The BOCG Committee also takes into consideration whether particular individuals satisfy the independence criteria set forth in the NYSE listing standards together with any special criteria applicable to service on various standing committees of the Board. The full Board (a) considers candidates recommended to it by the BOCG Committee, (b) considers the optimum size of the Board, (c) determines the manner in which any vacancies on the Board are addressed, and (d) determines the composition of all Board committees. The BOCG Committee also oversees the evaluation of the Board and undertakes such other tasks as the Board may from time to time delegate or assign. The BOCG Committee met six times during fiscal 2003.

      The BOCG Committee will consider nominees for directors recommended by stockholders of Federated and will evaluate such nominees using the same criteria used to evaluate director candidates otherwise identified by the BOCG Committee. Stockholders wishing to make such recommendations should write to the Board Organization and Corporate Governance Committee, c/o Dennis J. Broderick, Secretary, Federated Department Stores, Inc., 7 West Seventh Street, Cincinnati, Ohio 45202. Persons making submissions should include the full name and address of the recommended nominee, a description of the proposed nominee’s qualifications and other relevant biographical information. See “Director Nomination Procedures” for a discussion of nomination procedures under the By-Laws.

      Compensation Committee. In March 2004, the Board adopted a revised charter for the Compensation Committee, which is disclosed on Federated’s website at www.fds.com/corporategovernance. The Compensation

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      Section 162(m) Subcommittee. The Board has established a subcommittee of the Compensation Committee, presently composed of Messrs. Feldberg and Pichler (the “Section 162(m) Subcommittee”). The Section 162(m) Subcommittee is required to be composed solely of two or more members of the Compensation Committee who are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations of the Internal Revenue Service relating thereto (collectively, “Section 162(m)”). The Section 162(m) Subcommittee is authorized to take all required actions under the Equity Plans and the 1992 Bonus Plan, and such other compensation plans, agreements or arrangements of Federated as may be specified by the Board from time to time, in each case with respect to such action as may be necessary under Section 162(m) in order to cause any compensation that is paid thereunder to a person who is, or is specified by the Compensation Committee as being reasonably likely to become, a “covered employee” within the meaning of Section 162(m) to qualify as “performance based” within the meaning of Section 162(m). The Section 162(m) Subcommittee met twice during fiscal 2003.

Director Nomination Procedures

      The By-Laws provide that nominations for election of directors by the stockholders will be made by the Board or by any stockholder entitled to vote in the election of directors generally. The By-Laws require that stockholders intending to nominate candidates for election as directors deliver written notice thereof to the Secretary of Federated not less than 60 days prior to the meeting of stockholders. However, in the event that the date of the meeting is not publicly announced by Federated by inclusion in a report filed with the SEC or furnished to stockholders, or by mail, press release or otherwise more than 75 days prior to the meeting, notice by the stockholder to be timely must be delivered to the Secretary of Federated not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was so communicated. The By-Laws further require, among other things, that the notice by the stockholder set forth certain information concerning such stockholder and the stockholder’s nominees, including their names and addresses, a representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, the class and number of shares of Federated’s stock owned or beneficially owned by such stockholder, a description of all arrangements or understandings between the stockholder and each nominee, such other information as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such stockholder, and the consent of each nominee to serve as a director of Federated if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with these requirements. Similar procedures prescribed by the By-Laws are applicable to stockholders desiring to bring any other business before an annual meeting of the stockholders. See “Stockholders Proposals — Proposals for 2005 Annual Meeting.”

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Corporate Governance Guidelines and Code of Business Conduct and Ethics

           The Board has approved the adoption by Federated of Corporate Governance Guidelines and a Code of Business Conduct and Ethics, each of which is disclosed on Federated’s website at www.fds.com/corporategovernance.

Director Compensation

      Non-Management Directors receive an annual base retainer fee in the amount of $40,000, and a fee of $2,000 for each Board or Board Committee meeting attended and for each review session with one or more members of management. In addition, each Non-Management Director who chairs a Board Committee receives an annual fee of $10,000. Since January 1, 1999, the annual base retainer fee (including the fee payable to a committee chair) and the meeting fee payable to Non-Management Directors is being paid 50% (or such greater percentage, in ten percent increments, any individual director may have elected) in credits representing the right to receive shares of common stock, with the balance being paid in cash. Such stock credits will be settled in shares of common stock three years following the issuance of such stock credits (or at such later time as any individual director’s service on the Board ends, if such individual director has elected to defer compensation under the directors’ deferred compensation plan).

      Subject to the holding period described above for stock credits covering a portion of retainer and meeting fees, any Non-Management Director may defer all or a portion of those fees either as stock credits or cash credits under the directors’ deferred compensation plan until such director’s service on the Board ends.

      In connection with the termination of the retirement plan for Non-Management Directors described below, the 1995 Equity Plan was amended to make each Non-Management Director eligible to receive annual grants of options to purchase up to 3,500 shares of common stock. The 1995 Equity Plan was further amended to make each Non-Management Director eligible to receive, commencing with fiscal year 2001, annual grants of options to purchase up to 5,000 shares of common stock. Each Non-Management Director was granted an option to purchase 5,000 shares of common stock in respect of his or her service as such during fiscal 2003. Directors who are also full-time employees of Federated receive no additional compensation for service as directors.

      Federated’s retirement plan for Non-Management Directors was terminated on a prospective basis effective May 16, 1997 (the “Plan Termination Date”). As a result of such termination, persons who first become Non-Management Director after the Plan Termination Date will not be entitled to receive any payment thereunder. Persons who were Non-Management Directors as of the Plan Termination Date will be entitled to receive retirement benefits accrued as of the Plan Termination Date. Subject to an overall limit in an amount equal to the aggregate retirement benefit accrued as of the Plan Termination Date (i.e., the product of the amount of the annual base retainer fee earned immediately prior to retirement and the years of Board service prior to the Plan Termination Date), and the vesting requirements described below, persons who retire from service as Non-Management Directors after the Plan Termination Date will be entitled to receive an annual payment equal to the amount of the annual base retainer fee earned immediately prior to retirement, payable in monthly installments, commencing at age 60 (if such person’s termination of Board service occurred prior to reaching age 60) and continuing for the lesser of such person’s remaining life or a number of years equal to such person’s years of Board service prior to the Plan Termination Date. Full vesting will occur for Non-Management Directors who reach age 60 while serving on the Board, irrespective of such person’s years of Board service. Vesting will occur as follows for Non-Management Directors whose Board service terminates before the director reaches age 60: 50% vesting after five years of Board service and an additional 10% vesting for each year of Board service after

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      Non-Management Directors also receive executive discounts on merchandise purchased.

Certain Relationships and Related Transactions

      Dr. Whittington, a director of Federated, is Chief Operating Officer of Allianz Dresdner Asset Management, which through its insurance affiliate, Allianz Insurance Company, provided Federated during fiscal year 2003 portions of Federated’s excess casualty insurance coverage at an aggregate premium cost of $390,000.

Compliance with Section 16(a) of the Securities Exchange of 1934

      Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires Federated’s directors and executive officers, and certain persons who own more than 10% of the common stock outstanding, to file with the SEC and the New York Stock Exchange (the “NYSE”) initial reports of ownership and reports of changes in ownership of common stock. Executive officers, directors and greater than 10% stockholders are required by SEC regulation to furnish Federated with copies of all Section 16(a) reports they file. See “Stock Ownership — Certain Beneficial Owners.”

      To Federated’s knowledge, based solely on a review of the copies of reports furnished to Federated and written representations signed by all directors and executive officers that no other reports were required with respect to their beneficial ownership of common stock during fiscal 2003, the directors and executive officers and all beneficial owners of more than 10% of the common stock outstanding complied with all applicable filing requirements under Section 16(a) of the Exchange Act with respect to their beneficial ownership of common stock during fiscal 2003.

ITEM 2 — APPOINTMENT OF INDEPENDENT ACCOUNTANTS

      The Board, upon the recommendation of the Audit Review Committee, has appointed the firm of KPMG LLP independent public accountants, to audit the books, records and accounts of Federated for the fiscal year ending January 29, 2005. The Board’s appointment is subject to ratification by Federated’s stockholders. KPMG LLP and its predecessors have served as independent accountants for Federated since 1988, and are considered well qualified. Representatives of KPMG LLP are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire to do so. It is also expected that they will be available to respond to appropriate questions.

Fees Paid to Independent Accountants

      The table below summarizes the fees paid to KPMG LLP during fiscal 2003 and fiscal year 2002:

      Audit fees represent fees for professional services rendered for the audit of Federated’s annual financial statements and the reviews of the interim financial statements included in Federated’s Forms 10-Q.

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      Audit related fees represent professional services principally related to the audits of financial statements of employee benefit plans, audits of financial statements of certain subsidiaries and certain subsidiaries that were sold and certain agreed upon procedures reports.

      Tax fees represent professional services related to tax compliance and consulting services.

      All other fees represent professional services other than those covered above. Included in this are fees related to consulting services specifically on two projects in 2002 and one project in 2003.

      The Audit Review Committee has adopted policies and procedures for the pre-approval of all permitted non-audit services provided by Federated’s independent accountants. A description of such policies and procedures is attached as Appendix C to this Proxy Statement and incorporated herein by reference.

      The Board recommends that the stockholders vote FOR such ratification. Proxies solicited by the Board will be so voted unless stockholders specify in their proxies a contrary choice.

ITEM 3 — AMENDMENT TO 1995 EQUITY PLAN

      One of the key elements of Federated’s strategic plan is the practice of linking the compensation of key employees to the achievement of specific performance levels. The 1995 Equity Plan is intended to provide an equity interest in Federated to key management personnel and thereby provide additional incentives for such persons to devote themselves to the maximum extent practicable to the business of Federated and its subsidiaries. The 1995 Equity Plan is also intended to aid in attracting persons of outstanding ability to enter and remain in the employ of Federated and its subsidiaries.

      To further the objectives of the 1995 Equity Plan, the Board has accepted the Compensation Committee’s recommendation that the 1995 Equity Plan be amended, subject to approval by Federated’s stockholders, to increase by 5.0 million shares the total number of shares of common stock available for issuance thereunder (without increasing the number of shares available for issuance thereunder as restricted stock). If the holders of a majority of the shares of common stock present in person or by proxy at the annual meeting vote for the approval of the proposed amendment to the 1995 Equity Plan, such amendment will immediately become effective. If such approval by Federated’s stockholders is not obtained at the annual meeting, the proposed amendment to the 1995 Equity Plan will not become effective, and the 1995 Equity Plan as it presently exists will continue in effect. Neither the effectiveness of the proposed amendment to the 1995 Equity Plan nor the failure of such amendment to become effective will have any effect on the awards outstanding under the 1995 Equity Plan at the time of the annual meeting.

      The 1995 Equity Plan is administered by the Compensation Committee, no voting member of which may be an employee of Federated or its subsidiaries and, to the extent described in “Further Information Concerning the Board of Directors — Committees of the Board — Section 162(m) Subcommittee,” by the Section 162(m) Subcommittee. Pursuant to the 1995 Equity Plan, the Compensation Committee is authorized to grant stock options (“Options”), stock appreciation rights (“SARs”), and shares of restricted stock (“Restricted Stock” and, collectively with Options and SARs, “Awards”) to officers and key employees of Federated and its subsidiaries (approximately 1,170 persons in the aggregate at the date of this Proxy Statement). The 1995 Equity Plan also provides for annual grants of Options to purchase up to 5,000 shares of common stock to each Non-Management Director (eight persons in the aggregate at the date of this Proxy Statement). The 1995 Equity Plan provides that Awards generally may be transferred only upon death or pursuant to qualified domestic relations orders, except that certain participants may transfer Awards to members of their immediate family (as defined in the Rule 16a-1(e) under the Exchange Act). Particular Awards may be subject to additional restrictions on transfer.

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      As of April 2, 2004, 1,151,490 shares which were not the subject of outstanding Awards remained available for issuance as or pursuant to Awards under the 1995 Equity Plan (of which 54,291 shares were available for issuance as Restricted Stock). Upon the effectiveness of the proposed amendment, the total number of shares available for issuance as or pursuant to Awards under the 1995 Equity Plan will be equal to the sum of (a) the number of shares remaining available for issuance as or pursuant to Awards under the 1995 Equity Plan immediately prior to the effectiveness of such amendment and (b) 5 million. Of such total number of shares, the number of shares that will be available for issuance under the 1995 Equity Plan as Restricted Stock will be 54,291 (subject to reduction on a share-for-share basis on account of any shares of Restricted Stock issued after April 2, 2004).

      Options granted under the 1995 Equity Plan may be incentive stock options (“ISOs”), nonqualified stock options, or combinations of the foregoing. The 1995 Equity Plan specifies a maximum ten year term for Options granted thereunder. A grant of Options may provide for the deferred payment of the exercise price from the proceeds of sales through a bank or broker on the exercise date of some or all of the shares of common stock to which such exercise relates. The exercise price (the “Exercise Price”) of Options may not be less than (a) the closing sale price per share of the common stock as reported in the NYSE Composite Tape (or any other consolidated transactions reporting system which subsequently may replace such Composite Tape) for the trading day immediately preceding the date determined as the grant date in accordance with the authorization of the Board (and, in the case of nonqualified Options awarded to non employee directors of Federated as described below, the trading day immediately preceding the date of the Award), or if there are no reported sales on such date, on the next preceding day on which there were sales; (b) the average (whether weighted or not) or mean price, determined by reference to the closing sales prices, average between the high and low sales prices, or any other standard for determining price adopted by the Board, per share of the common stock as reported in the NYSE Composite Transactions Report as of the date or for the period determined in accordance with the authorization of the Board; or (c) in the event that the common stock is not listed for trading on the NYSE as of a relevant date of grant, an amount determined in accordance with standards adopted by the Board. In general, among other requirements, in order to permit Federated to exclude any amount reportable as taxable income for federal income tax purposes as a result of the exercise of such Options and SARs in computing compensation that is subject to the $1.0 million deductibility limit imposed by Section 162(m) (discussed below), Options and SARs granted to executives who are or who could be subject to the $1.0 million limitation will be granted with an Exercise Price of not less than the market value per share on the date of grant.

      Each grant of Options will specify whether the Exercise Price is payable in cash, by the actual or constructive transfer to Federated of nonforfeitable, unrestricted shares of common stock already owned by the participant having an actual or constructive value as of the time of exercise equal to the total Exercise Price, by any other legal consideration authorized by the Compensation Committee, or by a combination of such methods of payment. The 1995 Equity Plan does not require that a participant hold shares received upon the exercise of an Option for a specified period and permits immediate sequential exercises of Options with the Exercise Price therefore being paid in shares of common stock, including shares acquired as a result of prior exercises of Options. Under the 1995 Equity Plan, the Board may not, without further approval of the stockholders of Federated, authorize the amendment of any outstanding option right to reduce the option price, or cancel and replace any such outstanding option right with awards having a lower option price.

      SARs may be granted under the 1995 Equity Plan in tandem with the Options. Upon exercise, a holder of a SAR would receive, in the discretion of the Compensation Committee, cash, shares of the common stock, or a combination thereof having an aggregate value equal to all or some portion of the excess of the market value of the shares of common stock in respect of which the SAR is exercised, determined in the manner specified in the

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      Restricted Stock involves the immediate transfer by Federated to a participant of ownership of a specified number of shares of common stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend, and other ownership rights in such shares provided, however, that at least a portion of the Restricted Shares covered by such issuance or transfer is subject to a “substantial risk of forfeiture” within the meaning of section 83 of the Internal Revenue Code for a period of (i) at least one year following the Date of Grant in the case of a performance-based grant of Restricted Shares, and (ii) at least three years following the Date of Grant in the case of any grant of Restricted Shares that is not performance-based.

      Options granted under the 1995 Equity Plan may be Options that are intended to qualify as ISOs, or nonqualified stock options that are not intended to so qualify. Nonqualified stock options generally will not result in any taxable income to the optionee at the time of the grant, but the holder thereof will realize ordinary income at the time of exercise of the Options if the optioned shares are not subject to any substantial risk of forfeiture (as defined in section 83 of the Internal Revenue Code). Under such circumstances, the amount of ordinary income is measured by the excess of the fair market value of the optioned shares at the time of exercise over the Exercise Price. If the Exercise Price of a nonqualified stock option is paid for, in whole or in part, by the delivery of shares of common stock previously owned by the optionee, no gain or loss will be recognized to the extent that the shares of common stock received are equal in fair market value to the shares of common stock surrendered. An optionee’s tax basis in shares acquired upon the payment of the exercise price of nonqualified stock options in cash is equal to the Exercise Price plus any amount treated as ordinary income.

      ISOs normally will not result in any taxable income to the optionee at the time of grant. If certain requirements are met, the excess of the fair market value of the optioned shares (“the ISO Shares”) over the Exercise Price will not be subject to regular income tax upon the exercise of the Option and will be characterized as a capital gain rather than as ordinary income upon the sale of the ISO Shares. However, the excess of the fair market value of ISO Shares over the Exercise Price is a tax preference item that is potentially subject to the alternative minimum tax. To the extent that the aggregate fair market value of common stock with respect to which ISOs are exercisable for the first time by an employee during any calendar year exceeds $100,000, such excess ISOs will be treated as Options which are not ISOs. No deduction is available to the employer of an optionee upon the optionee’s exercise of an ISO nor upon the sale or exchange of ISO Shares if the holding period requirements for ISO Shares and the statutory employment requirement are satisfied by the holder of the ISO Shares.

      In general, the grant of an SAR will not produce taxable income to the recipient. However, upon exercise of an SAR, the amount of any cash received and the fair market value on the exercise date of any shares of common stock received will be taxable as ordinary income to the recipient.

      For federal income tax purposes, no taxable income will be recognized by a participant who receives a Restricted Stock Award pursuant to the 1995 Equity Plan in the year such Award is made to the participant. If the participant makes an election under section 83(b) of the Internal Revenue Code to have such stock taxed to him (a “Section 83(b) Election”), however, he will recognize as ordinary income for such year an amount equal to the excess of the fair market value of the shares of common stock (determined without regard to any lapse restrictions imposed thereon) at the time of transfer over any amount paid by the participant therefor. If a

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      To the extent that a recipient of an Award recognizes ordinary income in the circumstances described above, Federated would be entitled to a corresponding deduction, provided in general that (a) the amount is an ordinary and necessary business expense and such income meets the test of reasonableness; (b) the deduction is not disallowed pursuant to Section 162(m), as described below; and (c) certain statutory provisions relating to so-called “excess parachute payments” do not apply. Awards granted under the 1995 Equity Plan are subject to acceleration in the event of a change-in-control of Federated and, therefore, it is possible that these change-in-control features may affect whether amounts realized upon the receipt or exercise of Awards will be deductible by Federated under the “excess parachute payments” provisions of the Internal Revenue Code.

      Section 162(m) generally disallows a tax deduction to public companies for compensation over $1.0 million accrued with respect to the chief executive officer and the four most highly compensated executive officers in addition to the chief executive officer employed by the company at the end of the applicable year. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. In the case of options, one requirement is that the plan under which the options are granted state a maximum number of shares with respect to which options may be granted to any one participant during a specified period. Accordingly, the 1995 Equity Plan restricts Awards so that no participant may be granted Options to purchase more than 1,000,000 shares in any period of three fiscal years of Federated, subject to adjustment by the Compensation Committee in certain circumstances to prevent dilution or enlargement of the participant’s rights. A second requirement is that the 1995 Equity Plan be approved by stockholders. This requirement has been satisfied with respect to the 1995 Equity Plan as presently in effect.

      The foregoing discussion of the material provisions of the 1995 Equity Plan, as proposed to be amended, does not purport to be complete and is qualified in its entirety by reference to the full text thereof, which is attached as Appendix D to this Proxy Statement and incorporated herein by reference. As proposed to be amended, the 1995 Equity Plan would be subject to further amendment from time to time by the Board, except that no amendment to increase the maximum numbers of shares of common stock or shares of Restricted Stock issuable pursuant to the 1995 Equity Plan or the maximum number of shares of common stock that may be subject to Option Rights or Appreciation Rights granted to any participant in any period of three fiscal years of Federated could be effected without the further approval of the holders of a majority of the shares of common stock actually voting thereon at a meeting of Federated’s stockholders.

      The following table sets forth certain information regarding the Awards granted under the 1995 Equity Plan in fiscal 2003 and fiscal 2004 (through April 2, 2004). No determination has been made with respect to any

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1995 EXECUTIVE EQUITY INCENTIVE PLAN

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      The Board recommends that stockholders vote FOR the amendment to the 1995 Equity Plan. Proxies solicited by the Board will be so voted unless stockholders specify in their proxies a contrary choice.

ITEM 4 — STOCKHOLDER PROPOSAL SEEKING ANNUAL ELECTION OF DIRECTORS

      Mrs. Evelyn Y. Davis, Editor, Highlights and Lowlights, Watergate Office Building, 2600 Virginia Avenue, N.W., Suite 215, Washington, DC 20037, who is the beneficial owner of 200 shares of common stock, has notified Federated that she intends to submit the following proposal at the annual meeting:

      RESOLVED: “That the stockholders of Federated recommend that the Board of Directors take the necessary steps to reinstate the election of directors ANNUALLY, instead of the stagger system which was recently adopted.”

      REASONS: “Until recently, directors of Federated were elected annually by all shareholders.”

      The proponent has submitted the following statement in support of the proposal, for which Federated and the Board accept no responsibility:

      “The great majority of New York Stock Exchange listed corporations elect all their directors each year. This insures that ALL directors will be more accountable to ALL shareholders each year and to a certain extent prevents the self-perpetuation of the Board. Last year the owners of 128,943,118 shares, representing approximately 88% of shares voting, voted FOR this proposal. Yet YOUR Board has IGNORED the wishes of 88% of the shares voted FOR!!!”

      “If you AGREE, please mark your proxy FOR this resolution.”

      For the reasons discussed below, the Board recommends that stockholders vote AGAINST the foregoing proposal.

      Federated’s Certificate of Incorporation has provided for classified director terms for many years, including prior to the hostile takeover of Federated in 1988 that resulted in its bankruptcy in 1990. According to information provided to Federated by its advisors, approximately 60% of the companies included in the S&P 500 have classified boards of directors.

      The Board believes that the classification of director terms provides significant benefits to Federated’s stockholders. A classified Board provides for continuity and stability and enhances the Board’s ability to implement its long-term strategy and to focus on long-term performance. Because a classified Board makes it

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      The Board also believes that it has in place procedures, including a policy requiring retirement at age 70 and a policy requiring that any director whose principal occupation changes submit his or her resignation, to provide assurance that its composition is appropriate. The Board is presently comprised of ten members, all but two of whom are believed by the Board to be free of interests or relationships with Federated that could reasonably be expected to compromise the independent discharge of their duties.

      For the reasons set forth above, the Board recommends a vote AGAINST this proposal. Proxies solicited by the Board will be so voted unless stockholders specify in their proxies a contrary choice.

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EXECUTIVE COMPENSATION

Three-Year Compensation Summary

      The following table summarizes the compensation of the former Chairman and the six most highly compensated executive officers of Federated as of January 31, 2004 (the “Named Executives”) for Federated’s last three fiscal years for services rendered in all capacities to Federated and its subsidiaries.

SUMMARY COMPENSATION TABLE

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Fiscal 2003 Stock Option Grants

      The following table sets forth certain information regarding grants of stock options made during fiscal 2003 to the Named Executives pursuant to the 1995 Equity Plan. No grants of stock appreciation rights were made during fiscal 2003 to any of the Named Executives.

OPTION GRANTS IN LAST FISCAL YEAR

      See “Compensation Committee Report on Executive Compensation — Specific Compensation Practices — Equity-Based Plan” for further information regarding grants of stock options made during fiscal 2003.

Fiscal Year-End Option Values

      The following table sets forth certain information regarding the total number and aggregate value of options exercised by each of the Named Executives during fiscal 2003 and the total number and aggregate value of options held by each of the Named Executives at January 30, 2004.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

Change-in-Control Agreements

      Federated has entered into a change-in-control agreement (“Change-in-Control Agreement”) with each of the Named Executives. Under the Change-in-Control Agreements, if, prior to November 1, 2006, a change in control (as defined in the Change-in-Control Agreements) occurs and within three years thereafter Federated or, in certain circumstances, the executive terminates the executive’s employment and, in the case of a termination by Federated, cause (as defined in the Change-in-Control Agreements) therefor does not exist, the executive would be entitled to a cash severance benefit equal to three times the sum of his or her current base salary (or, if higher, the executive’s highest salary received for any year in the three full calendar years preceding the Change in Control) and target annual bonus (or, if higher, the executive’s highest bonus received for any year in the three full calendar years preceding the Change in Control), payment of any awards under Federated’s long-term incentive plan at target (if applicable, and prorated to the executive’s participation during each performance period), the continuation of welfare benefits for three years (subject, but only as to welfare benefits, to a requirement in any applicable welfare benefits plan that the executive maintain “actively at work status” and to early termination on the date the executive secures other full-time employment) and three years of retirement plan credits (but not pursuant to Federated’s qualified or non-qualified plans). The cash severance benefit payable under the Change-in-Control Agreements would be reduced by all amounts actually paid to the executive pursuant to any other employment or severance agreement or plan to which the executive and Federated are parties or in which the executive is a participant. In addition, the severance benefits under the Change-in-Control Agreements are subject to reduction in certain circumstances if the excise tax imposed under 280G of the Internal Revenue Code would reduce the net after-tax amount received by the executive.

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Retirement Program

      Federated’s retirement program (the “Retirement Program”) consists of a defined benefit plan and a defined contribution plan. As of January 1, 2004, approximately 73,100 employees, including the executive officers of Federated, participated in the Retirement Program.

      To allow the Retirement Program to provide benefits based on a participant’s total compensation, Federated adopted a Supplementary Executive Retirement Plan (the “SERP”). The SERP, which is a nonqualified unfunded plan, provides to eligible executives retirement benefits based on compensation in excess of Internal Revenue Code maximums, as well as on amounts deferred under Federated’s Executive Deferred Compensation Plan (“EDCP”), in each case employing a formula that is based on the participant’s years of vesting service and final average compensation, taking into consideration the participant’s balance in the Cash Account Pension Plan and Retirement Profit Sharing Credits (as defined below). As of January 1, 2004, approximately 780 employees were eligible to receive benefits under the terms of the SERP. Federated has reserved the right to suspend or terminate supplemental payments as to any category of employee or former employee, or to modify or terminate any other element of the Retirement Program, in accordance with applicable law.

      Under the Retirement Program’s Cash Account Pension Plan, a participant retiring at normal retirement age is eligible to receive the amount credited to his or her pension account or the monthly benefit payments determined actuarially based on the amount credited to his or her pension account. Amounts credited to a participant’s account consist of an opening cash balance equal to the single sum present value, using stated actuarial assumptions, of the participant’s accrued normal retirement benefit earned at December 31, 1996, under the applicable predecessor pension plan, Pay Credits (generally, a percentage of eligible compensation credited annually based on length of service) and Interest Credits (credited quarterly, based on the 30 Year Treasury Bond rate for the November prior to each calendar year). In addition, if a participant retires at or after age 55 having, while employed, both reached age 55 and completed ten or more years of vesting service by December 31, 2001, the pension benefit payable in an annuity form, other than a single life annuity, will not be less than that which would have been payable from the predecessor pension plan under which such participant was covered on December 31, 1996.

      Prior to the adoption of the Retirement Program, Federated’s primary means of providing retirement benefits to employees was through defined contribution profit sharing plans. An employee’s accumulated retirement profit sharing interests in the profit sharing plans (the “Retirement Profit Sharing Credits”) which accrued prior to the adoption of the pension plans, continue to be maintained and invested until retirement, at which time they are distributed.

      With defined benefit plans in place, Federated continued, and presently expects to continue, to make contributions to the Profit Sharing 401(k) Investment Plan. It is impractical to estimate the accrued benefits upon retirement under Federated’s Profit Sharing 401(k) Investment Plan because the amount, if any, that will be contributed by Federated and credited to a participant in any year is determined by such variable factors, among others, as the amount of net income of Federated, participants’ annual contributions to the plan, the amount of matching contributions of Federated, and the earnings on participants’ accounts.

      The following table shows the estimated hypothetical total annual benefits payable under the SERP benefit formula pursuant to the Cash Account Pension Plan, Retirement Profit Sharing Credits and the SERP to persons retiring at their normal retirement age in 2004 in specified eligible compensation and years of service classifications, assuming that a retiring participant under the Retirement Program elects a single life annuity distribution of his or her balance in the Cash Account Pension Plan and Retirement Profit Sharing Credits. Such benefits are not subject to any deduction for Social Security or other offset amounts; however, if the total annual

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PENSION PLAN TABLE

      Mr. Zimmerman, Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe have completed 37, 22, 21, 31, 30, 30 and 16 years of vesting service, respectively. Pursuant to the terms of Mr. Tysoe’s employment with Federated, Mr. Tysoe, whose actual employment commenced on March 1, 1987, is deemed to have commenced employment on February 19, 1981 for the purpose of calculating years of vesting service for benefit accrual. Pursuant to the terms of Mr. Zimmerman’s employment agreement with Federated, Mr. Zimmerman’s age will be increased by five years for the purpose of calculating the early retirement monthly and lump sum benefits under the formula used in the SERP. All benefits under the SERP, including the additional benefits payable to Messrs. Tysoe and Zimmerman, are payable out of the general corporate assets of Federated. The present value of the total amount of additional benefits due to Messrs. Tysoe and Zimmerman, assuming they satisfy certain eligibility requirements, is estimated to be approximately $245,000 and $2,551,000, respectively, as of January 31, 2004.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Overview of Federated’s Executive Compensation Policies and Practices

      Federated’s executive compensation program, which was developed with the assistance of independent compensation and other advisors, is principally intended to: (a) provide appropriate incentives designed to aid in assuring the accomplishment of Federated’s performance and financial objectives; (b) help ensure that Federated is able to attract and retain top-quality management personnel; and (c) ensure that an appropriate portion of

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      The key guiding principle of the program is that total compensation opportunities, which include annual cash compensation and the value of long-term stock and cash incentives, should be positioned at competitive levels when performance expectations are met, should lead the industry when performance exceeds expectations and should lag behind the industry when performance falls short. The particular components of this program may vary from year to year. The 2003 program consisted of the following components: (a) Base Salary — targeted at competitive levels within the retail industry; (b) Performance-Based Annual Cash Incentive — based on attainment of specific financial objectives for the total corporation, operating unit and/or individual; and (c) Equity — in the form of stock options, which tie any executive gain directly to value creation and stock price appreciation, and, to a limited extent, the use of restricted stock, the ultimate value of which is also directly tied to creation of stockholder value. Information relating to each of the foregoing components is set forth below.

      The Compensation Committee (the “Committee”) engages outside executive compensation consultants, who, along with Federated management, assist the Committee in periodically reviewing the compensation programs of Federated to determine whether the total compensation provided by these programs is consistent with Federated’s performance-driven policies. It is also the Committee’s general policy to consider whether particular payments and awards are deductible for federal income tax purposes, along with such other factors as may be relevant in the circumstances, in reviewing executive compensation programs. Consistent with this policy, and in response to the final Treasury regulations regarding the deductibility of executive compensation under Section 162(m), the Committee has taken what it believes to be appropriate steps to maximize the future deductibility of payments under Federated’s 1992 Bonus Plan and of stock options awarded under the 1995 Equity Plan.

      During fiscal 2003, Federated’s overall executive compensation program and each of its components were administered by the Committee and the Section 162(m) Subcommittee, based on authority delegated by the Board. As required by the Compensation Committee charter, all members of the Committee are independent directors and all of the members of the Section 162(m) Subcommittee are “outside directors” within the meaning of Section 162(m). See “Further Information Concerning The Board of Directors — Committees of the Board — Compensation Committee” for further information regarding the Section 162(m) Subcommittee. In the opinion of the Board, each of the Compensation Committee and the Section 162(m) Subcommittee is composed of directors who are independent of any relationships with any officer or other person that would prevent such committee or subcommittee from making independent judgments with respect to matters pertaining to executive compensation generally within its authority or as applied to any specific officer. No executive officer of Federated serves on the board of directors of any other company of which any member of the Board is an executive officer.

Specific Compensation Practices

      Employment Agreement with James Zimmerman. Federated and Mr. Zimmerman entered into an employment agreement, dated as of August 27, 1999, which provided for Mr. Zimmerman to serve as Chairman of the Board and Chief Executive Officer of Federated for a term expiring on April 30, 2003. The employment agreement was amended on June 8, 2001 to extend the term of the agreement to February 1, 2004, and amended again as of February 26, 2003 to provide that Mr. Zimmerman would cease to serve as the Chief Executive Officer of Federated as of February 26, 2003, but would continue as the Chairman of the Board until February 1, 2004. Pursuant to an amendment dated December 31, 2003, Mr. Zimmerman ceased to serve as Chairman of the Board as of January 15, 2004, but continued to be employed by Federated through March 31, 2004, receiving

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      Employment Agreement with Terry Lundgren. Federated and Mr. Lundgren have entered into an employment agreement, dated as of March 1, 2003, and amended effective as of January 15, 2004, pursuant to which Mr. Lundgren serves as President and Chief Executive Officer of Federated for a term expiring on February 28, 2007. Mr. Lundgren was appointed Chief Executive Officer of Federated on February 26, 2003 and Chairman of the Board on January 15, 2004. Mr. Lundgren’s employment agreement provides for a base salary of $1.25 million per year, and specifically includes Mr. Lundgren as a participant in the 1992 Bonus Plan. In connection with his agreement to serve as President and Chief Executive Officer of Federated, Mr. Lundgren was granted, on February 24, 2003, an option to purchase 250,000 shares of common stock at an exercise price of $25.58 per share, which was the closing price of the stock on the trading day immediately preceding the grant date. Twenty-five percent of the option award vested, or is scheduled to vest on each of February 24, 2004, February 24, 2005, February 24, 2006 and February 24, 2007. Mr. Lundgren was also granted on February 24, 2003, 50,000 shares of restricted stock, with the restrictions on one hundred percent of the award scheduled to lapse on February 28, 2007. Pursuant to Section 162(m), annual compensation accrued to Mr. Lundgren that is in excess of $1.0 million (excluding Mr. Lundgren’s bonus earned under the 1992 Bonus Plan, as well as any gains from the stock options awarded) will not be deductible by Federated for federal income tax purposes.

      Mr. Lundgren’s employment agreement provides that a termination of Mr. Lundgren’s employment by Federated other than for “cause” or by Mr. Lundgren for “good reason” would entitle Mr. Lundgren to receive all salary and target annual bonuses until the expiration of the stated term thereof. The term “cause” is defined generally to include (a) willful and material breaches of duties, (b) habitual neglect of duties, or (c) the final conviction of a felony, but generally does not include bad judgment or negligence, any act or omission believed by Mr. Lundgren in good faith to have been in or not opposed to the interests of Federated or any act or omission in respect of which a determination could properly have been made by the Board that Mr. Lundgren met the applicable standard of conduct prescribed for indemnification or reimbursement under the By-Laws or the laws of the state of Delaware. The term “good reason” is defined generally to include (w) the assignment to Mr. Lundgren of any duties materially inconsistent with his position, authority, duties or responsibilities as contemplated in the agreement, or any other action by Federated which results in a material diminution in such

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      Employment Agreements With Other Executive Officers. Each of Federated’s other executive officers, along with a number of other key employees, is a party to an employment agreement with Federated. Most of these agreements have a two-year term, although several are for three years or four years, and all incorporate non-compete and mitigation clauses. The agreements with Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe presently specify the following respective annual base salary rates: $750,000, $750,000, $750,000, $1,000,000 and $825,000. In connection with employment agreements entered into in June 2001, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe each received a grant of stock options and restricted stock.

      The Committee reviews the compensation levels and other terms of employment of each of Federated’s executive officers against the performance of such officers and other factors determined to be appropriate by the Committee on a continuing basis. While the Committee expects Federated will continue its historical practice of entering into employment agreements with its executive officers and other key employees, it reserves the right to modify or terminate that practice generally or in a specific instance upon the expiration of any such agreements.

      Annual Cash Incentive. Since fiscal year 1992, Federated’s executives have participated in an annual cash bonus plan that was tied directly to Federated’s performance. In fiscal 2003, the annual bonus opportunity for Mr. Zimmerman, Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Kronick and Mr. Tysoe was based approximately 60% upon Federated’s performance against a specific “EBIT” (Earnings Before Interest and Taxes) target, approximately 20% against a specific sales target and approximately 20% against a specific cash flow target. In fiscal 2003, Ms. Grove’s annual bonus opportunity was based approximately 27% upon Federated’s EBIT target, approximately 20% upon Federated’s cash flow target, approximately 27% upon the Federated Merchandising Group (FMG) EBIT target, approximately 13% upon a private label sales target, approximately 6.5% upon the headquarter stores sales target and approximately 6.5% upon a private label margin target. The Committee (or in certain cases, the Section 162(m) Subcommittee) established performance levels for each annual bonus component: threshold, target and above-target levels for Federated EBIT; target and maximum levels for sales and private label margin; and threshold, target and maximum levels for cash flow and FMG EBIT. For 2003, Federated’s actual EBIT and FMG EBIT results were over plan, actual private label sales results met plan, actual corporate sales, headquarter store sales, and private label margin results were below plan; and the actual cash flow result exceeded the maximum level. Accordingly, Mr. Zimmerman, Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe earned bonuses that reflected the amounts for above-target performance for the Federated EBIT result and the maximum bonus for the cash flow result. In addition, Ms. Grove earned a bonus that reflected amounts for target performance for private label sales and for performance between target and maximum for the FMG EBIT result. The Committee (or in certain cases, the Section 162(m) Subcommittee) has reviewed and approved the 2004 annual cash incentive performance targets for the executive group and the corresponding annual bonus opportunities. In 2004 Ms. Grove’s bonus components will be the same as the components for the other executive officers.

      Long-Term Incentive. The Compensation Committee decided to discontinue, for an indefinite period, which commenced in fiscal year 2002, the use of long-term incentive awards under the 1992 Bonus Plan. Consequently, no long-term incentive award was established for the 2002-2004 performance period or any period commencing after the end of fiscal year 2002. In connection with this decision, long-term incentive awards (and the related performance goals) under the 1992 Bonus Plan for the 2001-2003 performance period were prorated (i.e., reduced by two-thirds). For the fiscal 2001-2003 program, approximately 70% of the incentive opportunity

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      Equity-Based Plan. Stock option awards were granted in fiscal 2003 by the Section 162(m) Subcommittee to Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe.

      The fiscal 2003 stock option awards were granted within the guidelines of the equity program established for all executives except Mr. Lundgren. The guidelines featured the use of a range of annual stock option award opportunities for each eligible position within Federated, with the range of opportunity reflecting competitive levels of awards as compared to other retailers and with individual awards reflecting individual performance within Federated. In granting these performance-based awards, key employees were provided with an immediate financial interest in increasing stockholder value. Option awards are typically granted with an exercise price equal to 100% of fair market value at the time of grant, with a 10-year term and vesting over four years.

      All equity awards granted in fiscal 2003 were granted pursuant to the 1995 Equity Plan.

      Stock Credit Plan. In March 2004, the Committee implemented a new compensation program to further align the interests of key members of senior management, including the Named Executives, with those of Federated’s shareholders. Pursuant to this program, the number of stock option awards that would have been granted to participants in fiscal year 2004 and would likely be granted in fiscal year 2005 were reduced by fifty percent. The remaining fifty percent of such stock option awards were converted into stock credits on a ratio of three stock options to one stock credit. One-third of such stock credits are subject to performance criteria established by the Committee based on Federated’s four key priorities — merchandise assortments, price simplification, the shopping experience and marketing. At the conclusion of fiscal year 2005, the Committee will evaluate Federated’s performance in fiscal year 2004 and fiscal year 2005 against these criteria. Based upon its evaluation, the Committee may reduce the number of stock credits held by participants by up to one-third. After giving effect to any such reduction, the value of one-half of the stock credits held by participants will be paid in cash in the Spring of 2008 and the value of the other half of such stock credits will be paid in cash in the Spring of 2009, the value being determined in each case on the basis of the then-current 20-day average trading price of Federated common stock. In general, each stock credit is intended to represent the right to receive the value associated with one share of Federated common stock, including dividends paid on shares of Federated common stock during the period from the end of 2005 until such stock credit is settled in cash.

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Conclusion

      The Committee intends to seek to continue to operate under, and to adjust where necessary, these performance-driven compensation policies and practices to assure that they are consistent with the goals and objectives of Federated, and with the primary mission of the full Board of increasing long-term stockholder value.

AUDIT REVIEW COMMITTEE REPORT

      The Board has adopted a written Audit Review Committee Charter, a copy of which is attached hereto as Appendix B. All members of the Audit Review Committee are independent, as defined in Section 303.01(B)(2)(a) and (3) of the New York Stock Exchange’s listing standards.

      The Audit Review Committee has reviewed and discussed with Federated’s management and KPMG LLP, the audited financial statements of Federated contained in Federated’s Annual Report to stockholders for fiscal 2003. The Audit Review Committee has also discussed with KPMG LLP the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements on Auditing Standards, Communications with Audit Committees).

      The Audit Review Committee has received and reviewed the written disclosures and the letter from KPMG LLP required by Independence Standards Board Standard No. 1 (titled, “Independence Discussions with Audit Committee’s”), and has discussed with KPMG LLP their independence.

      Based on the review and discussions referred to above, the Audit Review Committee recommended to the Board that the audited financial statements be included in Federated’s Annual Report on Form 10-K for fiscal 2003, filed with the United States Securities and Exchange Commission.

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COMPARISON OF TOTAL STOCKHOLDER RETURN

      The following graph compares the cumulative total stockholder return on the common stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s Retail Department Store Index for the period from January 30, 1999 through January 31, 2004, assuming an initial investment of $100 and the reinvestment of all dividends, if any.

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STOCKHOLDER PROPOSALS