FEDERATED DEPARTMENT STORES, INC.

7 West Seventh Street, Cincinnati, Ohio 45202

and

151 West 34th Street, New York, New York 10001

April 13, 2006

To the Stockholders:

      You are cordially invited to attend the 2006 annual meeting of the stockholders of Federated Department Stores, Inc. The annual meeting will be held on Friday, May 19, 2006, at 11:00 a.m., Eastern Daylight Time, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The official notice of meeting, proxy statement and form of proxy are enclosed with this letter. The matters listed in the notice of meeting are described in the attached proxy statement.

      The vote of every stockholder is important. Accordingly, we would appreciate it if you would cast your vote promptly by following the instructions on the enclosed proxy card.

      Thank you for your cooperation and support of Federated.

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,

PLEASE CAST YOUR VOTE PROMPTLY

BY FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD.

FEDERATED DEPARTMENT STORES, INC.

7 West Seventh Street, Cincinnati, Ohio 45202

and

151 West 34th Street, New York, New York 10001

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To the Stockholders:

      Federated hereby gives notice that the annual meeting of its stockholders will be held at 11:00 a.m., Eastern Daylight Time, on Friday, May 19, 2006, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The items on the agenda for the annual meeting are:

      Each of these matters is more fully described in the attached proxy statement. Stockholders of record at the close of business on March 31, 2006 are entitled to vote at the annual meeting or any postponements or adjournments thereof.

April 13, 2006

FEDERATED DEPARTMENT STORES, INC.

7 West Seventh Street, Cincinnati, Ohio 45202

and

151 West 34th Street, New York, New York 10001

PROXY STATEMENT

      The board of directors of Federated (the “Board”) is furnishing this proxy statement in connection with its solicitation of proxies for use at the annual meeting of Federated’s stockholders. The annual meeting will be held at 11:00 a.m., Eastern Daylight Time, on Friday, May 19, 2006, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The proxies received will be used at the annual meeting and at any postponements or adjournments of the annual meeting for the purposes set forth in the accompanying notice of meeting. This proxy statement, the notice of meeting and accompanying proxy are being mailed to stockholders on or about April 13, 2006.

      Except where the context requires otherwise, the term “Federated” includes Federated and its subsidiaries.

GENERAL

      The record date for the annual meeting is March 31, 2006. The holders of record of shares of common stock of Federated at the close of business on the record date are entitled to vote such shares at the annual meeting. As of the record date, 275,265,327 shares of common stock were outstanding. Shares held in the treasury of Federated and shares issuable in connection with the acquisition of The May Department Stores Company (“May”) to former holders of May common stock who had not, as of the record date, properly surrendered May stock certificates are not treated as being outstanding for any purpose relating to the annual meeting. Each outstanding share of common stock is entitled to one vote on each of the matters listed in the notice of meeting.

      The holders of a majority of the outstanding shares of common stock as of the record date will constitute a quorum for the transaction of business at the annual meeting. For purposes of determining whether a quorum exists, abstentions and broker non-votes will be included in determining the number of shares present or represented at the annual meeting. However, with respect to any matter, other than the matter described under Item 3, that is brought to a vote at the annual meeting, abstentions and broker non-votes will be treated as shares not voted for purposes of determining whether the requisite vote has been obtained. In order to obtain approval of any such matter the affirmative vote of the holders of a majority (or, in the case of the election of any nominee as a director, a plurality) of the shares of common stock represented at the annual meeting and actually voted is required. Consequently, abstentions and broker non-votes will have no effect on the outcome of the vote on any such matter. In order to obtain approval of the matter described under Item 3, the affirmative vote of a majority of the outstanding shares entitled to vote at the annual meeting is required and, with respect to such matter, abstentions and broker non-votes will have the effect of votes against such matter. If the persons present or represented by proxy at the annual meeting constitute the holders of less than a majority of the outstanding shares of common stock as of the record date, the annual meeting may be adjourned to a subsequent date for the purpose of obtaining a quorum.

      The Board has adopted a policy under which all voting materials that identify the votes of specific stockholders will be kept confidential and will not be disclosed to officers, directors or employees of Federated or third parties except as described below. Voting materials may be disclosed in any of the following circumstances:

The policy described above will apply to the annual meeting.

      All shares of common stock represented at the annual meeting by proxies properly submitted prior to or at the annual meeting will be voted at the annual meeting in accordance with the instructions on the proxies, unless such proxies previously have been revoked. If no instructions are indicated, such shares will be voted:

      Stockholders have three voting options:

      A number of banks and brokerage firms participate in a program that also permits stockholders whose shares are held in street name to direct their vote over the Internet or by telephone. This option, if available, will be reflected in the voting instructions from the bank or brokerage firm that accompany this proxy statement. Stockholders may use the Internet or telephone to direct the vote of shares held in an account at a bank or brokerage firm by following the voting instructions enclosed with the proxy form from the bank or brokerage firm. The Internet and telephone proxy procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their proxy voting instructions and to confirm that those instructions have been properly recorded. Votes directed over the Internet or by telephone through such a program must be received by 5:00 p.m., Eastern Daylight Time, on Thursday, May 18, 2006. Requesting a proxy prior to the deadline described above will automatically cancel any voting directions stockholders have previously given over the Internet or by telephone with respect to their shares. Directing the voting of their shares will not affect stockholders’ right to vote in person if they decide to attend the annual meeting; however, they must first obtain a signed and properly executed proxy from their bank, broker or other nominee to vote their shares held in street name at the annual meeting.

      Stockholders who are participants in Federated’s Profit Sharing 401(k) Investment Plan or May’s Profit Sharing Plan will receive voting instruction cards for the Federated common stock allocated to their accounts in those plans. Plan participants may instruct the plan trustee on how to vote their proportional interest in any Federated shares held by the plans by signing, dating and mailing the enclosed voting instruction cards, or by submitting their voting instructions by telephone or over the Internet. The plan trustees will vote participants’ proportional interests in accordance with the instructions received from participants and the terms of the plans. If a plan participant under either plan fails to vote, the trustee for that plan, subject to its fiduciary obligations under ERISA, will vote the participant’s proportional interests in the same proportion as it votes the proportional interests for which it receives instructions from other plan participants. Under the terms of the plans, the trustees must receive voting instructions from plan participants by 5:00 p.m., Eastern Daylight Time, on Wednesday, May 17, 2006.

      A stockholder may revoke a proxy at any time by submitting to the Secretary of Federated evidence of such revocation or a subsequent proxy authorized by such stockholder or by voting in person at the annual meeting. Attendance at the annual meeting will not, in itself, constitute revocation of a proxy.

STOCK OWNERSHIP

      Certain Beneficial Owners. The following table sets forth information as to the beneficial ownership of each person known to Federated to own more than 5% of Federated’s outstanding common stock as of December 31, 2005.

      1. According to the Private Capital Schedule 13G, (i) each of Private Capital Management, Bruce S. Sherman and Gregg J. Powers has shared power to vote and shared power to dispose of 14,797,101 of the 14,828,251 shares beneficially owned by Private Capital, and (ii) Bruce S. Sherman has sole power to vote and the sole power to dispose of 31,150 of such shares.

      2. According to the FMR Schedule 13G, (a) 10,924,794 of the 13,640,520 shares beneficially owned by FMR (approximately 4.0% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR (“FMRC”), as a result of acting as investment advisor to various investment companies, (b) 896,851 of such shares (approximately 0.3% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management Trust Company, a wholly-owned subsidiary of FMR (“FMTC”), as a result of its serving as investment manager of institutional account(s), (c) 1,818,400 of such shares (approximately 0.7% of the total number of shares outstanding) were beneficially owned by Fidelity International Limited (“FIL”), and (d) 475 of such shares were beneficially owned by Strategic Advisers, Inc., a wholly-owned subsidiary of FMR. According to the FMR Schedule 13G:

According to the FMR Schedule 13G, Edward C. Johnson 3d and various Johnson family members are the predominant owners of the Series B shares of common stock of FMR, representing approximately 49% of the voting power of FMR. According to the FMR Schedule 13G, through their ownership of FMR’s voting common stock and related agreements, members of the Johnson family may be deemed to form a controlling group with respect to FMR.

      Stock Ownership of Directors and Executive Officers. The following table sets forth the shares of common stock beneficially owned (or deemed to be beneficially owned pursuant to the rules of the SEC) as of March 31, 2006 by each director of Federated, by each of the Named Executives (as defined below) and by directors and executive officers of Federated as a group. The business address of each of the individuals named in the table is 7 West Seventh Street, Cincinnati, Ohio 45202.

      Securities Authorized for Issuance Under Equity Compensation Plans. The following table presents certain aggregate information, as of January 28, 2006, with respect to (i) the 1995 Equity Plan (included on the line captioned “Equity compensation plans approved by security holders”), and (ii) the 1994 Stock Incentive Plan, which plan, including outstanding options granted thereunder to certain former May executives, was assumed by Federated in connection with Federated’s acquisition of May (included on the line captioned “Equity compensation plans not approved by security holders”).

      For a summary of the material terms of the 1995 Equity Plan, see “Item 4  — Proposal to Amend the 1995 Executive Equity Incentive Plan.” For a summary of the material terms of the 1994 Stock Incentive Plan, see “Item 5 — Proposal to Amend the 1994 Stock Incentive Plan.”

      The foregoing table does not reflect shares of restricted stock previously issued under the 1995 Equity Plan or the 1994 Stock Incentive Plan. As of January 28, 2006, there were 50,750 shares of restricted stock outstanding that remained subject to possible forfeiture and 54,291 shares of common stock available for future issuance as restricted stock under the 1995 Equity Plan and 1,075,993 shares of common stock available for future issuance as restricted stock under the 1994 Stock Incentive Plan. The shares remaining available for future issuance as restricted stock are included in the totals reflected in column (c). Under the 1995 Equity Plan and the 1994 Stock Incentive Plan, if these shares are not issued as restricted stock they may be made subject to grants of stock options.

      The foregoing table does not reflect stock credits issued under Federated’s Executive Deferred Compensation Plan, the compensation program for directors who are not employees of Federated (the “Non-Employee Directors”), the Non-Employee Directors’ deferred compensation plan, and the Associated Dry Goods Corporation Executives Deferred Compensation Plan (assumed by Federated in connection with its acquisition of May), which have not been approved by Federated’s stockholders. Pursuant to the Executive Deferred Compensation Plan, eligible executives may elect to receive a portion of their cash compensation in the form of stock credits. For a discussion of stock credits issued to Non-Employee Directors under the Non-Employee Directors’ compensation program, see “Further Information Concerning the Board of Directors — Director Compensation.” Pursuant to the Associated Dry Goods Corporation Executives Deferred Compensation Plan, participants elected to receive a portion of their cash compensation in the form of stock credits.

      Under the plans described in the immediately preceding paragraph, entitlements due to participants are expressed as dollar amounts and then converted to stock credits in amounts equal to the number of shares of common stock that could be purchased by the applicable plan at current market prices with the cash that otherwise would have been payable to the participant. In general, each stock credit, other than a stock credit payable in cash under the terms of the applicable plan, entitles the holder to receive one share of common stock three years after the issuance of the stock credit, or, in the case of the Executive Deferred Compensation Plan,

the Non-Employee Directors’ deferred compensation plan and the Associated Dry Goods Corporation Executives Deferred Compensation Plan, upon the termination of the holder’s employment or service with Federated, together with amounts equal to any dividends paid on one share of common stock. No specific number of shares are authorized for issuance under the deferred compensation plans.

ITEM 1 — ELECTION OF DIRECTORS

      Federated’s Certificate of Incorporation (the “Certificate of Incorporation”) and By-Laws (the “By-Laws”), as amended with the approval of Federated’s stockholders obtained at the 2005 annual meeting, provide that beginning at the 2006 annual meeting, as current terms expire, directors will be elected at each annual meeting of Federated stockholders for a one-year term. Directors elected prior to the 2006 annual meeting would continue to serve for their current terms. By 2008, all directors would be elected annually and would serve one-year terms.

      In accordance with the recommendation of its NCG Committee, the Board has nominated Joyce M. Roché, William P. Stiritz and Craig E. Weatherup, each of whom is currently a member of the Board, for election as directors. If elected, such nominees will serve for a one-year term to expire at Federated’s annual meeting of stockholders in 2007 or until their successors are duly elected and qualified. Information regarding these nominees, as well as the other persons who are expected to serve on the Board following the annual meeting, is set forth below.

      The Board has no reason to believe that any of the nominees will not serve if elected. However, if any nominee should subsequently become unavailable to serve as a director, the Board may designate a substitute nominee and the persons named as proxies may, in their discretion, vote for such substitute nominee designated by the Board. Alternatively, the Board may reduce the number of directors to be elected at the annual meeting.

      The Board recommends that stockholders vote FOR the election of the nominees named above. Proxies solicited by the Board will be so voted except where authority has been withheld.

Nominees for Election as Directors — Terms Expire at the 2007 annual meeting

Joyce M. Roché

      Ms. Roché, age 59, is the President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. Prior to assuming her position at Girls Incorporated in September 2000, Ms. Roché was an independent marketing consultant from 1998 to August 2000. She served as President and Chief Operating Officer of Carson, Inc. from 1996 to 1998 and also held senior marketing positions Carson, Inc., Revlon, Inc. and Avon, Inc. Ms. Roché is also a member of the boards of directors of Anheuser-Busch Companies, Inc., AT&T and Tupperware Corporation. Ms. Roché is a member of the Audit and NCG Committees of the Board. Ms. Roché has been a director since February 2006.

William P. Stiritz

      Mr. Stiritz, age 71, is Chairman of the Boards of Energizer Holding, Inc. and Ralcorp Holdings, Inc. He served as Chairman of the Board, President and Chief Executive Officer of Agribrands International, Inc. from 1998 to May 2001. Mr. Stiritz is also a member of the board of directors of Vail Resorts, Inc. Mr. Stiritz is a member of the Audit and Finance Committees of the Board. Mr. Stiritz has been a director since October 2005.

Craig E. Weatherup

      Mr. Weatherup, age 60, was Chairman and Chief Executive Officer of The Pepsi Bottling Group, Inc. from November 1998 until January 2003. Mr. Weatherup is also a member of the board of directors of Starbucks Corporation. Mr. Weatherup is a member of the Compensation and Management Development and NCG Committees of the Board. Mr. Weatherup has been a director since August 1996.

Directors — Terms Expire at the 2008 annual meeting

Meyer Feldberg

      Professor Feldberg, age 64, has been Dean Emeritus and Sanford Bernstein Professor of Leadership and Ethics at Columbia Business School at Columbia University since June 2004. Prior thereto he served as the Dean of the Columbia Business School at Columbia University from 1989 to June 2004. He is currently on leave of absence from Columbia University and is serving as a Senior Advisor at Morgan Stanley. He is also a member of the boards of directors of Revlon, Inc., Primedia, Inc., UBS Global Asset Management and SAPPI Limited. Professor Feldberg is a member of the NCG and Compensation and Management Development Committees of the Board. Professor Feldberg has been a director since May 1992.

Terry J. Lundgren

      Mr. Lundgren, age 54, has been Chairman of Federated since January 15, 2004 and President and Chief Executive Officer of Federated since February 26, 2003. Prior thereto he served as the President/ Chief Operating Officer and Chief Merchandising Officer of Federated since April 15, 2002. From May 1997 until April 15, 2002, he was President and Chief Merchandising Officer of Federated. Mr. Lundgren has been a director since May 1997.

Marna C. Whittington

      Dr. Whittington, age 58, has been President of Nicholas Applegate Capital Management since 2001 and Chief Operating Officer of Allianz Dresdner Asset Management, the parent of Nicholas Applegate Capital Management, since 2002. Dr. Whittington is also a member of the board of directors of Rohm & Haas Company. Dr. Whittington is a member of the Audit and Finance Committees of the Board. Dr. Whittington has been a director since June 1993.

Directors — Terms Expire at the 2007 annual meeting

Sara Levinson

      Ms. Levinson, age 55, has been the Non-Executive Chairman of ClubMom, Inc. since October 2002 and was President of the Women’s Group of Rodale, Inc. from October 2002 until June 2005. Prior to October 2000, she was President of NFL Properties, Inc. since September 1994. Ms. Levinson is also a member of the board of directors of Harley Davidson, Inc. Ms. Levinson is a member of the NCG and Compensation and Management Development Committees of the Board. Ms. Levinson has been a director since May 1997.

Joseph Neubauer

      Mr. Neubauer, age 65, has been Chairman and Chief Executive Officer of ARAMARK Corporation since September 2004. From January 2004 to September 2004 he served as Executive Chairman of ARAMARK Corporation. Prior to that, he was Chief Executive Officer of ARAMARK Corporation from 1983 until

December 2003 and Chairman from 1984 until December 2003. He is also a member of the boards of directors of ARAMARK Corporation, Verizon Communications, Inc. and Wachovia Corporation. Mr. Neubauer is a member of the Audit, Compensation and Management Development and NCG Committees of the Board. Mr. Neubauer has been a director since September 1992.

Joseph A. Pichler

      Mr. Pichler, age 66, was Chairman of The Kroger Co. from June 2003 until June 2004 and was Chairman and Chief Executive Officer of The Kroger Co. from June 1990 until June 2003. Mr. Pichler is a member of the NCG and Compensation and Management Development Committees of the Board. Mr. Pichler has been a director since December 1997.

Karl M. von der Heyden

      Mr. von der Heyden, age 69, was Vice Chairman of the Board of Directors of PepsiCo, Inc. from September 1996 to January 2001. He is also a member of the board of directors of ARAMARK Corp., PanAmSat Corp., New York Stock Exchange Group and Dreamworks Animation SKG, Inc. Mr. von der Heyden is a member of the Audit and Finance Committees of the Board. Mr. von der Heyden has been a director since February 1992.

FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS

Attendance at Meetings

      The Board held nine meetings during the fiscal year ended January 28, 2006 (“fiscal 2005”). During fiscal 2005, no director attended fewer than 75%, in the aggregate, of the total number of meetings of the Board and Board Committees on which such director served.

Director Attendance at Annual Meetings

      As a matter of policy, Federated expects its directors to make reasonable efforts to attend Federated’s annual meetings of stockholders. Six of Federated’s directors attended its most recent annual meeting of stockholders.

Communications with the Board

      Interested parties may communicate with the full Board, the Audit Committee, directors who are not employees of Federated, referred to as the Non-Employee Directors, or any individual director by communicating through Federated’s Internet website at www.fds.com/ir/corpgov or by mailing such communications to 7 West Seventh Street, Cincinnati, Ohio 45202, Attn: General Counsel. Such communications should indicate to whom they are addressed. Any communications received that relate to accounting, internal accounting controls or auditing matters will be referred to members of the Audit Committee unless the communication is otherwise addressed. Parties may communicate anonymously and/or confidentially if they desire. All communications received will be collected by the Office of the General Counsel of Federated and forwarded to the appropriate director(s).

Director Independence

      Federated’s Corporate Governance Principles require that a majority of the Board consist of directors who the Board has determined do not have any material relationship with Federated and are independent. The Board

has adopted standards for independence (the “Standards for Director Independence”), a copy of which is attached hereto as Appendix A, to assist the Board in determining if a director is independent.

      The Board has determined that the members of the Board who are Non-Employee Directors qualify as independent. Each of the directors who were determined to be independent by the Board satisfied the Standards for Director Independence.

Non-Employee Directors’ Meetings

      The Non-Employee Directors of the Board meet in executive session without management either before or after all regularly scheduled Board meetings. The chairpersons of the Board Committees preside at such sessions by rotation. If a Non-Employee Director were not independent under the New York Stock Exchange (the “NYSE”) listing standards, that director could participate in these executive sessions, but the Board would hold at least one executive session each year exclusively for Non-Employee Directors who are independent under the NYSE listing standards.

Committees of the Board

      The following standing committees of the Board were in existence throughout fiscal 2005: the Audit Committee, the Compensation and Management Development Committee, the Finance Committee and the NCG Committee.

      Audit Committee. The Audit Committee is presently composed of Dr. Whittington, Ms. Roché and Messrs. Neubauer, Stiritz and von der Heyden. The Audit Committee Charter is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the Audit Committee Charter, the Board has determined that all members of the Audit Committee are independent under Federated’s Standards for Director Independence and that Dr. Whittington and other members of the Audit Committee qualify as “financial experts.” During fiscal 2005, Mr. von der Heyden served on the audit committees of three other public companies. The Board previously determined that such service did not impair Mr. von der Heyden’s ability to serve on Federated’s Audit Committee.

      The responsibilities of the Audit Committee include:

See “Report of the Audit Committee” for further information regarding the Audit Committee’s review. The Audit Committee met five times during fiscal 2005.

      Compensation and Management Development Committee. The CMD Committee is presently composed of Ms. Levinson and Messrs. Feldberg, Neubauer, Pichler and Weatherup. The charter for the Compensation and Management Development Committee (“CMD Committee”) is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the CMD Committee Charter, all current members of the CMD Committee are independent under Federated’s Standards for Director Independence.

      The responsibilities of the CMD Committee include:

The CMD Committee met seven times during fiscal 2005.

      Finance Committee. The Finance Committee is presently composed of Dr. Whittington and Messrs. Stiritz and von der Heyden.

      The responsibilities of the Finance Committee include:

The Finance Committee met nine times during fiscal 2005.

      Nominating and Corporate Governance Committee. The NCG Committee is presently composed of Ms. Levinson and Ms. Roché and Messrs. Feldberg, Neubauer, Pichler and Weatherup. The charter for the NCG Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the NCG Committee Charter, all current members of the NCG Committee are independent under Federated’s Standards for Director Independence.

      The responsibilities of the NCG Committee include:

The NCG Committee met six times during fiscal 2005.

      Among other means of identifying potential candidates, under the NCG Committee Charter, the NCG Committee is authorized to employ third-party search firms. The criteria considered by the NCG Committee in evaluating potential candidates include the following:

      The NCG 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 NCG 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 NCG 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 NCG Committee. Stockholders wishing to make such recommendations should write to the Nominating 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 Federated’s By-Laws.

Director Nomination Procedures

      Federated’s 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,

The chairman of the Board 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 “Submission of Future Stockholders Proposals.”

      The merger agreement between Federated and May provided that Federated would appoint to the Federated board two individuals who were directors of May as of the date of the merger agreement (February 27, 2005) and recommended by the NCG Committee. Upon the recommendation of the NCG Committee, the Board elected Mr. Stiritz as a director, effective October 27, 2005, and Ms. Roché as a director, effective February 23, 2006. The Board has waived the application of the mandatory retirement policy set forth in Federated’s Corporate Governance Principles with respect to Mr. Stiritz until the 2007 annual meeting. Ms. Roché and Mr. Stiritz have been nominated by the Board for election by the stockholders through the 2007 annual meeting.

Corporate Governance Principles and Code of Business Conduct and Ethics

      The Corporate Governance Principles and Code of Business Conduct and Ethics approved by the Board for adoption by Federated are disclosed on Federated’s website at www.fds.com/ir/corpgov.

Director Compensation

      Non-Employee Directors receive the following compensation:

      Subject to the holding period described above for stock credits covering a portion of retainer and meeting fees, any Non-Employee Director may defer all or a portion of the total fees received by him or her either as stock credits or cash credits under the Non-Employee Directors’ deferred compensation plan until such director’s service on the Board ends, provided that the stock credits subject to the holding period described above may be deferred under the Non-Employee Directors’ deferred compensation plan only as stock credits.

      Directors who are also full-time employees of Federated receive no additional compensation for service as directors.

      Federated’s retirement plan for Non-Employee 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-Employee Directors after the Plan Termination Date will not be entitled to receive any payment thereunder. Persons who were Non-Employee 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-Employee 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 the later of retirement or 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-Employee 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-Employee 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 five years. Board service following the Plan Termination Date will be given effect for purposes of the foregoing vesting requirements. There are no survivor benefits under the terms of the retirement plan.

      Each Non-Employee Director, his or her spouse and eligible dependents also receive executive discounts on merchandise purchased at Federated stores, which benefit remains available to them following such director’s retirement from the Board.

      In 2005, the NCG Committee recommended, and the Board adopted, stock ownership guidelines for Non-Employee Directors. Under these guidelines, Non-Employee Directors are required to accumulate over time shares of Federated common stock equal in value to at least five times the annual base retainer. Shares counted toward this requirement include:

Federated common stock subject to unvested or unexercised stock options and unlapsed restricted stock, if any, granted to Non-Employee Directors do not count toward the ownership requirement. Non-Employee Directors must comply with these guidelines by December 9, 2010 or within five years from the date the director’s Board service commenced, whichever is later.

Certain Relationships and Related Transactions

      Earl G. Graves, Sr., a former director of Federated who retired on July 13, 2005, is the Publisher and Chief Executive Officer of “Black Enterprise” Magazine and Chairman and Chief Executive Officer of Earl G. Graves, Ltd. In fiscal 2005, Federated purchased $80,325 in advertising space in Black Enterprise Magazine and spent $35,000 for event sponsorship with Earl G. Graves, Ltd. These expenditures were made in furtherance of Federated’s minority hiring programs.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires Federated’s directors and executive officers, and certain persons who beneficially own more than 10% of the common stock outstanding, to file with the SEC and 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,” and “Stock Ownership — Stock Ownership of Directors and Executive Officers.”

      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 2005, all reports required by Section 16(a) of the Exchange Act to be filed by the directors and executive officers and all beneficial owners of more than 10% of the common stock outstanding to report transactions in securities were timely filed, except for a report filed two days late by Mr. Graves due to a miscommunication.

ITEM 2 — APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      The Audit Committee has appointed KPMG LLP, an independent registered public accounting firm, to audit the books, records and accounts of Federated for the fiscal year ending February 3, 2007. The Audit Committee’s appointment is subject to ratification by Federated’s stockholders. KPMG LLP and its predecessors have served as the independent registered public accounting firm for Federated since 1988, and the Board considers them 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 Registered Public Accounting Firm

      The table below summarizes the fees paid to KPMG LLP during fiscal 2005 and fiscal year 2004:

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

      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 agreed upon procedures reports.

      Tax fees represent professional services related to tax compliance and consulting services, provided, however, that such tax consulting services did not involve the provision of advice regarding tax strategy or planning.

      All other fees represent professional services other than those covered above.

      The Audit Committee has adopted policies and procedures for the pre-approval of all permitted non-audit services provided by Federated’s independent registered public accounting firm. A description of such policies and procedures is attached as Appendix B 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 — PROPOSAL TO AMEND FEDERATED’S CERTIFICATE OF INCORPORATION

      The Board has approved, subject to stockholder approval, an amendment to Federated’s Certificate of Incorporation to increase the number of authorized shares of common stock from 500 million shares to one billion shares. The affirmative vote of a majority of the shares entitled to vote at the annual meeting is required to approve this amendment to Federated’s Certificate of Incorporation.

      As of February 25, 2006, approximately 191,400,000 shares of common stock were neither issued nor reserved for issuance. The Board believes that this number of shares of common stock is not sufficient to provide Federated the needed flexibility to conduct its business and plan for future events, including issuances of common stock for such general corporate purposes as stock splits, stock dividends, incentive awards, acquisitions and other similar transactions. The number of shares of common stock available for issuance by Federated was reduced by approximately 114 million shares in connection with the May acquisition, including approximately 100 million shares issued to former May stockholders and approximately 14 million shares reserved for issuance under equity incentive plans assumed by Federated.

      If the amendment to the Certificate of Incorporation is approved by Federated’s stockholders, the Board presently intends to approve a two-for-one stock split to be effected in the form of a stock dividend. In such event, pursuant to the provisions of Federated’s equity compensation plans, the Board would also adjust the number of shares of common stock available for issuance and the number of shares covered by outstanding awards or stock units issued under such plans to give effect to the split. The issuance of shares of common stock in connection with the stock split would not require stockholder approval. Based on the number of shares of common stock outstanding and reserved for issuance as of February 25, 2006, if the stock split were approved by the Board and implemented, the number of shares of common stock outstanding and reserved for issuance would be increased to approximately 617,200,000 and the number of shares of common stock remaining available for issuance would be increased to approximately 382,800,000. Federated has no other present plan, arrangement or understanding to issue additional shares of common stock, other than shares previously reserved for issuance and shares to be reserved if stockholders approve the amendment to the 1995 Equity Plan pursuant to Item 4.

      If this amendment is approved by Federated’s stockholders, Section 1 of Article Fourth of Federated’s Certificate of Incorporation would be amended and restated in its entirety to read as follows:

FOURTH. Section 1. Authorized Capital Stock. The Company is authorized to issue two classes of capital stock, designated Common Stock and Preferred Stock. The total number of shares of capital stock that the Company is authorized to issue is 1,125,000,000 shares, consisting of 1,000,000,000 shares of Common Stock, par value $0.01 per share, and 125,000,000 shares of Preferred Stock, par value $0.01 per share.

      The additional authorized shares of Federated common stock, if and when issued, would be part of the existing class of Federated common stock and would have the same rights and privileges as the shares of Federated common stock presently issued and outstanding. Although the additional shares of common stock would not have any effect on the rights and privileges of Federated’s existing stockholders, the issuance of additional shares of common stock, other than in connection with a stock split or stock dividend, may dilute the voting power of existing stockholders. In addition, the issuance of additional shares of common stock may decrease earnings and the book value attributable to shares presently issued and outstanding.

      In addition, the availability of additional authorized but unissued shares of common stock could have an anti-takeover effect. Although the Board has no present intention of doing so, new shares of common stock could be issued without stockholder approval to dilute the percentage ownership of current stockholders, thereby increasing the cost and difficulty of obtaining control of Federated. Federated is not aware of any pending or proposed effort to obtain control of Federated or to change Federated’s management.

      If the amendment to Federated’s Certificate of Incorporation is approved, it will become effective upon its filing with the Delaware Secretary of State, which will occur as soon as reasonably practicable after approval. No changes will be made in the respective rights and privileges pertaining to the outstanding shares of common stock upon the filing of the amendment to Federated’s Certificate of Incorporation.

      The Board recommends that stockholders vote FOR the amendment to Federated’s Certificate of Incorporation. Proxies solicited by the Board will be so voted except where authority has been withheld.

ITEM 4 — PROPOSAL TO AMEND THE 1995 EXECUTIVE EQUITY INCENTIVE PLAN

Overview

      Items 4 and 5. Items 4 and 5 relate to proposed amendments to Federated’s two equity incentive plans that provide for grants of stock options, restricted stock and performance restricted stock for Federated employees. The 1995 Equity Plan has historically applied to Federated employees. The 1994 Stock Incentive Plan has historically applied to May employees. In connection with Federated’s 2005 acquisition of May, Federated assumed May’s obligations under the 1994 Stock Incentive Plan. In Items 4 and 5, the Board recommends, among other things, that the stockholders approve amendments to:

      Items 4 and 5 are independent matters. Stockholders are entitled to vote on them separately. However, the Board encourages stockholders to review and consider them as related Items. The shares available as of April 1, 2006, under each plan are as follows:

      Commitment to Making Responsible Awards of Equity Compensation. The Board is committed to making responsible awards of equity compensation. For example, under both the 1995 Equity Plan and the 1994 Stock Incentive Plan:

In addition, Federated has reduced the numbers of stock options it has granted under the 1995 Equity Plan over the last three years to the named executive officers and to all employees as a group.

      Prudent Management of Stock Option Program. Management believes that it has managed Federated’s stock option program prudently, as demonstrated by Federated’s burn rate and option overhang.

      Burn Rate. Federated has reduced the size of employee stock option grants significantly from prior years and thereby reduced Federated’s “Burn Rate” to lower levels. The “Burn Rate” is the level of option grants

made by Federated divided by the shares outstanding at the beginning of the period. For the last four fiscal years, the amounts were as follows:

      For the past four fiscal years, Federated has maintained its Burn Rate at below 2.2%. The Board expects that Federated will be able to continue to contain its Burn Rate, while still attracting, retaining and motivating outstanding employees. The anticipated increase in 2006 results primarily from anticipated grants to former May executives as part of the Federated option program.

      Option Overhang. Federated has also focused on reducing the potential dilution caused by stock option grants, which is referred to as the “Option Overhang.” The Option Overhang is calculated by dividing (A) the total number of shares of Federated’s common stock issuable upon exercise of all stock options outstanding and available for grant (the “Total Option Shares”) by (B) the sum of the total number of shares of Federated’s common stock outstanding at the beginning of the year, plus the Total Option Shares. The following graph highlights the downward trend in Federated’s Option Overhang through 2005 and projected for 2006:

      The Board believes that the proposed amendments to the 1995 Equity Plan and the 1994 Stock Incentive Plan are in the best interests of Federated’s stockholders because of Federated’s continuing need to provide stock options and other forms of equity compensation to attract and retain quality employees. The current hiring environment is more competitive than in the past. Having additional stock options and other forms of equity

compensation available for grant under both plans will enable Federated to recruit the top talent necessary to enable it to achieve continued success.

      The Board will continue to monitor changes in the marketplace relating to equity compensation and respond appropriately. The CMD Committee periodically revises Federated’s option grant guidelines in response to evolving market practices and will continue to be vigilant in this regard so that, in its efforts to provide competitive equity compensation, Federated will match, but not significantly exceed, prevailing market standards.

      Federated’s executive officers and directors will be eligible to receive awards under the amended 1995 Equity Plan and the 1994 Stock Incentive Plan, and therefore have an interest in Items 4 and 5.

      For further information, the principal provisions of the 1995 Equity Plan and the 1994 Stock Incentive Plan, assuming approval of the proposed amendments, are summarized below.

Item 4: Specific Proposal

      The CMD Committee and the Board recommend that the stockholders approve the proposal to amend the 1995 Equity Plan to:

      As of April 1, 2006, an aggregate of 2,370,243 shares of common stock remained available for issuance as or pursuant to awards under the 1995 Equity Plan. The Board believes it is important to Federated’s continued success to have available an adequate reserve of shares under the 1995 Equity Plan for use in attracting, motivating and retaining qualified employees.

      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 proposed amendment to the 1995 Equity Plan, it will immediately become effective. If Federated’s stockholders do not approve the proposed amendment at this 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. The results of the vote will not affect any awards outstanding under the 1995 Equity Plan at the time of the annual meeting.

Background

      Purpose. As one of the key elements of its strategic plan, Federated links the compensation of key employees to the creation of stockholder value. 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 help attract people with outstanding ability to enter and remain in the employ of Federated and its subsidiaries.

      Participants. The CMD Committee may grant awards to key executives, officers and employees of Federated and its subsidiaries. The Board grants awards to the Chief Executive Officer and the Non-Employee Directors upon the recommendation of the CMD Committee.

      Administration. The Board has delegated authority to the CMD Committee, as the “Compensation Committee,” to administer the 1995 Equity Plan. No voting member of the CMD Committee may be an employee of Federated or its subsidiaries. Each voting member must be “independent” of Federated within the meaning of the NYSE listing standards.

      Awards. Pursuant to the 1995 Equity Plan, the CMD Committee is authorized to grant stock options (“Options”), stock appreciation rights (“SARs”), shares of restricted stock (“Restricted Stock”) and restricted stock units (“Restricted Stock Units” and, collectively with Options, SARs and Restricted Stock, “Awards”) to officers, directors and key employees of Federated and its subsidiaries (approximately 2,800 persons in the aggregate at the date of this Proxy Statement). The Board may determine the date on which an Award becomes effective, which may be on or after (but not before) the date on which the Board acts.

      Per Person Limitations. The per person limitations on Awards are combined with the limitations under the 1994 Stock Incentive Plan.

      Transferability. 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.

      Shares. As of April 1, 2006, 2,370,243 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 7,291 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) six 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 or Restricted Stock Units will be 2 million.

      Options. Options granted under the 1995 Equity Plan may be incentive stock options (“ISOs”), nonqualified stock options, or combinations of the foregoing. The maximum term of Options is ten years. The exercise price (the “Exercise Price”) of Options may not be less than:

      If an executive sells some or all of the shares of common stock to which an exercise relates through a bank or broker on the exercise date, then the executive may defer payment of the Exercise Price if the bank or broker agrees to pay the Exercise Price from the proceeds of the sale.

      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 CMD 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.

      Repricing of Options Prohibited. The Board may not authorize the amendment of any outstanding Option or SAR to reduce the Exercise Price, or to cancel and replace any outstanding Option or SAR with awards having a lower Exercise Price, without further approval of the stockholders of Federated.

      SARs. SARs may be granted under the 1995 Equity Plan in tandem with Options. Upon exercise, a holder of a SAR would receive, in the discretion of the CMD Committee, cash, shares of 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 1995 Equity Plan as of the date of such exercise, over the aggregate Exercise Price of the related Option. The Option to which the SAR is related would be canceled to the extent of the exercise of the SAR. The Exercise Price per share of the related Option may not be less than the market value thereof as of the grant date. Under the 1995 Equity Plan, the market value of SARs is determined in the same manner as the Exercise Price of Options discussed above. The maximum term for SARs is ten years.

      Restricted Stock. 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 Stock 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 Performance Restricted Stock, and (ii) at least three years following the date of grant in the case of any grant of Restricted Stock that is not Performance Restricted Stock.

      Restricted Stock Units. A grant of Restricted Stock Units is Federated’s agreement to provide compensation based on the value of the common stock and the other terms of the Restricted Stock Unit grant. Restricted Stock Units involve Federated crediting Restricted Stock Units to a participant’s account in consideration of the performance of services. The participant is entitled to receive credits for dividend equivalents, but has no voting or other rights as a stockholder. A portion of the Restricted Stock Units is subject to forfeiture for a period of (i) at least one year following the date of grant in the case of Performance Restricted Stock Units and (ii) at least three years following the date of grant in the case of any grant of Restricted Stock Units that are not Performance Restricted Stock Units.

      Performance Restricted Stock and Performance Restricted Stock Units. The CMD Committee may designate Restricted Stock as “Performance Restricted Stock” and may designate Restricted Stock Units as “Performance Restricted Stock Units”. If it does so, then the CMD Committee shall establish, at the time of the grant, the “Performance Period,” “Performance Formula,” “Performance Measures” and “Performance Goals” that would determine the extent to which the restrictions on the Performance Restricted Stock or Performance Restricted Stock Units shall lapse on any specified date. No restrictions shall lapse on any Performance Restricted Stock or Performance Restricted Stock Units until the CMD Committee certifies that the performance requirements have been met. The CMD Committee may adjust an award of Performance Restricted Stock or Performance Restricted Stock Units, in its discretion, to prevent the enlargement or dilution of the award because of extraordinary events or circumstances, as determined by the CMD Committee, provided, however, that no such adjustment shall be made if the effect of such adjustment would be to cause the related compensation to fail to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code.

      “Performance Measure” means one or more of the following measures selected by the CMD Committee to measure performance for a Performance Period:

Each measure that is a financial measure shall be determined in accordance with generally accepted accounting principles as consistently applied by Federated and, if so determined by the CMD Committee, adjusted to exclude the effects of extraordinary items, unusual or non-recurring events, changes in accounting principles, discontinued operations, acquisitions, divestitures and material restructuring charges, provided, however, that no such adjustment shall be made if the effect of such adjustment would be to cause the related compensation to fail to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code. Performance Measures may vary from performance period to performance period and from Participant to Participant and may be established on a stand-alone basis, in tandem or in the alternative.

      Change in Control. Option awards may provide for accelerated vesting upon a change in control of Federated. SAR awards may provide that an SAR may only be exercised in the event of a change in control of Federated or that, in the event of a change in control, an SAR will be deemed to have been exercised. Awards of Restricted Stock and Restricted Stock Units may provide that the Board may remove restrictions thereon in the event of a change of control.

      Adjustments. The CMD Committee may adjust the maximum number of shares available for issuance under the 1995 Equity Plan, the maximum number of awards that may be granted to a participant, the number of shares of common stock covered by any outstanding Option, SAR or Restricted Stock Unit awarded under the 1995 Equity Plan, the prices per share applicable to those outstanding Awards and the kinds of shares covered thereby as the CMD Committee may determine is equitable to prevent dilution or enlargement of the rights of participants in the event of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, reorganization or similar transaction affecting Federated’s common stock.

Miscellaneous

      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 C 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 the Board may not amend the 1995 Equity Plan without the approval of the stockholders to:

      Awards under the 1995 Equity Plan are discretionary. Federated cannot currently determine the number or types of Awards that will be granted under the 1995 Equity Plan, as proposed to be amended, in the future.

      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 5 — PROPOSAL TO AMEND THE 1994 STOCK INCENTIVE PLAN

      The CMD Committee and the Board recommend that the stockholders approve a proposal to amend the 1994 Stock Incentive Plan to

      to the corresponding provisions of the 1995 Equity Plan; and

Approval by the Federated stockholders of the proposed amendment to the 1994 Stock Incentive Plan will constitute approval of the entire plan, as amended and restated.

      The proposed amendment does not increase the number of shares of common stock that may be issued under the 1994 Stock Incentive Plan.

      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 proposed amendment to the 1994 Stock Incentive Plan, the amendment will immediately become effective. If Federated’s stockholders do not approve the proposed amendment at this annual meeting, the proposed amendment to the 1994 Stock Incentive Plan will not become effective, and the 1994 Stock Incentive Plan as it presently exists will continue in effect. The results of the vote will not affect any awards outstanding under the 1994 Stock Incentive Plan at the time of the annual meeting.

Background

      The 1994 Stock Incentive Plan was in effect before Federated acquired May and permitted grants to management employees of May and its subsidiaries.

      In connection with the acquisition, Federated assumed the 1994 Stock Incentive Plan and all outstanding option awards thereunder. In addition, all outstanding options under the 1994 Stock Incentive Plan accelerated and became immediately exercisable in connection with the acquisition. Each May stock option assumed by Federated continued to have the same terms and conditions as immediately before the effective time of the

acquisition except that each option (i) was accelerated in accordance with the terms of the 1994 Stock Incentive Plan, and (ii) became exercisable for a number of shares of Federated common stock at an exercise price based on a conversion formula set forth in the merger agreement. The share limitations (in the aggregate and per person) were adjusted based on the conversion formula as well.

Options, SARs, Restricted Stock and Restricted Stock Units.

      If the proposed amendment of the 1994 Stock Incentive Plan is approved by the stockholders at the 2006 annual meeting, then:

      The proposed amendment would not, however, increase the number of shares available for grants under the 1994 Stock Incentive Plan.

      Taxation of Awards. See the discussion of taxation in “Item 4 — Proposal to Amend the 1995 Executive Equity Incentive Plan.”

      Amendment or Termination. The 1994 Stock Incentive Plan will terminate on March 21, 2013. The Board may amend, extend or terminate the 1994 Stock Incentive Plan at any time prior to that date and make any changes in the 1994 Stock Incentive Plan it deems advisable, except that stockholder approval will be sought when necessary or required by tax, securities, or other laws.

      The foregoing discussion of the material provisions of the 1994 Stock Incentive 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 1994 Stock Incentive Plan would be subject to further amendment from time to time by the Board, except that the Board may not amend the 1994 Stock Incentive Plan without the approval of the stockholders to:

      Awards under the 1994 Stock Incentive Plan are discretionary. Federated cannot currently determine the number or types of Awards that will be granted under the 1994 Stock Incentive Plan, as proposed to be amended, in the future.

      The Board recommends that stockholders vote FOR the amendment to the 1994 Stock Incentive Plan. Proxies solicited by the Board will be so voted unless stockholders specify in their proxies a contrary choice.

ITEM 6 — STOCKHOLDER PROPOSAL SEEKING A LIMIT ON THE NUMBER

OF BOARDS ON WHICH FEDERATED’S DIRECTORS MAY CONCURRENTLY SERVE

      Communications Workers of America Members’ Relief Fund, 501 Third Street, N.W., Washington, DC, 20001, the beneficial owner of Federated common stock with a market value in excess of $2,000, has notified Federated that it intends to submit the following proposal at the annual meeting:

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

      Federated’s Corporate Governance Principles specifically require all of its directors to rigorously prepare for, attend and participate in all meetings of the Board and each Board committee on which they serve and to devote the time necessary to appropriately discharge their responsibilities. Each director is expected to ensure that other commitments, including other directorships, do not materially interfere with his or her service as a director of Federated. Additionally, each director is required to advise the CEO and the chairman of the NCG Committee before accepting a membership on another board or on the audit committee of another board.

      When the NCG Committee evaluates a nominee for election or reelection to the Board, it weighs many criteria, including the nominee’s:

      Many factors, in addition to service on other corporate boards, affect a nominee’s ability and willingness to dedicate adequate time and attention to Board matters, including the nominee’s present employment and personal commitments and activities. The NCG Committee selects only those individuals who are willing and able to make the necessary commitment to serve Federated and its stockholders effectively.

      The NCG Committee believes that multiple directorships have not impaired the ability of Federated’s directors to effectively fulfill their duties and responsibilities to the Board and Federated. To the contrary, Federated and its stockholders have benefited from the diversity of experiences and knowledge gained by a director who holds multiple directorships.

      The NCG Committee needs the discretion to nominate individuals who are best qualified overall to serve on the Board and who meet the needs of the Board at that time. In light of the foregoing, the Board does not believe that it is appropriate to adopt a specific limitation on the number of directorships an individual may hold.

      The Board recommends that the stockholders vote AGAINST this proposal. Proxies solicited by the Board will be so voted unless stockholders specify in their proxies a contrary choice.

EXECUTIVE COMPENSATION

Three-Year Compensation Summary

      The following table summarizes the compensation of the Chairman and the five other most highly compensated executive officers of Federated as of January 28, 2006 (the “Named Executives”) for Federated’s last three fiscal years for services rendered in all capacities to Federated and its subsidiaries.

SUMMARY COMPENSATION TABLE

Fiscal 2005 Stock Option Grants

      The following table sets forth certain information regarding grants of stock options made during fiscal 2005 to the Named Executives pursuant to the 1995 Equity Plan. No grants of stock appreciation rights were made during fiscal 2005 to any of the Named Executives.

OPTION GRANTS IN LAST FISCAL YEAR

      See “Compensation and Management Development Committee Report — Equity Compensation — Stock Options” for further information regarding grants of stock options made during fiscal 2005.

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 2005 and the total number and aggregate value of options held by each of the Named Executives at January 28, 2006.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES

Change-in-Control Agreements

      Federated has entered into a change-in-control agreement, referred to as the Change-in-Control Agreements 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:

      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.

Retirement Program

      Federated’s retirement program, referred to as the Retirement Program, consists of defined benefit plans and a defined contribution plan. As of January 1, 2006, approximately 70,200 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 all eligible compensation, including 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, 2006, approximately 700 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 2006 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 benefits payable to a person pursuant to the Cash Account Pension Plan and the Retirement Profit Sharing Credits under the foregoing assumptions would exceed the amount set forth below, no benefit would be payable to such person under the SERP. Eligible compensation for this purpose includes amounts reflected in the Annual Compensation portion of the Summary Compensation Table under the headings “Salary” and “Bonus,” but excludes amounts reflected in such portion of such table under the heading “Other Annual Compensation.”

PENSION PLAN TABLE

      As of December 31, 2005, Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe have completed 24, 23, 33, 32, 32 and 18 years of service, respectively. Average annual compensation (determined as the highest five years’ compensation out of the last 10 years) as of December 31, 2005 for Mr. Lundgren, Mr. Cody, Mr. Cole, Ms. Grove, Ms. Kronick and Mr. Tysoe was approximately $2,600,000, $1,300,000, $1,400,000, $1,500,000, $1,700,000 and $1,400,000, 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. All benefits under the SERP, including the additional benefits payable to Mr. Tysoe, are payable out of the general corporate assets of Federated. The present value of the total amount of additional benefits due to Mr. Tysoe, assuming that he satisfies certain eligibility requirements, is estimated to be approximately $386,649, as of January 28, 2006.

      In connection with Federated’s acquisition of May, Federated assumed responsibility for May’s retirement programs. Under May’s noncontributory retirement plan, associates at least age 21 who are paid for 1,000 or more hours per year accrue benefits. A participant may select from several payment options at retirement, including a single life annuity and various joint and survivor annuities. May’s supplementary retirement plan covers associates who, at one time, had compensation in a calendar year equal to twice the amount of “wages” then subject to the payment of old age, survivor, and disability insurance Social Security taxes. Participants become entitled to a single life annuity retirement benefit equal to (a) 2% of the average of the participant’s highest three out of five fiscal years of final annual salary and bonus multiplied by their years of service, up to a maximum or 25 years, reduced by (b) primary Social Security benefits, company-provided benefits under May’s retirement and profit sharing plans, and if appropriate, amounts to reflect early retirement. The minimum benefit under May’s supplementary retirement plan is the amount of company-provided benefits that would be payable under May’s retirement and profit sharing plans determined without regard to any statutory limits, less the amount of these benefits actually payable under those plans. Associates who are at least age 21 who are paid for 1,000 or more hours per year are eligible to participate in May’s profit sharing plan. The plan links its benefits to company performance and to the value of Federated common stock. The company matches employee contributions up to the first 5% of pay for each pay period that an associate invests in the plan.

Stock Ownership Guidelines For Executives

      The Board currently intends to adopt stock ownership guidelines for certain executives of Federated, including the Named Executives.

COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT

Role of the Compensation and Management Development Committee

      The Compensation and Management Development Committee (the “Committee”) establishes and administers the compensation practices related to the senior executive officers of Federated and also ensures appropriate succession plans for the CEO and key executive positions. When establishing and reviewing the compensation practices, the Committee makes use of Federated resources and, when it deems appropriate, retains the services of independent compensation consultants. All members of the Committee qualify:

Compensation Philosophy

      Federated’s compensation program is performance-driven and designed to support the needs of the business by:

      Deductibility for federal income tax purposes under Section 162(m) of the Internal Revenue Code is also considered in the design of compensation programs. The Committee has taken what it believes to be appropriate steps to maximize the future deductibility of payments under Federated’s 1992 Incentive Bonus Plan and of stock options awarded under the 1995 Equity Plan. However, the Committee realizes that in order to retain the flexibility to provide compensation that furthers business goals, there may be portions of the total compensation program that may not be deductible under Section 162(m).

      The current compensation program, which is a mix of short-term and long-term incentives, includes base salary, an annual cash incentive plan, and equity-based compensation in the form of stock options, restricted stock and/or stock credits.

Base Pay

      Base pay is a significant retention tool when managed appropriately. Base pay decisions for an individual take into account many factors including:

Annual Cash Incentive

      The annual cash incentive plan is designed to align the pay of the senior executives with Federated’s annual performance. The actual amount of annual cash incentive earned each year is based on Federated’s performance results against performance measures set at the beginning of the fiscal year. In fiscal 2005, the performance components were EBIT, sales, and cash flow dollars.

      In 2005, the components of the annual incentive plan for the named executive officers were structured and paid out as shown below.

      The fiscal 2005 EBIT objective originally took into account expenses related to stock option expensing that ultimately were not incurred, and the cash flow objective originally took into account certain pension plan funding that ultimately did not occur. The Committee exercised its discretion in adjusting downward the actual payout related to the EBIT and cash flow components so that the bonuses for the named executive officers would appropriately reflect Federated’s performance.

      The maximum payment that can be received by any participant in the 1992 Incentive Bonus Plan is $7.0 million. For fiscal 2005, the bonus to the Chief Executive Officer was 29.7% of this maximum bonus opportunity.

Equity Compensation — 1995 Equity Plan

      Each year the Committee reviews the use of long-term incentives under Federated’s 1995 Equity Plan. Grant types and levels are determined based on market data, emerging trends and other financial considerations, including the impact on stockholder dilution. Efforts to stem dilution over the last several years have led to a reduced reliance solely on stock option grants for long-term incentives. Federated’s equity compensation

programs in 2005 consisted of stock options under the 1995 Equity Plan and a stock credit plan outside the 1995 Equity Plan. The Committee does provide, from time-to-time, restricted stock grants on a limited basis for retention or performance reasons. No restricted stock was granted in 2005.

Stock Options

      All stock options granted to Federated executives in 2005 were granted from the stockholder-approved 1995 Equity Plan. This option plan reflects Federated’s commitment to effective management of equity-based compensation and incorporates the following:

      Options granted in 2005 vest 25% per year over four years beginning with the first anniversary of the date of grant. Therefore, in order to exercise all options in a grant, the recipient must remain with Federated for four years after the grant. In 2005, approximately 1,140 Federated employees were issued options under the 1995 Equity Plan.

      Federated has continued to use stock options as a long-term incentive vehicle because:

Stock Credit Plan

      In March 2004, Federated implemented the Stock Credit Plan to further align the interests of senior executives with those of the stockholders and to increase the focus on the achievement of Federated’s Four Priorities for 2004 and 2005 — Merchandise Assortments, Price Simplification, The Shopping Experience and Marketing. The Stock Credit Plan replaced 50% of the option grants to these executives and, as a result, the number of options that normally would have been granted to participants in fiscal years 2004 and 2005 were reduced by 50%. The number of stock credits was determined by converting the replaced options with stock credits at a ratio of three stock options to one stock credit. 33% of the stock credits were subject to performance criteria based on Federated’s Four Priorities.

      At the end of fiscal 2005, the Committee evaluated the performance results for the 33% of the stock credits granted in 2004 that were subject to performance criteria. Based on that evaluation, the Committee concluded

that 95% of those stock credits were earned. The remaining 5% of those stock credits were forfeited. The stock credits are subject to a two-year and three-year holding period and their ultimate value to the participants will be based on Federated’s stock price performance. The value of one-half of the stock credit balance will be paid in cash in Spring 2008 and the value of the other half will be paid in Spring 2009. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the New York Stock Exchange for the 20 business days preceding the payment date. The performance period of the current plan concluded at the end of 2005.

      During 2005, the Committee reviewed the elements of the total compensation program for senior management and determined that stock credits continue to provide the link it seeks to align management’s compensation to Federated’s performance and stockholder interests. Consequently, the Committee authorized a new stock credit plan for the 2006-2007 performance period for senior management, including the named executive officers, consisting of both core stock credits and merger stock credits, with the following features:

      The performance portion of the stock credits for Mr. Tysoe, who has previously announced his intended retirement, will be based on goals specific to his responsibilities for merger-related asset and real estate transactions. His stock credits are 75% performance based and 25% time based. Mr. Tysoe’s performance period will be 2006-2007, with payout of his time based and any earned performance based stock credits in 2008.

Compensation of Chairman, President and CEO

      With the assistance of independent outside compensation consultants, the Committee reviews Mr. Lundgren’s total compensation annually, or more frequently if appropriate. The Committee reviews Mr. Lundgren’s goals and objectives, evaluates his performance and establishes his compensation based on that evaluation. Mr. Lundgren’s performance is evaluated based on many factors, including the following:

      After an evaluation of Mr. Lundgren’s performance, the Committee determines his total compensation. The components of Mr. Lundgren’s compensation for fiscal 2005 are identified in the “Summary Compensation Table.”

Employment Agreements

      Mr. Terry Lundgren. Upon his appointment as President, Chief Merchandising Officer and CEO in March 2003, Federated entered into an employment agreement with Mr. Lundgren with an expiration date of February 2007. Pursuant to that agreement, Mr. Lundgren’s base salary was $1,100,000. He was granted 250,000 stock options 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 of February 24, 2003. The grant has a 10-year term and twenty-five percent of the option award vested or is scheduled to vest on each of the first four anniversaries of the grant beginning on February 24, 2004. He was granted 50,000 shares of restricted stock, with the restrictions on 100% of the award scheduled to lapse on February 28, 2007. He was specifically designated as a participant in the annual incentive plan.

      Mr. Lundgren’s agreement has been amended four times:

      Mr. Lundgren’s employment agreement provides that if he is terminated by Federated for other than “cause” or by Mr. Lundgren for “good reason” he would be entitled to receive all salary and target annual bonuses until the expiration of the employment agreement. Under the terms of his agreement, “cause” is defined generally to include:

      Generally “cause” is defined not to 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.

      Under the terms of his agreement, “good reason” is defined generally to include:

      In addition, Mr. Lundgren’s agreement contains non-compete, non-solicitation and mitigation clauses.

      Other Senior Executive Officers. Federated has entered into employment agreements with the following named executive officers. The agreements presently specify the following annual base salaries effective as of April 1, 2006 and contract term:

      The agreements with these executives contain provisions that in the event of termination of the executive by Federated other than for “cause” the executive would be entitled to receive base salary until the end of the term of the agreement. The term “cause” has the same definition as previously described above in the discussion of Mr. Lundgren’s agreement. In addition, the agreements contain similar non-compete, non-solicitation and mitigation clauses.

Conclusion

      The Committee will continue to review existing compensation programs and implement new compensation programs as appropriate to ensure the compensation policies and practices of Federated are consistent with its goals and objectives, including increasing long- term stockholder value and providing valuable compensation to attract and retain key executives who are vital to the continued success of the business.

REPORT OF THE AUDIT COMMITTEE

      The Board has adopted a written Audit Committee Charter. All members of the Audit Committee are independent, as defined in Sections 303A.06 and 303A.07 of the NYSE’s listing standards.

      The Audit 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 2005. The Audit 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 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 Committee recommended to the Board that the audited financial statements be included in Federated’s Annual Report on Form 10-K for fiscal 2005, filed with the United States Securities and Exchange Commission.

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 February 2, 2001 through January 27, 2006, assuming an initial investment of $100 and the reinvestment of all dividends, if any.

SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS

      Proposals for 2007 Annual Meeting. Stockholders of Federated may submit proposals on matters appropriate for stockholder action at meetings of Federated’s stockholders in accordance with Rule 14a-8 promulgated under the Exchange Act (“Rule 14a-8”). For such proposals to be included in Federated’s proxy materials relating to its 2007 annual meeting of stockholders, all applicable requirements of Rule 14a-8 must be satisfied and such proposals must be received by Federated no later than December 14, 2006.

      Except in the case of proposals made in accordance with Rule 14a-8, the By-Laws require that stockholders intending to bring any business before an annual meeting of stockholders deliver written notice thereof to the Secretary of Federated not less than 60 days prior to the meeting. 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 at least 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 a description of the business to be brought before the meeting and certain information concerning the stockholder proposing such business, including such stockholder’s name and address, the class and number of shares of Federated’s capital stock that are owned beneficially by such stockholder and any material interest of such stockholder in the business proposed to be brought before the meeting. The chairman of the meeting may refuse to permit to be brought before the meeting any stockholder proposal (other than a proposal made in accordance with Rule 14a-8) not made in compliance with these requirements. Similar procedures prescribed by the By-Laws are applicable to stockholders desiring to nominate candidates for election as directors. See “Further Information Concerning the Board of Directors — Director Nomination Procedures.”

OTHER MATTERS

      The Board knows of no business which will be presented for consideration at the annual meeting other than that described in this proxy statement. However, if any business shall properly come before the annual meeting, the persons named in the enclosed form of proxy or their substitutes will vote said proxy in respect of any such business in accordance with their best judgment pursuant to the discretionary authority conferred thereby.

      The cost of preparing, assembling and mailing the proxy material will be borne by Federated. The Annual Report of Federated for fiscal 2005, which is being mailed to the stockholders with this proxy statement, is not to be regarded as proxy soliciting material. Federated may solicit proxies otherwise than by the use of the mails, in that certain officers and regular employees of Federated, without additional compensation, may use their personal efforts, by telephone or otherwise, to obtain proxies. Federated will also request persons, firms and corporations holding shares in their names, or in the name of their nominees, which are beneficially owned by others, to send proxy material to and obtain proxies from such beneficial owners and will reimburse such holders for their reasonable expenses in so doing. In addition, Federated has engaged the firm of Georgeson Shareholder Communications, Inc. (“Georgeson”), of New York City, to assist in the solicitation of proxies on behalf of the Board. Georgeson will solicit proxies with respect to common stock held by brokers, bank nominees, other institutional holders and certain individuals, and will perform related services. It is anticipated that the cost of the solicitation service to Federated will not substantially exceed $12,000.

April 13, 2006

PLEASE CAST YOUR VOTE BY FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED

PROXY CARD. IF YOU CHOOSE TO CAST YOUR VOTE BY COMPLETING THE

ENCLOSED PROXY CARD, PLEASE RETURN IT PROMPTLY IN THE

ENCLOSED ADDRESSED ENVELOPE, WHICH REQUIRES NO

POSTAGE IF MAILED IN THE UNITED STATES.

Appendix A

FEDERATED DEPARTMENT STORES, INC.

STANDARDS FOR DIRECTOR INDEPENDENCE

      As set forth in Federated’s Corporate Governance Principles, a majority of the Board shall consist of directors who the Board has determined do not have any material relationship with the Company and who are otherwise independent. A director shall be presumed independent by the Board if all of the standards set forth below are met.

      1. The director may not be (and may not have been within the preceding 60 months) an employee and no member of the director’s immediate family may be (and may not have been within the preceding 36 months) an executive officer of Federated or any of its subsidiaries. For purposes of these Standards for Director Independence, “immediate family” includes a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home.

      2. The director is not a party to any contract pursuant to which such director provides personal services (other than as a director) to Federated or any of its subsidiaries.

      3. Neither the director nor any member of his or her immediate family receives, or has received within the preceding 36 months, direct compensation of more than $100,000 per year from Federated or any of its subsidiaries (other than director and committee fees and pension or other forms of deferred compensation for prior service that is not contingent on continued service or, in the case of an immediate family member, compensation for service as a non-executive employee).

      4. Neither the director nor any member of his or her immediate family is (and has not been within the preceding 60 months) affiliated with or employed in a professional capacity, including as an executive officer, partner or principal, by any corporation or other entity that is or was a paid adviser, consultant or provider of professional services to, or a substantial supplier of, Federated or any of its subsidiaries.

      5. The director is not an employee or executive officer and no member of his or her immediate family is an executive officer of (and have not been within the preceding 36 months) a company that makes payments to, or receives payments from, Federated for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues.

      6. The director is not employed by an organization that received, within the preceding 60 months, eleemosynary grants or endowments from Federated or any of its subsidiaries in excess of $250,000 in any fiscal year of Federated.

      7. The director is not a parent, child, sibling, aunt, uncle, niece, nephew or first cousin of any other director of Federated.

      8. The director is not a party to any agreement binding him or her to vote, as a stockholder of Federated, in accordance with the recommendations of the Board.

      9. The director is not a director of any corporation or other entity (other than Federated) of which Federated’s Chairman or Chief Executive Officer is also a director.

      10. Neither the director nor a member of the director’s immediate family is employed (and has not been employed for the preceding 12 months) by another company whose compensation committee includes as a member any of Federated’s present executive officers.

      In determining whether any of the foregoing criteria are satisfied, reference may be made to the commentary accompanying any related NYSE listing standard and any other interpretation or guidance of the NYSE relating to such listing standard.

      In making a determination regarding a proposed directors independence, the Board shall consider all relevant facts and circumstances, including the director’s commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships.

      Any interest or relationship of a director of a type described in Item 404 of Regulation S-K that is outside of the scope of the foregoing criteria and that is not required to be disclosed pursuant to Item 404 shall be presumed not to be inconsistent with the independence of such director.

      Except to the extent otherwise provided in the applicable NYSE listing standards, neither the failure of a director to satisfy one or more of the foregoing criteria, nor the existence of any obligation to disclose an interest or relationship of a director pursuant to Item 404, will preclude the Board from determining that such director is independent.

Appendix B

POLICY AND PROCEDURES FOR PRE-APPROVAL OF

NON-AUDIT SERVICES BY OUTSIDE AUDITORS

      Except as noted below, the Audit Committee (the “Committee”) will approve in advance all permitted non-audit services(1) (the “Permitted NAS”).

      A. The Committee may delegate to the Chair of the Committee the authority to pre-approve Permitted NAS; provided that any such pre-approval of Permitted NAS granted by any such delegee must be presented to the Committee at its meeting next following the approval.

      B. Pre-approval is not required for any Permitted NAS if:

      A. The Committee is to receive an itemization in the outside auditor’s engagement letter of Permitted NAS that the outside auditors propose to deliver to Federated during the course of the year covered by the engagement and contemplated at the time of the engagement.

      B. Whether a Permitted NAS is set out in the auditor engagement letter or proposed by the outside auditors subsequent to the time the engagement letter is submitted, the Committee (or its delegee as described above) is to consider, with input from management, whether delivery of the Permitted NAS impairs independence of the outside auditors.

      The Committee will determine on an annual basis whether to amend this policy.

Appendix C

FEDERATED DEPARTMENT STORES, INC.

1995 Executive Equity Incentive Plan

(As Amended and Restated as of May 19, 2006)

      Federated Department Stores, Inc., a Delaware corporation (the “Company”), hereby amends and restates this 1995 Executive Equity Incentive Plan (this “Plan”) effective, subject to the provisions of Section 15, as of May 19, 2006 (the “Effective Date”).

      1. Purpose. The purpose of this Plan is to attract and retain directors, officers, and other key executives and employees of the Company and its subsidiaries and to provide to such persons incentives and rewards relating to the Company’s business plans.

      2. Definitions. In addition to the terms defined elsewhere herein, the following terms have the following meanings when used herein with initial capital letters:

      3. Shares Available Under the Plan.

      4. Option Rights. The Board may from time to time authorize the grant to Participants of options to purchase Common Shares upon such terms and conditions as it may determine in accordance with the following provisions:

      5. Appreciation Rights. The Board may also authorize the grant to any Optionee of Appreciation Rights in respect of Option Rights granted hereunder. An Appreciation Right will be a right of the Optionee, exercisable by surrender of the related Option Right or in accordance with the applicable agreement referred to in Section 5(f), to receive from the Company an amount, as determined by the Board, which will be expressed as a percentage of the Spread at the time of exercise. Each such grant will be in accordance with the following provisions:

      6. Restricted Stock. The Board may also authorize the issuance or transfer of Restricted Stock to Participants in accordance with the following provisions:

      7. Restricted Stock Units. The Board may also authorize the issuance or transfer of Restricted Stock Units to Participants in accordance with the following provisions:

      8. Transferability.

      9. Adjustments. The Board may make or provide for such adjustments in the numbers of Common Shares covered by outstanding Option Rights, Appreciation Rights or Restricted Stock Units granted hereunder, in the prices per share applicable to Option Rights, Appreciation Rights or Restricted Stock Units, and in the kind of shares covered thereby, as the Board may determine is equitably required to prevent dilution or enlargement of the rights of Participants that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation, or other distribution of assets

or issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing; provided, however, that no such adjustment in the numbers of Common Shares covered by outstanding Option Rights, Appreciation Rights or Restricted Stock Units will be made unless such adjustment would change by more than 5% the number of Common Shares issuable upon exercise of Option Rights, Appreciation Rights or with respect to Restricted Stock Units; provided, further, however, that any adjustment which by reason of this Section 8 is not required to be made currently will be carried forward and taken into account in any subsequent adjustment. In the event of any such transaction or event, the Board may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced. The Board may also make or provide for such adjustments in the numbers of Common Shares specified in Section 3 as the Board may determine is appropriate to reflect any transaction or event described in this Section 9.

      10. Fractional Shares. The Company will not be required to issue any fractional Common Shares pursuant to this Plan. The Board may provide for the elimination of fractions and for the settlement of fractions in cash.

      11. Withholding Taxes. To the extent that the Company is required to withhold federal, state, local, or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes required to be withheld, which arrangements may include relinquishment of a portion of such benefit.

      12. Administration of the Plan.

      13. Compliance with Section 409A of the Code. To the extent applicable, it is intended that this Plan and any grants made hereunder comply with the provisions of Section 409A of the Code. This Plan and any grants made hereunder shall be administered in a manner consistent with this intent. Any amendments made to comply with Section 409A of the Code may be retroactive to the extent permitted by Section 409A of the Code and may be made by the Company without the consent of Participants. Any reference in this Plan to Section 409A of the Code will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

      14. Amendments, Etc.

      15. Effectiveness. The amendment and restatement of this Plan set forth herein will not become effective unless the holders of a majority of the Common Shares present in person or by proxy at a meeting of the stockholders of the Company and entitled to vote generally in the election of directors approve the amendments to be effected hereby.

Appendix D

FEDERATED DEPARTMENT STORES, INC.

1994 Stock Incentive Plan