabama Municipal Cash
Trust 1 Municipal Money Market $ 203,205,912 $ 201,067,195 N
Automated Cash
Management Trust 2 Prime Money Market Fund 2,040,045,042 2,242,457,787 N
Automated Government
Cash Reserves 1 Government Money Market Fund 650,076,109 715,038,147 N
Automated Government
Money Trust 1 Government Money Market Fund 2,456,083,048 2,544,309,698 N
Automated Treasury Cash
Reserves 1 Government Money Market Fund 304,616,991 348,747,499 N
California Municipal
Cash Trust 2 Municipal Money Market 154,685,649 294,521,703 N
Connecticut Municipal
Cash Trust 1 Municipal Money Market 258,339,849 285,340,770 N
Edward D. Jones Daily
Passport Cash Trust 1 Government Money Market Fund 4,535,259,470 5,359,163,532 N
Federated Master Trust 1 Prime Money Market Fund 644,277,076 484,444,229 N
Federated Prime Money
Fund II 1 Prime Money Market Fund 45,746,377 59,899,921 N
Federated Short-term
U.S. Government Trust 1 Government Money Market Fund 609,567,479 489,275,595 N
Federated Short-term
U.S. Prime Fund 1 Government Money Market Fund 74,382,060 212,779,692 N
Federated Short-term
U.S. Govt Securities
Fund 3 Government Money Market Fund 400,342,086 643,663,153 N
Federated Short-term
U.S. Treasury
Securities Fund 1 Government Money Market Fund 134,997,310 663,034,892 N
Federated Tax-Free Trust 1 Municipal Money Market 731,890,372 548,044,591 N
Florida Municipal Cash
Trust 2 Municipal Money Market 1,217,168,027 1,516,718,171 N
Georgia Municipal Cash
Trust 1 Municipal Money Market 129,586,145 158,064,583 N
Government Cash Series 1 Government Money Market Fund 527,180,029 621,040,238 N
Government Obligations
Fund 2 Government Money Market Fund 3,042,001,963 4,588,450,925 N
Government Obligations
Tax Managed Fund 2 Government Money Market Fund 838,195,596 1,569,456,609 N
Liberty U.S. Government
Money Market Trust 2 Government Money Market Fund 661,218,883 642,514,903 N
Liquid Cash Trust 1 Government Money Market Fund 379,585,110 431,214,316 N
Maryland Municipal Cash
Trust 1 Municipal Money Market 52,447,144 56,194,345 N
Massachusetts Municipal
Cash Trust 2 Municipal Money Market 181,614,968 273,563,664 N
Michigan Municipal Cash
Trust 2 Municipal Money Market 120,499,515 171,013,062 N
Minnesota Municipal Cash
Trust 2 Municipal Money Market 435,095,416 512,334,959 N
Money Market Management
Inc. 1 Prime Money Market Fund 87,490,017 81,323,868 N
Money Market Trust 1 Prime Money Market Fund 485,379,613 453,659,354 N
Municipal Cash Series 1 Municipal Money Market 593,032,465 581,837,364 N
Municipal Cash Series II 1 Municipal Money Market 262,925,236 242,291,266 N
Municipal Obligations
Fund 3 Municipal Money Market 167,100,850 225,366,244 N
New Jersey Municipal
Cash Trust 2 Municipal Money Market 162,011,810 213,102,234 N
</TABLE>

A-4
<PAGE>

<TABLE>
<CAPTION>
NUMBER
OF SHARE ASSETS AS OF
CLASSES DECEMBER 31,
(EFFECTIVE -------------------------------
FUND NAME 12/31/97) FUND CATEGORY 1996 1997 LOAD
- --------- ---------- ---------------------------- --------------- --------------- ----
<S> <C> <C> <C> <C> <C>
New York Municipal Cash
Trust 2 Municipal Money Market $ 407,422,822 $ 478,857,695 N
North Carolina Municipal
Cash Trust 1 Municipal Money Market 139,229,169 189,867,579 N
Ohio Municipal Cash
Trust 3 Municipal Money Market 360,428,860 386,764,947 N
Pennsylvania Municipal
Cash Trust 3 Municipal Money Market 289,850,278 386,705,001 N
Prime Cash Obligations
Fund 3 Prime Money Market Fund 2,014,934,193 1,671,284,478 N
Prime Cash Series 1 Prime Money Market Fund 2,261,082,894 3,311,349,879 N
Prime Obligations Fund 2 Prime Money Market Fund 4,433,858,005 7,458,749,393 N
Prime Value Obligations
Fund 3 Prime Money Market Fund 298,418,962 747,771,108 N
Tax-Free Instruments
Trust 2 Municipal Money Market 1,715,010,067 1,785,482,665 N
Tax-Free Obligations
Fund 2 Municipal Money Market 1,947,545,321 2,159,766,868 N
Tennessee Municipal Cash
Trust 2 Municipal Money Market 45,431,477 44,971,066 N
Treasury Cash Series 1 Government Money Market Fund 769,987,496 837,236,142 N
Treasury Cash Series II 1 Government Money Market Fund 344,129,911 180,580,680 N
Treasury Obligations
Fund 3 Government Money Market Fund 7,018,704,138 10,628,218,627 N
Trust for Government
Cash Reserves 1 Government Money Market Fund 1,129,469,505 727,412,486 N
Trust for Short-term
U.S. Government
Securities 1 Government Money Market Fund 823,592,333 695,374,444 N
Trust for U.S. Treasury
Obligations 1 Government Money Market Fund 2,431,870,853 2,009,131,516 N
U.S. Treasury Cash
Reserves 2 Government Money Market Fund 1,634,087,219 1,835,432,074 N
Virginia Municipal Cash
Trust 2 Municipal Money Market 217,822,882 248,279,256 N
--------------- ---------------
TOTAL MONEY MARKET FUNDS 50,868,924,002 63,213,170,413
--------------- ---------------
Discontinued Fund Total 8,994,794 0
--- --------------- ---------------
MANAGED FUND TOTAL 238 72,504,872,183 89,989,548,889
--- --------------- ---------------
Other Managed Assets 2,338,094,698 2,550,709,865
--------------- ---------------
TOTAL MANAGED ASSETS $74,842,966,881 $92,540,258,754
=============== ===============
</TABLE>

SUMMARY:
Total Number of Load Funds: 32
Total Number of No-Load Funds: 92
Total Number of Funds: 124

* "fund-of-funds" product which invests principally in shares of other
Federated managed funds

A-5
<PAGE>

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

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

----------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 13
Federated................................................................. 18
Use of Proceeds........................................................... 21
Dilution.................................................................. 21
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Recent Developments....................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 40
Management................................................................ 55
Certain Transactions...................................................... 65
Principal and Selling Shareholders........................................ 66
Description of Securities................................................. 70
Shares Eligible for Future Sale........................................... 73
Underwriting.............................................................. 76
Legal Matters............................................................. 79
Experts................................................................... 79
Index to Financial Statements............................................. F-1
Appendix A................................................................ A-1
</TABLE>

----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE CLASS B COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENTS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

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

16,290,235 SHARES

FEDERATED INVESTORS, INC.
CLASS B
COMMON STOCK
(NON-VOTING)

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

PROSPECTUS

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

MERRILL LYNCH & CO.

PAINEWEBBER INCORPORATED

SALOMON SMITH BARNEY

, 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PRELIMINARY PROSPECTUS DATED MAY 7, 1998

PROSPECTUS
16,290,235 SHARES
LOGO
Federated
World-Class
Investment Manager
FEDERATED INVESTORS, INC.

CLASS B COMMON STOCK
(NON-VOTING)

----------

Of the 16,290,235 shares of Class B Common Stock ("Class B Common Stock")
offered hereby, 3,258,045 shares are being offered outside the United States
and Canada by the International Underwriters (the "International Offering") and
13,032,190 shares are being offered concurrently in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering"). Such offerings are
collectively referred to as the "Offering." The offering price and underwriting
discount in the U.S. Offering and the International offering are identical. See
"Underwriting."

Of the 16,290,235 shares of Class B Common Stock offered hereby, 2,610,000
shares will be issued and sold by Federated Investors, Inc., a Pennsylvania
corporation (the "Company"), and 13,680,235 shares will be sold by certain
selling shareholders (the "Selling Shareholders"). See "Selling Shareholders."
The Company will not receive any proceeds from the sale of the shares by the
Selling Shareholders.

Application has been made to list the Class B Common Stock on the New York
Stock Exchange.

FOR INFORMATION CONCERNING CERTAIN CONSIDERATIONS RELATING TO THIS OFFERING,
SEE "RISK FACTORS" ON PAGE 13 IMMEDIATELY FOLLOWING THE SUMMARY.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS (2)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- -------------------------------------------------------------------------------------
Total (3)............... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2)Before deducting estimated expenses of the Offering of $ , of which $
will be paid by the Company and $ will be paid by the Selling Shareholders.
(3)The Company and the Selling Shareholders have granted the U.S. and
International Underwriters 30 day options to purchase up to 390,000 and
2,053,535 additional shares of Class B Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the total
price to public, underwriting discount, proceeds to the Company and proceeds to
the Selling Shareholders will be $ , $ , $ , and $ , respectively.
See "Underwriting."

The Class B Common Stock is offered by the several Underwriters, subject to
prior sale, when, as and if issued or sold to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Class B Common Stock will be made in New York,
New York on or about May , 1998.

--------
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
--------

The date of this Prospectus is May , 1998.
<PAGE>

[Alternate Page for International Prospectus]
CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class B
Common Stock by a person that, for United States federal income tax purposes,
is (a) neither a citizen nor resident of the United States, (b) a corporation
or partnership created or organized in or under the laws of a country other
than the United States, or (c) a foreign estate or trust (collectively
referred to as a "non-U.S. holder"). This discussion is based on currently
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), currently effective and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect on the date hereof and all of which are subject to change, possibly
with retroactive effect. This discussion does not address the tax consequences
to subsequent purchasers of Class B Common Stock, does not consider tax
consequences to persons who are considered residents of the United States,
does not consider the particular facts and circumstances of each non-U.S.
holder's situation (including the tax position of certain U.S. expatriates)
and does not address U.S. state and local or foreign tax consequences. Each
non-U.S. holder as well as any person who may be considered a resident of the
United States is urged to consult his or her own tax advisor with respect to
the application of the United States federal income and estate tax laws to his
or her particular situation, as well as the tax consequences arising under the
applicable laws of any state, municipality, foreign country or other taxing
jurisdiction.

Dividends

Dividends received by a non-U.S. holder on Class B Common Stock will be
subject to United States federal withholding tax at a 30% rate upon the actual
payment of the dividends except as described below and except where an
applicable tax treaty provides for the reduction or elimination of such
withholding tax. However, a non-U.S. holder generally will be taxed in the
same manner as a United States corporation or resident individual with respect
to such income if it is effectively connected with the conduct of a trade or
business in the United States or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of such holder. Such
effectively connected income received by a non-U.S. holder that is a
corporation may, in certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate, or, if applicable, a lower treaty rate.

To determine the applicability of a tax treaty providing for a lower rate of
withholding under the currently effective Treasury Regulations (the "Current
Regulations"), dividends paid to an address in a foreign country are presumed
to be paid to a resident of that country absent knowledge to the contrary.
Under Treasury Regulations issued on October 6, 1997 (the "Final
Regulations"), generally effective for payments made after December 31, 1999,
non-U.S. holders (including, in certain cases of non-U.S. holders that are
entities, the owner or owners of such entities) will be required to satisfy
certain certification requirements in order to claim a reduced rate of
withholding pursuant to an applicable income tax treaty.

Disposition of Class B Common Stock

A non-U.S. holder generally will not be subject to United States federal
income or withholding tax in respect of gain recognized on the disposition of
Class B Common Stock unless (i) the holder is an individual who holds the
Class B Common Stock as a capital asset and was present in the United States
for 183 days or more during the taxable year and either (a) such holder has a
"tax home" in the United States or (b) the gain is attributable to an office
or other fixed place of business maintained in the United States by such
holder, (ii) the gain is effectively connected with a United States trade or
business of the holder or, if an income tax treaty applies, is attributable to
a U.S. permanent establishment of the holder, or (iii) the Company is or has
been a United States real property holding corporation ("USRPHC") for United
States federal income tax purposes and, so long as the Class B Common Stock is
regularly traded on an established securities market, the non-U.S. holder has
held actually or constructively more than 5% of the Class B Common Stock at
some time during the shorter of (a) the

74
<PAGE>

five-year period ending on the disposition of such Class B Common Stock or (b)
the period during which the non-U.S. holder held such Class B Common Stock.
The Company does not believe that it is or has been a USRPHC, and for purposes
of this discussion it is assumed that the Company is not a USRPHC.

Federal Estate Taxes

If an individual non-U.S. holder holds Class B Common Stock at the time of
his or her death, such Class B Common Stock will be included in such holder's
gross estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

Dividends paid to non-U.S. holders outside the United States that are
subject to the withholding tax described above will generally be exempt from
United States backup withholding, but the payor must report annually to the
United States Internal Revenue Service and to each non-U.S. holder the amount
of dividends paid to such holder and the tax withheld from such payment,
regardless of whether withholding was required. Backup withholding and
information reporting generally will apply, however, to dividends paid on
shares of Class B Common Stock to a non-U.S. holder at an address in the
United States, if such holder fails to establish an exemption or to provide
certain other information to the payor.

Generally, the payor of the dividends may rely on the payee's address
outside the United States (absent knowledge to the contrary) in determining
that the withholding tax discussed above applies, and consequently, that the
backup withholding provisions do not apply.

Under the Current Regulations, the payment of the proceeds of the sale of
Class B Common Stock to or through the United States office of a broker will
be subject to information reporting and possible backup withholding at a rate
of 31% unless the owner certifies its non-United States status under penalties
of perjury or otherwise establishes an exemption. The payment of the proceeds
of the sale of Class B Common Stock to or through the foreign office of a
broker generally will not be subject to backup withholding, but will be
subject to information reporting if the broker is, for U.S. federal tax
purposes, a United States person, a "controlled foreign corporation" for
United States federal income tax purposes, or a foreign person 50% or more of
whose gross income for a specified period is derived from activities that are
effectively connected with the conduct of a United States trade or business,
or for payments made after December 31, 1999, a foreign partnership, in which
one or more U.S. persons in the aggregate, own more than 50% of the income or
capital interests in the partnership or which is engaged in a trade or
business in the United States at any time during its tax year, unless the
broker has documentary evidence in its files that the owner is a non-United
States person and the broker has no actual knowledge to the contrary or the
holder otherwise establishes an exemption.

Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Class B Common Stock to a non-U.S. holder may
be subject to information reporting and backup withholding unless such
recipient satisfies applicable certification requirements or otherwise
establishes an exemption. Any amounts withheld under the backup withholding
rules from a payment to a non-U.S. holder will be allowed as a refund or a
credit against such non-U.S. holder's United States federal income tax,
provided that the required information is furnished to the IRS.

75
<PAGE>

[Alternate Page for International Prospectus]
UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") among the Company, the Selling
Shareholders and each of the underwriters named below (the "International
Underwriters"), and concurrently with the sale of Class B Common Stock to the
U.S. Underwriters, the Company and the Selling Shareholders have agreed to
sell to the International Underwriters, and each of the International
Underwriters severally has agreed to purchase, the aggregate number of shares
of Class B Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Merrill Lynch International...........................................
PaineWebber International (U.K.) Ltd..................................
Smith Barney Inc......................................................

---------
Total................................................................. 3,258,045
=========
</TABLE>

Merrill Lynch International, PaineWebber International (U.K.) Ltd., and Smith
Barney Inc. are acting as representatives of the International Underwriters
(in such capacity, the "International Representatives").

The Company and the Selling Shareholders also have entered into a purchase
agreement (the "U.S. Purchase Agreement") with certain underwriters within the
United States and Canada (the "U.S. Underwriters" and, together with the
International Underwriters, the "Underwriters") for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, PaineWebber Incorporated and Smith Barney
Inc. are acting as representatives (the "U.S. Representatives"). Subject to
the terms and conditions set forth in the U.S. Purchase Agreement, and
concurrently with the sale of 3,258,045 shares of Class B Common Stock to the
International Underwriters pursuant to the International Purchase Agreement,
the Company and the Selling Shareholders have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase, an
aggregate of 13,032,190 shares of Class B Common Stock. The initial public
offering price per share and the underwriting discount per share are identical
under the International Purchase Agreement and the U.S. Purchase Agreement.

In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Underwriters and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class B Common Stock being sold
pursuant to each such Purchase Agreement if any of the shares being sold
pursuant to each such Agreement are purchased. Under certain circumstances,
the commitments of non-defaulting International Underwriters or U.S.
Underwriters (as the case may be) may be increased. The closings with respect
to the sale of Class B Common Stock to the International Underwriters and the
U.S. Underwriters are conditioned upon one another.

The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") which provides
for the coordination of their activities. The Underwriters are permitted to
sell Class B Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell Class B Common Stock will offer
to sell or sell shares to persons who are non-United States or non-Canadian
persons or to persons they believe intend to resell to persons who are non-
United States or non-Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell shares will not offer to sell or sell shares to non-
United States or non-Canadian persons or to persons they believe intend to
resell to non-United States or non-Canadian persons, except, in each case, for
transactions pursuant to such Agreement.

76
<PAGE>

The International Representatives have advised the Company and the Selling
Shareholders that the International Underwriters propose initially to offer
the Class B Common Stock to the public at the initial public offering price
set forth on the cover page of this Prospectus and to certain selected dealers
at such price less a concession not in excess of $ per share. The
International Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share on sales to certain other dealers. After the
Offering, the public offering price, concession and discount may be changed.

The Company and the Selling Shareholders have granted the International
Underwriters options, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to 78,000 and 410,707 additional shares of
Class B Common Stock, respectively, and have granted the U.S. Underwriters
options, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 312,000 and 1,642,828 additional shares of Class
B Common Stock, respectively, in each case, at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise these options only to cover over-
allotments, if any, made on the sale of the Class B Common Stock offered
hereby. To the extent that the International Underwriters exercise their
option, each International Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of such
shares as the number of shares of Class B Common Stock to be purchased by it
as shown in the foregoing table bears to the total number of such shares
initially offered hereby.

Pursuant to the International Purchase Agreement, the Company, its officers
and trustees and certain other shareholders of the Company have agreed not to
during the period of 180 days from the date of this prospectus, without the
prior written consent of Merrill Lynch International, directly or indirectly,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, any Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or file any registration statement under the Securities Act with respect
to any of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
(collectively, the "Lock-Up"), subject to certain limited exceptions. With
respect to the Selling Shareholders, the Lock-Up shall not apply to (A) the
issuance of the securities being sold by the Selling Shareholders in the
Offering; (B) any transfer of such securities to an affiliate of the Selling
Shareholder which agrees in a writing in form and substance reasonably
satisfactory to Merrill Lynch to agree to be bound by the provisions of the
Lock-Up as if it was the Selling Shareholder, (C) any pledge prior to the date
of this Prospectus by a shareholder of the Company of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
and (D) any pledge after the date of this Prospectus by a shareholder of the
Company of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for the purpose of securing a bona fide loan by
a financial institution to such shareholder. With respect to the Company, the
Lock-Up shall not apply to (A) the issuance of the securities being sold by
the Company in the Offering, (B) any issuance of Common Stock by the Company
upon the exercise of an option or warrant or the conversion or exchange of a
security outstanding on the date hereof and referred to in the Prospectuses,
(C) any issuance of Common Stock, or any grant of options to purchase Common
Stock, pursuant to existing employee benefit plans of the Company referred to
in the Prospectuses, (D) any issuance of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock by the
Company in consideration of the acquisition by the Company from a third party
of a business (whether through a merger, sale of assets or securities, or
otherwise), provided that each transferee of such Common Stock or securities
agrees in a writing in form and substance reasonably satisfactory to Merrill
Lynch to agree to be bound by the provisions of the Lock-Up as if it was the
Company, or the filing by the Company of a registration statement under the
1933 Act with respect to such issuance and acquisition.

77
<PAGE>

considered in determining the initial public offering price, in addition to
prevailing market conditions, will be certain financial information of the
Company, including earnings, the history of, and the prospects for, the
Company and the industry in which it competes, an assessment of the management
of the Company, the Company's past and present operations, the prospects for,
and timing of, future revenues and earnings of the Company, the present state
of the Company's development and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to the Company. There can be no assurance that an active trading
market will develop for the Class B Common Stock or that the Class B Common
Stock will trade in the public market subsequent to the Offering at or above
the initial public offering price.

Application has been made to list the Class B Common Stock on the New York
Stock Exchange.

The Underwriters do not intend to confirm sales of the Class B Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.

In the International Purchase Agreement and the U.S. Purchase Agreement, the
Company has agreed to indemnify the several Underwriters against certain civil
liabilities which may be incurred in connection with the Offering, including
certain liabilities under the Securities Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof.

Until the distribution of the shares of Class B Common Stock to be sold in
the Offering is completed, rules of the Commission may limit the ability of
the International Underwriters to bid for and purchase the shares of Class B
Common Stock. As an exception to these rules, the International Underwriters
are permitted to engage in certain transactions that stabilize the price of
the shares of Class B Common Stock. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
shares of Class B Common Stock.

If the International Underwriters create a short position in the shares of
Class B Common Stock in connection with the initial resale of the shares of
Class B Common Stock to be sold in the Offering, i.e., if they sell more
shares of Class B Common Stock than are set forth on the cover page of this
Prospectus, the International Underwriters may reduce such short position by
purchasing shares of Class B Common Stock in the open market. The
International Underwriters may also elect to reduce any short position by
exercising all or part of the overallotment option described above.

The International Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the International
Representatives purchase shares of Class B Common Stock in the open market to
reduce the International Underwriters' short position or to stabilize the
price of the shares of Class B Common Stock, they may reclaim the amount of
the selling concession from the International Underwriters and selling group
members who initially resold such shares.

Neither the Company nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any transaction
described above may have on the price of the shares of Class B Common Stock.
In addition, neither the Company nor any Underwriter makes any representation
that the International Representatives will engage in such transactions, once
commenced, will not be discontinued without notice.

78
<PAGE>

Certain of the Underwriters, including the International Representatives,
perform brokerage services for the Company and its affiliates and investment
companies managed by them from time to time for which they receive customary
compensation. Each of the International Representatives distributes the
Company's mutual fund products and provides shareholder services in connection
with such products in the ordinary course of business for which they receive
customary compensation. Affiliates of certain of the Underwriters own shares
of Class B Common Stock of the Company and intend to sell a portion of their
holdings in the Offering. See "Principal and Selling Shareholders." In
February 1996, certain affiliates of Merrill Lynch sold an aggregate of 50,000
Trust Class B Common Shares (without taking into account subsequent stock
splits) for an aggregate consideration of $950,000. Merrill Lynch has
historically provided investment banking advisory services to the Company for
which it received customary compensation.

Each International Underwriter has agreed that (i) it has not offered or
sold, and will not offer or sell, in the United Kingdom by means of any
document any Class B Common Stock other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 (the "Regulations"), (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act of 1986 and the Regulations with respect to anything done by it
in relation to the Class B Common Stock in, from or otherwise involving the
United Kingdom and (iii) it has only issued or passed on and will only issue
or pass on to any person in the United Kingdom any document received by it in
connection with the issuance of Class B Common Stock if that person is of a
kind described in Article 11(3) of the Financial Services Act of 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.

Purchasers of Class B Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase, in addition to the offering price set forth on the cover
page hereof.

DIRECTED SHARE PROGRAM

LEGAL MATTERS

EXPERTS

79
<PAGE>

80
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 13
Federated................................................................. 18
Use of Proceeds........................................................... 21
Dilution.................................................................. 21
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Recent Developments....................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 40
Management................................................................ 55
Certain Transactions...................................................... 65
Principal and Selling Shareholders........................................ 66
Description of Securities................................................. 70
Shares Eligible for Future Sale........................................... 73
Certain United States Tax Considerations for Non-United States Holders.... 74
Underwriting.............................................................. 76
Legal Matters............................................................. 79
Experts................................................................... 79
Index to Financial Statements............................................. F-1
Appendix A................................................................ A-1
</TABLE>

UNTIL , 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS B COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENTS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

[Alternate Page for International Prospectus]
16,290,235 SHARES

FEDERATED INVESTORS, INC.

CLASS B
COMMON STOCK
(NON-VOTING)

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

PROSPECTUS

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

MERRILL LYNCH INTERNATIONAL

PAINEWEBBER INTERNATIONAL

SALOMON SMITH BARNEY INTERNATIONAL

, 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

FEDERATED INVESTORS, INC.

PRIVATE PLACEMENT IN CANADA OF
CLASS B COMMON STOCK

THE OFFERING

The shares of Class B Common Stock (the "Class B Common Stock") being
offered hereby are part of an offering by Federated Investors, Inc., a
Pennsylvania corporation (the "Company"), and by certain shareholders of the
Company (the "Selling Shareholders"), of 16,290,235 shares of Class B Common
Stock (18,733,770 shares of Class B Common Stock if the Underwriters' over-
allotment options are exercised in full). Of the 16,290,235 shares of Class B
Common Stock being offered initially, 13,032,190 shares of Class B Common
Stock are being offered in the United States and Canada and 3,258,045 shares
of Class B Common Stock are being offered outside of the United States and
Canada.

Attached hereto is a copy of the prospectus (the "U.S. Prospectus") filed
with the Securities and Exchange Commission in the United States regarding the
offering being made in the United States. The offering in Canada is being made
solely in the Provinces of Ontario and British Columbia.

RESALE RESTRICTIONS

The distribution of the shares of Class B Common Stock in Canada is being
made on a private placement basis. Accordingly, any resale of such shares must
be made in accordance with an exemption from the registration and prospectus
requirements of applicable securities laws, which vary depending on the
province. Purchasers of shares of Class B Common Stock are advised to seek
legal advice prior to any resale of the shares of Class B Common Stock.

REPRESENTATION BY PURCHASERS

Confirmations of the acceptance of offers to purchase the shares of Class B
Common Stock will be sent to purchasers in Canada who have not withdrawn their
offers to purchase prior to the issuance of such confirmations. Each purchaser
who receives a purchase confirmation will, by the purchaser's receipt thereof,
be deemed to represent to the Company, the Selling Shareholders and the dealer
from whom such purchase confirmation is received that such purchaser is a
person or company to which shares of Class B Common Stock may be sold without
the benefit of a prospectus qualified under applicable provincial securities
laws.

ENFORCEMENT OF LEGAL RIGHTS

The shares of Class B Common Stock being offered are those of a foreign
issuer and Ontario purchasers will not receive the contractual right of action
prescribed by section 32 of the Regulation under the Securities Act (Ontario).
As a result, Ontario purchasers must rely on other remedies that may be
available, including common law rights of action for damages or rescission or
rights of action under the civil liability provisions of the U.S. federal
securities laws.

All of the Company's directors and officers, the Selling Shareholders and
the experts named in the U.S. Prospectus may be located outside of Canada and,
as a result, it may not be possible for Canadian purchasers to effect service
of process within Canada upon the Company or such persons. All or a
substantial portion of the assets of the Company and such persons may be
located outside of Canada and, as a result, it may not be possible to satisfy
a judgment against the Company or such persons in Canada or to enforce a
judgment obtained in Canadian courts against the Company or such persons
outside of Canada.
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered*:

<TABLE>
<S> <C>
SEC Registration Fee................................................ $110,529
NASD Fee............................................................ 30,500
NYSE Listing Fees................................................... 86,022
Printing and Engraving Expenses..................................... **
Accounting Fees and Expenses........................................ **
Legal Fees and Expenses............................................. **
Blue Sky Fees and Expenses.......................................... 5,000
Transfer Agent Fees and Expenses.................................... **
Miscellaneous....................................................... **
--------
Total............................................................. $ **
========
</TABLE>
- --------
* The Selling Shareholders will bear their respective pro rata portion of
certain expenses of the Offering.
**To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Sections 1741 and 1742 of the Pennsylvania Business Corporation Law (the
"PBCL") provide that a business corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer, employee or agent of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such proceeding, if such person acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal proceeding,
has no reasonable cause to believe his conduct was unlawful. In the case of an
action by or in the right of the corporation, such indemnification is limited
to expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person has been adjudged to be liable to the
corporation unless, and only to the extent that, a court determines upon
application that, despite the adjudication of liability but in view of all the
circumstances, such person is fairly and reasonably entitled to indemnity for
the expenses that the court deems proper.

PBCL Section 1744 provides that, unless ordered by a court, any
indemnification referred to above shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification is
proper in the circumstances because the director, officer, employee or agent
of the corporation has met the applicable standard of conduct. Such
determination shall be made:

(1) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to the proceeding; or

(2) if such a quorum is not obtainable or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or

(3) by the shareholders.

Notwithstanding the above, PBCL Section 1743 provides that to the extent
that a director, officer, employee or agent of a business corporation is
successful on the merits or otherwise in defense of any proceeding referred

II-1
<PAGE>

to above as contained in sections 1741 and 1742, or in defense of any claim
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.

PBCL Section 1745 provides that expenses (including attorneys' fees)
incurred by an officer, director, employee or agent of a business corporation
in defending any such proceeding may be paid by the corporation in advance of
the final disposition of the action or proceeding upon receipt of an
undertaking to repay the amount advanced if it is ultimately determined that
the director, officer, employee or agent of the corporation is not entitled to
be indemnified by the corporation.

PBCL Section 1746 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, the foregoing provisions is not
exclusive of any other rights to which a person seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise both as to action in such person's official capacity
and as to action in another capacity while holding office, and that
indemnification may be granted under any bylaw, agreement, vote of
shareholders or directors or otherwise for any action taken whether or not the
corporation would have the power to indemnify the person under any other
provision of law and whether or not the indemnified liability arises or arose
from any threatened, pending or completed action by or in the right of the
corporation, provided, however, that no indemnification may be made in any
case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.

The By-Laws of the Registrant provide that the Directors, officers, agents
and employees of the Registrant shall be indemnified as of right to the
fullest extent now or hereafter not prohibited by law in connection with any
actual or threatened action, suit or proceeding, civil, criminal,
administrative, investigative or other (whether brought by or in the right of
the Registrant or otherwise) arising out of their service to the Registrant or
to another enterprise at the request of the Registrant.

PBCL Section 1747 permits a Pennsylvania business corporation to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another threatened, pending or completed action or other enterprise, against
any liability asserted against such person and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify the person against such liability under the
provisions described above.

The By-Laws of the Registrant provide that the Registrant may purchase and
maintain insurance to protect itself and any Director, officer, agent or
employee entitled to indemnification under the By-Laws against any liability
asserted against such person and incurred by such person in respect of the
service of such person to the Registrant whether or not the Registrant would
have the power to indemnify such person against such liability by law or under
the provisions of the By-Laws.

The Registrant maintains directors' and officers' liability insurance
covering its Directors and officers with respect to liabilities, including
liabilities under the Securities Act of 1933, as amended, which they may incur
in connection with their serving as such. Under this insurance, the Registrant
may receive reimbursement for amounts as to which the Directors and officers
are indemnified by the Registrant under the foregoing By-Law indemnification
provision. Such insurance also provides certain additional coverage for the
Directors and officers against certain liabilities even though such
liabilities may not be covered by the foregoing By-Law indemnification
provision.

As permitted by PBCL Section 1713, the By-Laws of the Registrant provide
that no Director shall be personally liable for monetary damages for any
action taken, unless such Director's breach of duty or failure to perform
constituted self-dealing, willful misconduct or recklessness. The PBCL states
that this exculpation from liability does not apply to the responsibility or
liability of a Director pursuant to any criminal statute or the liability of a
Director for the payment of taxes pursuant to Federal, state or local law. It
may also not apply to

II-2
<PAGE>

liabilities imposed upon directors by the Federal securities laws. PBCL
Section 1715(d) creates a presumption, subject to exceptions, that a Director
acted in the best interests of the corporation. PBCL Section 1712, in defining
the standard of care a Director owes to the corporation, provides that a
Director stands in a fiduciary relation to the corporation and must perform
his duties as a Director or as a member of any committee of the Board in good
faith, in a manner he reasonably believes to be in the best interest of the
corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the three years ended December 31, 1997, the Company's predecessor,
Federated Investors, sold the following securities in transactions exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder by the Commission:

1. On March 17, 1995, Federated issued 25,000 Trust Class B Common Shares
(without adjusting for subsequent stock dividends) to a senior executive for a
total cash consideration of $25,000 pursuant to Federated's Restricted Stock
Plan.

2. On November 27, 1995, Federated issued 15,000 Trust Class B Common Shares
(without adjusting for subsequent stock dividends) to a senior executive for a
total cash consideration of $15,000 pursuant to Federated's Restricted Stock
Plan.

3. On March 6, 1997, Federated issued 25,000 Trust Class B Common Shares
(without adjusting for subsequent stock dividends) to a senior executive for a
total cash consideration of $25,000 pursuant to Federated's Restricted Stock
Plan.

4. In January 1996, Federated granted nonqualified stock options to
employees under the Stock Incentive Plan with respect to an aggregate of
205,000 Trust Class B Common Shares having an exercise price of $11.58 per
share in reliance on Rule 701. The number of shares and the price per share do
not reflect the stock dividends declared in November 1996, February 1998 and
April 1998.

5. In December 1997, Federated granted nonqualified stock options to
employees under the Stock Incentive Plan with respect to an aggregate of
561,000 Trust Class B Common Shares having an exercise price of $18.00 per
share in reliance on Rule 701. The number of shares and the price per share do
not reflect the stock dividends declared in February 1998 and April 1998.

In addition, the Company offered to holders of stock appreciation rights
("SARs") an opportunity to exchange outstanding SARs for an equivalent number
of nonqualified stock options to be granted under Federated's Stock Incentive
Plan adopted on October 31, 1995. A total of 507,500 SARs then outstanding
were exchanged at exercise prices of $11.42 to $11.58 per share (without
adjusting for subsequent stock dividends). The exchange was exempt from
registration under Section 3(a)(9) of the Securities Act of 1933. The grant of
nonqualified options under the Stock Incentive Plan having exercise prices of
$11.42 to $11.58 per share, an aggregate of up to $5,878,130 for SARs tendered
in exchange, was made in reliance on Rule 701. The foregoing numbers of shares
and prices per share do not reflect the subsequent stock dividends declared in
November 1996, February 1998, and April 1998.

II-3
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following exhibits are filed as part of this registration statement:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.01 Forms of Purchase Agreements (Filed herewith)
2.01 Agreement and Plan of Merger dated as of February 20, 1998 between
Federated Investors and the Company(1)
3.01 Restated Articles of Incorporation of the Company(1)
3.02 Restated By-Laws of the Company(1)
4.01 Form of Class A Common Stock certificate(1)
4.02 Form of Class B Common Stock certificate(1)
4.04 Stock Purchase Agreement dated August 1, 1989 between the Company and
Westinghouse Credit Corporation(1)
4.05 Intercompany Subordination Agreement dated as of June 15, 1996 by and
among the Company and its subsidiaries(1)
4.06 Shareholder Rights Agreement dated August 1, 1989 between the Company
and The Standard Fire Insurance Company, as amended through January
31, 1996(1)
4.07 Senior Secured Credit Agreement, dated as of January 31, 1996, by and
among Federated and the Banks set forth therein and PNC, National
Association(1)
4.08 Federated Note Purchase Agreement, dated as of June 15, 1996(1)
4.09 Federated Program Master Agreement, dated as of October 24, 1997,
among Federated, Federated Funding 1997-1, Inc., Federated Management
Company, Federated Securities Corp., Wilmington Trust Company, PLT
Finance, L.P., Putnam, Lovell & Thornton Inc. and Bankers Trust
Company*(1)
4.10 Federated Investors Program Initial Purchase Agreement, dated as of
October 24, 1997, between Federated Funding 1997-1, Inc., and
Wilmington Trust Company, solely as Trustee of the PLT Finance Trust
1997-1(1)(2)
4.11 Federated Investors Program Revolving Purchase Agreement, dated as of
October 24, 1997, between Federated Funding 1997-1, Inc., and PLT
Finance, L.P.(1)(2)
4.12 Federated Investors Program Fee Agreement, dated as October 24, 1997,
between Federated Investors and PLT Finance, L.P.(1)
4.13 Schedule X to Federated Program Master Agreement, dated as of October
24, 1997, among Federated, Federated Funding 1997-1, Inc., Federated
Management Company, Federated Securities Corp., Wilmington Trust
Company, PLT Finance, L.P., Putnam, Lovell & Thornton Inc. and Bankers
Trust Company(1)
5.01 Opinion of Kirkpatrick & Lockhart LLP as to the legality of the
securities being registered (Filed herewith)
9.01 Voting Shares Irrevocable Trust dated May 31, 1989(1)
10.01 Stock Incentive Plan(1)
10.02 Executive Annual Incentive Plan(1)
10.03 Federated Investors Tower Lease dated January 1, 1993(1)
10.04 Federated Investors Tower Lease dated February 1, 1994(1)
10.05 Centre City Tower Lease dated July 23, 1992, as amended(1)
10.06 Employment Agreement dated January 16, 1997 between Federated
Investors and Arthur L. Cherry(1)
10.07 Employment Agreement dated March 17, 1995 between Federated Investors
and Henry A. Frantzen(1)
10.08 Employment Agreement dated December 28, 1990 between Federated
Investors and John B. Fisher(1)
10.09 Employment Agreement dated December 22, 1993 between Federated
Securities Corp. and James Getz(1)
16.01 Letter of KPMG Peat Marwick LLP(1)
21.01 Subsidiaries of the Registrant**
23.01 Consent of Kirkpatrick & Lockhart LLP (included in opinion filed as
Exhibit 5.01)(1)
23.02 Consent of Ernst & Young LLP (Filed herewith)
23.03 Consent of KPMG Peat Marwick LLP (Filed herewith)
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
24.01 Power of Attorney (included on signature page)**
27.01 Financial Data Schedule**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference from exhibits to the Company's Registration
Statement on Form S-4 (No. 333-48361) originally filed on March 20, 1998
and as amended.
(2) Certain portions of this exhibit have been omitted based upon a request
for confidential treatment filed by the Company with the Secretary of the
Commission on March 26, 1998, as amended on April 23, 1998. The omitted
portion of this exhibit has been separately filed with the Commission.

(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the Registrant's consolidated financial statements or
accompanying notes.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pittsburgh, Commonwealth of
Pennsylvania, on May 7, 1998.

FEDERATED INVESTORS, INC.

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

Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<S> <C>
SIGNATURE CAPACITY
DATE

* Chairman and Director May 7, 1998
- -------------------------
John F. Donahue

/s/ J. Christopher Donahue President, Chief Executive May 7, 1998
- ------------------------- Officer and Director
J. Christopher Donahue

* Director May 7, 1998
- -------------------------
John W. McGonigle

/s/ Thomas R. Donahue Chief Financial Officer May 7, 1998
- ------------------------- (Principal Financial and
Thomas R. Donahue Accounting Officer)

*By: /s/ Thomas R. Donahue
----------------------
Thomas R. Donahue
Attorney-in-Fact
</TABLE>

II-6

<PAGE>

Exhibit 1.01

16,290,235 Shares

FEDERATED INVESTORS, INC.

(a Pennsylvania Corporation)

Class B Common Stock

(Non-Voting)

(No Par Value Per Share)

U.S. PURCHASE AGREEMENT
-----------------------

May __, 1998

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209

Dear Ladies and Gentlemen:

Federated Investors, Inc., a Pennsylvania corporation (the "Company"), and the
shareholders of the Company named in Schedule D hereto (the "Selling
Shareholders") confirm their agreements with Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and PaineWebber Incorporated and Smith
Barney Inc. (the "Other U.S. Representatives") and each of the other
underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters,"
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch and the Other U.S.
Representatives are acting as representatives (in such capacity, Merrill Lynch
and the Other U.S. Representatives shall hereinafter be referred to as the "U.S.
Representatives") with respect to the sale by the Company and the Selling
Shareholders, acting severally and not jointly, of an aggregate of 16,290,235
shares of Class B Common Stock (non-voting), no par value per share (the "Class
B Common Stock"), of the Company, and the purchase by the
<PAGE>

U.S. Underwriters, acting severally and not jointly, of the respective numbers
of Class B Common Stock set forth in said Schedule A hereto, and with respect to
the grant by the Company and the Selling Shareholders indicated on Schedule D
hereto to the U.S. Underwriters, acting severally and not jointly, of the
options described in Section 2(b) hereof to purchase all or any part of 312,000
additional shares of Class B Common Stock in the aggregate and 1,642,828
additional shares of Class B Common Stock in the aggregate, respectively, to
cover over-allotments, if any. The 13,032,190 shares of Class B Common Stock
(the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all
or any part of the 1,954,828 shares of Class B Common Stock subject to the
options described in Section 2(b) hereof (the "U.S. Option Securities") are
hereinafter called, collectively, the "U.S. Securities". The Class B Common
Stock and the Class A Common Stock, no par value per share, of the Company are
hereinafter referred to as the "Common Stock".

The Company and the Selling Shareholders understand that the U.S. Underwriters
propose to make a public offering of the U.S. Securities as soon as the U.S.
Representatives deem advisable after this Agreement has been executed and
delivered.

It is understood and agreed by all parties that the Company and the Selling
Shareholders are concurrently entering into an agreement dated the date hereof
(the "International Purchase Agreement") providing for the sale by the Company
and the Selling Shareholders of up to 3,258,045 shares of Class B Common Stock
(the "Initial International Securities") through arrangements with certain
managing underwriters outside the United States and Canada (the "International
Managers") for whom Merrill Lynch International ("Merrill Lynch International"),
PaineWebber International (U.K.) Ltd. and Smith Barney Inc. are acting as lead
managers (the "Lead Managers") and the grant by the Company and the Selling
Shareholders indicated on Schedule D thereto to the International Managers of
options to purchase all or any part of 78,000 additional shares of Class B
Common Stock in the aggregate and 410,707 additional Class B Common Stock in the
aggregate, respectively (the "International Option Securities"), to cover over-
allotments, if any, of the Initial International Securities. The Initial
International Securities and the International Option Securities are hereinafter
called the "International Securities". The U.S. Securities and the International
Securities, collectively, are hereinafter called the "Securities". It is
understood that the Company is not obligated to sell and the U.S. Underwriters
are not obligated to purchase any Initial U.S. Securities unless all of the
Initial International Securities are contemporaneously purchased by the
International Managers.

The Company and the Selling Shareholders understand that the U.S. Underwriters
and the International Managers (collectively, the "Underwriters") will
concurrently enter into an Intersyndicate Agreement of even date herewith (the
"Intersyndicate Agreement") providing for the coordination of certain
transactions among the Underwriters under the direction of Merrill Lynch.

The Company and the U.S. Underwriters agree that up to 750,000 shares of the
Initial U.S. Securities to be purchased by the U.S. Underwriters (the "Reserved
Securities") shall be reserved for sale by the U.S. Underwriters to certain
eligible employees of the Company, as part of the distribution of the U.S.
Securities by the U.S. Underwriters, subject
<PAGE>

to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees by
the end of the first business day after the date of this Agreement, such
Reserved Securities may be offered to the public as part of the public offering
contemplated hereby.

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-48405) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement and the International
Purchase Agreement (collectively, the "Purchase Agreements"), the Company will,
in connection with the offering of each of the U.S. Securities and the
International Securities, either (i) prepare and file a prospectus in accordance
with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of
the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company
has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 424(b). The information included in any prospectus or in
any Term Sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each
prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto,
schedules thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus, in the form first furnished to the U.S. Underwriters for use in
connection with the offering of the U.S. Securities is herein called the "U.S.
Prospectus" and the final prospectus, in the form first furnished to the
International Managers for use in connection with the International Securities,
is herein called the "International Prospectus", and the U.S. Prospectus and the
International Prospectus are hereinafter called, collectively, the
"Prospectuses," and each individually, a "Prospectus." If Rule 434 is relied
on, each of the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary prospectus dated April 24, 1998, together with the
applicable Term Sheet and all references in this Agreement and the International
Purchase Agreement to the date of the U.S. Prospectus and International
Prospectus, respectively, shall mean the date of such Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission
<PAGE>

pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR"). The U.S. Prospectus is identical to the International Prospectus,
except for the front cover page, a "United States Tax Considerations for Non-
United States Holders" section in the International Prospectus, the
"Underwriting" section and the back cover page.

All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectuses (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectuses as the case may be.

The Company also has filed with the Commission a registration statement on
Form S-4 (No. 333-48361) covering the registration under the 1933 Act of 6,000
shares of Class A Common Stock, no par value, and 83,427,000 shares of Class B
Common Stock, no par value, to be issued by the Company in connection with a
merger (the "Merger") of Federated Investors, a Delaware business trust and
parent of the Company ("Federated Investors"), into the Company, pursuant to
which the Company is the surviving corporation, under the terms of that certain
Agreement and Plan of Merger dated as of February 20, 1998 between Federated
Investors and the Company (the "Merger Agreement"). On April 30, 1998 the S-4
Registration Statement was declared effective by the Commission and definitive
proxy statement/prospectuses were distributed to shareholders of Federated
Investors to vote at a special meeting of the shareholders on May 15, 1998 to
approve and adopt the Merger Agreement.

SECTION 1. Representations and Warranties.
------------------------------

(a) Representations and Warranties by the Company. The Company represents and
warrants to each U.S. Underwriter as of the date hereof and as of the Closing
Time referred to in Section 2(a) hereof, and agrees with each U.S. Underwriter,
as follows:

(i) Compliance with Registration Requirements. The Company
-----------------------------------------
meets the requirements for use of Form S-1 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.

At the respective times the Registration Statement, the Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities are
purchased, up to the Date of Delivery referred to below), (A) the
Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied and
<PAGE>

will comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (B) neither the Prospectuses nor any amendments or supplements
thereto contained or will contain an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading and (C) if Rule 434 is used, the Company will
comply with the requirements of Rule 434; provided, however, that the
-----------------
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or Prospectuses
made in reliance upon and in conformity with information furnished to the
Company in writing by any U.S. Underwriter through Merrill Lynch or by any
International Manager through Merrill Lynch International, expressly for
use in the Registration Statement or Prospectuses.

Each preliminary prospectus and the Prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations.

(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants, in the case of Ernst & Young
LLP, as required by the 1933 Act and the 1933 Act Regulations and, in the
case of KPMG Peat Marwick LLP, as required by rule 101 of the AICPA's Code
of Professional Conduct.

(iii) Financial Statements. The consolidated financial
--------------------
statements included in the Registration Statement and the Prospectuses,
together with the related schedules and notes, present fairly the
consolidated financial position of Federated Investors and its subsidiaries
(including the Company) at the dates indicated and the statement of
operations, shareholders' equity and cash flows of Federated Investors and
its subsidiaries for the periods specified, on the basis stated in the
Registration Statement at the respective dates or for the respective
periods for which they apply. Such financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP")
applied, except as disclosed therein, on a consistent basis throughout the
periods involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses are
accurately presented in all material respects and have been compiled on a
basis consistent with such consolidated financial statements included in
the Registration Statement and the books and records of Federated Investors
and its subsidiaries.

(iv) No Material Adverse Change in Business. Since the
--------------------------------------
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except for the contemplated Merger and
related transactions and as otherwise stated
<PAGE>

therein, (A) there has been no material adverse change in the condition,
financial or other, the business or in the earnings of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or any development involving, or which may
reasonably be expected to involve, prospectively such a material adverse
change (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in
the ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C) there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock, except to the extent
described in the Prospectuses.

(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the Commonwealth of Pennsylvania with the requisite power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign business trust to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify or to be in good standing would not
result in a Material Adverse Effect.

(vi) Good Standing of Subsidiaries. Each "significant
-----------------------------
subsidiary" of the Company (as such term in defined in Rule 1-02 of
Regulation S-X) (each a "Subsidiary" and, collectively, the "Subsidiaries")
has been duly organized, and is validly existing as a corporation, business
trust or partnership, as the case may be, in good standing under the laws
of the jurisdiction of its organization, has the requisite power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation, business trust or partnership, as the case may be, to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to
so qualify or to be in good standing would not result in Material Adverse
Effect; except as otherwise disclosed in the Registration Statement, all of
the issued and outstanding capital stock of each Subsidiary of the Company
has been duly authorized and validly issued, is fully paid and non-
assessable and is owned by the Company (except, in the case of foreign
subsidiaries, for qualifying shares owned by foreign nationals), directly
or through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity, except that all of the stock of
substantially all of the Subsidiaries is pledged as security pursuant to a
Senior Secured Credit Agreement, dated as of January 31, 1996 among
Federated Investors, the lenders named therein and PNC, National
Association, as Agent, and a Note Purchase Agreement, dated as of June 15,
1996 between Federated Investors and the Noteholders named therein; none of
the outstanding shares of capital stock of the Subsidiaries was issued in
violation of any preemptive or similar rights arising by operation of law,
or under the organizational documents or by-laws of the Company or
<PAGE>

any Subsidiary or under any agreement to which the Company or any
Subsidiary is a party. The only subsidiaries of the Company are the
subsidiaries listed on Exhibit 21.01 to the Registration Statement and
certain other subsidiaries which, considered in the aggregate as a single
subsidiary, do not constitute a "significant subsidiary" as defined in Rule
1-02 of Regulation S-X.

(vii) Capitalization. Subject to the consummation of the
--------------
Merger, the authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectuses in the column entitled "Actual" under
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement or pursuant to employee benefit or stock option plans referred to
in the Prospectuses).

(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.

(ix) Authorization and Description of Securities. Subject to
-------------------------------------------
the consummation of the Merger in accordance with its terms, the
outstanding Class B Common Stock will have been duly authorized and validly
issued and will be fully paid and non-assessable; and none of the
outstanding Class B Common Stock, when issued in connection with the
Merger, will be issued in violation of the preemptive or other similar
rights arising by operation of law, under the Restated Articles of
Incorporation or Restated By-Laws of the Company, under any agreement to
which the Company or any of its subsidiaries is a party, or otherwise. The
Class B Common Stock to be issued and sold by the Company have been duly
authorized for issuance and sale to the U.S. Underwriters and the
International Managers pursuant to this Agreement and the International
Purchase Agreement and, when issued and delivered by the Company pursuant
to this Agreement and the International Purchase Agreement against payment
of the consideration set forth herein and therein, will be validly issued
and fully paid and non-assessable; the Class B Common Stock conforms to all
statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Class B Common Stock will be subject to personal
liability by reason of being such a holder; and the issuance of the Class B
Common Stock to be issued and sold by the Company is not subject to
preemptive or other similar rights arising by operation of law, under the
Restated Articles of Incorporation or Restated By-Laws of the Company,
under any agreement to which the Company or any of its subsidiaries is a
party, or otherwise. There are no persons with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act other than Westinghouse Pension Plan.

(x) Absence of Defaults and Conflicts. Subject to the
---------------------------------
consummation of the Merger in accordance with its terms and the
satisfaction of all conditions set forth in the Merger Agreement, neither
the Company nor any of the Subsidiaries is in violation of its
organizational documents, or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any bond,
<PAGE>

debenture, note or any contract, indenture, mortgage, deed of trust, loan
or credit agreement, lease or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which any of them may
be bound, or to which any of the property or assets of the Company or the
Subsidiaries is subject (collectively, the "Agreements and Instruments")
except for such defaults that would not have a Material Adverse Effect; and
the execution, delivery and performance of this Agreement and the
International Purchase Agreement and the consummation of the transactions
contemplated herein, therein and in the Registration Statement (including
the use of the proceeds by the Company from the sale of Class B Common
Stock as described in the Prospectuses under the caption "Use of Proceeds")
and compliance by the Company with its obligations hereunder and thereunder
have been duly authorized by all necessary action and will not, whether
with or without the giving of notice or the passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, any of the Agreements and Instruments, except for
such conflicts, breaches, defaults, liens, charges or encumbrances that
would not have a Material Adverse Effect, nor will any such action result
in any violation of the provisions of the Restated Articles of
Incorporation or Restated By-Laws of the Company or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
assets or properties. As used herein, a "Repayment Event" means any event
or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any Subsidiary.

(xi) Absence of Labor Dispute. No labor problems exist with the
------------------------
employees of the Company or any Subsidiaries or, to the knowledge of the
Company, are imminent which could reasonably be expected to result in a
Material Adverse Effect.

(xii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any of its
subsidiaries which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might result in a
Material Adverse Effect or which might reasonably be expected to materially
and adversely affect the properties or assets thereof or the consummation
of this Agreement or the International Purchase Agreement or the
performance by the Company of its obligations hereunder; the aggregate of
all pending legal or governmental proceedings to which the Company or any
subsidiary of the Company is a party or of which any of their respective
properties or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
<PAGE>

incidental to the business, could not reasonably be expected to result in a
Material Adverse Effect.

(xiii) Accuracy of Exhibits. There are no contracts or
--------------------
documents which are required to be described in the Registration Statement,
the Prospectuses or the documents to be filed as exhibits thereto which
have not been so described and filed as required by the 1933 Act.

(xiv) Possession of Intellectual Property. The Company and the
-----------------------------------
Subsidiaries own or possess adequate rights to use all patents, trademarks,
service marks, trade names, copyrights, licenses and rights (collectively,
"Intellectual Property") necessary to carry on the business now operated by
them, and neither the Company nor any of the Subsidiaries has received any
notice or is otherwise aware of any infringement of or conflict with
asserted rights of others with respect to any Intellectual Property, or of
any facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Company or any of the
Subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.

(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, order registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder in
connection with the offering, issuance or sale of the U.S. Securities
hereunder or the International Securities under the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement or the International Purchase Agreement, except such as may be
required under the 1933 Act or the 1933 Act Regulations or state securities
laws or in connection with registration of the Securities under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), filing to
list the Securities on the New York Stock Exchange on or prior to the
Closing Time or the filing of a Certificate of Merger of the Company or of
Federated Investors in accordance with applicable law in the State of
Delaware and the Commonwealth of Pennsylvania on or prior to Closing Time
(all of which have been or will be effective in accordance with this
Agreement).

(xvi) Possession of Licenses and Permits. The Company and the
----------------------------------
Subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business of the Company as described in the
Prospectuses; the Company and the Subsidiaries are in compliance with the
terms and conditions of all such Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and neither the Company nor any
of the Subsidiaries has
<PAGE>

received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.

(xvii) Title to Property. The Company and the Subsidiaries have
-----------------
good and marketable title to all real property owned by the Company and the
Subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind, except such as (a) are
described in the Prospectuses or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
the Subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one enterprise,
and under which the Company or any Subsidiary holds properties described in
the Prospectuses, are in full force and effect, and neither the Company nor
any Subsidiary has any notice of any material claim of any sort that has
been asserted by anyone adverse to the rights of the Company or any
Subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such Subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.

(b) Each of the Selling Shareholders, severally, and not jointly,
represents and warrants to each U.S. Underwriter as of the date hereof and as of
the Closing Time referred to in Section 2(a) hereof, and agrees with each U.S.
Underwriter as follows:

(i) Absence of Defaults and Conflicts. The execution and
---------------------------------
delivery of this Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated by this Agreement and the
International Purchase Agreement will not conflict with or result in a
breach or violation by such Selling Shareholder of, or constitute a default
by such Selling Shareholder under, any indenture, mortgage, loan agreement,
deed or trust, contract or other similar agreement or instrument, any
charter, bylaws or other governing documents, or any decree, judgment,
order, statute, rule or regulation of any court or governmental agency or
body of the United States or any state thereof, in all such cases, to which
such Selling Shareholder is a party or by which such Selling Shareholder is
bound or to which any of the assets or property of such Selling Shareholder
is subject, except in all such cases, for such conflicts, breaches,
defaults and violations as would not, individually or in the aggregate,
adversely effect the sale of Securities by such Selling Shareholder
hereunder.

be sold by such Selling Shareholder hereunder and under the International
Purchase Agreement and payment of the purchase price therefor as herein
contemplated, each of the U.S. Underwriters and the International Managers
will receive good and valid title to its ratable share of the Securities
purchased by it from such Selling Shareholder, free and clear of any
pledge, lien, security interest, encumbrance or other adverse claim,
assuming that the U.S. Underwriters and Managers purchase such Securities
in good faith and without notice of any such pledge, security interest,
lien, encumbrance or other adverse claim within the meaning of the Uniform
Commercial Code.

(iii) Absence of Further Requirements. All authorizations,
-------------------------------
approvals and consents necessary for the execution and delivery by such
Selling Shareholder of this Agreement, the International Purchase Agreement
and, if such Selling Shareholder is a party to it, the Power of Attorney
dated on or before the date hereof between such Selling Shareholder, the
Company and the Attorneys-in-Fact named therein (the "Power of Attorney")
and the Custody Agreement dated on or before the date hereof between such
Selling Shareholder, the Company and the Custodian named therein (the
"Custody Agreement") and the sale and delivery of the Securities to be sold
by such Selling Shareholder hereunder and under the International Purchase
Agreement (other than the issuance of the order of the Commission declaring
the Registration Statement effective and such authorizations, approvals or
consents as may be necessary under state or foreign securities laws) have
been obtained and are in full force and effect; and such Selling
Shareholder has the full right, power and authority to enter into this
Agreement and the International Purchase Agreement, and to sell, transfer
and deliver the Securities to be sold by such Selling Shareholder hereunder
and under the International Purchase Agreement.

(iv) Authorization of Agreements. This Agreement, the
---------------------------
International Purchase Agreement and, if such Selling Shareholder is a
party to it, the Power of Attorney and the Custody Agreement have been duly
executed and delivered by such Selling Shareholder.

(v) Restriction on Sale of Securities. During the period of 180
---------------------------------
days from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of Merrill Lynch, directly or indirectly,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, any Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the
issuance of the Securities being sold hereunder and under the International
Purchase Agreement by the Selling Shareholder, (B) any transfer of such
Securities to an affiliate of the Selling Shareholder which agrees in a
writing in form
<PAGE>

and substance reasonably satisfactory to Merrill Lynch to agree to be bound
by the provisions hereof as if it was the Selling Shareholder, (C) any
pledge prior to the date of the Prospectuses by a shareholder of the
Company of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock, and (D) any pledge after the date of the
Prospectuses by a shareholder of the Company of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
for the purpose of securing a bona fide loan by a financial institution to
such shareholder.

(vi) Absence of Misstatements and Omissions. To the extent that
--------------------------------------
any statements or omissions made in the Registration Statement, any
preliminary prospectus, the Prospectuses or any amendment or supplement
thereto are made in reliance upon and in conformity with information
furnished in writing to the Company by such Selling Shareholder expressly
for use therein, the Registration Statement and such preliminary prospectus
do not, and the Prospectuses and any amendments or supplements thereto will
not, as of the applicable effective date or as of the applicable filing
date, as the case may be, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.

(vii) Absence of Stabilization. Such Selling Shareholder has
------------------------
not taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities.

(viii) Share Certificates. If such Selling Shareholder is a
------------------
party to the Custody Agreement, certificates in negotiable form for all
Class B Common Shares of Federated Investors to be exchanged in the Merger
for the Securities to be sold hereunder and under the International
Purchase Agreement have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.

(c) Officer's Certificates. Any certificate signed by any officer of the
----------------------
Company or by any Selling Shareholder (or any trustee thereof) and delivered to
the U.S. Representatives, the Lead Managers, the U.S. Underwriters or the
International Managers, or to counsel thereof shall be deemed a representation
and warranty by the Company or by such Selling Shareholder, as the case may be,
to each U.S. Representative, U.S. Underwriter, Lead Manager and Manager as to
the matters covered thereby.

SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------

share set forth in Schedule B, the number of Initial U.S. Securities set forth
in Schedule A opposite the name of such U.S. Underwriter, plus any additional
number of Initial U.S. Securities which such U.S. Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.

(b) Option Securities. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each of the Selling Shareholders indicated on Schedule D hereto hereby
grant options to the U.S. Underwriters, severally and not jointly, to purchase
the additional number of shares of Class B Common Stock set forth in Schedule D
hereto and the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase 312,000 additional shares of Class B
Common Stock, in each case at the price per share set forth in Schedule B, less
an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities. The options hereby granted will expire 30 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial U.S. Securities upon notice by the U.S.
Representatives to the Company or the Selling Shareholder, as the case may be,
setting forth the number of U.S. Option Securities as to which the several U.S.
Underwriters are then exercising the option and the U.S. time and date of
payment and delivery for such U.S. Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the U.S.
Representative(s), but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the options are exercised as to all or any portion of
the U.S. Option Securities, each of the U.S. Underwriters, acting severally and
not jointly, will purchase that proportion of the total number of U.S. Option
Securities then being purchased which the number of Initial U.S. Securities set
forth in Schedule A opposite the name of such U.S. Underwriter bears to the
total number of Initial U.S. Securities, subject in each case to such
adjustments as the U.S. Representative(s) in their discretion shall make to
eliminate any sales or purchases of fractional shares. If the options are
exercised as to less than all of the U.S. Option Securities, the Company and the
Selling Shareholders will sell additional shares of Class B Common Stock to the
U.S. Underwriters pro rata on the basis of the total number of U.S. Option
Securities allocated to them.

(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial U.S. Securities shall be made at the office of
Kirkpatrick & Lockhart LLP, counsel for the Company, at 1500 Oliver Building,
Pittsburgh, Pennsylvania 15222, or at such other place as shall be agreed upon
by the U.S. Representatives, the Company and the Selling Shareholders, at 10:00
A.M. on the third (fourth, if the pricing occurs after 4:30 P.M. on any given
day) business day after the date hereof (unless postponed in accordance with the
provisions of Section 10 or 11), or such other time not later than ten business
days after such date as shall be agreed upon by the U.S. Representatives and the
Company (such time and date of payment and delivery being herein called "Closing
Time").

In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of
<PAGE>

certificates for, such U.S. Option Securities shall be made at the office of
Kirkpatrick & Lockhart LLP, counsel for the Company, at 1500 Oliver Building,
Pittsburgh, Pennsylvania 15222, or at such other place as shall be agreed upon
by the U.S. Representatives, the Company and the Selling Shareholders, on each
Date of Delivery as specified in the notice from the U.S. Representatives to the
Company or such Selling Shareholders, as the case may be. All payments shall be
made to the Company or the Selling Shareholders, as the case may be, in New York
Clearing House funds or in similar next-day funds payable to the order of the
Company or the custodians named in the Custody Agreement, on behalf of such
Selling Shareholders, as the case may be, against delivery to the U.S.
Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as a U.S.
Representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose payment
has not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder. In the event that Merrill Lynch, individually and not
as a U.S. Representative of the U.S. Underwriters, shall, as an accommodation to
the Company or any of the Selling Shareholders, arrange for payment of all or a
portion of the Initial U.S. Securities or U.S. Option Securities to be made to
the Company in immediately available funds, the Company agrees to reimburse
Merrill Lynch for its cost of funds, as determined by Merrill Lynch in its sole
discretion, in respect of such payment, such reimbursement to be effected by
wire transfer of immediately available funds by the Company or the Selling
Shareholders, as the case may be, to Merrill Lynch prior to 10:00 A.M., New York
City time, on the closing date, or the relevant Date of Delivery, as the case
may be.

(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in the City of New
York not later than 10:00 A.M. on the business day prior to the Closing Time or
the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company. The Company covenants with each U.S.
------------------------
Underwriter as follows:

(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A and will notify the U.S. Representatives immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectus shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii)
<PAGE>

of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectuses or for
additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary prospectus,
or of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it
deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.

(b) Filing of Amendments. The Company will give the U.S.
Representatives notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)), any
Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectuses whether pursuant to the 1933 Act, the 1934
Act or otherwise, will furnish the U.S. Representatives with copies of any
such documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the U.S. Representatives or counsel for the U.S. Underwriters shall
object.

(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the U.S. Representatives and counsel to the U.S.
Underwriters, without charge, signed copies of the Registration Statement
as originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the U.S. Underwriters.

(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby
consents to the use of such copies for purposes permitted by the 1933 Act.
The Company will furnish to each U.S. Underwriter, without charge, during
the period when the U.S. Prospectus is required to be delivered under the
1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as
amended or supplemented) as such U.S. Underwriter may reasonably request.

Securities as contemplated in this Agreement and in the U.S. Prospectus. If
at any time when a prospectus is required by the 1933 Act to be delivered
in connection with sales of the U.S. Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion
of counsel for the U.S. Underwriters or the Company, to amend the
Registration Statement or amend or supplement the U.S. Prospectus in order
that the U.S. Prospectus will not include any untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend the
Registration statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations,
the Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
U.S. Prospectus comply with such requirements, and the Company will furnish
to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.

(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the U.S.
Securities for offering and sale under the applicable securities laws of
such states and other jurisdictions of the United States as the U.S.
Representatives may designate and to maintain such qualifications in effect
for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign business
trust or as dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation in respect of doing business in
any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the U.S. Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.

(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
security holders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.

(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".

(i) Listing. The Company will use its best efforts to effect the
listing of the Class B Common Stock (including the Securities) on the New
York Stock Exchange.
<PAGE>

(j) Restriction on Sale of Securities. During the period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of, any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
or file any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to (A) the issuance of the
Securities being sold hereunder and under the International Purchase
Agreement by the Company, (B) any issuance of Common Stock by the Company
upon the exercise of an option or warrant or the conversion or exchange of
a security outstanding on the date hereof and referred to in the
Prospectuses, (C) any issuance of Common Stock, or any grant of options to
purchase Common Stock, pursuant to existing employee benefit plans of the
Company referred to in the Prospectuses, (D) any issuance of Common Stock
or any securities convertible into or exercisable or exchangeable for
Common Stock by the Company in consideration of the acquisition by the
Company from a third party of a business (whether through a merger, sale of
assets or securities, or otherwise), provided that each transferee of such
Common Stock or securities agrees in a writing in form and substance
reasonably satisfactory to Merrill Lynch to agree to be bound by the
provisions hereof as if it was the Company, or the filing by the Company of
a registration statement under the 1933 Act with respect to such issuance
and acquisition.

(k) Reporting Requirements. The Company, during the period
when the U.S. Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by the
1934 Act and the 1934 Act Regulations.

SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the U.S.
Underwriters of this Agreement, any agreement among U.S. Underwriters and, such
other documents as may be required in connection with the offering, purchase,
sale and delivery of the U.S. Securities; (iii) the preparation, issuance and
delivery of the certificates for the U.S. Securities to the U.S. Underwriters,
including any stock or other transfer taxes or duties payable upon the sale of
the U.S. Securities to the U.S. Underwriters, (iv) the fees and disbursements of
the Company's counsel, accountants and other advisors, (v) the qualification of
the U.S. Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the U.S. Underwriters in connection therewith and
in connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and
<PAGE>

delivery to the U.S. Underwriters of copies of each preliminary prospectus, any
Term Sheets and of the Prospectuses and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the U.S. Underwriters of copies
of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses
of any transfer agent or registrar for the Securities, (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the U.S.
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the listing of
the Class B Common Stock on the New York Stock Exchange and (xi) all costs and
expenses of the Underwriters, including the reasonable fees and disbursements of
counsel for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company.

(b) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.

The provisions of this Section shall not affect any agreement which the
Company and the Selling Shareholders may make for the allocation or sharing of
such expenses and costs.

SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations of
--------------------------------------------
the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company,
any Subsidiary or any Selling Shareholder delivered pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of their
covenants and other obligations hereunder, and to the following further
conditions:

(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective not later than 5:30 P.M. on the date hereof, and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of
the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A Information shall have been filed with
the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A). If the Company
has elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).

(b) Opinions of Counsel for Company. At Closing Time the
U.S. Representatives shall have received:
<PAGE>

(1) The favorable opinion, dated as of Closing Time, of
Kirkpatrick & Lockhart LLP, counsel for the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other
U.S. Underwriters, to the effect set forth in Exhibit A hereto.

(2) The favorable opinion, dated as of the Closing Time, of John
W. McGonigle, Executive Vice President and General Counsel of the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter
for each of the other U.S. Underwriters, to the effect set forth in
Exhibit B hereto.

(3) The favorable opinions, dated as of the Closing Time, of
counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters, to the effect set forth in Exhibit C hereto.

(c) Opinion of Counsel for Underwriters. At Closing Time
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Simpson Thacher & Bartlett, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters, with respect to certain matters. In
giving such opinion such counsel may rely, as to all matters governed by
the laws of jurisdictions other than the law of the State of New York and
the federal law of the United States, upon the opinions of counsel
satisfactory to you. Such counsel may also state that, insofar as such
opinion involved factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.

(d) Officer's Certificate. At Closing Time there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any Material Adverse Effect and
the U.S. Representatives shall have received a certificate of the President
or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such Material Adverse Effect, (ii) the
representations and warranties in Section 1 hereof are true and correct in
all material respects with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission.

(e) Accountants' Comfort Letters. At the time of the
execution of this Agreement, the U.S. Representatives shall have received
from each of Ernst & Young LLP and KPMG Peat Marwick LLP a letter dated
such date, in form and substance satisfactory to the U.S. Representatives,
together with signed or reproduced copies of
<PAGE>

such letters for each of the other U.S. Underwriters, containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectuses.

(f) Bring-down Comfort Letters. At Closing Time the U.S.
Representatives shall have received from Ernst & Young LLP a letter, dated
as of Closing Time, to the effect that they reaffirm the statements made in
their respective letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not
more than three days prior to Closing Time.

(g) Approval of Listing. At the Closing Time, the Class B
Common Stock (including the Securities) shall have been approved for
listing on the New York Stock Exchange, subject only to official notice of
issuance.

(h) The NASD. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.

(i) Lock-Up Agreements. At the date of this Agreement, the
U.S. Representatives shall have received an agreement substantially in the
form of Exhibit D hereto signed by the persons listed on Schedule C hereto.

(j) Additional Documents. At Closing Time and at each Date
of Delivery, counsel for the U.S. Underwriters shall have been furnished
with such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the U.S.
Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company and
the Selling Shareholders in connection with the issuance and sale of the
U.S. Securities as herein contemplated shall be reasonably satisfactory in
form and substance to the U.S. Representatives and counsel for the U.S.
Underwriters.

(k) Selling Shareholder Certificate. At Closing Time the
U.S. Representatives shall have received a certificate of each Selling
Shareholder, or a certificate of the President or a Vice President or an
Assistant Vice President or a general partner or a managing member or a
trustee, as the case may be, of such Selling Shareholder, as the case may
be, dated as of Closing Time, to the effect that (i) the representations
and warranties of such Selling Shareholder contained in Section 1(b) are
true and correct in all material respects with the same force and effect as
though expressly made at and as of Closing Time and (ii) each Selling
Shareholder has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time.

(l) Purchase of Initial International Securities. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement,
<PAGE>

the International Managers shall have purchased the Initial International
Securities under the International Purchase Agreement.

(m) Consummation of Merger. The Merger shall have been consummated
concurrently therewith.

(n) Conditions to Purchase of Option Securities. In the
event that the U.S. Underwriters exercise their option provided in Section
2(b) hereof to purchase all or any portion of the U.S. Option Securities,
the representations and warranties of the Company and the Selling
Shareholders contained herein and the statements in any certificates
furnished by the Company and the Selling Shareholders hereunder shall be
true and correct as of each Date of Delivery and, at the relevant Date of
Delivery, the U.S. Representatives shall have received:

(i) Officer's Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(d) hereof remains true and correct as of such
Date of Delivery.

(ii) Selling Shareholder's Certificate. A certificate, dated
---------------------------------
such Date of Delivery, of the Selling Shareholders selling U.S.
Option Securities confirming that the certificate delivered at the
Closing Time pursuant to Section 5(k) hereof remains true and correct
as of such Date of Delivery.

(iii) Opinions of Counsel for Company. The favorable opinions
-------------------------------
of Kirkpatrick & Lockhart LLP and John W. McGonigle, Executive Vice
President and General Counsel of the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the U.S. Option Securities to be purchased on
such Date of Delivery, and otherwise to the same effect as the
opinions required by Sections 5(b)(1) and 5(b)(2).

(iv) Opinion of Counsel for Selling Shareholders. The favorable
-------------------------------------------
opinions of counsel to the Selling Shareholders selling U.S. Option
Securities, dated such Date of Delivery, relating to such U.S. Option
Securities to be purchased on such Date of Delivery, and otherwise to
the same effect as the opinions required by Section 5(b)(3).

(v) Opinion of Counsel for U.S. Underwriters. The favorable
----------------------------------------
opinion of Simpson Thacher & Bartlett, counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Sections 5(c)
hereof.
<PAGE>

(vi) Bring-down Comfort Letters. A letter from Ernst & Young
--------------------------
LLP, in form and substance satisfactory to the U.S. Representatives
and dated such Date of Delivery, substantially the same in form and
substance as the letter furnished to the U.S. Representatives
pursuant to Section 5(f) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.

(o) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company and the Selling Shareholders at any time at or prior to Closing Time,
and such termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1,6,7 and 8 shall
survive any such termination and remain in full force and effect.

SECTION 6. Indemnification.
---------------

(a) Indemnification of U.S. Underwriters. The Company agrees to indemnify
and hold harmless each U.S. Underwriter and each person, if any, who controls
any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;

(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission; or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and

(iii) against any and all expense whatsoever, as incurred,
(including the fees and disbursements of counsel chosen by Merrill Lynch)
reasonably incurred in
<PAGE>

investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through Merrill Lynch, or by any International Manager through
Merrill Lynch International, expressly for use in the Registration Statement (or
any amendment thereto), including the 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectuses
(or any amendment or supplement thereto).

(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectuses (or any amendment or supplements thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through Merrill Lynch or by such Manager through Merrill Lynch
International expressly for use in the Registration Statement (or any amendments
thereto) or such preliminary prospectus or the Prospectuses (or any amendment or
supplement thereto).

(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect to which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
<PAGE>

No indemnifying party shall, without the prior written consent of the
indemnified paries, settle or compromise or consent to the entry of any judgment
with respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.

(d) Settlement without Consent of Failure to Reimburse. If
at any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such requirements
prior to the date of such settlement.

(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a
request, in writing to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees of the Company to pay
for and accept delivery of Reserved Securities which, by the end of the first
business day following the date of this Agreement, were subject to a properly
confirmed agreement to purchase.

The provisions of this Section shall not affect any indemnification agreement
between the Company and any Selling Shareholder, as between them.

SECTION 7. Contribution. If the indemnification provided for in Section 6
------------
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of losses, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
U.S. Underwriters on the other hand from the offering of the U.S. Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the U.S. Underwriters on
the other hand in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
<PAGE>

The relative benefits received by the Company on the one hand and the U.S.
Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the Prospectuses, or, if
Rule 434 is used, the corresponding location on the Term Sheet bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.

The relative fault of the Company on the one hand and the U.S. Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

The Company and the U.S. Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the U.S. Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are
<PAGE>

several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.

The provisions of this Section shall not affect any contribution agreement
between the Company and any Selling Shareholder, as between them.

SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement, or
in certificates of officers of the Company or certificates of the Selling
Shareholders submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any U.S.
Underwriter or controlling person, or by or on behalf of the Company or the
Selling Shareholders, and shall survive delivery of the U.S. Securities to the
U.S. Underwriters.

SECTION 9. Termination of Agreement.
------------------------

(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectuses, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the U.S. Representatives, impracticable to market the U.S.
Securities or to enforce contracts for the sale of the U.S. Securities, or (iii)
if trading in any securities of Company has been suspended or limited by the
Commission or the NYSE, or if trading generally on the American Stock Exchange
or the NYSE or in the Nasdaq National Market has been suspended or limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by either Federal, New York or
Pennsylvania authorities.

(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1,6,
7 and 8 shall survive such termination and remain in full force and effect.

SECTION 10. Default by One or More of the U.S. Underwriters. If one or more
-----------------------------------------------
of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Initial U.S. Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the U.S. Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting U.S. Underwriters, or
<PAGE>

any other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the U.S. Representatives shall not have completed such
arrangements within such 24-hour period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or

(b) if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the U.S. Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-
defaulting U.S. Underwriter.

No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the U.S. Representatives, the Company or
the Selling Shareholders shall have the right to postpone Closing Time or a Date
of Delivery for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectuses or in any other
documents or arrangements.

SECTION 11. Default by One or More of the Selling Shareholders. If one or
--------------------------------------------------
more of the Selling Shareholders shall fail at Closing Time to sell and deliver
the number of Initial U.S. Securities or U.S. Option Securities which such
Selling Shareholder or Selling Shareholders are obligated to sell hereunder (the
"Selling Shareholder Defaulting Securities"), the non-defaulting Selling
Shareholders shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting Selling Shareholders to sell
all, but not less than all, of the Selling Shareholder Defaulting Securities in
such amounts as may be agreed upon and upon the terms herein set forth; if the
non-defaulting Selling Shareholders have not completed such arrangements within
such 24-hour period, then the U.S. Underwriters may, at their option, by notice
from the U.S. Representatives to the Custodian and the non-defaulting Selling
Shareholders, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party if the sum of the Selling Shareholder
Defaulting Securities under this Agreement and the Selling Shareholder
Defaulting Securities as defined in the International Purchase Agreement exceeds
10% of the number of Securities to be purchased on such date or (b) elect to
purchase the Initial U.S. Securities which the non-
<PAGE>

defaulting Selling Shareholders have agreed to sell hereunder. If more than one
of the non-defaulting Selling Shareholders want to sell, in the aggregate, a
number of additional shares of Class B Common Stock in excess of the number of
Selling Shareholder Defaulting Securities, each of such non-defaulting Selling
Shareholders shall sell such additional shares of Class B Common Stock pro rata
on the basis of the number of shares of Class B Common Stock being sold by them
as listed on Schedule D.

No action taken pursuant to this Section shall relieve any Selling
Shareholder or Selling Shareholders so defaulting from liability, if any, in
respect of such default.

In the event of a default by any Selling Shareholder as referred to in this
Section, the U.S. Representatives and the non-defaulting Selling Shareholders
shall have the right to postpone the Closing Time for a period not exceeding
seven days in order to effect any required changes in the Registration Statement
or Prospectuses or in any other documents or arrangements.

SECTION 12. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives in care of Merrill
Lynch at North Tower, World Financial Center, New York, New York 10281-1201,
attention of Lee Whitley, telecopy number (212) 449-0019, with a copy to Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017, attention of
Peter J. Gordon, telecopy number (212) 455-2502; notices to the Company shall be
directed to it at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779, attention of John W. McGonigle, telecopy number (412)
288-7578, with a copy to Kirkpatrick & Lockhart LLP, 1500 Oliver Building,
Pittsburgh, Pennsylvania 15222, attention of Michael C. McLean, telecopy number
(412) 355-6501; notices to the Selling Shareholders shall be directed to John W.
McGonigle, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779, telecopy number (412) 288-7578.

SECTION 13. Parties. This Agreement shall each inure to the benefit of and
-------
be binding upon the U.S. Underwriters, the Company and the Selling Shareholders
and their respective successors. Nothing expressed or implied in this Agreement
is intended or shall be construed to give any person, firm or corporation, other
than the U.S. Underwriters, the Company and the Selling Shareholders and their
respective successors and the controlling persons and officers, and trustees
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
U.S. Underwriters, the Company and the Selling Shareholders and their respective
successors, and said controlling persons and officers and trustees and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of U.S. Securities from any U.S. Underwriter shall be
deemed to be a successor by reason merely of such purchase.
<PAGE>

SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
----------------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Article and Section headings herein and
------------------
the Table of Contents are for convenience only and shall not affect the
construction hereof.
<PAGE>

If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the U.S. Underwriters, the Company and the Selling Shareholders in accordance
with its terms.

Very truly yours,

FEDERATED INVESTORS

By:______________________________________
Title:

[Selling Shareholders]

By:______________________________________
Title:

Other Selling Shareholders

By:______________________________________
Attorney-in-Fact, acting on behalf of
each of the above Selling Shareholders

CONFIRMED AND ACCEPTED,
as of the date first above
written:

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By:__________________________________
Authorized Signatory

For itself and the Other U.S. Representatives
and on behalf of the other
U.S. Underwriters named in Schedule A hereto
<PAGE>

SCHEDULE A

Number of Initial
Name of U.S. Underwriter U.S. Securities
------------------------ -----------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated

PaineWebber Incorporated

Smith Barney Inc.

Total .................................................... __________
13,032,190
==========
<PAGE>

SCHEDULE B

13,032,190 Shares

Federated Investors

Class B (Non-Voting) Common Stock

(No Par Value Per Share)

1. The initial public offering price per share for the U.S. Securities,
determined as provided in said Section 2, shall be $ .

2. The purchase price per share for the U.S. Securities to be paid by the
several U.S. Underwriters shall be $ , being an amount equal to the initial
public offering price set forth above less $ per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
<PAGE>

SCHEDULE C

The following Stockholders shall execute agreements in the form of Exhibit D
hereto:

J. Christopher Donahue

Arthur L. Cherry

James F. Getz

William D. Dawson III

Thomas R. Donahue

John B. Fisher

Henry A. Frantzen

J. Thomas Madden
<PAGE>

SCHEDULE D
<TABLE>
<CAPTION>

Number of Initial U.S. Number of U.S. Option
Name of Selling Shareholder Securities to be Sold Securities to be Granted
- ------------------------------------------- ---------------------- ------------------------
<S> <C> <C>

John F. Donahue 469,496 70,424
John W. McGonigle 354,960 53,244
Richard B. Fisher 668,160 100,224
Eugene F. Maloney 31,320 4,698
Westinghouse Pension Plan 2,505,600 375,840
James J. and Patricia D. Dolan 522,000 78,300
John A. Staley, IV and Patricia D. Staley 1,043,480 156,522
Glen Arden Associates 522,520 78,378
Merrill Lynch & Co. affiliates 1,044,000 156,600
Glen R. Johnson 638,608 95,791
The Jones Financial Companies 1,566,000 234,900
Federated Investors, Inc. Employees
Profit Sharing Plan Trust 187,920 28,188

Henry J. Gailliot 626,400 93,960
Gonzales Investment Company 98,136 14,720
Thomas J. Donnelly 52,200 7,830
Mary Elizabeth D. and Richard S. Donley 25,200 3,780
Harry J. and Lois M. Donahue 178,800 26,820
Edward Sean Donahue 22,260 3,339
Robert M. Donahue 20,872 3,131
Christopher C. Donahue 21,568 3,235
William J. and Janet O. Donahue 10,400 1,560
David and Sheila Johnson 13,564 2,035
Vicki Lindgren 12,520 1,878
Theresa M. and Alfonso C. D'Orazio 50,160 7,524
PKM/CDM Partners 49,600 7,440
</TABLE>
<PAGE>

Tiger Partners, L.P. 174,000 26,100
David M. Taylor 20,880 3,132
Lori and Miles Wallace 13,564 2,035
---------- ----------
10,944,188 [1,641,628]
========== ==========
</TABLE>
<PAGE>

16,290,235 Shares

FEDERATED INVESTORS, INC.

(a Pennsylvania Corporation)

Class B Common Stock

(Non-Voting)

(No Par Value Per Share)

INTERNATIONAL PURCHASE AGREEMENT
--------------------------------

May __, 1998

MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
SMITH BARNEY INC.
as Lead Managers of the several Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England

Dear Ladies and Gentlemen:

Federated Investors, Inc., a Pennsylvania corporation (the "Company"), and the
shareholders of the Company named in Schedule D hereto (the "Selling
Shareholders") confirm their agreements with Merrill Lynch International
("Merrill Lynch International") and PaineWebber International (U.K.) Ltd. and
Smith Barney Inc. (the "Other Lead Managers") and each of the other underwriters
named in Schedule A hereto (collectively, the "International Managers," which
term shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch International and the Other Lead
Managers are acting as representatives (in such capacity, Merrill Lynch
International and the Other Lead Managers shall hereinafter be referred to as
the "Lead Managers") with respect to the sale by the Company and the Selling
Shareholders, acting severally and not jointly, of an aggregate of 16,290,235
shares of Class B Common Stock
<PAGE>

(non-voting), no par value per share (the "Class B Common Stock"), of the
Company, and the purchase by the International Managers, acting severally and
not jointly, of the respective numbers of shares of Class B Common Stock set
forth in said Schedule A hereto, and with respect to the grant by the Company
and the Selling Shareholders indicated on Schedule D hereto to the International
Managers, acting severally and not jointly, of the options described in Section
2(b) hereof to purchase all or any part of 78,000 additional shares of Class B
Common Stock in the aggregate and 410,707 additional shares of Class B Common
Stock in the aggregate to cover over-allotments, if any. The 3,258,045 shares of
Class B Common Stock (the "Initial International Securities") to be purchased by
the International Managers and all or any part of the 488,707 shares of Class B
Common Stock subject to the option described in Section 2(b) hereof (the
"International Option Securities") are hereinafter called, collectively, the
"International Securities". The Class B Common Stock and the Class A Common
Stock, no par value per share, of the Company are hereinafter referred to as the
"Common Stock".

The Company and the Selling Shareholders understand that the International
Managers propose to make a public offering of the International Securities as
soon as the Lead Managers deem advisable after this Agreement has been executed
and delivered.

It is understood and agreed by all parties that the Company and the Selling
Shareholders are concurrently entering into an agreement dated the date hereof
(the "U.S. Purchase Agreement") providing for the sale by the Company and the
Company and the Shareholders of up to 13,032,190 shares of Class B Common Stock
(the "Initial U.S. Securities") through arrangements with certain managing
underwriters in the United States and Canada (the U.S. Underwriters") for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
PaineWebber Incorporated and Smith Barney Inc. are acting as representatives
(the "U.S. Representatives") and the grant by the Company and the Selling
Shareholders indicated on Schedule D thereto to the U.S. Underwriters of options
to purchase all or any part of 312,000 additional shares of Class B Common Stock
in the aggregate and 1,642,828 additional shares of Class B Common Stock in the
aggregate (the "U.S. Option Securities") to cover over-allotments, if any, of
the Initial U.S. Securities. The Initial U.S. Securities and the U.S. Option
Securities are hereinafter called the "U.S. Securities". The International
Securities and the U.S. Securities, collectively, are hereinafter called the
"Securities". It is understood that the Company is not obligated to sell and
the International Managers are not obligated to purchase any Initial
International Securities unless all of the Initial U.S. Securities are
contemporaneously purchased by the U.S. Underwriters.

The Company and the Selling Shareholders understand that the International
Managers and the U.S. Underwriters (collectively, the "Underwriters") will
concurrently enter into an Intersyndicate Agreement of even date herewith (the
"Intersyndicate Agreement") providing for the coordination of certain
transactions among the Underwriters under the direction of Merrill Lynch.

The Company and the International Managers understand that up to 750,000
shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters
(the "Reserved Securities") shall be reserved for sale by the U.S. Underwriters
to certain eligible employees
<PAGE>

of the Company, as part of the distribution of the Securities by the U.S.
Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Reserved Securities are not orally confirmed for purchase by
such eligible employees by the end of the first business day after the date of
this Agreement, such Reserved Securities may be offered to the public as part of
the public offering contemplated hereby.

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-48405) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement and the U.S. Purchase
Agreement (collectively, the "Purchase Agreements"), the Company will, in
connection with the offering of each of the International Securities and the
U.S. Securities, either (i) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of
Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare
and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule
434 and Rule 424(b). The information included in any prospectus or in any Term
Sheet, as the case may be, that was omitted from such registration statement at
the time it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d)
of Rule 434 is referred to as "Rule 434 Information." Each prospectus used
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto, schedules thereto, if
any, at the time it became effective and including the Rule 430A Information and
the Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus, in the
form first furnished to the International Managers for use in connection with
the offering of the International Securities is herein called the "International
Prospectus" and the final prospectus, in the form first furnished to the
International Managers for use in connection with the International Securities,
is herein called the "International Prospectus", and the International
Prospectus and the U.S. Prospectus are hereinafter called, collectively, the
"Prospectuses," and each individually, a "Prospectus." If Rule 434 is relied
on, each of the terms "International Prospectus" and "U.S. Prospectus" shall
refer to the preliminary prospectus dated April 24, 1998 together with the
applicable Term Sheet and all references in this Agreement and the U.S. Purchase
Agreement to the date of the International Prospectus and U.S. Prospectus,
respectively, shall mean the date of such Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet
or any amendment or
<PAGE>

supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR"). The International Prospectus is identical to the
U.S. Prospectus, except for the front cover page, a "United States Tax
Considerations for Non-United States Holders" section in the International
Prospectus, the "Underwriting" section and the back cover page.

SECTION 1. Representations and Warranties.
------------------------------

(a) Representations and Warranties by the Company. The Company represents and
warrants to each International Manager as of the date hereof and as of the
Closing Time referred to in Section 2(a) hereof, and agrees with each
International Manager, as follows:

At the respective times the Registration Statement, the Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, up to the Date of Delivery referred to below), (A) the
Registration Statement, the Rule 462(b)
<PAGE>

Registration Statement and any amendments and supplements thereto complied
and will comply in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (B) neither the Prospectuses nor any amendments or supplements
thereto contained or will contain an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading and (C) if Rule 434 is used, the Company will
comply with the requirements of Rule 434; provided, however, that the
-----------------
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or Prospectuses
made in reliance upon and in conformity with information furnished to the
Company in writing by any International Manager through Merrill Lynch
International or by any U.S. Underwriter through Merrill Lynch, expressly
for use in the Registration Statement or Prospectuses.

Each preliminary prospectus and the Prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations.

except for the contemplated Merger and related transactions and as
otherwise stated therein, (A) there has been no material adverse change in
the condition, financial or other, the business or in the earnings of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or any development involving,
or which may reasonably be expected to involve, prospectively such a
material adverse change (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Company or any of its subsidiaries,
other than those in the ordinary course of business, which are material
with respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock,
except to the extent described in the Prospectuses.

(vi) Good Standing of Subsidiaries. Each "significant
-----------------------------
subsidiary" of the Company (as such term in defined in Rule 1-02 of
Regulation S-X) (each a "Subsidiary" and, collectively, the "Subsidiaries")
has been duly organized, and is validly existing as a corporation, business
trust or partnership, as the case may be, in good standing under the laws
of the jurisdiction of its organization, has the requisite power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation, business trust or partnership, as the case may be, to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to
so qualify or to be in good standing would not result in Material Adverse
Effect; except as otherwise disclosed in the Registration Statement, all of
the issued and outstanding capital stock of each Subsidiary of the Company
has been duly authorized and validly issued, is fully paid and non-
assessable and is owned by the Company (except, in the case of foreign
subsidiaries, for qualifying shares owned by foreign nationals), directly
or through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity, except that all of the stock of
substantially all of the Subsidiaries is pledged as security pursuant to a
Senior Secured Credit Agreement, dated as of January 31, 1996, among
Federated Investors, the lenders named therein and PNC, National
Association, as Agent and a Note Purchase Agreement, dated as of June 15,
1996 between Federated Investors and the Noteholders named therein; none of
the outstanding shares of capital stock of the Subsidiaries was issued in
violation of any preemptive or similar rights arising by
<PAGE>

7
operation of law, or under the organizational documents or by-laws of the
Company or any Subsidiary or under any agreement to which the Company or
any Subsidiary is a party. The only subsidiaries of the Company are the
subsidiaries listed on Exhibit 21.01 to the Registration Statement and
certain other subsidiaries which, considered in the aggregate as a single
subsidiary, do not constitute a "significant subsidiary" as defined in Rule
1-02 of Regulation S-X.

(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.

(ix) Authorization and Description of Securities. Subject to
-------------------------------------------
the consummation of the Merger in accordance with its terms, the
outstanding Class B Common Stock will have been duly authorized and validly
issued and will be fully paid and non-assessable; and none of the
outstanding Class B Common Stock, when issued in connection with the
Merger, will be issued in violation of the preemptive or other similar
rights arising by operation of law, under the Restated Articles of
Incorporation or Restated By-Laws of the Company, under any agreement to
which the Company or any of its subsidiaries is a party, or otherwise. The
Class B Common Stock to be issued and sold by the Company have been duly
authorized for issuance and sale to the International Managers and the U.S.
Underwriters pursuant to this Agreement and the U.S. Purchase Agreement
and, when issued and delivered by the Company pursuant to this Agreement
and the U.S. Purchase Agreement against payment of the consideration set
forth herein and therein, will be validly issued and fully paid and non-
assessable; the Class B Common Stock conforms to all statements relating
thereto contained in the Prospectuses and such description conforms to the
rights set forth in the instruments defining the same; no holder of the
Class B Common Stock will be subject to personal liability by reason of
being such a holder; and the issuance of the Class B Common Stock to be
issued and sold by the Company is not subject to preemptive or other
similar rights arising by operation of law, under the Restated Articles of
Incorporation or Restated By-Laws of the Company, under any agreement to
which the Company or any of its subsidiaries is a party, or otherwise.
There are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act other than
Westinghouse Pension Plan.

debenture, note or any contract, indenture, mortgage, deed of trust, loan
or credit agreement, lease or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which any of them may
be bound, or to which any of the property or assets of the Company or the
Subsidiaries is subject (collectively, the "Agreements and Instruments")
except for such defaults that would not have a Material Adverse Effect; and
the execution, delivery and performance of this Agreement and the U.S.
Purchase Agreement and the consummation of the transactions contemplated
herein, therein and in the Registration Statement (including the use of the
proceeds by the Company from the sale of Class B Common Stock as described
in the Prospectuses under the caption "Use of Proceeds") and compliance by
the Company with its obligations hereunder and thereunder have been duly
authorized by all necessary action and will not, whether with or without
the giving of notice or the passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to, any of the Agreements and Instruments, except for such
conflicts, breaches, defaults, liens, charges or encumbrances that would
not have a Material Adverse Effect, nor will any such action result in any
violation of the provisions of the Restated Articles of Incorporation or
Restated By-Laws of the Company or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or any of their assets or properties. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.

(xii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any of its
subsidiaries which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might result in a
Material Adverse Effect or which might reasonably be expected to materially
and adversely affect the properties or assets thereof or the consummation
of this Agreement or the U.S. Purchase Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary of the
Company is a party or of which any of their respective properties or assets
is the subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a Material Adverse Effect.
<PAGE>

(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, order registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder in
connection with the offering, issuance or sale of the International
Securities hereunder or the U.S. Securities under the U.S. Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement or the U.S. Purchase Agreement, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state securities laws or
in connection with registration of the Securities under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), filing to list the
Securities on the New York Stock Exchange on or prior to the Closing Time
or the filing of a Certificate of Merger of the Company and of Federated
Investors in accordance with applicable law in the State of Delaware or the
Commonwealth of Pennsylvania on or prior to the Closing Time (all of which
have been or will be effective in accordance with this Agreement).

(b) Each of the Selling Shareholders, severally, and not jointly,
represents and warrants to each International Manager as of the date hereof and
as of the Closing Time referred to in Section 2(a) hereof, and agrees with each
International Manager as follows:

(i) Absence of Defaults and Conflicts. The execution and
---------------------------------
delivery of this Agreement and the U.S. Purchase Agreement and the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement will not conflict with or result in a breach or
violation by such Selling Shareholder of, or constitute a default by such
Selling Shareholder under, any indenture, mortgage, loan agreement, deed or
trust, contract or other similar agreement or instrument, any charter,
bylaws or other governing documents, or any decree, judgment, order,
statute, rule or regulation of any court or governmental agency or body, in
all such cases, to which such Selling Shareholder is a party or by which
such Selling Shareholder is bound or to which any of the assets or property
of such Selling Shareholder is subject, except in all such cases, for such
conflicts, breaches, defaults and violations as would not, individually or
in the aggregate, adversely effect the sale of Securities by such Selling
Shareholder hereunder.

(ii) Marketable Title. Such Selling Shareholder has or will
----------------
have at the Closing Time referred to in Section 2(c) hereof good and valid
title to the Securities to be sold by such Selling Shareholder hereunder
and under the U.S. Purchase Agreement, free and clear of any pledge, lien,
security interest, encumbrance, claim or equity interest, other than
pursuant to this Agreement or the U.S. Purchase Agreement; such Selling
Shareholder has full right, power and authority to sell, transfer and
deliver the Securities to be sold by such Selling Shareholder hereunder and
under the U.S. Purchase Agreement; and upon delivery of the Securities to
be sold by such Selling Shareholder hereunder and under the U.S. Purchase
Agreement and payment of the purchase price therefor as herein
contemplated, each of the International Managers and the U.S. Underwriters
will receive good and valid title to its ratable share of the Securities
purchased by it from such Selling Shareholder, free and clear of any
pledge,
<PAGE>

lien, security interest, encumbrance or other adverse claim, assuming that
the International Managers and U.S. Underwriters purchase such Securities
in good faith and without notice of any such pledge, security interest,
lien, encumbrance or other adverse claim within the meaning of the Uniform
Commercial Code.

(iii) Absence of Further Requirements. All authorizations,
-------------------------------
approvals and consents necessary for the execution and delivery by such
Selling Shareholder of this Agreement, the U.S. Purchase Agreement and, if
such Selling Shareholder is a party to it, the Power of Attorney dated on
or before the date hereof between such Selling Shareholder, the Company and
the Attorneys-in-Fact named therein (the "Power of Attorney") and the
Custody Agreement dated on or before the date hereof between such Selling
Shareholder, the Company and the Custodian named therein (the "Custody
Agreement") and the sale and delivery of the Securities to be sold by such
Selling Shareholder hereunder and under the U.S. Purchase Agreement (other
than the issuance of the order of the Commission declaring the Registration
Statement effective and such authorizations, approvals or consents as may
be necessary under state or foreign securities laws) have been obtained and
are in full force and effect; and such Selling Shareholder has the full
right, power and authority to enter into this Agreement and the U.S.
Purchase Agreement, and to sell, transfer and deliver the Securities to be
sold by such Selling Shareholder hereunder and under the U.S. Purchase
Agreement.

(iv) Authorization of Agreements. This Agreement, the U.S.
---------------------------
Purchase Agreement and, if such Selling Shareholder is a party to it, the
Power of Attorney and the Custody Agreement have been duly executed and
delivered by such Selling Shareholder.

(v) Restriction on Sale of Securities. During the period of 180
---------------------------------
days from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of Merrill Lynch International, directly
or indirectly, (i) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the issuance of the Securities being sold hereunder and under the
U.S. Purchase Agreement by the Selling Shareholder, (B) any transfer of
such Securities to an affiliate of the Selling Shareholder which agrees in
a writing in form and substance reasonably satisfactory to Merrill Lynch
International to agree to be bound by the provisions hereof as if it was
the Selling Shareholder, (C) any pledge prior to the date of the
Prospectuses by a shareholder of the Company of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock, and (D) any pledge after the date of the Prospectuses by a
shareholder of the Company of
<PAGE>

12
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for the purpose of securing a bona fide loan
by a financial institution to such shareholder.

(viii) Share Certificates. If such Selling Shareholder is a
------------------
party to the Custody Agreement, certificates in negotiable form for all
Class B Common Shares of Federated Investors to be exchanged in the Merger
for the Securities to be sold hereunder and under the U.S. Purchase
Agreement have been placed in custody with the Custodian for the purpose of
effecting delivery hereunder.

(c) Officer's Certificates. Any certificate signed by any officer of the
----------------------
Company or by any Selling Shareholder (or any trustee thereof) and delivered to
the Lead Managers, the U.S. Representatives, the International Managers or the
U.S. Underwriters, or to counsel thereof shall be deemed a representation and
warranty by the Company or by such Selling Shareholder, as the case may be, to
each Lead Manager, U.S. Representative, International Manager and U.S.
Underwriter as to the matters covered thereby.

SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------

(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company and each of the Selling Shareholders, severally and not jointly, agrees
to sell to each International Manager, severally and not jointly, and each
International Manager, severally and not jointly, agrees to purchase from the
Company and each of the Selling Shareholders, at the price per share set forth
in Schedule B, the number of Initial International Securities set forth in
Schedule A opposite the name of such International Manager, plus any additional
number of Initial International Securities which such International Manager may
become obligated to purchase pursuant to the provisions of Section 10 hereof.
<PAGE>

(b) Option Securities. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each of the Selling Shareholders indicated on Schedule D hereto hereby
grant options to the International Managers, severally and not jointly, to
purchase the additional number of shares of Class B Common Stock set forth in
Schedule D hereto and the Company hereby grants an option to the International
Managers severally and not jointly, to purchase 78,000 additional shares of
Class B Common Stock, in each case at the price per share set forth in Schedule
B, less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial International Securities but not payable
on the International Option Securities. The options hereby granted will expire
30 days after the date hereof and may be exercised in whole or in part from time
to time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial International
Securities upon notice by the Lead Managers to the Company or the Selling
Shareholders, as the case may be, setting forth the number of International
Option Securities as to which the several International Managers are then
exercising the option and the time and date of payment and delivery for such
International Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Lead Manager(s), but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the options are
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, will purchase
that proportion of the total number of International Option Securities then
being purchased which the number of Initial International Securities set forth
in Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to such
adjustments as the Lead Manager(s) in their discretion shall make to eliminate
any sales or purchases of fractional shares. If the option is exercised as to
less than all of the International Option Securities, the Company and the
Selling Shareholders will sell additional shares of Class B Common Stock to the
International Managers pro rata on the basis of the total number of
International Option Securities allocated to them.

(c) Payment. Payment of the purchase price for, and delivery of certificates
for, the Initial International Securities shall be made at the office of
Kirkpatrick & Lockhart LLP, counsel for the Company, at 1500 Oliver Building,
Pittsburgh, Pennsylvania 15222, or at such other place as shall be agreed upon
by the Lead Managers, the Company and the Selling Shareholders, at 10:00 A.M. on
the third (fourth, if the pricing occurs after 4:30 P.M. on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10 or 11), or such other time not later than ten business
days after such date as shall be agreed upon by the Lead Managers and the
Company (such time and date of payment and delivery being herein called "Closing
Time").

In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the office of Kirkpatrick & Lockhart LLP, counsel
for the Company, at 1500 Oliver Building, Pittsburgh, Pennsylvania 15222, or at
such other place as shall be agreed upon by the Lead Managers, the Company and
the Selling Shareholders, on each Date of Delivery as specified in the
<PAGE>

notice from the Lead Managers to the Company or such Selling Shareholders, as
the case may be. All payments shall be made to the Company or the Selling
Shareholders, as the case may be, in New York Clearing House funds or in similar
next-day funds payable to the order of the Company or the custodians named in
the Custody Agreement on behalf of such Selling Shareholders, as the case may
be, against delivery to the Lead Managers for the respective accounts of the
International Managers of certificates for the International Securities to be
purchased by them. It is understood that each International Manager has
authorized the Lead Managers, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the Initial International
Securities and the International Option Securities, if any, which it has agreed
to purchase. Merrill Lynch International, individually and not as a Lead Manager
of the International Managers, may (but shall not be obligated to) make payment
of the purchase price for the Initial International Securities or the
International Option Securities, if any, to be purchased by any International
Manager whose payment has not been received by the Closing Time or the relevant
Date of Delivery, as the case may be, but such payment shall not relieve such
International Manager from its obligations hereunder. In the event that Merrill
Lynch International, individually and not as a Lead Manager of the International
Managers, shall, as an accommodation to the Company or any of the Selling
Shareholders, arrange for payment of all or a portion of the Initial
International Securities or International Option Securities to be made to the
Company in immediately available funds, the Company agrees to reimburse Merrill
Lynch International for its cost of funds, as determined by Merrill Lynch
International in its sole discretion, in respect of such payment, such
reimbursement to be effected by wire transfer of immediately available funds by
the Company or the Selling Shareholders, as the case may be, to Merrill Lynch
International prior to 10:00 A.M., New York City time, on the closing date, or
the relevant Date of Delivery, as the case may be.

(d) Denominations; Registration. Certificates for the Initial International
Securities and the International Option Securities, if any, shall be in such
denominations and registered in such names as the Lead Managers may request in
writing at least one full business day before the Closing Time or the relevant
Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in the City
of New York not later than 10:00 A.M. on the business day prior to the Closing
Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
International Manager as follows:

(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A and will notify the Lead Managers immediately,
and confirm the notice in writing, (i) when any post-effective amendment to
the Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectus shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectuses or for additional information, and (iv)
<PAGE>

15
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest possible moment.

(b) Filing of Amendments. The Company will give the Lead
Managers notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectuses whether pursuant to the 1933 Act, the 1934 Act or
otherwise, will furnish the Lead Managers with copies of any such documents
a reasonable amount of time prior to such proposed filing or use, as the
case may be, and will not file or use any such document to which the Lead
Managers or counsel for the International Managers shall object.

(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Lead Managers and counsel to the
International Managers, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and signed
copies of all consents and certificates of experts, and will also deliver
to the Lead Managers a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers.

(d) Delivery of Prospectuses. The Company has delivered to
each International Manager, without charge, as many copies of each
preliminary prospectus as such International Manager reasonably requested,
and the Company hereby consents to the use of such copies for purposes
permitted by the 1933 Act. The Company will furnish to each International
Manager, without charge, during the period when the International
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
such number of copies of the International Prospectus (as amended or
supplemented) as such International Manager may reasonably request.

(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act
and the 1934 Act Regulations so as to permit the completion of the
distribution of the International Securities as contemplated in this
Agreement and in the International Prospectus. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with
sales of the International Securities, any event shall occur
<PAGE>

or condition shall exist as a result of which it is necessary, in the
opinion of counsel for the International Managers or the Company, to amend
the Registration Statement or amend or supplement the International
Prospectus in order that the International Prospectus will not include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at
any such time to amend the Registration statement or amend or supplement
the Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the International Prospectus comply with such
requirements, and the Company will furnish to the International Managers
such number of copies of such amendment or supplement as the International
Managers may reasonably request.

(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the International Managers, to qualify the
International Securities for offering and sale under the applicable
securities laws of such states and other jurisdictions as the Lead Managers
may designate and to maintain such qualifications in effect for a period of
not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign business trust or as dealer
in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
International Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such jurisdiction
to continue such qualification in effect for a period of not less than one
year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.

(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in
the Prospectuses under "Use of Proceeds".

(i) Listing. The Company will use its best efforts to
effect the listing of the Class B Common Stock (including the Securities)
on the New York Stock Exchange.
<PAGE>

(j) Restriction on Sale of Securities. During the period
of 180 days from the date of the Prospectuses, the Company will not,
without the prior written consent of Merrill Lynch International, directly
or indirectly, (i) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the issuance of the Securities being sold hereunder and under the
U.S. Purchase Agreement by the Company, (B) any issuance of Common Stock by
the Company upon the exercise of an option or warrant or the conversion or
exchange of a security outstanding on the date hereof and referred to in
the Prospectuses, (C) any issuance of Common Stock, or any grant of options
to purchase Common Stock, pursuant to existing employee benefit plans of
the Company referred to in the Prospectuses, (D) any issuance of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock by the Company in consideration of the acquisition by the
Company from a third party of a business (whether through a merger, sale of
assets or securities, or otherwise), provided that each transferee of such
Common Stock or securities agrees in a writing in form and substance
reasonably satisfactory to Merrill Lynch International to agree to be bound
by the provisions hereof as if it was the Company, or the filing by the
Company of a registration statement under the 1933 Act with respect to such
issuance and acquisition.

(k) Reporting Requirements. The Company, during the period
when the International Prospectus is required to be delivered under the
1933 Act or the 1934 Act, will file all documents required to be filed with
the Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the 1934 Act Regulations.

SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
International Managers of this Agreement, any agreement among the International
Managers and, such other documents as may be required in connection with the
offering, purchase, sale and delivery of the International Securities; (iii) the
preparation, issuance and delivery of the certificates for the International
Securities to the International Managers, including any stock or other transfer
taxes or duties payable upon the sale of the International Securities to the
International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the
International Securities under securities laws in accordance with the provisions
of Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the
<PAGE>

International Managers in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the International Managers of copies of each preliminary
prospectus, any Term Sheets and of the Prospectuses and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
International Managers of copies of the Blue Sky Survey and any supplement
thereto, (viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the International Managers in connection with, the
review by the National Association of Securities Dealers, Inc. (the "NASD") of
the terms of the sale of the Securities, (x) the fees and expenses incurred in
connection with the listing of the Class B Common Stock on the New York Stock
Exchange and (xi) all costs and expenses of the Underwriters, including the
reasonable fees and disbursements of counsel for the Underwriters, in connection
with matters related to the Reserved Securities which are designated by the
Company for sale to employees and others having a business relationship with the
Company.

(b) Termination of Agreement. If this Agreement is terminated by the Lead
Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Managers.

The provisions of this Section shall not affect any agreement which the
Company and the Selling Shareholders may make for the allocation or sharing of
such expenses and costs.

SECTION 5. Conditions of International Managers' Obligations. The
-------------------------------------------------
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof or in certificates of any officer of
the Company, any Subsidiary or any Selling Shareholder delivered pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their covenants and other obligations hereunder, and to the
following further conditions:

(a) Effectiveness of Registration Statement. The
Registration Statement, including any Rule 462(b) Registration Statement,
shall have become effective not later than 5:30 P.M. on the date hereof,
and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b)
(or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule
430A). If the Company has elected to rely upon Rule 434, a Term Sheet
shall have been filed with the Commission in accordance with Rule 424(b).
<PAGE>

(b) Opinions of Counsel for Company. At Closing Time the
Lead Managers shall have received:

(1) The favorable opinion, dated as of Closing Time, of
Kirkpatrick & Lockhart LLP, counsel for the Company, in form and
substance satisfactory to counsel for the International Managers,
together with signed or reproduced copies of such letter for each of
the other International Managers, to the effect set forth in Exhibit A
hereto.

(2) The favorable opinion, dated as of the Closing Time, of John
W. McGonigle, Executive Vice President and General Counsel of the
Company, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of
such letter for each of the other International Managers, to the
effect set forth in Exhibit B hereto.

(3) The favorable opinions, dated as of the Closing Time, of
counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the International Managers, together with
signed or reproduced copies of such letter for each of the other
International Managers, to the effect set forth in Exhibit C hereto.

(c) Opinion of Counsel for Underwriters. At Closing Time the Lead
Managers shall have received the favorable opinion, dated as of Closing
Time, of Simpson Thacher & Bartlett, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers, with respect to certain matters. In
giving such opinion such counsel may rely, as to all matters governed by
the laws of jurisdictions other than the law of the State of New York and
the federal law of the United States, upon the opinions of counsel
satisfactory to you. Such counsel may also state that, insofar as such
opinion involved factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.

(d) Officer's Certificate. At Closing Time there shall not
have been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any Material Adverse Effect and
the Lead Managers shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such Material Adverse Effect, (ii) the
representations and warranties in Section 1 hereof are true and correct in
all material respects with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission.
<PAGE>

(e) Accountants' Comfort Letters. At the time of the execution of
this Agreement, the Lead Managers shall have received from each of Ernst &
Young LLP and KPMG Peat Marwick LLP a letter dated such date, in form and
substance satisfactory to the Lead Managers, together with signed or
reproduced copies of such letters for each of the other International
Managers, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.

(f) Bring-down Comfort Letters. At Closing Time the Lead Managers
shall have received from Ernst & Young LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in their
respective letter furnished pursuant to subsection (e) of this Section,
except that the specified date referred to shall be a date not more than
three days prior to Closing Time.

(g) Approval of Listing. At the Closing Time, the Class B Common
Stock (including the Securities) shall have been approved for listing on
the New York Stock Exchange, subject only to official notice of issuance.

(h) The NASD. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.

(i) Lock-Up Agreements. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of
Exhibit D hereof signed by the persons listed on Schedule C hereto.

(j) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the International Managers shall have been furnished
with such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
International Securities as herein contemplated, or in order to evidence
the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the
issuance and sale of the International Securities as herein contemplated
shall be reasonably satisfactory in form and substance to the Lead Managers
and counsel for the International Managers.

(k) Selling Shareholder Certificate. At Closing Time the Lead
Managers shall have received a certificate of each Selling Shareholder, or
a certificate of the President or a Vice President or an Assistant Vice
President or a general partner or a managing member or a trustee, as the
case may be, of such Selling Shareholder dated as of Closing Time, to the
effect that (i) the representations and warranties of such Selling
Shareholder contained in Section 1(b) are true and correct in all material
respects with the same force and effect as though expressly made at and as
of Closing Time and (ii) each Selling Shareholder has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time.
<PAGE>

(l) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.

(m) Consummation of Merger. The Merger shall have been consummated
concurrently herewith.

(n) Conditions to Purchase of Option Securities. In the event that
the International Managers exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the International Option
Securities, the representations and warranties of the Company and the
Selling Shareholders contained herein and the statements in any
certificates furnished by the Company and the Selling Shareholders
hereunder shall be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Lead Managers shall have received:

(i) Officer's Certificate. A certificate, dated such Date
---------------------
of Delivery, of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.

(ii) Selling Shareholder's Certificate. A certificate,
---------------------------------
dated such Date of Delivery, of the Selling Shareholders selling
International Option Securities confirming that the certificate
delivered at the Closing Time pursuant to Section 5(k) hereof remains
true and correct as of such Date of Delivery.

(iii) Opinions of Counsel for Company. The favorable
-------------------------------
opinions of Kirkpatrick & Lockhart LLP and John W. McGonigle,
Executive Vice President and General Counsel of the Company, in form
and substance satisfactory to counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery, and otherwise to
the same effect as the opinions required by Sections 5(b)(1) and
5(b)(2).

(iv) Opinion of Counsel for Selling Shareholders. The
-------------------------------------------
favorable opinions of counsel to the Selling Shareholders selling
International Option Securities, dated such Date of Delivery, relating
to such International Option Securities to be purchased on such Date
of Delivery, and otherwise to the same effect as the opinions required
by Section 5(b)(3).

(v) Opinion of Counsel for International Managers. The
---------------------------------------------
favorable opinion of Simpson Thacher & Bartlett, counsel for the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Sections 5(c) hereof.
<PAGE>

(vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP, in
-------------------------
form and substance satisfactory to the Lead Managers and dated such
Date of Delivery, substantially the same in form and substance as the
letter furnished to the Lead Managers pursuant to Section 5(f) hereof,
except that the "specified date" in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such
Date of Delivery.

(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities, may be terminated by the Lead
Managers by notice to the Company and the Selling Shareholders at any time
at or prior to Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4
and except that Sections 1, 6, 7 and 8 shall survive any such termination
and remain in full force and effect.

SECTION 6. Indemnification.
---------------

(a) Indemnification of International Managers. The Company agrees to
indemnify and hold harmless each International Manager and each person, if any,
who controls any International Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:

(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and

(iii) against any and all expense whatsoever, as incurred,
(including the fees and disbursements of counsel chosen by Merrill Lynch
International) reasonably
<PAGE>

incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through Merrill Lynch International, or by any U.S.
Underwriter through Merrill Lynch, expressly for use in the Registration
Statement (or any amendment thereto), including the 430A Information and the
Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectuses (or any amendment or supplement thereto).

(b) Indemnification of Company, Directors and Officers. Each
International Manager severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectuses (or any amendment or supplements thereto) in
reliance upon and in conformity with written information furnished to the
Company by such International Manager through Merrill Lynch International or by
such U.S. Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendments thereto) or such preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto).

(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect to which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch International, and, in the case of parties indemnified pursuant to Section
6(b) above, counsel to the indemnified parties shall be selected by the Company.
An indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
<PAGE>

(d) Settlement without Consent of Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such requirements
prior to the date of such settlement.

(e) Indemnification for Reserved Securities. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request, in writing to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees of the Company to pay
for and accept delivery of Reserved Securities which, by the end of the first
business day following the date of this Agreement, were subject to a properly
confirmed agreement to purchase.

The provisions of this Section shall not affect any indemnification
agreement between the Company and any Selling Shareholder, as between them.

SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of losses, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the International Managers on the other hand from the offering of the
International Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
<PAGE>

The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
Prospectuses, or, if Rule 434 is used, the corresponding location on the Term
Sheet bear to the aggregate initial public offering price of the International
Securities as set forth on such cover.

The relative fault of the Company on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

The Company and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Manager has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission.

No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the
<PAGE>

Company. The International Managers' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the number of Initial
International Securities set forth opposite their respective names in Schedule A
hereto and not joint.

The provisions of this Section shall not affect any contribution
agreement between the Company and any Selling Shareholder, as between them.

SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement, or in certificates of officers of the Company or certificates of the
Selling Shareholders submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any International Manager or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
International Securities to the International Managers.

SECTION 9. Termination of Agreement.
------------------------

(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectuses, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Lead Managers, impracticable to market the International
Securities or to enforce contracts for the sale of the International Securities,
or (iii) if trading in any securities of Company has been suspended or limited
by the Commission or the NYSE, or if trading generally on the American Stock
Exchange or the NYSE or in the over-the-counter market has been suspended or
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by order of
the Commission or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal, New York or Pennsylvania
authorities.

(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.

SECTION 10. Default by One or More of the International Managers. If
----------------------------------------------------
one or more of the International Managers shall fail at Closing Time or a Date
of Delivery to purchase the Initial International Securities which it or they
are obligated to purchase under this Agreement (the "Defaulted Securities"), the
Lead Managers shall have the right, within
<PAGE>

24 hours thereafter, to make arrangements for one or more of the non-defaulting
International Managers, or any other underwriters, to purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Lead Managers shall not have
completed such arrangements within such 24-hour period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting International Managers, or

(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the International Managers to purchase and of the Company
to sell the International Option Securities to be purchased and sold on
such Date of Delivery shall terminate without liability on the part of any
non-defaulting International Manager.

No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.

In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers,
the Company or the Selling Shareholders shall have the right to postpone Closing
Time or a Date of Delivery for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectuses or in
any other documents or arrangements.

SECTION 11. Default by One or More of the Selling Shareholders. If
--------------------------------------------------
one or more of the Selling Shareholders shall fail at Closing Time to sell and
deliver the number of Initial International Securities or International Option
Securities which such Selling Shareholder or Selling Shareholders are obligated
to sell hereunder (the "Selling Shareholder Defaulting Securities"), the non-
defaulting Selling Shareholders shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting Selling
Shareholders to sell all, but not less than all, of the Selling Shareholder
Defaulting Securities in such amounts as may be agreed upon and upon the terms
herein set forth; if the non-defaulting Selling Shareholders have not completed
such arrangements within such 24-hour period, then the International Managers
may, at their option, by notice from the Lead Managers to the Custodian and the
non-defaulting Selling Shareholders, either (a) terminate this Agreement without
any liability on the part of any non-defaulting party if the sum of the Selling
Shareholder Defaulting Securities under this Agreement and the Selling
Shareholder Defaulting Securities as defined in the U.S. Purchase Agreement
exceeds 10% of the number
<PAGE>

of Securities to be purchased on such date (b) elect to purchase the Initial
International Securities which the non-defaulting Selling Shareholders have
agreed to sell hereunder. If more than one of the non-defaulting Selling
Shareholders want to sell, in the aggregate, a number of additional shares of
Class B Common Stock in excess of the number of Selling Shareholder Defaulting
Securities, each of such non-defaulting Selling Shareholders shall sell such
additional shares of Class B Common Stock pro rata on the basis of the number of
shares of Class B Common Stock being sold by them as listed on Schedule D.

No action taken pursuant to this Section shall relieve any Selling
Shareholder or Selling Shareholders so defaulting from liability, if any, in
respect of such default.

In the event of a default by any Selling Shareholder as referred to in
this Section, the Lead Managers and the non-defaulting Selling Shareholders
shall have the right to postpone the Closing Time for a period not exceeding
seven days in order to effect any required changes in the Registration Statement
or Prospectuses or in any other documents or arrangements.

SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers in care of Merrill
Lynch International Limited, Ropemaker Place, 25 Ropemaker Street, London EC2Y
9LY, England, attention of Managing Director, Equity Capital Markets, telecopy
number (011) 44 71 867-2516, with a copy to Simpson Thacher & Bartlett, 425
Lexington Avenue, New York, New York 10017, attention of Peter J. Gordon,
telecopy number (212) 455-2502; notices to the Company shall be directed to it
at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779, attention of John W. McGonigle, telecopy number (412) 288-7578, with
a copy to Kirkpatrick & Lockhart LLP, 1500 Oliver Building, Pittsburgh,
Pennsylvania 15222, attention of Michael C. McLean, telecopy number (412) 355-
6501; notices to the Selling Shareholders shall be directed to John W.
McGonigle, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779, telecopy number (412) 288-7578.

SECTION 13. Parties. This Agreement shall each inure to the benefit
-------
of and be binding upon the International Managers, the Company and the Selling
Shareholders and their respective successors. Nothing expressed or implied in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the International Managers, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers, and trustees referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the International Managers, the Company and the Selling
Shareholders and their respective successors, and said controlling persons and
officers and trustees and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of International
Securities from any International Manager shall be deemed to be a successor by
reason merely of such purchase.
<PAGE>

SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
----------------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE>

If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers, the Company and the Selling Shareholders in
accordance with its terms.

Very truly yours,

FEDERATED INVESTORS, INC.

By:
----------------------------
Title:

[Selling Shareholders]

By:
----------------------------
Title:

Other Selling Shareholders

By:
----------------------------
Attorney-in-Fact, acting on behalf of each of
the above Selling Shareholders

CONFIRMED AND ACCEPTED,
as of the date first above
written:

MERRILL LYNCH INTERNATIONAL

By:
----------------------------------
Authorized Signatory

For itself and the Other Lead Managers
and on behalf of the other
International Managers named in
Schedule A hereto
<PAGE>

SCHEDULE A

Number of Initial
International
Name of International Manager Securities
----------------------------- -----------------

Merrill Lynch International

PaineWebber International (U.K.) Ltd.

Smith Barney Inc.

---------
Total............................................ 3,258,045
=========
<PAGE>

SCHEDULE B

3,258,045 Shares

Federated Investors, Inc.

Class B (Non-Voting) Common Stock

(No Par Value Per Share)

1. The initial public offering price per share for the International
Securities, determined as provided in said Section 2, shall be $ .

2. The purchase price per share for the International Securities to be
paid by the several International Managers shall be $ , being an amount equal
to the initial public offering price set forth above less $ per share;
provided that the purchase price per share for any International Option
Securities purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial International
Securities but not payable on the International Option Securities.
<PAGE>

SCHEDULE C

J. Christopher Donahue

Arthur L. Cherry

James F. Getz

William D. Dawson III

Thomas R. Donahue

John B. Fisher

Henry A. Frantzen

J. Thomas Madden
<PAGE>

SCHEDULE D

<TABLE>
<CAPTION>
Number of Initial Number of International
International Securities Option Securities
Name of Selling Shareholder to be Sold to be Granted
- --------------------------- ---------- -------------
<S> <C> <C>
John F. Donahue 117,374 17,606
John W. McGonigle 88,740 13,311
Richard B. Fisher 167,040 25,056
Eugene F. Maloney 7,830 1,175
Westinghouse Pension Plan 626,400 93,960
James J. and Patricia D. Dolan 130,500 19,575
John A. Staley, IV and Patricia D. Staley 260,870 39,131
Glen Arden Associates 130,630 19,595
Merrill Lynch & Co. affiliates 261,000 39,150
Glen R. Johnson 159,652 23,948
The Jones Financial Companies 391,500 58,725
Federated Investors, Inc. Employees 46,980 7,047
Profit Sharing Plan Trust
Henry J. Gailliot 156,600 23,490
Gonzales Investment Company 24,534 3,680
Thomas J. Donnelly 13,050 1,958
Mary Elizabeth D. and Richard S. Donley 6,300 945
Harry J. and Lois M. Donahue 44,700 6,705
Edward Sean Donahue 5,565 835
Robert M. Donahue 5,218 783
Christopher C. Donahue 5,392 809
William J. and Janet O. Donahue 2,600 390
David and Sheila Johnson 3,391 509
Vicki Lindgren 3,130 470
Theresa M. and Alfonso C. D'Orazio 12,540 1,881
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
PKM/CDM Partners 12,400 1,860
Tiger Partners, L.P. 43,500 6,525
David M. Taylor 5,220 783
Lori and Miles Wallace 3,391 509
-------- --------
2,736,047 [410,407]
========= ========
</TABLE>

<PAGE>
Exhibit 5.01

May 6, 1998

Federated Investors, Inc.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Ladies and Gentlemen:

You have requested our opinion with respect to the matters set forth
below in connection with (a) the issuance and sale by Federated Investors, Inc.,
a Pennsylvania corporation (the "Company"), of shares of the Company's Class B
Common Stock, no par value per share ("Original Issue Shares"), and (b) the sale
by certain selling shareholders (the "Selling Shareholders") of shares of the
Class B Common Stock of the Company, no par value per share (the "Selling
Shareholder Shares," and together with the Original Issue Shares, the "Shares"),
as described below.

An aggregate of 2,610,000 Original Issue Shares and 13,680,235 Selling
Shareholder Shares will be sold in an initial public offering (the "Offering")
to be made pursuant to a purchase agreement (the "U.S. Purchase Agreement")
among the Company, the Selling Shareholders, and certain underwriters, including
Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber Incorporated and
Smith Barney Inc. (the "U.S. Underwriters") and a purchase agreement (the
"International Purchase Agreement," and together with the U.S. Underwriting
Agreement, the "Underwriting Agreements") among the Company, the Selling
Shareholders, and certain underwriters, including Merrill Lynch International,
PaineWebber International (U.K.) Ltd. and Smith Barney Inc. (the "International
Underwriters"). In addition, the Company and certain of the Selling
Shareholders have granted to the U.S. Underwriters and the International
Underwriters options ("Overallotment Options"), exerciseable during the 30-day
period after the date of the Prospectus, to purchase an aggregate of 391,500
additional Original Issue Shares and 2,052,035 additional Selling Shareholder
Shares to cover over-allotments, if any, made on the sale of Class B Common
Stock of the Company pursuant to the Offering. The Company has filed a
Registration Statement on Form S-1 (the "S-1") for the purpose of registering
the issuance of the Original Issue Shares under the Securities Act of 1933 (the
"1933 Act").

Contingent upon and concurrently with the consummation of the
Offering, the Selling Shareholder Shares will be issued pursuant to an Agreement
and Plan of Merger, dated as of February 20, 1998 (the "Plan"), between
Federated Investors, a Delaware business trust (the
<PAGE>

Federated Investors, Inc.
May 6, 1998
Page 2

"Trust"), and the Company. The Plan provides for the merger of the Trust into
the Company, which is a wholly-owned subsidiary of the Trust, with the Company
as the surviving corporation (the "Merger"). The Trust has issued and
outstanding both (a) shares of Class A Common Stock, $0.01 stated value per
share ("Trust Class A Commons Shares") and (b) shares of Class B Common Stock,
$0.01 stated value per share ("Trust Class B Common Shares"). Pursuant to the
Merger, each issued and outstanding Trust Class A Common Share will be converted
into one Class A Common Share of the Company, no par value per share (the "Class
A Common Shares"), and each issued and outstanding Trust Class B Common Share
will be converted into one Class B Common Share of the Company, no par value per
share (the "Class B Common Shares"). The Selling Shareholder Shares comprise of
portion of the Class B Common Shares issued pursuant to the Merger. In
connection with the Merger, the Company has filed a Registration Statement on
Form S-4 (the "S-4," and together with the S-1, the "Registration Statements")
for the purpose of registering the issuance of the Class A Common Shares and the
Class B Common Shares under the 1933 Act. Under the Plan, the Merger is
conditioned upon, among other things, the effectiveness of the Registration
Statements and the consummation of the Offering on terms and conditions
(including size and price) satisfactory to the Company and the Trust.

We have examined the Company's Restated Articles of Incorporation (the
"Articles") and Restated Bylaws (the "Bylaws"), to become effective at the
Effective Time of the Merger, and resolutions adopted by the Board of Directors
of the Company relating to, among other things, (i) adoption and approval of the
Articles and Bylaws, (ii) authorization of the issuance, offer and sale of
Shares pursuant to the Offering and the Overallotment Options, (iii)
authorization of the preparation and filing of the Registration Statements and
any amendments thereto, (iv) authorization to enter into the Underwriting
Agreements, and (v) authorization to take such action as necessary to qualify or
register for the sale of securities under the applicable laws of various states.
We have also reviewed the Underwriting Agreements and the Registration
Statements and such other documents relating to the authorization, issuance and
sale of the Shares as we have deemed necessary in order to express an informed
opinion on the matters set forth below.

On the basis of the foregoing, it is our opinion that (i) the Shares
are duly authorized; (ii) assuming that consideration therefor will be paid in
accordance with the terms of the Plan, and subject to compliance with the 1933
Act and applicable state laws regulating the distribution of securities and the
consummation of the Merger, the Selling Shareholder Shares may be issued and,
when so issued, will be legally issued and outstanding, fully-paid and
nonassessable; (iii) assuming that consideration therefor will be paid in
accordance with the terms of the Underwriting Agreements and the Plan, and
subject to compliance with the 1933 Act and applicable state laws regulating the
distribution of securities, the Original Issue Shares may be issued and, when so
issued, will be legally issued and outstanding, fully-paid and nonassessable.
<PAGE>

Federated Investors, Inc.
May 6, 1998
Page 3

We are opining herein only as to the laws of the Commonwealth of
Pennsylvania, excluding its conflict of laws rules, and we express no opinion as
to the possible applicability to, or effect on, any of the matters covered
herein of the laws of any other jurisdiction or the federal laws of the United
States.

We hereby consent to the filing of this opinion as an exhibit to the
S-1 and to the reference to this firm under the caption "Legal Matters" in the
Prospectus filed as part of the S-1.

Yours truly,

/s/ KIRKPATRICK & LOCKHART LLP

<PAGE>

EXHIBIT 23.02

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 23, 1998, in Amendment No. 3 to the
Registration Statement (Form S-1) and related Prospectus of Federated
Investors, Inc. dated May 7, 1998.

/s/ Ernst & Young LLP

Ernst & Young LLP

Pittsburgh, Pennsylvania

May 7, 1998

<PAGE>

EXHIBIT 23.03

CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS

We consent to the use of our report dated January 25, 1996 included in this
registration statement on Form S-1 of Federated Investors, Inc., with respect
to the consolidated financial statements of Federated Investors for the year
ended December 31, 1995 and to the reference to our firm under the heading
"Experts" in the registration statement.

/s/ KPMG PEAT MARWICK LLP

KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania

May 7, 1998