##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





(Mark One)

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

For the fiscal year ended December 31, 2009

OR



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

For the transition period from              to

Commission File Number: 001-33518





FBR CAPITAL MARKETS CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 20-5164223                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1001 Nineteenth Street North, Arlington, VA                    |  | 22209                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(703)
312-9500

(Registrants telephone number, including area code)

Securities registered pursuant to section 12(b) of the act:



|                               |  |                                                                
|------------------------------ |  | ---------------------------------------------------------------
|Title of Each Class            |  | Name of Each Exchange on which Registered                      
|Common Stock, Par Value $0.001 |  | The Nasdaq Stock Market LLC (The NASDAQ Global Select MarketSM)

Securities registered pursuant to section 12(g) of the act: None





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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days:    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K:    x

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act:

Large Accelerated Filer   ̈            Accelerated Filer  x            Non-Accelerated Filer   ̈            Smaller Reporting Company   ̈

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

The aggregate market value of FBR Capital Markets Corporations outstanding common stock held by non-affiliates as of June 30, 2009
was approximately $198.9 million. In determining this figure, the registrant has excluded all shares of common stock beneficially owned by its directors and executive officers and each person who beneficially owns 10% or more of FBR Capital
Markets Corporations outstanding common stock. By doing so, the registrant does not admit that such persons are affiliates within the meaning of Rule 405 of the Securities Act of 1933, as amended, or for any other purpose.

On February 28, 2010, there were 63,503,836 shares of FBR Capital Markets Corporation common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                                                                           |  |                                     
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------
|Document                                                                                                                                   |  | Where Incorporated                  
|FBR Capital Markets Corporation 2010 Proxy Statement (to be filed with the Securities and Exchange Commission on or before
April 30, 2010) |  | Part III, Items 10,11, 12, 13 and 14









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TABLE OF CONTENTS



|                                                   |  |                                                                                                              |  |     
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                   |  |                                                                                                              |  | Page
|Forward-Looking Statements                         |  | 1                                                                                                           
|Available Information                              |  | 2                                                                                                           
|                                                   |  |                                                                                                             
|PART I                                             |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 1.                                            |  | Business                                                                                                     |  | 3   
|Item 1A.                                           |  | Risk Factors                                                                                                 |  | 12  
|Item 1B.                                           |  | Unresolved Staff Comments                                                                                    |  | 25  
|Item 2.                                            |  | Properties                                                                                                   |  | 25  
|Item 3.                                            |  | Legal Proceedings                                                                                            |  | 25  
|Item 4.                                            |  | Reserved                                                                                                     |  | 26  
|                                                   |  |                                                                                                             
|PART II                                            |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 5.                                            |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 27  
|Item 6.                                            |  | Selected Financial Data                                                                                      |  | 29  
|Item 7.                                            |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                        |  | 31  
|Item 7A.                                           |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 53  
|Item 8.                                            |  | Financial Statements and Supplementary Data                                                                  |  | 53  
|Item 9.                                            |  | Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure                         |  | 53  
|Item 9A.                                           |  | Controls and Procedures                                                                                      |  | 53  
|Item 9B.                                           |  | Other Information                                                                                            |  | 54  
|                                                   |  |                                                                                                             
|PART III                                           |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 10.                                           |  | Directors, Executive Officers and Corporate Governance                                                       |  | 55  
|Item 11.                                           |  | Executive Compensation                                                                                       |  | 55  
|Item 12.                                           |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters               |  | 55  
|Item 13.                                           |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 55  
|Item 14.                                           |  | Principal Accountant Fees and Services                                                                       |  | 55  
|                                                   |  |                                                                                                             
|PART IV                                            |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 15.                                           |  | Exhibits and Financial Statement Schedules                                                                   |  | 56  
|Signatures                                         |  | 60                                                                                                          
|Index to Audited Consolidated Financial Statements |  | F-1                                                                                                         



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FORWARD-LOOKING STATEMENTS

Some of the statements contained in or incorporated by reference in this Form 10-K are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are predictive in nature
and can be identified by the use of forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, plan, goal,
objective, potential, project, should, will and would or the negative of these terms or other comparable terminology. Statements concerning projections, future performance
developments, events, revenues, expenses, earnings, run rates, and any other guidance on present or future periods constitute forward-looking statements. Such statements include, but are not limited to, those relating to the effects of growth, our
principal investing activities, levels of assets under management and our current equity capital levels. Forward-looking statements involve risks and uncertainties. You should be aware that a number of important factors could cause our actual
results to differ materially from those in forward-looking statements. These factors include, but are not limited to:



| |  |  | the risks identified under the section captioned Risk Factors in this Form 10-K;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | general volatility of the capital markets and the possibility that an active public trading market for our common stock cannot be sustained;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | deterioration in the business environment in the specific sectors of the economy in which we focus or a decline in the market for securities of
companies within these sectors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substantial fluctuations in our financial results;
| | - |  | --------------------------------------------------



| |  |  | our ability to retain our senior professionals;
| | - |  | -----------------------------------------------



| |  |  | pricing and other competitive pressures;
| | - |  | ----------------------------------------



| |  |  | changes in laws and regulations and industry practices that adversely affect our sales and trading business;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | incurrence of losses in the future;
| | - |  | -----------------------------------



| |  |  | the singular nature of our capital markets and strategic advisory engagements;
| | - |  | ------------------------------------------------------------------------------



| |  |  | competition among financial services firms for business and personnel;
| | - |  | ----------------------------------------------------------------------



| |  |  | larger and more frequent capital commitments in our trading and underwriting businesses;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | limitations on our access to capital;
| | - |  | -------------------------------------



| |  |  | malfunctioning or failure in our operations and infrastructure;
| | - |  | ---------------------------------------------------------------



| |  |  | our entry into new business areas, including entry through strategic investments, acquisitions and joint ventures;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | failure to achieve and maintain effective internal controls;
| | - |  | ------------------------------------------------------------



| |  |  | declines in the market value of our principal investments;
| | - |  | ----------------------------------------------------------



| |  |  | the loss of our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (the 1940 Act);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the overall environment for interest rates;
| | - |  | -------------------------------------------



| |  |  | changes in our business strategy; and
| | - |  | -------------------------------------



| |  |  | availability, terms and deployment of capital.
| | - |  | ----------------------------------------------

We will not necessarily update the information presented or incorporated by reference in this Form 10-K if any of these forward-looking statements turn out to be inaccurate, and there are no guarantees
about our performance. This Form 10-K, including the consolidated financial statements and notes thereto and the documents incorporated by reference, should be read for a complete understanding of our business, an investment in our company and the
risks and other uncertainties associated with that business or an investment in our company.



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AVAILABLE INFORMATION

FBR Capital Markets Corporation (we, us, our company or the Company) files annual, quarterly
and current reports, proxy statements, information statements and other information with the United States Securities and Exchange Commission (the SEC). You may read and copy any document we file with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains annual, quarterly and current
reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our electronic SEC filings are available to the public at http://www.sec.gov.

Our public internet site is http://www.fbrcapitalmarkets.com. We make available free of charge through our public internet site our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. We also make available through our public internet site statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and
others under Section 16 of the Exchange Act.

We also make available on http://www.fbrcapitalmarkets.com
(i) our Corporate Governance Guidelines, (ii) Statement of Business Principles (our code of business conduct and ethics), including any waivers, if any, therefrom granted to executive officers or directors, and (iii) the charters of
the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board of Directors. These documents are also available in print without charge to any person who requests them by writing or telephoning:

FBR Capital Markets Corporation

1001 Nineteenth Street North

Arlington, Virginia 22209

(703) 312-9500

Attention: Corporate Secretary



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Overview

FBR Capital Markets Corporation is a full-service investment banking, institutional brokerage and asset management firm
with a customer-focused and innovative approach to meeting our clients needs. In addition, we make principal investments, including merchant banking investments, with our own capital. We were formed in June 2006, and we completed the initial
public offering of our common stock in June 2007. Since the founding of certain predecessor companies, we have grown from a boutique investment bank with primary expertise in financial institutions into a full-service U.S. investment bank for
middle-market companies.

Through our principal operating subsidiaries, FBR Capital Markets & Co.
(FBR & Co.), an SEC-registered broker-dealer, FBR Capital Markets International, Ltd. (FBRIL), a broker-dealer registered with the United Kingdoms Financial Services Authority (FSA), and FBR Fund
Advisers, Inc. (FBR Fund Advisers), an SEC-registered investment adviser, we have focused our business on providing:



| |  |  | capital raising services, including underwriting and placement of public and private equity and debt;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | financial advisory services, including merger and acquisition (M&A) advisory, restructuring, liability management, recapitalization and
strategic alternative analysis;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | institutional sales and trading services focused on equities, equity-linked securities, high-yield bonds, senior debt and bank loans;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | research coverage;
| | - |  | ------------------



| |  |  | asset management services through a family of mutual funds; and
| | - |  | ---------------------------------------------------------------



| |  |  | proprietary investment returns to our shareholders through merchant banking and other direct investments that we make utilizing our own capital.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

We focus our capital markets business (investment banking and institutional brokerage) in eight broad
industry sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, healthcare, insurance, real estate, and technology, media and telecommunications (TMT). We collectively refer to these eight
sectors as our core sectors. In 2009, we executed 39 banking assignments, including $3.3 billion total transaction value of lead- and co-lead managed capital raising transactions, and completed 19 M&A and advisory assignments. As of
December 31, 2009, we were a market-maker or trader in more than 970 securities, provided sales and trading services to more than 960 institutional equity sales clients, 320 convertible, credit and listed option clients, and 165 clients
serviced through our office in London, and provided independent research on more than 420 companies.

Our asset management
business manages a family of mutual funds. As of December 31, 2009, we had approximately $1.3 billion in mutual fund assets under management.

We are a Virginia corporation that was formed as a consolidated subsidiary of Arlington Asset Investment Corp. (Arlington Asset), a separate publicly-traded corporation that invests primarily
in mortgage-related assets (NYSE: AI). In July 2006, Arlington Asset contributed the subsidiaries that had historically conducted its capital markets and asset management business to us and we sold shares of our common stock in a private offering
and a concurrent private placement to Crestview Partners (Crestview), a New York-based private equity firm. In this Form 10-K, we refer to this private offering and the concurrent private placement to Crestview as our July 2006
private offering. Since our July 2006 private offering, we have operated as an independent company with a separate board of directors. We became a publicly-traded company listed on The NASDAQ Global Select MarketSM(Nasdaq: FBCM) in June 2007 when Arlington Asset and certain other



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shareholders sold an aggregate of 12,960,950 shares of our common stock in an underwritten initial public offering that reduced Arlington Assets ownership in our company to just above 50%.
In May 2009, we entered into a stock repurchase agreement with Arlington Asset (Repurchase Agreement) pursuant to which, among other things, we repurchased 16,667,000 shares of our common stock from Arlington Asset at a share price of
$4.35 and, in October 2009, Arlington Asset sold its remaining 14,755,017 shares of our common stock at $6.00 per share in a secondary public offering.

We are headquartered in Arlington, Virginia and also have offices in Boston, Dallas, Houston, Irvine, London, New York and San Francisco. The address of our principal executive offices is 1001 Nineteenth
Street North, Arlington, Virginia 22209. Our telephone number is (703) 312-9500.

Business Segments

Our business comprises three separate segments: capital markets, which includes investment banking and institutional brokerage and research;
asset management; and principal investing, which includes merchant banking.

Financial information concerning our company for
the fiscal years ended December 31, 2009, 2008, and 2007, including the amount of net revenues contributed by each segment in such periods, is set forth in our consolidated financial statements and the notes thereto in Part II, Item 8, of
this Form 10-K. Information with respect to our operations by business segment is set forth under the captions Managements Discussion and Analysis of Financial Condition and Results of OperationsExecutive Overview in Part II,
Item 7, of this Form 10-K and in Note 15 to our consolidated financial statements in Part II, Item 8, of this Form 10-K.

Capital Markets

Our capital markets business is conducted by our investment banking and institutional
brokerage professionals through our U.S. and United Kingdom broker-dealer subsidiaries. These professionals provide investment banking services, including capital raising and financial advisory services, and institutional brokerage services
including sales, trading, and research services, to our institutional clients across our core sectors. We believe the capital markets transactions sourced by our investment banking professionals create the types of investment opportunities that our
institutional brokerage clients seek, while our institutional brokerage clients provide demand for our investment banking clients securities issues, thus helping to provide these corporate issuers with the ability to meet their corporate
financing needs.

The current disruption in the financial services industry has created opportunities for us to expand our
existing business and to that end we have recently added capabilities in convertible securities sales and trading, loan trading, restructuring and liability management advisory services, and high yield debt and listed options sales and trading, as
well as prime brokerage services for underserved money managers. We believe that these additions can meaningfully add to our revenue stream although there can be no assurance that they will do so or that they will otherwise perform as we expect. In
addition, in 2009, we added additional capabilities to our existing M&A and advisory services. Since January 2008, we reduced our total number of employees and made adjustments to our variable cost structure to better align our overall cost
structure with current market conditions.

Investment Banking

Our investment banking professionals, backed by their industry knowledge and our strong distribution platform, seek to establish and maintain
relationships with our corporate clients and to provide them with capital raising and financial advisory services. We provide capital raising services in industry specific investment banking teams that operate across our core sectors: consumer,
diversified industrials, energy and natural resources, financial institutions, insurance, real estate, healthcare, and TMT, and these teams work closely with our M&A investment banking group in connection with the delivery of financial advisory
services. We also have a financial sponsors investment banking group that works closely with our industry-focused investment banking teams to deliver a full array of investment banking products and solutions to the private equity community and their
portfolio companies.



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Over the past two years we have responded to the disruptions in the financial services
industry by hiring professionals from many of our competitors to strengthen our corporate finance platform. By hiring senior investment banking personnel, we expect to acquire new client relationships and augment our current investment banking
revenue stream. In addition, we have added convertible securities and debt capital markets personnel that we believe will help us enhance our relationships with issuers and to diversify our investment banking revenue stream, and have also added a
restructuring finance and advisory group that will focus on accessing the equity and debt capital markets to create client solutions outside of insolvency proceedings. In 2009, our convertible securities team enabled us to participate in four
transactions comprised of three offerings and an advisory role in one exchange offer. We expect to make additional hires in these areas over time, although there can be no assurance that we will be successful in doing so.

We have also made, and expect to continue making, opportunistic acquisitions to complement our investment banking platform to increase our
product offerings and add to the coverage in our core industry groups.

As an investment bank with an ability to raise equity
in the private capital markets, we are involved with companies early in their formation in order to establish relationships that will provide us with ongoing revenues as these companies corporate finance and financial advisory needs grow. We
seek to provide our investment banking clients with the financing and advisory services that they will need at all stages of their corporate lifecycle.

Capital Raising. We have developed a strong market presence, primarily in a lead-managing role, as a leading underwriter of equity securities in the United States. During 2008, the overall number
of equity offerings throughout the investment banking industry declined, and we were the lead or sole book-running manager of five equity offerings and co-managed 15 other equity offerings, raising proceeds to the issuers of approximately $7.1
billion. During 2009, the overall equity offerings throughout the investment banking industry continued to be impacted by the downturn in the economic environment, and we were the lead or sole book-running manager of 14 equity offerings and
co-managed 25 other equity offerings.

We base our decision to underwrite an offering of a clients securities on company
and industry fundamentals, managements track record, historical financial results, financial projections, and other factors, all backed by extensive due diligence. We offer a wide range of financial products and services designed to serve the
needs of our investment banking clients, including private equity offerings, initial public, follow-on, and secondary offerings of common equity, equity-linked convertible debt offerings, public and private preferred equity offerings, and debt
offerings.

Strategic Advisory Services. Our financial advisory practice builds on our capital markets expertise and
focuses on helping our investment banking clients to assess strategic alternatives, including advice on M&A, liability management and financial restructuring, and strategic partnerships. In addition, we provide valuation advice, fairness
opinions, market comparable valuation analysis and other corporate finance advice, including advice with respect to dividend policies and evaluations of stock repurchase programs. In 2009, we completed 19 strategic advisory assignments.

Institutional Brokerage and Research

Through our institutional brokerage professionals, we provide research and institutional sales and trading services to institutional investors in North America, Europe and elsewhere. We execute securities
transactions for institutional investors such as mutual funds, insurance companies, hedge funds, banks, money managers and pension and profit-sharing plans. In 2008, we significantly expanded our institutional brokerage capability by adding a
convertible securities desk to enhance our ability to work on multiple securities classes with existing clients and to add to overall brokerage relationships. We added a credit trading desk that began operations in May 2009 and a listed options
trading desk that began operations in December 2009.



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Institutional Brokerage. We believe our institutional brokerage professionals are
distinguished by their in-depth understanding of the companies and industries in which we focus. Our traders and salespeople are required to develop detailed knowledge and relationships and provide trade execution and sales and trading services to a
diverse institutional client base of more than 1,400 institutional investor accounts as of December 31, 2009. Many of our institutional clients have been long-standing investors in transactions that our investment banking teams have brought to
the capital markets and have continued a close relationship with us as they have grown in size and assets under management.

Our sales professionals work closely with our research analysts and our trading desks to provide the most up-to-date information to our institutional clients. Our sales, trading, and research professionals work together to maintain regular
contact with the specialized portfolio managers and buy-side analysts of each institutional client. Our trading professionals facilitate trading in equity, convertible securities, and loan products, and we expect to begin trading high-yield debt in
the near term. We make markets in Nasdaq and other securities, we trade listed securities and loan products, and we service the trading desks of major institutions in the United States, Europe and elsewhere.

Research. We understand the importance of research and the role quality research plays in the institutional brokerage process,
particularly for accounts that do not maintain a large in-house research team. As of December 31, 2009, our research analysts performed independent research on more than 420 companies to help our clients understand the dynamics that drive the
sectors and companies they cover. We seek to differentiate ourselves through originality of perspective, depth of insight, and our ability to uncover industry trends. We believe our unique viewpoint has helped us develop relationships with investor
clients in both our primary distribution and secondary trading businesses.

Our research analysts operate under three guiding
principles: (i) to provide objective, independent analysis of securities, their issuers, and their place in the capital markets; (ii) to identify undervalued investment opportunities in the capital markets; and (iii) to communicate
effectively the fundamentals of these investment opportunities to potential investors. To achieve these objectives, we believe that industry specialization is necessary and, as a result, we organize our research staff along industry lines. Each
industry team works together to identify and evaluate industry trends and developments. Within industry groups, analysts are further subdivided into specific areas of focus so that they can maintain and apply specific industry knowledge to each
investment opportunity they address.

After initiating coverage on a company, our analysts seek to maintain a long-term
relationship with that company and a long-term commitment to ensure that new developments are effectively communicated to our sales force and institutional investors. Our research team analyzes major trends, publishes original research on new areas
of growth, provides fundamental, company-specific coverage and works with our institutional clients to identify and evaluate public equity investment opportunities.

Asset Management

Our SEC registered investment adviser subsidiaries
principally manage a family of mutual funds. We are focused on expanding our asset management business and strive to utilize our intellectual capital, relationships and other resources, to achieve this goal. As of December 31, 2009, we had $1.3
billion in assets under management.

At December 31, 2009, we managed client assets in excess of $1.3 billion through our
four traditional asset class equity and our five specialty mutual fund product lines. Our traditional asset class equity funds provide investors with access to institutional quality exposure to the large, mid- and small-cap segments of the capital
markets, and our specialty funds allow investors to add targeted exposure to growth opportunities in specific industry sectors, including through an index fund. Regardless of market capitalization and industry sector, through strict attention to
relative valuation and careful security selection, our actively managed mutual funds strive both to participate in rising markets and preserve capital in down markets.



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Principal Investing

Our principal investing activity consists primarily of investments in merchant banking investments and short-term liquid instruments. We have historically made merchant banking investments in selected
transactions that our investment banking group underwrites. This strategy involves putting our capital to work alongside the capital of our institutional clients.

Accounting, Administration and Operations

Our accounting, administration
and operations personnel are responsible for financial controls, internal and external financial reporting, human resources and personnel services, office operations, information technology and telecommunications systems, the processing of
securities transactions, and corporate communications. With the exception of payroll processing, which is performed by an outside service bureau, and customer account processing, which is performed by our clearing brokers, most data processing
functions are performed internally. We believe that future growth will require implementation of new and enhanced communications and information systems and training of our personnel to operate such systems.

Compliance, Legal, Risk Management and Internal Audit

Our compliance, legal and risk management personnel (together with other appropriate personnel) are responsible for our compliance procedures with regard to the legal and regulatory requirements of our
company and for our procedures with regard to our exposure to market, credit, operations, liquidity, compliance, legal, reputational and equity ownership risk. In addition, our internal audit and compliance personnel test and audit for compliance by
our personnel with our policies and procedures. Our legal personnel also provide legal service throughout our company, including advice on managing legal risk. The supervisory personnel in these areas have direct access to, and meet regularly with,
our executive management and with the Audit Committee of our Board of Directors to ensure their independence in performing these functions. Pursuant to its charter, the Audit Committee has oversight of the staffing, qualifications and performance of
our internal audit function. In addition to our internal compliance, legal, risk management and internal audit personnel, we outsource particular functions to outside consultants and attorneys for their particular expertise.

Competition

Over the course of 2008 and 2009, the financial services industry underwent a dramatic reshaping, as several major financial institutions consolidated, were forced to merge, declared bankruptcy, received substantial government assistance or
were placed into conservatorship, all of which has resulted in significant upheaval in the competitive environment. These events accelerated a longstanding trend toward consolidation among companies in the financial services industry and created an
environment of uncertainty among financial services firms of all sizes. As a full-service investment banking, institutional brokerage and asset management firm, all aspects of our business are intensely competitive. Our competitors are other
traditional and online brokerage firms, investment banking firms, merchant banks and financial advisory firms. Some of our competitors have fundamentally changed their respective business models over the past two years, including, in certain cases,
becoming commercial banks, and there has been significant movement of personnel, both among firms as well as out of the industry altogether. We compete with some of our competitors nationally and with others on a regional, product or business line
basis. Many of our competitors have substantially greater capital and resources than we do and offer a broader range of financial products and services, and recent developments could result in our remaining competitors gaining even greater capital
and other resources. We believe that the principal factors affecting competition in our business include the strength and extent of our client relationships, our reputation, the abilities of our professionals, our market focus and the relative
quality and price of our services and products.

We have experienced intense price competition in some areas of our capital
markets businesses, in particular, discounts in large block trades and trading commissions and spreads. The ability to execute trades electronically, through the Internet and through other alternative trading systems, has increased the pressure on



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trading commissions and spreads. We believe that this trend toward alternative trading systems will continue. We may experience competitive pressures in these and other areas in the future as
some of our competitors seek to increase market share by reducing prices.

In our asset management business, we compete with
many of the same firms as we do in the investment banking and brokerage businesses as well as with venture capital firms, large mutual fund companies, commercial banks and smaller niche players, including private hedge funds.

Competition is also intense for the recruitment and retention of qualified professionals. The performance of our business is in a large part
dependent on the skills, expertise and performance of our employees. Our ability to continue to compete effectively in our businesses will depend upon our continued ability to attract new professionals and retain and motivate our existing
professionals.

Risk Management

In conducting our business, we are exposed to a range of risks including, without limitation:



| |  |  | Market risk. Market risk is the risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as
market liquidity, will result in losses for a position or portfolio.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit risk.Credit risk is the risk of loss due to an individual customers or institutional counterpartys unwillingness or
inability to pay its obligations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operations risk. Operations risk is the risk of loss resulting from systems failure, inadequate controls, human error, fraud or unforeseen
catastrophes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Liquidity risk.Liquidity risk is the risk that we may be unable to meet our obligations as they come due because of our inability to liquidate
assets or obtain funding. Liquidity risk also includes the risk of having to sell assets at a loss to generate liquid funds.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regulatory risk.Regulatory risk is the risk of loss, including fines, penalties or restrictions in our activities, from failing to comply with
federal, state or local laws, rules and regulations pertaining to financial services activities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legal risk. Legal risk is the risk of loss, disruption or other negative effect on our operations or condition that arises from unenforceable
contracts, lawsuits, adverse judgments, or adverse governmental or regulatory proceedings, or the threat thereof.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reputational risk. Reputational risk is the risk that negative publicity regarding our practices, whether true or not, will cause a decline in
the customer base, resulting in costly litigation, or reduce our revenues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We monitor market and business
risk, including credit risk, operations, liquidity, regulatory, legal, and reputational risk through a number of control procedures designed to identify and evaluate the various risks to which our businesses and investments are exposed. We have
established various committees to assess and manage risk associated with our investment banking, merchant banking and other activities. We review, among other things, business and transactional risks associated with investment banking potential
clients and engagements. We seek to manage the risks associated with our investment banking and merchant banking activities by review and approval of transactions by the relevant committee, prior to accepting an engagement or pursuing a material
investment transaction. Although we believe that our risk management program and our internal controls are appropriately designed to address the risks to which we are exposed, we cannot provide assurance that our risk management program or our
internal controls will prevent or reduce such risks.

Insurance

We maintain insurance in types and amounts and with deductibles that management believes are customary for companies of similar size and
engaged in similar businesses. However, the insurance market is volatile, and there can be no assurance that any particular coverage will be available in the future on terms acceptable to us.



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Employees

As of December 31, 2009, we had 595 employees, in comparison to the 568 employees we had as of December 31, 2008. Our employees
are not subject to any collective bargaining agreement and we consider our relationship with our employees to be good.

Regulation

Our business, as well as the financial services industry generally, is subject to extensive
regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with
protecting the interests of customers participating in those markets. In light of current conditions in the financial markets and the economy, regulators have increased their focus on the regulation of the financial services industry. Proposals for
legislation that could substantially intensify the regulation of the financial services industry are expected to be introduced in the U.S. Congress, in state legislatures and around the world. In the U.S., the SEC is the federal agency responsible
for the administration of the federal securities laws. FBR & Co. and FBR Investment Services, Inc (FBRIS) are registered as broker-dealers with the SEC and the Financial Industry Regulatory Authority, Inc. (FINRA), a
self-regulatory organization, and in all 50 states, Puerto Rico and the District of Columbia. Accordingly, FBR & Co. and FBRIS are subject to regulation and oversight by the SEC and FINRA, which is itself subject to oversight by the SEC and
which adopts and enforces rules governing the conduct, and examines the activities, of its member firms, including FBR & Co. and FBRIS, and their registered representatives. State securities regulators also have regulatory or oversight
authority over FBR & Co. and FBRIS. Our business may also be subject to regulation by non-U.S. governmental and regulatory bodies and self-regulatory authorities in other countries where we operate.

FBR Fund Advisers and FBR Investment Management, Inc. (FBRIM) are SEC-registered investment advisers. Registered investment
advisers are subject to regulations under the Investment Advisers Act of 1940, as amended. Regulations under the Investment Advisers Act of 1940 relate to, among other things, recordkeeping and reporting requirements, disclosure requirements,
limitations on agency cross and principal transactions between an adviser and advisory clients, as well as general anti-fraud prohibitions. In addition, certain investment funds that we manage are registered investment companies under the Investment
Company Act of 1940, as amended. Those funds and the entities that serve as the funds investment advisers are subject to that act and the rules and regulations promulgated by the SEC under that act, which, among other things, regulate the
relationship between a registered investment company and its investment adviser and prohibit or severely restrict principal transactions and joint transactions.

Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers funds and
securities, capital structure, record-keeping, the financing of customers purchases and the conduct and qualifications of directors, officers and employees. In particular, as a registered broker-dealer and member of various self-regulatory
organizations, FBR & Co. and FBRIS are subject to the SECs uniform net capital rule, Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of
its assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the
regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the SECs uniform net capital rule imposes certain requirements that may have the
effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital.

Compliance with regulatory net capital requirements could limit those operations that require the intensive use of capital, such as underwriting and trading activities, and also could restrict our ability
to withdraw capital from our affiliated broker-dealers, which in turn could limit our ability to pay dividends, repay debt and redeem or repurchase shares of our outstanding capital stock.



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We believe that at all times FBR & Co. and FBRIS have been in compliance in all
material respects with the applicable minimum net capital rules of the SEC and FINRA. A failure of a U.S. broker-dealer to maintain its minimum required net capital would require it to cease executing customer transactions until it came back into
compliance, and could cause it to lose its FINRA membership, its registration with the SEC or require its liquidation. Further, the decline in a broker-dealers net capital below certain early warning levels, even though above minimum net
capital requirements, could cause material adverse consequences to the broker-dealer and to us.

FBR & Co. and FBRIS
also are subject to Risk Assessment Rules imposed by the SEC which require, among other things, that certain broker-dealers maintain and preserve certain information, describe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the broker-dealer. Certain material associated persons (as
defined in the Risk Assessment Rules) of the broker-dealer and the activities conducted by such material associated persons may also be subject to regulation by the SEC. In addition, the possibility exists that, on the basis of the information it
obtains under the Risk Assessment Rules, the SEC could seek authority over our unregulated subsidiaries either directly or through its existing authority over our regulated subsidiaries.

The research areas of investment banks have been and remain the subject of increased regulatory scrutiny. In 2002 and 2003, acting in part
pursuant to a mandate contained in the Sarbanes-Oxley Act of 2002, the SEC, the NYSE and the NASD (now FINRA) adopted rules imposing heightened restrictions on the interaction between equity research analysts and investment banking personnel at
member securities firms. In addition, in 2003 and 2004, several securities firms in the United States reached a settlement with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into their
equity research analysts alleged conflicts of interest. Under this settlement, the firms have been subject to certain restrictions and undertakings. As part of this settlement, restrictions have been imposed on the interaction between research
and investment banking departments, and these securities firms are required to fund the provision of independent research to their customers. In connection with the research settlement, we have also subscribed to a voluntary initiative imposing
restrictions on the allocation of shares in initial public offerings to executives and directors of public companies.

On
October 14, 2008, the SEC published final rules, effective as of October 17, 2008 under the Securities Exchange Act of 1934, as amended, adopting a temporary rule that expired on July 31, 2009, which contained a firm delivery
requirement for long and short sales, and the naked short selling anti-fraud rule, and on February 24, 2010, the SEC adopted a new rule under the Securities Exchange Act of 1934, as amended, to restrict short selling in stocks
experiencing significant downward price pressure.

The effort to combat money laundering and terrorist financing is a priority
in governmental policy with respect to financial institutions. The USA PATRIOT Act of 2001, as amended (the PATRIOT Act), contains anti-money laundering and financial transparency laws and mandates the implementation of various new
regulations applicable to broker-dealers and other financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Through
these and other provisions, the PATRIOT Act seeks to promote the identification of parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside the United States contain some similar provisions. The obligation of
financial institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial
institutions, has required the implementation and maintenance of internal practices, procedures and controls which have increased, and may continue to increase, our costs, and any failure with respect to our programs in this area could subject us to
serious regulatory consequences, including substantial fines, and potentially other liabilities.

Certain of our businesses
are subject to compliance with laws and regulations of U.S. federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges relating to the privacy of client information, and
any failure to comply with these regulations could expose us to liability and/or reputational damage.



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Additional legislation, changes in rules promulgated by the SEC and self-regulatory
organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operation and profitability.

Our broker-dealer business is also subject to regulation by various foreign governments and regulatory bodies. FBR & Co. is
registered with and subject to regulation by the Ontario Securities Commission in Canada. FBRIL, our United Kingdom brokerage subsidiary, is subject to regulation by FSA in the United Kingdom pursuant to the United Kingdom Financial Services and
Markets Act of 2000 (as amended). Foreign regulation may govern all aspects of the investment business, including regulatory capital, sales and trading practices, conflicts of interest, research, use and safekeeping of customer funds and securities,
record-keeping, margin practices and procedures, registration standards for individuals, periodic reporting and settlement procedures. The FSA has been pursuing an increased focus on the capital and liquidity strength of regulated firms, and has
also expressed its intention to focus on management structures and the culture of supervisory responsibility within firms. It has also set out its views on best practice in the area of position valuation and risk control following a number of
mis-marking incidents across the industry.

Many of the investment services that are subject to authorization and regulation
by the FSA under the Financial Services and Markets Act of 2000 (as amended) are also subject to certain European Union (EU) directives covering, among other things, the organizational requirements and operating conditions for investment
firms including customer protection requirements and conduct of business rules. These standards, requirements and rules are similarly implemented, under the same directives, throughout the EU and are broadly comparable in scope and purpose to the
customer protection requirements imposed under SEC rules. Where such investment services fall outside the scope of these EU directives, local regulation in each jurisdiction, including those in which we operate, may still apply and in some cases may
be more restrictive than the requirements of such directives.

The U.S. and non-U.S. government agencies and self-regulatory
organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or its directors, officers or employees. Occasionally, FBR & Co. has been subject to investigations and proceedings, and sanctions have been imposed for infractions of various regulations relating to its activities.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

You should
carefully consider the following risks and all of the other information contained in this Form 10-K, including the consolidated financial statements and the notes thereto included in Part II, Item 8, of this Form 10-K. If any of the risks,
uncertainties, events or developments described below occurs, our business, financial condition or results of operation could be negatively impacted. In connection with the forward-looking statements that appear in this Form 10-K, you should also
carefully review the cautionary statements included under the caption Forward-Looking Statements.

Risks Related
to Adverse Market Conditions

Our businesses have been and may continue to be materially and adversely affected by financial market
conditions and economic conditions generally.

As an investment bank, risk is an inherent part of our business. Our
businesses are materially affected by conditions in the financial markets and economic conditions generally around the world. In the past twelve to eighteen months, these conditions have changed suddenly and negatively. Since mid-2007, and
particularly during the second half of 2008 and through the first half of 2009, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset
classes. Concerns about financial institution profitability and solvency as a result of general market conditions, particularly in the credit markets, may cause our clients to reduce the level of business that they do with us. Declines in asset
values, the lack of liquidity, general uncertainty about economic and market activity and a lack of consumer, investor and CEO confidence have negatively impacted many of our businesses, particularly investment banking, merchant banking and asset
management. Our investment banking business has been significantly affected by the decrease in equity underwritings and the decline in both announced and completed mergers and acquisitions.

Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is
generally characterized by, among other factors, high global gross domestic product growth, stable geopolitical conditions, transparent and efficient capital markets, liquid markets with active investors, low inflation, high business and consumer
confidence and strong business earnings. Slowing growth, contraction of credit, increasing energy prices, declines in business or investor confidence or risk tolerance, increases in inflation, higher unemployment, outbreaks of hostilities or other
geopolitical instability, corporate, political or other scandals that reduce investor confidence in capital markets and natural disasters, among other things, can affect the global financial markets. In addition, economic or political pressures in a
country or region may cause local market disruptions and currency devaluations, which may also affect markets generally. In the event of changes in market conditions, such as interest or foreign exchange rates, equity, fixed income, commodity or
real estate valuations, liquidity, availability of credit or volatility, our businesses could be adversely affected in many ways.

Overall, the business environment over the past two years has been extremely adverse for many of our businesses and there can be no assurance that these conditions will improve in the near term. These conditions have had, and will continue
to have, a direct and material impact on our results of operations and financial condition because performance in the financial services industry is heavily influenced by the overall strength of economic conditions and financial market activity. We
expect that the reduced transaction volumes, reduced revenue and reduced profitability that we experienced in almost all of our main businesses in 2008 and 2009 may continue throughout 2010.

It is difficult to predict how long these uncertain and unfavorable market and economic conditions will continue, whether a continuation of
the global credit crisis will cause market and economic conditions to further deteriorate, and which of our markets, products and businesses will continue to be adversely affected and to what degree. Currently, we anticipate that some or all of
these challenging market conditions will persist throughout



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2010. We expect that equity and debt financing and acquisition and disposition activity may remain at a low level through 2010. Our financial performance will be negatively impacted by the
occurrence of these conditions because our business depends heavily on these markets, particularly equity financing, public finance and acquisition and disposition activity.

Our revenues may continue to be negatively impacted as a result of adverse market conditions.

The real estate market in the U.S. has experienced a significant downturn due to declining real estate values, substantially reducing mortgage loan originations and securitizations, and precipitating more
generalized credit market dislocations and a significant contraction in available liquidity globally, which has negatively impacted our revenues. These factors have continued into the beginning of 2010. These factors could continue beyond 2010.
Continued or further credit market dislocations or sustained market downturns may reduce cash flows from our clients.

Our
investment banking revenues are directly related to the number and size of the transactions in which we participate and therefore were adversely affected in 2008 and 2009 by the mortgage and credit market dislocations, and the overall level of
equity prices, and may be further impacted by continued or further credit market dislocations or a continuation of the market downturn. Our investment banking revenues could continue to be impacted in 2010 and beyond as a result of these market
factors.

Sustained market downturns or continued or further credit market dislocations and liquidity issues would also likely
lead to a decline in the volume of secondary market trading that we execute for our institutional brokerage clients and, therefore, to a decline in the revenues we receive from commissions and spreads earned from the trades we execute for our
clients. In addition, because the fees that we charge for managing our clients portfolios are in many cases based on the value of those portfolios, a market downturn that reduces the value of our clients portfolios would reduce the
revenues we receive from our asset management business. Heightened risk aversion among investors may cause them to shift their trading activity to higher quality and more liquid products, which are generally somewhat less profitable for us.

Even in the absence of a market downturn, below-market investment performance by our fund and portfolio managers could reduce
our asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.

Risks Related to Our Business

Our financial results may fluctuate substantially
from quarter to quarter.

We have experienced, and expect to experience in the future, significant quarterly variations
in our revenues and results of operations. These variations may be attributed in part to the fact that our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond
our control. In most cases, we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our business is highly dependent on market conditions as well as the
decisions and actions of our clients and interested third parties. For example, a clients securities offering may be delayed or terminated because of adverse market conditions, failure to obtain necessary regulatory approvals or unexpected
financial or other problems in the clients business. If the parties fail to complete an offering in which we are participating as an underwriter or placement agent, we will earn little or no revenue from the transaction. This risk may be
intensified by our focus on early-stage companies in certain sectors, as the market for securities of these companies may experience significant variations in the number and size of equity offerings as well as the after-market trading volume and
prices of newly issued securities. More companies initiating the process of an initial public offering are simultaneously exploring M&A exit opportunities. Our investment banking revenues would be adversely affected in the event that an initial
public offering for which we are acting as an underwriter is preempted by the companys sale if we are not engaged as a strategic advisor in such sale. As a result, we are unlikely to achieve steady and predictable earnings on a quarterly
basis.



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We are dependent on our executive management team, and we may not be able to execute our business plan
in the event that members of our executive management team are no longer available to us and we are unable to find suitable replacements for them or the members of our executive management team do not dedicate a sufficient amount of their
professional time to our endeavors.

Certain members of our executive management team do not have employment agreements
with us. We have no assurance that the services of our executive management team will continue to be available to the full extent of our needs. We believe that our success depends to a significant extent upon the experience of our executive
management team, whose continued service is not guaranteed. If certain members of our executive management team leave our company or are otherwise no longer available to us or are not available to the full extent of our needs, we may not be able to
replace them with suitable management and may be unable to execute our business plan.

We encounter intense competition for qualified
professionals from other investment banking firms and from businesses outside the investment banking industry, such as hedge, private equity and venture capital funds, and our failure to hire qualified professionals and retain our existing
professionals may materially impede the success and growth of our business.

Our people are our most valuable resource.
Our ability to secure and maintain investment banking engagements depends upon the reputation, judgment, business generation capabilities and project execution skills of our professionals. Our professionals reputations and relationships with
our clients are a critical element in obtaining and executing client engagements. Generally, we do not have employment or non-competition agreements with any of our professionals. We encounter intense competition for qualified professionals from
other companies in the investment banking industry and from businesses outside the investment banking industry, such as hedge, private equity and venture capital funds. We may experience losses of investment banking, brokerage, research and other
professionals and our failure to hire qualified professionals and retain our existing professionals may materially impede our success and growth. The departure or other loss of our key professionals who manage substantial client relationships or who
possess substantial experience and expertise, could impair our ability to secure or successfully complete engagements, which could materially adversely affect our business and results of operations. In addition, if any of our investment bankers or
members of our executive management team were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of our services. We may not be able to prevent our investment
bankers or the members of our executive management team from resigning to join our competitors or from forming a competing company.

We
depend on relatively few industries to generate a significant percentage of our revenue, which may limit our revenues and net income and may adversely affect our operating results.

We are dependent on revenues related to securities issued by companies in specific industry sectors. The consumer, diversified industrials,
energy and natural resources, financial institutions, insurance, real estate and TMT sectors account for the majority of our investment banking, asset management, institutional trading and research activities. Therefore, any downturn in the market
for the securities of companies in these industry sectors, or factors affecting such companies, could adversely affect our operating results and financial condition. Additionally, the frequency and size of securities offerings can vary significantly
from industry to industry due to economic, legislative, regulatory and political factors.

Underwriting and other capital
raising transactions, strategic advisory engagements and related trading activities in our core sectors represent a significant portion of our businesses. This concentration of activity exposes us to the risk of substantial declines in revenues in
the event of downturns in our core sectors. Future downturns in our core sectors could result in a decrease in the size or number of transactions we complete, which would reduce our investment banking revenues.

We also derive a significant portion of our revenues from institutional sales and trading transactions related to the securities of
companies in these sectors. Our revenues from such institutional sales and trading transactions



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may decline when underwriting activities in these industry sectors decline, the volume of trading on the NASDAQ, the New York Stock Exchange (NYSE) or any other securities market or
exchange declines, or when industry sectors or individual companies report results below investors expectations.

We have incurred
losses in recent periods and may incur losses in the future.

We have incurred losses in recent periods. For the year
ended December 31, 2009, we had a net loss of $27.7 million. We may incur losses in future periods. If we are unable to fund future losses, those losses may have a significant effect on our liquidity as well as our ability to operate.

In addition, we may incur significant expenses in connection with any expansion of our capital markets and asset management
businesses or in connection with strategic acquisitions and investments. Accordingly, we will need to increase our revenues at a rate greater than our expenses to achieve and maintain profitability. If our revenues do not increase sufficiently, or
even if our revenues increase but we are unable to manage our expenses, we will not achieve and maintain profitability in future periods.

Our ability to use net capital loss carryovers to reduce our taxable income may be limited.

On
October 22, 2009, as a result of the sale by Arlington Asset of all of the remaining shares of our common stock then beneficially owned by it, we had an ownership change as defined in Internal Revenue Code section 382.
Section 382 limits tax deductions for net operating losses (NOL), net capital losses (NCL) and net unrealized built-in losses after there is a substantial change in ownership in a corporations stock involving a 50 percentage point
increase in ownership by 5% or larger stockholders over the relevant testing period.

Under the provisions of Section 13
of the Worker, Homeownership, and Business Act of 2009, enacted on November 6, 2009, we elected to use a five year carryback period for the domestic federal NOL incurred in 2008. As a result, we do not have any domestic federal NOL carryover
that would be subject to limitations of section 382. As of the end of 2009, we had NCL carryovers and certain built-in losses that would be subject to an annual section 382 limitation.

The Section 382 limitation is equal to the fair market value of our stock immediately prior to the ownership change multiplied by the
long-term tax-exempt rate applicable to the calendar month of the ownership change. In general, the long-term tax-exempt rate is a rate determined monthly by the Internal Revenue Service that approximates the yield on a tax-exempt bond
that would be equivalent to the market yield on long-term U.S. Treasury securities. The long-term tax-exempt rate for an ownership change occurring in October 2009 was 4.48%. Any NCLs that exceed the Section 382 limitation in any year will
continue to be allowed as carryforwards for the remainder of the carryforward period and such losses can be used to offset taxable income for years within the carryforward period subject to the Section 382 limitation (and other applicable
limitations) in each year. However, if the carryforward period for any NCL were to expire before that loss had been fully utilized, the unused portion of that loss would be lost. The carryforward period for NCLs is five years from the year in which
the losses giving rise to the NCL were incurred. Our use of new NOLs or NCLs arising after the date of the ownership change would not be affected by the Section 382 limitation, unless another ownership change were to occur after those new
losses arose.

Our failure to integrate and develop recently added capital markets capabilities or to expand our asset management
business could negatively affect the growth of our business.

Our ability to develop our capital markets business
depends upon expanding and enhancing the investment banking services we presently offer. We have recently added capabilities in convertible securities sales and trading, loan trading and restructuring, liability management advisory services, high
yield debt and listed options sales and trading, as well as prime brokerage services for underserved money managers. We intend to incur increased costs to support these capabilities. Our failure to successfully integrate these capabilities into our
business could have an adverse impact on our business. Furthermore, our failure to develop these capabilities to satisfy anticipated near-term demand in our core sectors may harm our growth prospects.



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Our ability to expand our asset management business depends on a variety of factors,
including but not limited to our ability to identify traditional and/or alternative asset managers and strategies, within our company and externally, and our ability to deploy capital into investments in this area. We cannot guarantee that we will
be able to successfully identify alternative asset managers and strategies or invest our own capital in alternative asset managers or strategies. Our inability to expand our asset management business could harm our growth prospects and could
negatively impact the value of our common stock.

Pricing and other competitive pressures may impair the revenues and profitability of
our institutional brokerage business.

We derive a significant portion of our revenues from our institutional brokerage
business. Along with other firms, we have experienced intense price competition in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the pressure on
trading commissions and spreads. We expect pricing pressures in the business to continue. Decimalization in securities trading, introduced in 2000, has also reduced revenues and lowered margins within the equity sales and trading divisions of many
firms, including ours. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis of price or use their own capital to facilitate client
trading activities. In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary products and services to clients in order to win their trading business. If we are unable to compete
effectively in these areas, the revenues from our sales and trading business may decline, and our business and results of operations may be adversely affected. Our research and institutional brokerage business also may be adversely affected by
changes in laws and regulations and industry practices.

Our institutional brokerage revenues may decline due to competition from
alternative trading systems.

Securities and futures transactions are now being conducted through the internet and
other alternative, non-traditional trading systems, and it appears that the trend toward alternative trading systems will continue and probably accelerate. A dramatic increase in computer-based or other electronic trading may adversely affect our
institutional brokerage revenues. The NYSEs adoption of its hybrid market for trading securities may increase pressure on our institutional brokerage business as customers execute more of their NYSE-related trades electronically. Even if we
were to develop our own electronic trading systems, we cannot assure you that the revenues generated by these systems will yield an adequate return on our investment, particularly given the relatively lower commissions arising from electronic
trades. As a result, our institutional brokerage revenues could decline in the future, which would negatively impact our cash flows and the value of our common stock.

We face strong competition from larger firms, some of which have greater resources and name recognition, which may impede our ability to grow our business.

The brokerage and investment banking industries are intensely competitive and we expect them to remain so. We compete on the basis of a
number of factors, including client relationships, reputation, the abilities of our professionals, market focus and the relative quality and price of our services and products. We have experienced intense price competition in some of our businesses,
in particular discounts in large block trades and trading commissions and spreads. In addition, pricing and other competitive pressures in investment banking, including the trends toward increased focus by many larger investment banking companies on
institutional equity offerings pursuant to Rule 144A, multiple book runners, co-managers and multiple financial advisors handling transactions, have continued and could adversely affect our revenues, even as the volume and number of investment
banking transactions have started to increase. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis of price.

Many of our competitors in the brokerage and investment banking industries have a broader range of products and services, greater financial
and marketing resources, larger customer bases, greater name recognition, more senior professionals to serve their clients needs, greater global reach and more established



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relationships with clients than we have. These larger and better capitalized competitors may be better able to respond to changes in the brokerage and investment banking industries, to compete
for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally.

The
scale of our competitors has increased in recent years as a result of substantial consolidation among companies in the brokerage and investment banking industries. In addition, a number of large commercial banks, insurance companies and other
broad-based financial services firms have established or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than
we do, which may enhance their competitive position. They also have the ability to support investment banking with commercial banking, insurance and other financial services in an effort to gain market share, which has resulted, and could further
result, in pricing pressure in our businesses. In particular, the ability to provide financing has become an important advantage for some of our larger competitors and, because we do not provide such financing, we may be unable to compete as
effectively for clients in a significant part of the brokerage and investment banking market.

If we are unable to compete
effectively with our competitors, our business, financial condition and results of operations will be adversely affected.

Our capital
markets and strategic advisory engagements are singular in nature and our failure to obtain new engagements may harm our operating results.

Our investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific capital markets or M&A transactions, rather than on a recurring basis
under long-term contracts. As these transactions are typically singular in nature and our engagements with these clients may not recur, we must continuously seek out new engagements when our current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from
the successful completion of transactions, our business and results of operations would likely be adversely affected.

Larger and more
frequent capital commitments in our trading and underwriting business increase the potential for us to incur significant losses.

We commit our capital to maintain trading positions in the equity, convertible securities, debt and listed options markets. We may enter into large transactions in which we commit our own capital as part
of our client trading activities. The number and size of these large transactions may materially affect our results of operations in a given period. We may also incur significant losses from our trading activities due to market fluctuations and
volatility in our results of operations. To the extent that we own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent we
have sold assets we do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market.

We use a number of quantitative measures to manage our exposure to market risk, including inventory position limits, scenario
analysis, and value at risk, or VaR. VaR is a model that quantifies potential losses using historical data. Because the historical market prices used in our VaR analysis may not be an accurate measure of future market events and conditions,
especially in highly stressful market environments, and because our VaR model measures the risk of a current net trading position and does not take into account future position changes arising from transaction and/or hedging activity, we could incur
losses that are materially greater than our reported VaR, and our business, financial condition and results of operations could be adversely affected.

Before the recent turmoil in the financial markets, there had been a trend toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in
order to win



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business investment banks had increasingly been committing to purchase large blocks of stock from publicly traded issuers or significant shareholders, instead of the more traditional marketed
underwriting process, in which marketing is typically completed before an investment bank commits to purchase securities for resale. We may undertake more block trades in the future. As a result, we will be subject to increased risk as we commit
greater amounts of capital to facilitate primarily client-driven business and, therefore, may suffer losses even when economic and market conditions are generally favorable for others in the industry.

Limitations on our access to capital could impair our liquidity and our ability to conduct our businesses.

Liquidity, or ready access to funds, is essential to financial services firms. Failures of financial institutions have often been
attributable in large part to insufficient liquidity. Liquidity is of particular importance to our trading business and perceived liquidity issues may affect our clients and counterparties willingness to engage in brokerage transactions
with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects our trading clients, third parties or us. Further, our ability to sell assets
may be impaired if other market participants are seeking to sell similar assets at the same time.

FBR & Co. and
FBRIS, which are domestic registered broker-dealers, are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a
broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. FBRIL, which is a registered broker-dealer in the United Kingdom, is also subject to the capital requirements of the FSA. Any
failure to comply with these net capital requirements could impair our ability to conduct our core business as a brokerage firm.

Furthermore, FBR & Co., FBRIS and FBRIL are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from them to us. As a holding company, we will depend on dividends, distributions and other payments
from our subsidiaries to fund our obligations, including debt obligations. As a result, regulatory actions could impede access to funds that we need to make payments on our obligations, including debt obligations.

We are highly dependent on communications, information and other systems and third parties, and any systems failures could significantly disrupt our
business.

Our business is highly dependent on communications, information and other systems, including systems
provided by our clearing broker and by and for other third parties. Any failure or interruption of our systems, the systems of our clearing broker or third-party trading or information systems could cause delays or other problems in our securities
trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock.

In addition, our clearing broker provides elements of our principal disaster recovery system. We cannot assure you that we or our clearing broker will not suffer any systems failure or interruption,
including one caused by a hurricane, earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war, terrorist attack, pandemic or other emergency situation, or that our or our clearing brokers back-up
procedures and capabilities in the event of any such failure or interruption will be adequate. The occurrence of any failures or interruptions could significantly harm our business.

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could harm our business.

We have devoted significant resources to develop our risk management strategies and techniques and expect to continue to do so in the future.
However, our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.



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We are exposed to the risk that third parties that owe us money, securities or other assets
will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, breach of contract or other reasons. We are also subject to the risk that our rights against third
parties may not be enforceable in all circumstances. Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from
events or circumstances that are difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely
affect us. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.

Strategic investments or acquisitions and joint ventures may result in additional risks and uncertainties in our business.

We intend to grow our core businesses through both internal expansion and through strategic investments, acquisitions or joint ventures. To
the extent we make strategic investments or acquisitions or enter into joint ventures, we face numerous risks and uncertainties combining or integrating the relevant businesses and systems, including the need to combine accounting and data
processing systems and management controls and to integrate relationships with customers and business partners. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to
liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. In addition, conflicts or disagreements between us and our joint venture partners may negatively impact our businesses.

To the extent that we pursue business opportunities outside the United States, we will be subject to political, economic, legal,
operational and other risks that are inherent in operating in a foreign country, including risks of possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as
the outbreak of hostilities. In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in
every market. Our inability to remain in compliance with local laws in a particular foreign market could have a significant and negative effect not only on our businesses in that market but also on our reputation generally. We are also subject to
the enhanced risk that transactions we structure might not be legally enforceable in the relevant jurisdictions.

Our due diligence may
not reveal all of a portfolio companys liabilities and may not reveal other weaknesses in a portfolio companys business.

Before we make merchant banking investments, we assess the strength and skills of an entitys management and other factors that we believe will determine the success of the investment. In making the
assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly-organized
entities because there may be little or no information publicly available about the company. We cannot assure you that our due diligence processes will uncover all relevant facts or risks about a company in which we make a merchant banking
investment, or that any such investment will be successful. Any unsuccessful merchant banking investments may have a material adverse effect on our financial condition and results of operation.

In any potential merchant banking investment, we depend on management and have limited ability to influence management of portfolio companies.

We generally do not control the management, investment decisions or operations of the enterprises in which we make
merchant banking investments. Management of those enterprises may decide to change the nature of their assets or business plan, or management may otherwise change in a manner that is not satisfactory to us. We typically have no ability to affect
these management decisions, and as noted below, may have only limited ability to dispose of these investments.



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We may make merchant banking investments that have limited liquidity, which may reduce the return on
those investments to our stockholders.

The equity securities of a new publicly-held or privately-held entity in which
we make a merchant banking investment are likely to be restricted as to resale and may otherwise be highly illiquid. We expect that there will be restrictions on our ability to resell the securities of any private or newly-public company that we
acquire for a period of at least one year after we acquire those securities. Thereafter, a public market sale may be subject to volume limitations or dependent upon securing a registration statement for a secondary offering of the securities.

The securities of newly-public entities may trade less frequently and in smaller volume than securities of companies that are
more widely held and have more established trading patterns. Sales of these securities may cause their values to fluctuate more sharply. Because we have made and expect to make merchant banking investments through an affiliate of FBR & Co.,
a registered broker-dealer in the U.S., and FBRIL, a registered broker-dealer in the United Kingdom, our ability to invest in companies may be constrained by applicable securities laws and regulations and the rules of FINRA and similar
self-regulatory organizations. FBR & Co.s investment and trading activities are regulated by the SEC, FINRA and other governmental authorities, and FBRILs investment and trading activities are regulated by similar regulatory
authorities in the United Kingdom, including the FSA. As a result, the rules of the SEC, FINRA, FSA and other governmental authorities and self-regulatory organizations may limit our ability to invest in the securities of companies whose securities
are underwritten or privately placed by our broker-dealer affiliates.

Prices of the equity securities of new entities in
which we make merchant banking investments may be volatile. We may make merchant banking investments that are significant relative to the portfolio companys overall capitalization, and resales of significant amounts of these securities might
adversely affect the market and the sales price for the securities.

The disposition value of our merchant banking investments
is dependent upon general and specific market conditions which could result in a decline of the value of these investments.

Even if we make an appropriate investment decision based on the intrinsic value of an enterprise, we cannot assure you that the market value of the investment will not decline, perhaps materially, as a result of general market conditions.
For example, an increase in interest rates, a general decline in the stock markets, or other market conditions adverse to companies of the type in which we invest could result in a decline in the value of our investments.

Our capital markets business is dependent on cash inflows to the mutual fund industry and other pooled investment vehicles, which could result in our
experiencing operating losses if cash flows slow.

A slowdown or reversal of cash inflows to the mutual fund industry
and other pooled investment vehicles could lead to lower capital markets revenues for us since mutual funds and other pooled investment vehicles purchase a significant portion of the securities offered in public offerings underwritten by our
broker-dealer subsidiaries and subsequently traded in the secondary markets. Demand for new equity offerings has been driven in part by institutional investors, particularly large mutual funds and hedge funds, seeking to invest on behalf of their
investors. The public may redeem mutual funds as a result of a decline in the market generally or as a result of a decline in mutual fund net asset values. To the extent that a decline in cash inflows into mutual funds reduces demand by fund
managers for initial public or secondary offerings, our capital markets business and results of operations could be materially adversely affected. Moreover, a slowdown in investment activity by mutual funds may have an adverse effect on the
securities markets generally.

Declines in the market values of our investments may adversely affect periodic reported results and
credit availability, which may reduce earnings.

We make merchant banking investments that are classified for
accounting purposes as available-for-sale. Changes in the market values of those assets will be directly charged or credited to stockholders equity. As a



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result, a further decline in market value of our investment securities may further reduce the book value of our assets. Moreover, if the decline in value of an available-for-sale security is
other-than-temporary, such decline will reduce earnings, as will a decline in the value of securities not classified as available-for-sale for accounting purposes.

A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets
declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. A reduction in credit
available may reduce our earnings.

Changes in interest rates could negatively affect the value of investments we make with our excess
capital, which could result in reduced earnings or losses.

We invest our excess capital from time to time in highly
liquid investments. Investments that are sensitive to interest rate fluctuations will decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us.

In addition, changes in interest rates may impact some of our merchant banking equity investments in companies whose business models are
sensitive to interest rates.

If we become subject to the registration requirements of the 1940 Act as a result of our principal
investing activities, our ability to operate our business as contemplated would be impaired, our operating results would be adversely affected.

The 1940 Act and the rules thereunder contain detailed parameters for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit
transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. We intend to conduct our operations so that we will not be deemed to
be an investment company under 1940 Act. However, if anything were to happen which would cause us to be deemed to be an investment company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure,
ability to transact business with affiliates and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among us and our subsidiary,
FBR & Co., and materially adversely affect our business, financial condition and results of operations.

We are a holding
company and are dependent on our subsidiaries for funds.

Since we are a holding company, our cash flow and consequent
ability to pay dividends and satisfy our obligations under securities we issue are dependent upon the earnings of our subsidiaries and the distribution of those earnings as dividends or loans or other payments by those subsidiaries to us. Our
broker-dealer subsidiaries are subject to various capital adequacy requirements promulgated by the regulatory and other authorities of the countries in which they operate. These regulatory rules may restrict our ability to withdraw capital from our
subsidiaries by dividends, loans or other payments. Additionally, our ability to participate as an equity holder in any distribution of assets of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the subsidiary.

Our exposure to legal liability is significant, and damages that we may be required to pay and the reputational harm that could result
from legal action against us could materially adversely affect our businesses.

We face significant legal risks in our
businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. These



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risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, potential
liability for fairness opinions and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of complex trading arrangements. We are also subject to claims arising from disputes with
employees for alleged discrimination or harassment, among other things.

As a brokerage and investment banking firm, we depend
to a large extent on our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses.
Moreover, our role as advisor to our clients on important underwriting or M&A transactions involves complex analysis and the exercise of professional judgment, including rendering fairness opinions in connection with mergers and
other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including stockholders of our clients who could bring securities class actions against us. Our
investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be enforceable in all cases.
Furthermore, there is no assurance that an investment banking client will be able to satisfy its indemnity or contribution obligations when due. As a result, we may incur significant legal and other expenses in defending against litigation and may
be required to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action against us could have a material adverse effect on our results of operations or cause us significant
reputational harm, which could seriously harm our business and prospects.

FBR & Co. has been named as a defendant in
a small number of securities claims involving investment banking clients of FBR & Co. as a result of FBR & Co.s role as an underwriter. While these cases are at a preliminary stage, based on managements review with
counsel and present information currently known by management, resolution of these matters is not expected to have a material adverse effect on our financial condition, results of operations or liquidity, although the outcome of these matters could
be material to our operating results and cash flows for a particular future period, depending on, among other things, the level of our revenues or income for such period. These cases include the following:

In May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for
the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBR & Co.) and eight other underwriters as defendants. The lawsuit, styled In Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United
States District Court for the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc., or TMI, and certain of its officers and directors, alleging material misrepresentations and omissions about, inter
alia, the financial position of TMI. The amended complaint now includes claims under Sections 11 and 12 of the Securities Act, against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two
offerings in January 2008). The allegations against FBR & Co. relate only to its role as underwriter or member of the syndicate that underwrote TMIs total of three offerings in September 2007 and January 2008each of which
occurred after the filing of the original complaintwith an aggregate offering price of approximately $818 million. The plaintiffs seek restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although
FBR & Co. is contractually entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBR & Co.
receives from TMI. On September 22, 2008, FBR & Co. filed a motion to dismiss the consolidated class action complaint as to FBR & Co. The District Court granted that motion on January 27, 2010. FBR &
Co. subsequently moved for entry of a final judgment in its favor. The plaintiffs have opposed that motion and have filed a motion seeking clarification of the Courts dismissal order. The plaintiffs contend that the District
Courts dismissal order is, or should be, without prejudice, and that they should be permitted to file an amended complaint that attempts to re-plead dismissed claims. The Court has yet to rule on FBR & Co.s motion for
entry of final judgment, the plaintiffs motion for clarification, or the plaintiffs expressed interest in filing an amended complaint. Because we intend to actively defend such litigation, significant legal expenses could be incurred.
While it is not possible to predict the outcome of litigation, management believes that there are meritorious



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defenses to the claims asserted and that this action should not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, an adverse
resolution of this litigation could materially affect our financial condition, operating results and liquidity.

Risks
Related to Use of Estimates and Valuations

We make various estimates that affect reported amounts and disclosures.

We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring
fair value of certain financial instruments, accounting for identifiable intangible assets, establishing provisions for potential losses that may arise from litigation, regulatory proceedings and tax examinations, assessing our ability to realize
deferred taxes and valuing equity-based compensation awards. Estimates are based on available information and judgment. Therefore, actual results could differ from our estimates and that difference could have a material effect on our consolidated
financial statements.

See Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of OperationsCritical Accounting Policies and Estimates and Note 2 to our consolidated financial statements in Part II, Item 8, of this Form 10-K for additional information concerning our use of estimates and valuation
methodologies.

Risks Related to Our Relationship with Crestview

We may not be successful in capturing the benefit of our ongoing strategic advisory relationship with an affiliate of Crestview which may impede our
growth and negatively impact our operating results.

We have agreed, subject to the modification described below, to
pay Crestview Advisors, L.L.C., an affiliate of Crestview, a $1.0 million annual strategic advisory fee and reimburse Crestview Advisors, L.L.C. for reasonable out-of-pocket expenses in exchange for ongoing strategic advice and assistance. This fee
is payable for as long as Crestview beneficially owns at least 50% of the shares of our common stock that the Crestview affiliates purchased in our 2006 private offering. In September 2008, we granted Crestview Advisors, L.L.C. options to purchase
502,268 shares of our common stock at a price of $5.30 per share in lieu of cash payments for the strategic advisory fee for the period from October 1, 2008 through December 31, 2009. Unless we agree otherwise, we will be required to pay
the strategic advisory fee to Crestview Advisors, L.L.C. in cash in future periods. Crestview Advisors, L.L.C. is not required to provide specified services to us or our affiliates, and we cannot assure you that this agreement will result in
increased opportunities for any of our businesses or in the establishment of new relationships with potential clients or investors. To the extent that we do not capture the anticipated benefit of these services, our payment obligations under this
agreement may impede our growth and negatively impact our operating results.

Pursuant to the Amended and Restated Voting Agreement (as
defined below) among Arlington Asset, FBR TRS Holdings, Crestview and us, Crestview has the right to designate two representatives to serve on our board of directors and therefore has the ability to influence any action taken or recommended by our
board of directors. If the interests of Crestview are in conflict with the interests of our other stockholders, Crestviews ability to influence our board of directors could result in a conflict of interest for members of our board.

In connection with the Repurchase Agreement, we entered into the Amended and Restated Voting Agreement with Arlington Asset,
FBR TRS Holdings and Crestview (the Amended and Restated Voting Agreement) that provides Crestview, among other things, with the right to designate two representatives for election to our board of directors. Subject to certain
conditions, Crestview also has the right to designate one representative to serve on each of the committees of our board of directors, to the extent permitted by law and the applicable regulations of the NASDAQ Global Select Market (or, if not so
permitted, such designee(s) will have certain observation rights). Accordingly, Crestview may have the ability to influence any action taken or recommended by our board of directors. If the interests of Crestview are in conflict with the interests
of our other stockholders, the ability of Crestview to influence our board of directors could result in a conflict of interest for members of our board.



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Crestview has certain registration rights with respect to the shares of our common stock owned by it
and the exercise of these rights could affect the trading market for our common stock.

As of December 31, 2009,
Crestview, directly and indirectly, beneficially owned approximately 15.4% of the outstanding shares of our common stock, including stock options issued to them. We entered into a registration rights agreement with Crestview, dated as of
July 20, 2006, with respect to the shares of our common stock beneficially owned by Crestview. The registration rights agreement contains certain demand and piggyback registration rights.

If Crestview exercises its registration rights with respect to some or all of its shares of our common stock, this could have an adverse
effect on the market price of our common stock. Crestview could sell its stake in us to one or more third parties that may not be favorable to our stockholders. In addition, the existence of these rights may make it more difficult to effect a
business combination or increase the cost of a target business in the event that we are unable to complete a business combination solely with cash, as the stockholders of a particular target business may be discouraged from entering into a business
combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our common stock.

Risks Related to Our Industry

Significantly expanded corporate governance and public disclosure requirements may result in fewer initial public offerings and distract existing public companies from engaging in capital market transactions which may reduce the
number of investment banking opportunities available to pursue.

Highly-publicized financial scandals in recent years
have led to investor concerns over the integrity of the U.S. financial markets, and have prompted the United States Congress, the SEC, the NYSE and Nasdaq to significantly expand corporate governance and public disclosure requirements. To the extent
that private companies, in order to avoid becoming subject to these new requirements, decide to forgo initial public offerings, our equity underwriting business may be adversely affected. In addition, provisions of the Sarbanes-Oxley Act of 2002 and
the corporate governance rules imposed by self-regulatory organizations have diverted many companies attention away from capital market transactions, including securities offerings and acquisition and disposition transactions. In particular,
companies that are or are planning to be public are incurring significant expenses in complying with the SEC and accounting standards relating to internal control over financial reporting, and companies that disclose material weaknesses in such
controls under the new standards may have greater difficulty accessing the capital markets. These factors, in addition to adopted or proposed accounting and disclosure changes, may have an adverse effect on our business.

Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and
reputational harm resulting from adverse regulatory actions.

As a participant in the financial services industry, we
are subject to extensive regulation under federal and state laws in the U.S. and under the laws of other countries in which we do business. We are also regulated by a number of self-regulatory organizations. The industry has experienced increased
scrutiny from a variety of regulators, including the SEC, NYSE, FINRA, FSA and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement
environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the
SEC, other United States or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets, including FINRA. Among other things, we could be fined, prohibited from engaging in some of our business
activities or subject to limitations or conditions on our business activities. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which
could seriously harm our business prospects.



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In addition, financial services firms are subject to numerous conflicts of interests or
perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts and
regularly seek to review and update our policies, controls and procedures. However, appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately
with conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and
procedures may result in regulatory sanctions or client litigation. For example, the research areas of investment banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction
between equity research analysts and investment banking personnel at securities firms.

Employee misconduct could harm us and is
difficult to detect and deter.

Our reputation is critical in maintaining our relationship with clients, investors,
regulators and the general public and is a key focus in our risk management efforts. In recent years, there have been a number of highly publicized cases involving fraud, conflicts of interest or other misconduct by employees in the financial
services industry, and we run the risk that employee misconduct could occur at our company. For example, misconduct by employees could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and
serious reputational or financial harm. Misconduct by employees could include binding us to transactions that exceed authorized limits or present unacceptable risks, or hiding from us unauthorized or unsuccessful activities, which, in either case,
may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. As a result, we could suffer significant reputational harm for any misconduct by our employee. In
addition, in certain circumstances our reputation could be damaged by activities of our clients or of hedge funds or other entities in which we invest, over which we have little or no control.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



|ITEM 2. | PROPERTIES
|------- | ----------

Our principal
executive offices are located at Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209. We carry out all aspects of our operations related to our capital markets, asset management and principal investing segments at that location.
We lease with our affiliates six floors of our headquarters building in Arlington, Virginia. We also lease office space with our affiliates in the following locations where we conduct certain portions of our operations as indicated: Boston,
Massachusetts (capital markets and asset management); Dallas, Texas (capital markets); Houston, Texas (capital markets); Irvine, California (capital markets); New York, New York (capital markets); San Francisco, California (capital markets);
and London, England (capital markets). We believe that the present facilities, together with current options to extend lease terms and occupy additional space, are adequate for our current and presently projected needs.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

Many
aspects of our business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state securities laws, other Federal and state laws and court decisions,
including decisions with respect to underwriters liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions
of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other



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personnel. In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments. In recent years, there has been an
increasing incidence of litigation and actions by government agencies and self regulatory organizations involving the securities industry, including class actions that seek substantial damages. We are also subject to the risk of litigation,
including litigation that may be without merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect our financial condition,
operating results and liquidity.

Except as described below, we are neither a defendant nor plaintiff in any lawsuits or
arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material adverse effect on our financial condition, results of operations or liquidity. We have been named as a defendant in a small
number of civil lawsuits and arbitrations relating to our various businesses. In addition, we are subject to various reviews, examinations, investigations and other inquiries by governmental agencies and self regulatory organizations. There can be
no assurance that these matters individually or in aggregate will not have a material adverse effect on our financial condition or results of operations in a future period. However, based on managements review with counsel, resolution of these
matters is not expected to have a material adverse effect on our financial condition, results of operations or liquidity.

FBR & Co has been named as a defendant in a small number of securities claims involving investment banking clients of FBR & Co. as a result of FBR & Co.s role as an underwriter. In these cases, the
underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBR & Co. against certain claims or liabilities, including claims or liabilities under the Securities Act, as
amended, or contribute to payments which FBR & Co. is required to make as a result of the litigation. There can be no assurance that such indemnification or contribution will ultimately be available to us or that an investment banking
client will be able to satisfy its indemnity or contribution obligations when due. In May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for the first time, named
Friedman, Billings, Ramsey & Co., Inc. (now FBR & Co.) and eight other underwriters as defendants. The lawsuit, styled In Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United States District Court for
the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc., or TMI, and certain of its officers and directors, alleging material misrepresentations and omissions about, inter alia, the financial position
of TMI. The amended complaint now includes claims under Sections 11 and 12 of the Securities Act against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two offerings in January 2008). The
allegations against FBR & Co. relate only to its role as underwriter or member of the syndicate that underwrote TMIs total of three offerings in September 2007 and January 2008each of which occurred after the filing of the
original complaintwith an aggregate offering price of approximately $818 million. The plaintiffs seek restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although FBR & Co. is contractually
entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBR & Co. receives from TMI. On September 22,
2008, FBR & Co. filed a motion to dismiss the consolidated class action complaint as to FBR & Co. The District Court granted that motion on January 27, 2010. FBR & Co. subsequently moved for entry of a final
judgment in its favor. The plaintiffs have opposed that motion and have filed a motion seeking clarification of the Courts dismissal order. The plaintiffs contend that the District Courts dismissal order is, or should be,
without prejudice, and that they should be permitted to file an amended complaint that attempts to re-plead dismissed claims. The Court has yet to rule on FBR & Co.s motion for entry of final judgment, the plaintiffs motion
for clarification, or the plaintiffs expressed interest in filing an amended complaint. Although these cases involving FBR & Co. are at a preliminary stage, based on managements review with counsel and present information
currently known by management, resolution of such matters is not expected to have a material effect on our financial condition, results of operations, or liquidity.



|ITEM 4. | Reserved
|------- | --------



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | -------------------------------------------------------------------------------------------------------------

Price Range of Common Stock

Our common stock has been listed on The NASDAQ Global Select MarketSMunder the symbol FBCM since our initial public offering on June 7, 2007 and traded on this exchange since June 8, 2007. As of February 28, 2010, there were
63,503,836 shares of our common stock outstanding and approximately 39 holders of record. The table below shows the high and low sales prices for our common stock on The NASDAQ Global Select MarketSMfor the periods indicated.



|                              |  |                            |      |     |   |     
|----------------------------- |  | -------------------------- | ---- | --- | - | ----
|                              |  | Price Range ofCommon Stock
|                              |  | High                       |      | Low
|Year Ended December 31, 2009: |  |                            |      |     |   |     
|Fourth Quarter                |  | $                          | 7.26 |     | $ | 5.60
|Third Quarter                 |  |                            | 6.10 |     |   | 4.60
|Second Quarter                |  |                            | 6.40 |     |   | 3.19
|First Quarter                 |  |                            | 5.15 |     |   | 1.98
|                              | 
|                              |  | Price Range ofCommon Stock
|                              |  | High                       |      | Low
|Year Ended December 31, 2008: |  |                            |      |     |   |     
|Fourth Quarter                |  | $                          | 6.79 |     | $ | 2.73
|Third Quarter                 |  |                            | 7.38 |     |   | 3.09
|Second Quarter                |  |                            | 7.50 |     |   | 4.70
|First Quarter                 |  |                            | 9.72 |     |   | 5.39

Dividends

Our board of directors has not authorized and we have not declared or paid any cash dividends on our common stock. We do not anticipate that
we will pay any cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and growth of our business.



27



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Stock Performance Graph

The following graph compares the cumulative total return on a $100 investment in each of our common stock, the Standard & Poors 500 Stock Index and our Peer Group Index for the period from
June 8, 2007 to December 31, 2009. This graph assumes an investment in our common stock and the indices of $100 on June 8, 2007 and that all dividends, if any, were reinvested:

LOGO



|                      |  |          |     |          |   |          |  |          |    |  |   |   
|--------------------- |  | -------- | --- | -------- | - | -------- |  | -------- | -- |  | - | --
|                      |  | 06/08/07 |     | 12/31/07 |   | 12/31/08 |  | 12/31/09
|FBCM Common Stock     |  | $        | 100 |          | $ | 53       |  | $        | 27 |  | $ | 34
|S&P 500 Index         |  |          | 100 |          |   | 98       |  |          | 62 |  |   | 78
|FBCM Peer Group Index |  |          | 100 |          |   | 78       |  |          | 56 |  |   | 79

Our Peer Group Index
includes the following companies in the broker-dealer industry: Cowen Group, Inc., Evercore Partners Inc., Jefferies Group Inc., JMP Group Inc., KBW, Inc., Lazard Ltd., Piper Jaffray Companies, Southwest Group Inc. and Thomas Weisel Partners Group,
Inc. The total return calculations reflected in the foregoing graph were performed by Securities Industry Analytics, LLC.



28



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------- | ---- | ----------------------- | ------- | ---- |  | - | -------- | - |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                                                        |      | Year Ended December 31, |        
|                                                                                        | 2009 |                         |         | 2008 |  |   | 2007     |   |  | 2006 |         |   | 2005 |  
|Consolidated Statements of Operations (dollars in thousands, except per share
amounts): |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Revenues:                                                                               |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Investment banking:                                                                     |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Capital raising                                                                         |      | $                       | 121,007 |      |  | $ | 76,377   |   |  | $    | 289,545 |   |      | $ | 190,576 |   |  | $ | 374,658 |  
|Advisory                                                                                |      |                         | 17,716  |      |  |   | 20,573   |   |  |      | 34,063  |   |      |   | 24,148  |   |  |   | 17,759  |  
|Institutional brokerage:                                                                |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Principal transactions                                                                  |      |                         | 40,271  |      |  |   | 20,261   |   |  |      | 10,152  |   |      |   | 5,814   |   |  |   | 15,980  |  
|Agency commissions                                                                      |      |                         | 92,864  |      |  |   | 118,314  |   |  |      | 104,633 |   |      |   | 100,855 |   |  |   | 82,551  |  
|Mortgage trading interest income                                                        |      |                         |        |      |  |   |         |   |  |      |        |   |      |   | 51,148  |   |  |   | 30,859  |  
|Mortgage trading net investment loss                                                    |      |                         |        |      |  |   |         |   |  |      |        |   |      |   | (3,298  | ) |  |   | (3,820  | )
|Asset management fees                                                                   |      |                         | 13,244  |      |  |   | 15,883   |   |  |      | 23,950  |   |      |   | 21,198  |   |  |   | 24,009  |  
|Net investment income (loss)                                                            |      |                         | 1,577   |      |  |   | (81,335  | ) |  |      | (4,497  | ) |      |   | 3,372   |   |  |   | 4,611   |  
|Interest, dividends & other                                                             |      |                         | 5,806   |      |  |   | 24,292   |   |  |      | 27,050  |   |      |   | 24,826  |   |  |   | 28,832  |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total revenues                                                                          |      |                         | 292,485 |      |  |   | 194,365  |   |  |      | 484,896 |   |      |   | 418,639 |   |  |   | 575,439 |  
|Interest expense                                                                        |      |                         | 252     |      |  |   | 12,457   |   |  |      | 5,337   |   |      |   | 54,543  |   |  |   | 42,630  |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Revenue, net of interest expense                                                        |      |                         | 292,233 |      |  |   | 181,908  |   |  |      | 479,559 |   |      |   | 364,096 |   |  |   | 532,809 |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Non-interest expenses:                                                                  |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Compensation and benefits                                                               |      |                         | 193,017 |      |  |   | 227,114  |   |  |      | 287,752 |   |      |   | 225,712 |   |  |   | 277,698 |  
|Professional services                                                                   |      |                         | 23,971  |      |  |   | 34,895   |   |  |      | 45,303  |   |      |   | 43,712  |   |  |   | 53,834  |  
|Business development                                                                    |      |                         | 13,770  |      |  |   | 30,057   |   |  |      | 37,356  |   |      |   | 33,772  |   |  |   | 39,335  |  
|Clearing and brokerage fees                                                             |      |                         | 13,945  |      |  |   | 14,010   |   |  |      | 12,373  |   |      |   | 11,715  |   |  |   | 8,690   |  
|Occupancy and equipment                                                                 |      |                         | 33,655  |      |  |   | 33,244   |   |  |      | 33,197  |   |      |   | 30,039  |   |  |   | 23,379  |  
|Communications                                                                          |      |                         | 21,304  |      |  |   | 24,183   |   |  |      | 22,434  |   |      |   | 20,039  |   |  |   | 17,354  |  
|Impairment of intangible assets                                                         |      |                         | 5,350   |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  
|Other operating expenses                                                                |      |                         | 16,210  |      |  |   | 16,625   |   |  |      | 15,868  |   |      |   | 12,219  |   |  |   | 18,500  |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total non-interest expenses                                                             |      |                         | 321,222 |      |  |   | 380,128  |   |  |      | 454,283 |   |      |   | 377,208 |   |  |   | 438,790 |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|(Loss) income before income taxes                                                       |      |                         | (28,989 | )    |  |   | (198,220 | ) |  |      | 25,276  |   |      |   | (13,112 | ) |  |   | 94,019  |  
|Income tax (benefit) provision                                                          |      |                         | (1,338  | )    |  |   | (3,490   | ) |  |      | 20,032  |   |      |   | (3,271  | ) |  |   | 45,934  |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Net (loss) income                                                                       |      | $                       | (27,651 | )    |  | $ | (194,730 | ) |  | $    | 5,244   |   |      | $ | (9,841  | ) |  | $ | 48,085  |  
|                                                                                        |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Basic and diluted (loss) earnings per share                                             |      | $                       | (0.46   | )    |  | $ | (3.09    | ) |  | $    | 0.08    |   |      | $ | (0.18   | ) |  | $ | 1.05    |  
|Weighted-average shares (in thousands):(1)                                              |      |                         |         |      |  |   |          |   |  |      |         |   |      |   |         |   |  |   |         |  
|Basic                                                                                   |      |                         | 60,094  |      |  |   | 63,056   |   |  |      | 64,123  |   |      |   | 54,137  |   |  |   | 46,000  |  
|Diluted                                                                                 |      |                         | 60,094  |      |  |   | 63,056   |   |  |      | 64,187  |   |      |   | 54,137  |   |  |   | 46,000  |  



|(1) | The weighted average shares outstanding used in the calculation of earnings per share is presented assuming the issuance of 1,000 shares associated with our formation
and 45,999,000 shares associated with the contribution transaction prior to our July 2006 private offering for the year ended December 31, 2005. The weighted average shares outstanding used in the calculation of earnings per share for the year
ended December 31, 2006, is presented assuming the issuance of 46,000,000 shares, previously discussed, as of January 1, 2006, and the effect of 18,000,000 shares issued in our July 2006 private offering.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|----------------------------------------------------------------- |  | ----------------------- | ------- | -- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | -- |  | - | --------- | -
|                                                                  |  | As of December 31,      |        
|                                                                  |  | 2009                    |         |    | 2008 |   |         | 2007 |  |   | 2006    |   |  | 2005 |        
|Consolidated Balance Sheet Data (in thousands):                   |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Assets:                                                           |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Cash and cash equivalents                                         |  | $                       | 275,506 |    |      | $ | 207,801 |      |  | $ | 383,558 |   |  | $    | 151,417 |    |  | $ | 162,434   |  
|Mortgage-backed securities, at fair value                         |  |                         |        |    |      |   | 454,339 |      |  |   |        |   |  |      | 415,391 |    |  |   |          |  
|Trading securities, at fair value                                 |  |                         | 94,478  |    |      |   | 17,954  |      |  |   | 19,057  |   |  |      | 18,180  |    |  |   | 1,034,388 |  
|Reverse repurchase agreements                                     |  |                         |        |    |      |   |        |      |  |   |        |   |  |      |        |    |  |   | 283,825   |  
|Long-term investments                                             |  |                         | 43,620  |    |      |   | 41,174  |      |  |   | 84,076  |   |  |      | 32,343  |    |  |   | 34,456    |  
|Due from brokers, dealers, and clearing organizations             |  |                         | 96,477  |    |      |   |        |      |  |   |        |   |  |      | 28,691  |    |  |   | 70,926    |  
|Other                                                             |  |                         | 46,244  |    |      |   | 79,101  |      |  |   | 122,041 |   |  |      | 113,397 |    |  |   | 96,958    |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Total assets                                                      |  | $                       | 556,325 |    |      | $ | 800,369 |      |  | $ | 608,732 |   |  | $    | 759,419 |    |  | $ | 1,682,987 |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Liabilities:                                                      |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Securities sold but not yet purchased, at fair value              |  | $                       | 51,669  |    |      | $ | 8,325   |      |  | $ | 206     |   |  | $    | 202     |    |  | $ | 150,547   |  
|Commercial paper                                                  |  |                         |        |    |      |   |        |      |  |   |        |   |  |      |        |    |  |   | 136,016   |  
|Repurchase agreements                                             |  |                         |        |    |      |   | 416,037 |      |  |   |        |   |  |      | 189,155 |    |  |   | 929,363   |  
|Accounts payable and other liabilities                            |  |                         | 94,989  |    |      |   | 69,271  |      |  |   | 94,274  |   |  |      | 85,674  |    |  |   | 218,093   |  
|Due to brokers, dealers, and clearing organizations               |  |                         | 90,168  |    |      |   | 3,009   |      |  |   | 7,512   |   |  |      |        |    |  |   |          |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Total liabilities                                                 |  |                         | 236,826 |    |      |   | 496,642 |      |  |   | 101,992 |   |  |      | 275,031 |    |  |   | 1,434,019 |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Shareholders equity                                              |  |                         | 319,499 |    |      |   | 303,727 |      |  |   | 506,740 |   |  |      | 484,388 |    |  |   | 248,968   |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Total liabilities and shareholders equity                        |  | $                       | 556,325 |    |      | $ | 800,369 |      |  | $ | 608,732 |   |  | $    | 759,419 |    |  | $ | 1,682,987 |  
|                                                                  |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|                                                                  | 
|                                                                  |  | Year ended December 31, |        
|                                                                  |  | 2009                    |         |    | 2008 |   |         | 2007 |  |   | 2006    |   |  | 2005 |        
|Statistical Data:                                                 |  |                         |         |    |      |   |         |      |  |   |         |   |  |      |         |    |  |   |           |  
|Total employees(1)                                                |  |                         | 595     |    |      |   | 568     |      |  |   | 758     |   |  |      | 702     |    |  |   | 761       |  
|Net revenue per employee                                          |  | $                       | 491     |    |      | $ | 320     |      |  | $ | 633     |   |  | $    | 519     |    |  | $ | 700       |  
|Pre-tax (loss) return on average equity                           |  |                         | (9      | )% |      |   | (49     | )%   |  |   | 5       | % |  |      | (4      | )% |  |   | 38        | %
|Compensation and benefits expense as a percentage of net revenues |  |                         | 66      | %  |      |   | 125     | %    |  |   | 60      | % |  |      | 62      | %  |  |   | 52        | %



|(1) | As of end of the period reported.
|--- | ---------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Overview

We are a
full-service investment banking, institutional brokerage and asset management firm with a customer-focused and innovative approach to meeting our clients needs. In addition, we make principal investments, including merchant banking
investments, with our own capital. We were formed in June 2006, and we completed the initial public offering of our common stock in June 2007. Since the founding of certain predecessor companies, we have grown from a boutique investment bank with
primary expertise in financial institutions into a full-service U.S. investment bank for middle-market companies.

Through our
principal operating subsidiaries, FBR Capital Markets & Co. (FBR & Co.), an SEC-registered broker-dealer, FBR Capital Markets International, Ltd. (FBRIL), a broker-dealer registered with the United
Kingdoms FSA, and FBR Fund Advisers, Inc. (FBR Fund Advisers), an SEC-registered investment adviser, we have focused our business on providing:



| |  |  | capital raising services, including underwriting and placement of public and private equity and debt;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | financial advisory services, including merger and acquisition (M&A), advisory, restructuring, liability management, recapitalization
and strategic alternative analysis;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | institutional sales and trading services focused on equity, equity-linked securities, high-yield bonds, senior debt and bank loans;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | research coverage, and;
| | - |  | -----------------------



| |  |  | asset management services through a family of mutual funds; and
| | - |  | ---------------------------------------------------------------



| |  |  | proprietary investment returns to our shareholders through merchant banking and other direct investments that we make utilizing our own capital.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

We focus our capital markets business (investment banking and institutional brokerage) in eight broad
industry sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, healthcare, insurance, real estate, and technology, media and telecommunications (TMT). We collectively refer to these eight
sectors as our core sectors. In 2009, we executed 39 banking assignments, including $3.3 billion total transaction value of lead- or co-lead managed capital raising transactions, and completed 19 M&A and advisory assignments. As of
December 31, 2009, we were a market-maker or trader in more than 970 securities, provided sales and trading services to more than 960 institutional equity sales clients, 320 convertible, credit and listed option clients, and 165 clients
serviced through our office in London, and provided independent research on more than 420 companies.

On the asset management
side of our business, through FBR Fund Advisers, we provide clients with a range of investment choices through The FBR Funds, a family of mutual funds. As of December 31, 2009, we had $1.3 billion in mutual fund assets under management.

Our business is comprised of three separate segments: capital markets, which includes investment banking and institutional
brokerage (including institutional sales and trading and research); asset management; and principal investing (including merchant banking).

Business Environment

The environment for both the equity and debt markets improved steadily throughout 2009
after reaching extreme lows in valuation and capital markets activity in the first quarter of the year. Overall economic conditions, however, remained challenging throughout the year. In particular, employment trends remained negative during most of
the year, with the seasonally adjusted unemployment rate reaching a high of 10.1% in October 2009, according to the U.S. Bureau of Labor Statistics.



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Although we expect to see improving trends in the financial markets in 2010, we also expect
economic conditions to remain challenging throughout the year. Despite solid GDP growth reported in the fourth quarter of 2009, continued high levels of unemployment, the anticipated reduction of government support for the mortgage markets, and the
fading impact of the 2009 stimulus package may be headwinds that keep any economic recovery from gaining significant momentum. As a result of recent conditions in the financial markets, legislators and regulators are considering a number of
proposals which, if adopted, could directly and indirectly affect the financial services industry and our business. Given the uncertainty surrounding current legislative and regulatory proposals, it is unclear whether any such changes would have an
adverse affect on our business. Finally, the uncertainty surrounding the scope and timing of regulatory reform may result in issuers and investors delaying or curtailing activity in the financial markets until the regulatory outlook becomes more
certain.

Against this economic backdrop, it is difficult to anticipate the duration and extent of any continued strength in
financial markets. Consequently, although we believe that trends in middle market advisory and capital raising activity will continue to improve during 2010, we expect that transaction volumes across capital markets sectors could remain at low
levels when compared to previous recoveries.

Executive Summary

For the year ended December 31, 2009, our total revenues, net of interest expense, were $292.2 million with a net loss of $27.7 million,
compared to total net revenues of $181.9 million and a net loss of $194.7 million for the year ended December 31, 2008. For the year ended December 31, 2007, our total revenues, net of interest expense, were $479.6 million and our net
income was $5.2 million. Our net loss for 2009 is reflective of the continued negative impact that the global economic environment has had on the equity capital markets particularly in the first half of the year.

As economic conditions in 2009 continued to be difficult due to the business environment discussed above and despite our net loss for the
year, 2009 was a year of successful repositioning for the Company. We maintained a significantly reduced cost structure during the year, enhanced and diversified our operating platform and returned to profitability in the second half of the year.

Our total fixed costs for the year ended December 31, 2009 were $190.8 million as compared to $247.5 million for 2008
and $217.9 million for 2007. The reduction in fixed costs during 2009 is a result of the effects of various cost savings measures initiated over the past two years to align our cost structure to the current business environment. These measures
included reductions in our average headcount, decreased professional services and business development expenditures as well as initiatives to right-size our facilities, the benefits of which we expect to more fully realize in 2010.

Our employee headcount increased from 568 at the end of 2008 to 595 at December 31, 2009, partially due to our addition of 70 senior
professionals in revenue generating departments during the year and our expansion of our institutional brokerage capabilities relative to credit trading, listed options trading and introducing prime brokerage. We believe that while the broadening of
our business over the past year assists in diversifying our revenue sources, more importantly it will allow us to better compete for corporate finance and advisory business throughout a companys lifecycle.

Our return to profitability during the second half of 2009 was driven primarily by $122.2 million of investment banking revenue during this
period, including $68.1 million from our completion of two large private placements.

Looking forward to 2010, it is not yet
apparent that a full recovery is underway and it is likely that markets will experience bouts of volatility as we work toward recovery in the coming quarters. We believe that the themes of the last few quarters of deleveraging both at the corporate
and consumer levels and the pursuit of returns from distressed asset classes will continue to drive capital markets activity.

The following is an analysis of our operating results by segment for the years ended December 31, 2009, 2008 and 2007.



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##### Table of Contents

Capital Markets

Our capital markets segment includes investment banking and institutional sales, trading and research. These business units operate as a
single integrated segment to deliver capital raising, advisory and sales and trading services to corporate and institutional clients. Our investment banking and institutional brokerage businesses are focused on the consumer, diversified industrials,
energy and natural resources, financial institutions, healthcare, insurance, real estate and TMT sectors. By their nature, our capital markets business activities are highly competitive and are subject to general market conditions, volatile trading
markets, and fluctuations in the volume of market activity, as well as to the conditions affecting the companies and markets in our areas of focus. As a result, our capital markets revenues and profits are subject to significant volatility from
period to period. The following table provides a summary of our results within the capital markets segment (dollars in thousands).



|                                          |  |                                 |         |   |      |   |          |      |  |   |        
|----------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------
|                                          |  | For the year ended December 31,
|                                          |  | 2009                            |         |   | 2008 |   |          | 2007
|Revenues, net of interest expense:        |  |                                 |         |   |      |   |          |      |  |   |        
|Investment banking                        |  | $                               | 138,723 |   |      | $ | 96,950   |      |  | $ | 323,608
|Institutional brokerage                   |  |                                 | 132,629 |   |      |   | 137,263  |      |  |   | 112,351
|Net interest income, dividends, and other |  |                                 | 1,358   |   |      |   | 1,795    |      |  |   | 10,847 
|                                          |  |                                 |         |   |      |   |          |      |  |   |        
|Total                                     |  |                                 | 272,710 |   |      |   | 236,008  |      |  |   | 446,806
|                                          |  |                                 |         |   |      |   |          |      |  |   |        
|Operating Expenses:                       |  |                                 |         |   |      |   |          |      |  |   |        
|Variable                                  |  |                                 | 116,159 |   |      |   | 121,270  |      |  |   | 220,154
|Fixed                                     |  |                                 | 176,103 |   |      |   | 224,789  |      |  |   | 197,575
|                                          |  |                                 |         |   |      |   |          |      |  |   |        
|Total                                     |  |                                 | 292,262 |   |      |   | 346,059  |      |  |   | 417,729
|                                          |  |                                 |         |   |      |   |          |      |  |   |        
|Pre-tax (loss) income                     |  | $                               | (19,552 | ) |      | $ | (110,051 | )    |  | $ | 29,077 
|                                          |  |                                 |         |   |      |   |          |      |  |   |        

The pre-tax loss from our capital markets segment
decreased from $110.1 million for the year ended December 31, 2008 to a pre-tax loss of $19.6 million for the year ended December 31, 2009. This decrease is primarily attributable to a $41.8 million increase in investment banking revenues
during 2009, reflecting a higher volume of capital raising activity, and a $53.8 million reduction in operating expenses. Our institutional brokerage sales and trading revenues decreased to $132.6 million for the year ended December 31, 2009 as
compared to $137.3 million for the year ended December 31, 2008. This decrease is primarily attributable to higher trading volume during the fourth quarter of 2008 as a result of significant volatility in the market partially offset by
increased revenue from our convertible securities, credit, and listed option trading businesses in 2009. Fixed expenses decreased $48.7 million, or 21.7% in 2009, which is attributable to non-compensation cost reduction initiatives, a reduction in
average employees, and a decrease in business development activities. The reduction in fixed costs reflects our actions over the past year to size our business and cost structure to the current operating environment. Variable expenses decreased $5.1
million, or 4.2% in 2009, in contrast to a 15.6% increase in net revenues, reflecting initiatives undertaken to reduce compensation expense and costs associated with investment banking transactions.

The pre-tax income from our capital markets segment was $29.1 million for the year ended December 31, 2007 compared to a pre-tax loss
of $110.1 million for the year ended December 31, 2008. This change was primarily attributable to a $226.7 million decrease in investment banking revenues during 2008, reflecting a substantially lower volume of capital raising activity and a
decrease in advisory revenues. The lower volume of capital raising activity during 2008 reflected the continued effect that the dislocation in credit markets and a world-wide recession had on U.S. equity markets and equity underwriting activity. Our
institutional brokerage sales and trading revenues increased to $137.3 million for the year ended December 31, 2008 as compared to $112.4 million for the year ended December 31, 2007. This increase in institutional brokerage sales and
trading revenues was attributable to increases in overall trading volume, the increased volatility in the equity markets due to the economic environment during 2008, and the integration of a convertible securities business. Variable



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expenses decreased $98.9 million, or 44.9%, which is attributable to reduced compensation expense and costs directly related to the decrease in net revenues. The decrease in variable expenses was
offset partially by a $27.2 million increase in fixed expenses that was attributable to severance costs associated with a reduction in our workforce, increased stock-based compensation related to senior employees, and increased costs related to
investments in our international operations.

Asset Management

Our asset management segment consists primarily of the management of The FBR Funds, a family of mutual funds. Our mutual fund assets under
management increased 8.3% from $1.2 billion at December 31, 2008 to $1.3 billion at December 31, 2009. The increase in the mutual fund assets under management is primarily the result of the performance of our mutual funds partially offset
by the transfer of an unprofitable money market mutual fund to a third party adviser in December 2009. Our remaining assets under management decreased from $253.5 million at December 31, 2008 to $9.3 million at December 31, 2009. The
decrease in these assets under management was primarily the result of our decision to transfer our private wealth client accounts to a third party adviser in May 2009. The following tables provide a summary of our results within the asset management
segment (dollars in thousands).



|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  
|---------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                   |  | For the year ended December 31, |        
|                                   |  | 2009                            |         |   | 2008 |   |         | 2007 | 
|Revenues, net of interest expense: |  |                                 |         |   |      |   |         |      |  |   |        |  
|Asset management fees              |  | $                               | 13,245  |   |      | $ | 15,883  |      |  | $ | 23,950 |  
|Net interest income and other      |  |                                 | 524     |   |      |   | 1,390   |      |  |   | 2,500  |  
|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  
|Total                              |  |                                 | 13,769  |   |      |   | 17,273  |      |  |   | 26,450 |  
|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  
|Operating Expenses:                |  |                                 |         |   |      |   |         |      |  |   |        |  
|Variable                           |  |                                 | 8,839   |   |      |   | 11,304  |      |  |   | 16,171 |  
|Fixed                              |  |                                 | 13,027  |   |      |   | 20,880  |      |  |   | 17,360 |  
|Impairment of intangible assets    |  |                                 | 5,350   |   |      |   |        |      |  |   |       |  
|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  
|Total                              |  |                                 | 27,216  |   |      |   | 32,184  |      |  |   | 33,531 |  
|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  
|Pre-tax loss                       |  | $                               | (13,447 | ) |      | $ | (14,911 | )    |  | $ | (7,081 | )
|                                   |  |                                 |         |   |      |   |         |      |  |   |        |  

The pre-tax loss from our asset management segment decreased to $13.4 million in 2009 compared to a
pre-tax loss of $14.9 million in 2008. Our results for 2009 include a $5.4 million impairment of an intangible asset related to the management contract for the money market mutual fund noted above. The impairment was the result of factors such as
significantly reduced yields on short- term government investments and the requirement for us to both waive our management fees and reimburse certain expenses of the fund resulting in the management contract becoming unprofitable for us in the
period. We also considered the cost structure of this fund, a forecasted continuation of a low rate environment for the funds investments and the forecasted ongoing waiver of our management fee in recognizing this impairment charge. Subsequent
to the impairment charge during 2009, we transferred the money market mutual fund to a third party adviser for no consideration. Despite this impairment charge, we were able to decrease the pre-tax loss for this segment due to a decrease in fixed
expenses as a result of cost reduction initiatives in non-compensation expenses and a reduction in employees.

The pre-tax
loss from our asset management activities increased to $14.9 million in 2008 compared to a pre-tax loss of $7.1 million in 2007. We recorded $15.3 million in management fees for the year ended December 31, 2008, as compared to $23.5
million for the year ended December 31, 2007. The decrease in management fees during 2008 reflects the effects of the decrease in average assets under management compared to the prior year. Operating expenses decreased as a result of lower
variable costs, including sub-advisory fees, offset by increases in fixed expenses attributable to initiatives to expand our mutual fund marketing activities.



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The following provides details relating to our assets under management (dollars in
millions):



|                               |  |                   |         |                   |   |          |  |        |         |  |   |        
|------------------------------ |  | ----------------- | ------- | ----------------- | - | -------- |  | ------ | ------- |  | - | -------
|                               |  | December 31, 2009 |         | December 31, 2008
|                               |  | Gross(1)          |         | Net(2)            |   | Gross(1) |  | Net(2)
|Mutual funds:                  |  |                   |         |                   |   |          |  |        |         |  |   |        
|Equity                         |  | $                 | 1,325.9 |                   | $ | 1,317.9  |  | $      | 1,088.6 |  | $ | 1,079.6
|Fixed income and money market  |  |                   |        |                   |   |         |  |        | 100.0   |  |   | 99.8   
|Managed accounts               |  |                   |        |                   |   |         |  |        | 216.6   |  |   | 216.6  
|Private equity and hedge funds |  |                   | 10.1    |                   |   | 9.3      |  |        | 40.7    |  |   | 36.9   
|                               |  |                   |         |                   |   |          |  |        |         |  |   |        
|Total                          |  | $                 | 1,336.0 |                   | $ | 1,327.2  |  | $      | 1,445.9 |  | $ | 1,432.9
|                               |  |                   |         |                   |   |          |  |        |         |  |   |        



|(1) | Gross assets under management represent the amount of actual gross assets of our proprietary investment partnerships and mutual funds, including leverage.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net assets under management represent gross assets under management, net of any repurchase agreement debt, margin loans, securities sold but not yet purchased, lines of
credit, and any other liabilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our asset management revenues and net income (loss) are subject to
fluctuations due to a variety of factors that are unpredictable, including the overall condition of the economy and the securities markets as a whole and our core sectors. These conditions can have a material effect on the inflows and outflows of
assets under management, and the performance of our asset management funds.

Principal Investing

As of December 31, 2009, our principal investing activity consists of investments in merchant banking and long-term equity investments
and investments in mutual, hedge and venture funds. The following tables provide a summary of our results within the principal investing segment (dollars in thousands):



|                                          |  |                                |       |      |   |         |      |  |   |        |  
|----------------------------------------- |  | ------------------------------ | ----- | ---- | - | ------- | ---- |  | - | ------ | -
|                                          |  | For the year endedDecember 31, |      
|                                          |  | 2009                           |       | 2008 |   |         | 2007 | 
|Revenues, net of interest expense:        |  |                                |       |      |   |         |      |  |   |        |  
|Net investment income (loss)              |  | $                              | 1,577 |      | $ | (79,551 | )    |  | $ | (4,507 | )
|Net interest income, dividends, and other |  |                                | 4,177 |      |   | 8,178   |      |  |   | 10,810 |  
|                                          |  |                                |       |      |   |         |      |  |   |        |  
|Total                                     |  |                                | 5,754 |      |   | (71,373 | )    |  |   | 6,303  |  
|                                          |  |                                |       |      |   |         |      |  |   |        |  
|Operating Expenses:                       |  |                                |       |      |   |         |      |  |   |        |  
|Variable                                  |  |                                | 109   |      |   | 55      |      |  |   | 105    |  
|Fixed                                     |  |                                | 1,635 |      |   | 1,830   |      |  |   | 2,918  |  
|                                          |  |                                |       |      |   |         |      |  |   |        |  
|Total                                     |  |                                | 1,744 |      |   | 1,885   |      |  |   | 3,023  |  
|                                          |  |                                |       |      |   |         |      |  |   |        |  
|Pre-tax income (loss)                     |  | $                              | 4,010 |      | $ | (73,258 | )    |  | $ | 3,280  |  
|                                          |  |                                |       |      |   |         |      |  |   |        |  



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The pre-tax income from our principal investing activities increased to $4.0 million in 2009
as compared to a pre-tax loss of $73.3 million in 2008. This change is primarily attributable to a $79.6 million net investment loss incurred during 2008 as compared to $1.6 million of net investment income in 2009 partially offset by a decrease in
net interest income. The net investment loss in 2008 includes other-than-temporary impairment charges related to merchant banking and long-term investments and mortgage-backed securities that arent comparable to 2009. The following table
details the components of net investment income/loss for the periods (dollars in thousands):



|                                                                                     |  |                                |        |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                     |  | For the year endedDecember 31, |       
|                                                                                     |  | 2009                           |        |   | 2008 |   |         | 2007 | 
|Other-than-temporary impairment losses on merchant banking and long-term investments |  | $                              |       |   |      | $ | (41,458 | )    |  | $ | (11,331 | )
|Realized (loss) income on sales of mortgage-backed securities                        |  |                                | (1,502 | ) |      |   | (21,853 | )    |  |   | 1,961   |  
|Other-than-temporary impairment losses on mortgage-backed securities                 |  |                                |       |   |      |   | (11,174 | )    |  |   |        |  
|Income (loss) on long-term equity investments and investment funds                   |  |                                | 3,079  |   |      |   | (5,066  | )    |  |   | 4,863   |  
|                                                                                     |  |                                |        |   |      |   |         |      |  |   |         |  
|Total                                                                                |  | $                              | 1,577  |   |      | $ | (79,551 | )    |  | $ | (4,507  | )
|                                                                                     |  |                                |        |   |      |   |         |      |  |   |         |  

For the year ended December 31, 2009, we generated income on long-term equity investments and
investment funds, consisting primarily of realized gains on sales and increases in the fair value of our seed investments in our mutual funds, of $3.1 million. This compares to losses on investment funds of $5.1 million as a result of market
conditions during 2008.

The other-than-temporary impairment losses recorded for the year ended December 31, 2008 related
to merchant banking and long-term investments reflect our assessment of the severity and duration of unrealized losses related to various securities. The recognition of these other-than-temporary impairment losses during 2008 was a result of
economic and market conditions during that period and our assessment of these conditions, as well as other company-specific factors, relative to the various investments. Based on our consideration of comparable factors, there were no
other-than-temporary impairment losses recorded for the year ended December 31, 2009. In addition, during 2008 we realized losses of $21.9 million and recognized other-than-temporary impairment losses of $11.2 million associated with the actual
and planned disposition of mortgage-backed securities held during the year. This compares to $1.5 million of realized losses related to the disposition during the first quarter of 2009 of the remaining mortgage-backed securities held at
December 31, 2008.

The pre-tax loss from our principal investing activities of $73.3 million in 2008 represents a
decrease from pre-tax income of $3.3 million in 2007. The decrease in pre-tax income was primarily attributable to substantially increased net investment losses due to the recognition of impairment losses and realized losses on dispositions of
merchant banking, long-term investments and mortgage-backed securities discussed above as compared to 2007. Also, the performance of our investment funds resulted in net investment losses of $5.5 million for the year ended December 31, 2008 as
compared to net investment income of $2.2 million in 2007.

In addition, the decrease in net interest income on our liquid
capital contributed to the decrease in pre-tax income during 2008. For the years ended December 31, 2008 and 2007, we recorded net interest income of $7.5 million and $10.1 million, respectively. This decrease in net interest income was
attributable to the year-over-year decrease in money market rates and lower interest-bearing cash and investment balances for the year ended December 31, 2008 compared to the same period in 2007.

Merchant Banking

The total value of our merchant banking portfolio and other long-term investments was $43.6 million as of December 31, 2009. Of this total, $34.1 million was held in the merchant banking portfolio, $9.3 million was held in investment
funds, and $0.2 million was held in other long-term investments.



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The following table provides additional detail regarding our merchant banking and other
long-term investments as of December 31, 2009 (dollars in thousands):

Merchant Banking and Other Long-Term Investments



|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|---------------------------------------------- |  | ----------------- |  | ------------------ | ------ | ---------------- | - | ------------------------- |  | - | ------
|                                               |  | December 31, 2009
|                                               |  | Numberof Shares   |  | OriginalCost Basis |        | AdjustedBasis(1) |   | Fair Value/Carrying Value
|Long-term investments, at fair value:          |  |                   |  |                    |        |                  |   |                           |  |   |       
|Merchant banking-marketable equity securities: |  |                   |  |                    |        |                  |   |                           |  |   |       
|Cohen & Company, Inc                           |  | 64,768            |  | $                  | 389    |                  | $ | 389                       |  | $ | 317   
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|Total long-term investments, at fair value     |  |                   |  | $                  | 389    |                  | $ | 389                       |  | $ | 317   
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|Other long-term investments:                   |  |                   |  |                    |        |                  |   |                           |  |   |       
|Merchant bankingnon-public securities(2):     |  |                   |  |                    |        |                  |   |                           |  |   |       
|Cohen & Company, Inc (Note).                   |  | n/a               |  | $                  | 312    |                  | $ | 312                       |  | $ | 312   
|Ellington Financial LLC                        |  | 1,438,750         |  |                    | 27,049 |                  |   | 21,581                    |  |   | 21,581
|NBH Holdings, Inc                              |  | 526,316           |  |                    | 10,000 |                  |   | 10,000                    |  |   | 10,000
|Thunderbird Resorts, Inc.                      |  | 1,249,914         |  |                    | 10,722 |                  |   | 1,875                     |  |   | 1,875 
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|Total                                          |  |                   |  | $                  | 48,083 |                  | $ | 33,768                    |  | $ | 33,768
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|Investment funds                               |  |                   |  |                    |        |                  |   |                           |  |   | 9,329 
|Other investments                              |  |                   |  |                    |        |                  |   |                           |  |   | 206   
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       
|Total other long-term investments              |  |                   |  |                    |        |                  |   |                           |  | $ | 43,303
|                                               |  |                   |  |                    |        |                  |   |                           |  |   |       



|(1) | Adjusted basis reflects the effects of other-than-temporary impairment, if any.
|--- | -------------------------------------------------------------------------------

|(2) | As of December 31, 2009, these shares cannot be traded in a public market (e.g., NYSE or Nasdaq) but may be sold in private transactions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

Revenues

Our revenues consist primarily of capital raising and advisory fees in investment banking;
agency commissions, principal transactions, including trading gains and losses, in institutional brokerage; base management fees and 12b-1 fees in asset management, and with respect to principal investing activities, net investment income, including
realized gains or losses, and dividends from merchant banking investments, earnings from investment funds, and net interest income from principal investing activities.

Revenue from capital raising transactions is substantially dependent on the market for public and private offerings of equity and debt securities within the core sectors in which we focus. Agency
commissions are dependent on the level of overall market trading volume and penetration of our institutional client base by our research, sales, and trading staff. Principal brokerage transactions are dependent on these same factors and on trading
volume and spreads in the securities of such companies; net trading gains and losses are dependent on the market performance of securities held, as well as our decisions as to the level of market exposure we accept in these securities. Asset
management revenues are dependent on the level of the capital on which our base management fees are calculated. Our asset management vehicles are subject to market risk in the markets in which they would seek to sell or buy financial instruments. As
such, revenue earned from these activities, including unrealized gains and losses from our seed investments, that are included in net investment income, may fluctuate as a result. Beginning in July 2009, we held short positions in certain
exchange-traded funds in order to hedge the effects of the performance of our seed investments in mutual funds. Accordingly, our revenues in these areas have fluctuated in the past, and we anticipate that they are likely to continue to fluctuate in
the future, based on these factors.



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In our principal investing activities, merchant banking and other
long-term investments are subject to market risk, as well as, any number of specific additional risks related to each investment. As a result, net investment income and dividends generated from these investments will vary and cannot be accurately
predicted. Also,mortgage-backed securities that were financed by repurchase agreement borrowings are subject to market risk and risks related to the terms and conditions of the financing agreements. During the first quarter of 2009, we sold our
remaining leveraged mortgage-backed securities and retired the related repurchase agreement borrowings used to finance these securities. We do not intend to purchase additional mortgage-backed securities.

Investment Banking

Capital raising revenue consists of underwriting discounts, selling concessions, management fees and reimbursed expenses associated with underwriting activities and private equity placements. We act in varying capacities in our capital
raising activities, which, based on the underlying economics of each transaction, determine our ultimate revenues from these activities. When we are engaged as lead-manager of an underwriting, we generally bear more risk and earn higher revenues
than if engaged as a co-manager, an underwriter (syndicate member) or a broker-dealer included in the selling group.

Advisory
revenue consists primarily of advisory fees and reimbursed expenses associated with such activities. Advisory fees have fluctuated in the past, and are likely to continue to fluctuate, based on the number and size of our completed transactions.

Institutional Brokerage

Principal transactions consist of a portion of dealer spreads attributed to our securities trading activities as principal in listed and other equity securities, convertible debt securities, listed
options and various credit-related instruments and are primarily derived from our customer trading activities. Trading gains and losses on equity securities, convertible debt securities and other instruments are combined and reported on a net basis
as part of principal transactions. Gains and losses result primarily from market price fluctuations that occur while holding positions in our trading security inventory.

Agency commissions consist of revenue resulting from the execution of exchange-listed securities and other transactions as agent.

Asset Management

We receive asset management revenue in our capacity as the investment manager to advisory clients, including our mutual funds, as general partner of certain hedge, private equity and venture capital investment partnerships and as
administrator to mutual funds. In addition, we include revenues for 12b-1 fees related to the distribution of our mutual funds.

Net Investment Income

Net investment income includes net realized gains or losses on sale of equity securities
and mortgage-backed securities, impairment losses related to investments in marketable and non-public equity securities and mortgage-backed securities, realized and unrealized gains and losses on long-term investments held at FBR & Co., and
income from investment funds.

We record allocations for our proportionate share of the earnings or losses of the mutual,
hedge, private equity and venture funds and other partnerships in which we have made investments. Income or loss allocations are recorded in net investment income in our statements of operations.



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Interest, Dividends & Other Income

Interest income and dividends includes interest earned on treasury management investments, which includes interest income earned on
interest-bearing accounts and securities and dividends on merchant banking and other equity investments. Other income primarily includes other miscellaneous fees generated from non-core business activities.

Expenses

Interest expense includes the costs of repurchase agreement borrowings, as well as costs of subordinated credit lines and other financings.

Compensation and benefits expense includes base salaries, non-cash expenses associated with all stock-based awards granted to employees, and incentive compensation. Incentive compensation varies primarily
based on revenue production. Salaries, payroll taxes and employee benefits are relatively fixed in nature. In addition, from time-to-time, severance charges related to reductions in the workforce will be included in this amount.

Professional services expenses include legal and consulting fees, recruiting fees, and asset management sub-advisory fees. Many of these
expenses, such as legal fees associated with investment banking transactions and sub-advisory fees are, to a large extent, variable with revenue.

Business development expenses include travel and entertainment expenses related to investment banking transactions, costs of investor conferences, sponsorships and advertising, including costs associated
with the former PGA event, the FBR Open. Expenses that are directly related to investment banking transactions are variable with revenue.

Clearing and brokerage fees include trade processing expenses that we pay to our clearing broker, and execution fees that we pay to floor brokers and electronic communication networks. These expenses are
almost entirely variable based on our revenue.

Occupancy and equipment includes rental costs for our facilities, depreciation
and amortization of equipment, software and leasehold improvements and expenses. These expenses are largely fixed in nature.

Communications expenses include voice, data and Internet service fees, and data processing costs. While variable in nature, these do not tend to vary with revenue.

Other operating expenses include professional liability and property insurance, amortization of certain intangible assets, printing and
copying, business licenses and taxes, offices supplies, interest related to taxes, penalties and fees, charitable contributions and other miscellaneous office expenses.



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The following table sets forth financial data as a percentage of net revenues. For the year
ended December 31, 2008, revenues, net of interest expense, includes a net investment loss of $81.3 million. This net investment loss has a significant impact on the comparability of the 2008 data to other periods.



|                                  |  |                                |    |  |        |    |  |       |   
|--------------------------------- |  | ------------------------------ | -- |  | ------ | -- |  | ----- | --
|                                  |  | For the Year EndedDecember 31, |   
|                                  |  | 2009                           |    |  | 2008   |    |  | 2007  |   
|Revenues:                         |  |                                |    |  |        |    |  |       |   
|Investment banking:               |  |                                |    |  |        |    |  |       |   
|Capital raising                   |  | 41.4                           | %  |  | 42.0   | %  |  | 60.4  | % 
|Advisory                          |  | 6.1                            | %  |  | 11.3   | %  |  | 7.1   | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Subtotal                          |  | 47.5                           | %  |  | 53.3   | %  |  | 67.5  | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Institutional brokerage:          |  |                                |    |  |        |    |  |       |   
|Principal transactions            |  | 13.8                           | %  |  | 11.1   | %  |  | 2.1   | % 
|Agency commissions                |  | 31.8                           | %  |  | 65.0   | %  |  | 21.8  | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Subtotal                          |  | 45.6                           | %  |  | 76.1   | %  |  | 23.9  | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Asset management fees             |  | 4.5                            | %  |  | 8.6    | %  |  | 4.9   | % 
|Net investment income (loss)      |  | 0.5                            | %  |  | (44.7  | )% |  | (0.9  | )%
|Interest, dividends & other       |  | 2.0                            | %  |  | 13.5   | %  |  | 5.7   | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Total revenues                    |  | 100.1                          | %  |  | 106.8  | %  |  | 101.1 | % 
|Interest expense                  |  | 0.1                            | %  |  | 6.8    | %  |  | 1.1   | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Revenues, net of interest expense |  | 100.0                          | %  |  | 100.0  | %  |  | 100.0 | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Non-interest expenses:            |  |                                |    |  |        |    |  |       |   
|Compensation and benefits         |  | 66.0                           | %  |  | 124.9  | %  |  | 60.0  | % 
|Professional services             |  | 8.2                            | %  |  | 19.2   | %  |  | 9.4   | % 
|Business development              |  | 4.7                            | %  |  | 16.5   | %  |  | 7.8   | % 
|Clearing and brokerage fees       |  | 4.8                            | %  |  | 7.7    | %  |  | 2.6   | % 
|Occupancy and equipment           |  | 11.5                           | %  |  | 18.3   | %  |  | 6.9   | % 
|Communications                    |  | 7.3                            | %  |  | 13.3   | %  |  | 4.7   | % 
|Impairment of intangible assets   |  | 1.8                            | %  |  |       |    |  |      |   
|Other operating expenses          |  | 5.6                            | %  |  | 9.1    | %  |  | 3.3   | % 
|                                  |  |                                |    |  |        |    |  |       |   
|Total non-interest expenses       |  | 109.9                          | %  |  | 209.0  | %  |  | 94.7  | % 
|                                  |  |                                |    |  |        |    |  |       |   
|(Loss) income before income taxes |  | (9.9                           | )% |  | (109.0 | )% |  | 5.3   | % 
|                                  |  |                                |    |  |        |    |  |       |   

Comparison of the Years Ended December 31, 2009 and 2008

Net loss decreased from $194.7 million in 2008 to $27.7 million in 2009. The decrease in net loss was primarily the result of the performance
of our capital markets segment where, due to the increase in capital raising revenues, pre-tax loss decreased from $110.1 million during 2008 to $19.6 million during 2009. In addition, pre-tax income from our principal investing segment increased
from a pre-tax loss of $73.3 million during 2008 to pre-tax income of $4.0 million during 2009, reflecting the effects of other-than-temporary impairments related to certain of our merchant banking investments, realized losses from sales and
other-than-temporary impairments of mortgage-backed securities, and losses from investment funds in 2008 that are not comparable to 2009. The pre-tax loss from our asset management segment decreased from $14.9 million during 2008 to
$13.4 million during 2009 as a result of decreased fixed costs partially offset by an impairment loss on a management contract intangible asset attributed to this segment of $5.4 million. The income tax benefit decreased from $3.5 million in
2008 to a $1.3 million tax benefit in 2009 due to the change in pre-tax income and impact of the valuation allowance related to tax benefits attributable to losses that are not realizable through loss carrybacks.



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Revenues

Our net revenues increased 60.6% from $181.9 million during 2008 to $292.2 million during 2009 due to the changes in revenues and interest expense discussed below.

Capital raising revenues increased 58.4% from $76.4 million in 2008 to $121.0 million in 2009. Our revenues from four private placements
completed during 2008 totaled $60.0 million as compared to $100.5 million in revenues from 10 private placements completed in 2009. Our 2009 capital raising revenues include $68.1 million from our completion of two large private placements. Also,
our aggregate transaction value on lead- or co-lead-managed public offerings increased from 2008 to 2009.

Advisory revenues
decreased 14.1% from $20.6 million in 2008 to $17.7 million generated in 2009. We completed 15 M&A and advisory assignments in 2008 as compared to 19 M&A and advisory assignments in 2009.

Institutional brokerage revenues from agency commissions and principal transactions decreased 4.0% from $138.6 million in 2008 to
$133.1 million in 2009 as a result of decreases in overall trading volume and decreased volatility in the equity markets, partially offset by increased revenues from the integration of our convertible securities, credit, and listed-options trading
platforms beginning in September 2008 and continuing throughout 2009.

Asset management fees decreased 17.0% from $15.9
million in 2008 to $13.2 million in 2009. The decrease is primarily attributable to the decrease in mutual fund management and administrative fees resulting from a decrease in average mutual fund assets under management during 2009 partially offset
by increased revenues related to 12b-1 fees associated with our acquisition of a mutual fund distribution business in the third quarter of 2008.

Net investment loss was $81.3 million in 2008 compared to net investment income of $1.6 million in 2009. This change is primarily attributable to income from investment funds as a result of fund
performance and net gains from the sale of certain merchant banking investments and mortgage-backed securities in 2009 as compared to realized losses on sales and other-than-temporary impairment losses on mortgage-backed securities of $21.9 million
and $11.2 million, respectively, and other-than-temporary impairment losses of $41.5 million on certain merchant banking and long-term investments during 2008.

Net interest, dividends and other revenues decreased 52.5% from $11.8 million in 2008 to $5.6 million in 2009. This decrease is primarily attributable to a reduction in net interest income as a result of
the sale of our mortgage-backed securities positions in the first quarter of 2009, partially offset by increases in dividends received on certain merchant banking investments in 2009.

Expenses

Total non-interest expenses decreased 15.5% from $380.1
million in 2008 to $321.2 million in 2009. This decrease was caused by the changes in non-interest expenses described below.

Compensation and benefits expenses decreased 15.0% from $227.1 million in 2008 to $193.0 million in 2009. This decrease is primarily due to a $15.1 million decrease in fixed compensation and benefits due to a 22% reduction in average
employees since the beginning of 2008 along with a $16.8 million decrease in severance costs in 2009 as compared to 2008.

Professional services expenses decreased 31.2% from $34.9 million in 2008 to $24.0 million in 2009 primarily due to decreased costs related to consultants, a reduction in investment banking transaction costs both primarily associated with
our cost reduction initiatives and a reduction in sub-advisory fees related to our



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management of mutual funds. The reduction in sub-advisory fees was the result of lower average mutual fund assets under management in 2009 compared to 2008 and our termination of the sub-advisory
agreement related to the FBR Focus Fund in August 2009.

Business development expenses decreased 54.2% from $30.1 million in
2008 to $13.8 million in 2009. This decrease reflects the effects of our cost reduction initiatives and is primarily due to a decrease in costs associated with investor conferences and our involvement in what had been known as the PGA Tours
FBR Open as well as an overall reduction in the costs associated with our investment banking transactions.

Clearing and
brokerage fees decreased 0.7% from $14.0 million in 2008 to $13.9 million in 2009. The decrease is due to decreased equity trading volumes.

Occupancy and equipment expenses increased 1.5% from $33.2 million in 2008 to $33.7 million in 2009. The increase is due to non-recurring charges of $3.0 million associated with lease terminations and the
subleasing of certain office space as part of a facility right-sizing initiative. An overall decrease in occupancy costs as a result of these facility right-sizing initiatives along with other cost reduction initiatives over the past two years
partially offset the non-recurring charges incurred in 2009.

Communications expenses decreased 12.0% from $24.2 million in
2008 to $21.3 million in 2009. The decrease in expenses is primarily due to the effects of cost reduction initiatives over the past two years including decreased costs related to market data and customer trading services.

For the year ended December 31 2009, we recognized a $5.4 million impairment of an intangible asset related to a money market mutual
fund managed by us. The impairment was the result of factors such as significantly reduced yields on short term government investments and the requirement for us to both waive our management fees and reimburse certain expenses of the fund resulting
in the management contract becoming unprofitable for us in the period. We also considered the cost structure of this fund, a forecasted continuation of the low rate environment for the funds investments and the forecasted ongoing waiver of our
management fee in recognizing this impairment charge. Subsequent to recognizing this charge, in December 2009, management of this fund was transferred to a third party adviser for no consideration.

Other operating expenses decreased 2.4% from $16.6 million in 2008 to $16.2 million in 2009 due primarily to a decrease in corporate
insurance costs partially offset by an increase in 12b-1 fees.

The income tax benefit decreased from $3.5 million in 2008 to
a $1.3 million tax benefit in 2009 due to the change in pre-tax income and impact of the valuation allowance related to tax benefits attributable to losses that are not realizable through loss carrybacks. The income tax benefits for 2008 and 2009
include a benefit for federal net operating losses utilized as a result of carryback of $17.8 million and $6.9 million, respectively. Our effective tax rate was 4.6% in 2009 as compared to 1.8% in 2008. In addition to the effects of the valuation
allowance, our effective tax rates during these periods differed from statutory rates primarily due to the discrete period reporting of the tax effects of restricted stock vestings, as required under the Financial Accounting Standards Boards
(FASB) Accounting Standard Codification (ASC) 718, Compensation-Stock Compensation (ASC 718), as restricted stock awards vested at share prices lower than original grant date prices as well as the
effect of permanent differences in relation to our operating results. The effective tax rate for 2009 also differed from the statutory rate due to the expected tax liability related to domestic operations. Without these and other discrete items, our
effective income tax rate would have been 33.2% and 39.6%, respectively, for the years ended December 31, 2009 and 2008.

At December 31, 2009, our net deferred tax assets totaled $82.4 million. We have established a full valuation allowance against these deferred tax assets based on the criteria in ASC 740, Income Taxes
(ASC 740). In addition, we have a $0.1 million a deferred tax liability related to an indefinite-lived intangible which cannot serve as a source of future income for determination of the Companys valuation allowance.



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Comparison of the Years Ended December 31, 2008 and 2007

Net income decreased from $5.2 million in 2007 to a net loss of $194.7 million in 2008. The decrease in net income was primarily the result
of the performance of our capital markets segment where, due to the decrease in capital raising revenues, pre-tax income decreased from $29.1 million during 2007 to a loss of $110.1 million during 2008. In addition, pre-tax income from our principal
investing segment decreased from $3.3 million during 2007 to a loss of $73.3 million during 2008, reflecting the effects of other-than-temporary impairments related to certain of our merchant banking investments, realized losses from sales and
other-than-temporary impairments of mortgage-backed securities, and losses from investment funds. The pre-tax loss from our asset management segment increased from a pre-tax loss of $7.1 million during 2007 to a $14.9 million loss in this
segment during 2008 as a result of a decrease in average assets under management and increased fixed costs. Our provision for income taxes was $20.0 million in 2007 as compared to a tax benefit of $3.5 million in 2008. For the year ended
December 31, 2008, we recorded a cumulative allowance of $76.7 million for deferred tax assets not realizable through loss carrybacks.

Revenues

Our net revenues decreased 62.1% from $479.6 million during 2007 to $181.9 million during 2008
due to the changes in revenues and interest expense discussed below.

Capital raising revenues decreased 73.6% from $289.5
million in 2007 to $76.4 million in 2008. The lower volume of capital raising activity was spread across all of our industry sectors reflecting the effects of the continued dislocation in U.S. financial markets and the world-wide recession,
resulting in the decrease in capital raising activity. Our revenues from 12 private placements completed during 2007 totaled $197.2 million as compared to $60.0 million in revenues from 4 private placements completed in 2008.

Advisory revenues decreased 39.6% from $34.1 million in 2007 to $20.6 million generated in 2008. We completed 40 merger and acquisition and
advisory assignments in 2007 as compared to 15 merger and acquisition and advisory assignments in 2008.

Institutional
brokerage revenues from agency commissions and principal transactions increased 20.7% from $114.8 million in 2007 to $138.6 million in 2008 as a result of increases in overall trading volume, increased volatility in the equity markets, and the
integration of a convertible securities platform partially offset by increased losses on trading securities.

Asset management
fees decreased 33.8% from $24.0 million in 2007 to $15.9 million in 2008. The decrease is primarily attributable to the decrease in mutual fund management and administrative fees resulting from a decrease in average mutual fund assets under
management during 2008.

Net investment loss was $4.5 million in 2007 compared to $81.3 million in 2008. This increase in the
net investment loss was due to increased other-than-temporary impairment charges on merchant banking and other long-term investments, realized and other-than-temporary losses on mortgage-backed securities, and a decrease in income from investment
funds as a result of negative fund performance during 2008 as compared to 2007.

Net interest, dividends and other revenues
decreased 45.6% from $21.7 million in 2007 to $11.8 million in 2008. This decrease is primarily attributable to a lower average interest bearing cash and investment balances and lower investment yields during 2008, as well as a decrease in dividends
on trading positions.

Expenses

Total non-interest expenses decreased 16.3% from $454.3 million in 2007 to $380.1 million in 2008. This decrease was caused by the changes in non-interest expenses described below.



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Compensation and benefits expenses decreased 21.1% from $287.8 million in 2007 to $227.1
million in 2008. This decrease is primarily due to a $83.7 million decrease in variable compensation associated with decreased investment banking revenues offset by increased severance costs of $17.9 million related to an overall reduction in our
personnel and increased stock-based compensation.

Professional services expenses decreased 23.0% from $45.3 million in 2007
to $34.9 million in 2008 primarily due to decreased costs associated with the lower volume of investment banking transactions and a reduction in sub-advisory fees as a result of the decrease in average mutual fund assets under management.

Business development expenses decreased 19.5% from $37.4 million in 2007 to $30.1 million in 2008. This decrease is
primarily due to a decrease in costs associated with the lower volume of investment banking transactions.

Clearing and
brokerage fees increased 12.9% from $12.4 million in 2007 to $14.0 million in 2008. The increase is due to costs associated with increased equity trading volumes and revenues.

Occupancy and equipment expenses remained consistent at $33.2 million for both 2007 and 2008.

Communications expenses increased 8.0% from $22.4 million in 2007 to $24.2 million in 2008 primarily due to increased costs related to
market data and customer trading services.

Other operating expenses increased 4.4% from $15.9 million in
2007 to $16.6 million in 2008 due primarily to a decrease in cost allocations to Arlington Asset, an increase in corporate insurance costs associated with being a publicly-traded entity for all 2008 and an increase in 12b-1 fees related to our
acquisition of a mutual fund distribution business at the end of the 3rdquarter, partially offset by a $4.5 million decrease in expenses related to costs indemnified and funded through capital contributions by Arlington Asset in 2007 with no comparable costs in 2008.

The income tax provision decreased from $20.0 million in 2007 to a $3.5 million tax benefit in 2008 due to the change in
pre-tax income. Our 2008 tax benefit reflects a full valuation allowance on tax benefits attributable to losses that are not realizable through loss carrybacks and the benefit of a federal net operating loss carryback of $17.8 million. At
December 31, 2008, our net deferred tax assets totaled approximately $76.7 million. We have established a full valuation allowance against these deferred tax assets not realizable through loss carrybacks based on the criteria in ASC 740. Our
effective tax rate was 1.8% in 2008 as compared to 79.3% in 2007. In addition to the effects of the valuation allowance in 2008, our effective tax rates during these periods differed from statutory rates primarily due to the discrete period
reporting of the tax effects of restricted stock vesting, as required under ASC 718 as restricted stock awards vested at share prices lower than original grant date prices as well as the effect of permanent differences in relation to our operating
results. Without these and other discrete items, our effective income tax rate would have been 39.6% and 48.7%, respectively, for the years ended December 31, 2008 and 2007.

Liquidity and Capital Resources

Liquidity is a measurement of our ability
to meet potential cash requirements, including ongoing funding for investments, and for other general business purposes. Regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. The
primary sources of funds for liquidity consist of existing cash balances (i.e., available liquid capital not invested in our operating businesses), proceeds from sales of securities, internally generated funds, dividends on equity securities, equity
capital contributions, and credit provided by margin accounts, banks, clearing brokers, and affiliates of our principal clearing broker. Potential future sources of liquidity for us include internally generated funds, borrowing capacity through
margin accounts, corporate lines of credit and other credit facilities which we may enter into in the future, and future issuances of common stock, preferred stock or debt securities.



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Cash Flows

As of December 31, 2009, our cash and cash equivalents totaled $275.5 million representing a net increase of $67.7 million for the year
ended December 31, 2009. The increase is primarily attributable to $456.0 million of cash provided by investing activities offset by $397.6 million of cash used in financing activities. Cash provided by operating activities of $9.3 million
includes cash operating income of $9.4 million partially offset by $0.1 million of net changes in operating assets and liabilities. Due to the cyclical nature of our industry and the industries in which we provide services, we maintain liquid
capital to cover potential cash outflows in periods of decreased revenues and earnings.

Net cash provided by our operating
activities of $9.3 million during 2009, compares to $78.9 million of cash used in operating activities during 2008. This increase in operating cash flows reflects the effects of the increase in capital raising revenues during 2009 as compared to
2008 as well as the effects of cost reduction initiatives implemented over the past two years.

Net cash provided by investing
activities of $456.0 million during 2009 compares to net cash used in investing activities of $479.7 million during 2008, reflecting the difference in investing activity during the periods. The activity during 2008 reflects the net purchase of
mortgage-backed securities, which were partially financed with repurchase agreement borrowings, while the 2009 activity reflects the sale of the remaining mortgage-backed securities held at December 31, 2008 (see further discussion below under
Assets).

Similarly, the primary difference between the net cash used in financing activities of $397.6 million
during 2009, as compared to net cash provided by financing activities of $382.9 million during 2008, relates to the partial financing of the mortgage-backed securities in 2008, as compared to sales of mortgage-backed securities and repayment of
related repurchase agreement financings during 2009. Also, during 2009, we received net inflows of $18.4 million as a result of our public, follow-on offering of common shares for $91.9 million offset partially by a repurchase of 16.7 million
shares of our common stock for $73.5 million from Arlington Asset, our former majority owner.

As of December 31, 2008,
our cash and cash equivalents totaled $207.8 million representing a net decrease of $175.8 million for the year ended December 31, 2008. The decrease is attributable to $479.7 million of cash used in investing activities offset by $382.9
million of cash provided by financing activities which primarily represents our net cash invested and realized losses on the sale of mortgage-backed securities and the repurchase of shares of our common stock. Cash used in operating activities of
$78.9 million includes cash operating losses of $65.5 million and $13.4 million of net changes in operating assets and liabilities.

Net cash used in our operating activities of $78.9 million during 2008, compares to $73.7 million of cash provided by operating activities during 2007. This decrease in operating cash flows reflects the effects of the decrease in capital
raising revenues during 2008 as compared to 2007 and the related decrease in accrued compensation and benefits associated with variable compensation. During the third quarter of 2008, our convertible securities business within our capital markets
segment commenced trading convertible and equity-linked securities. The initial infusion of capital into this trading securities activity during the year also contributed to the cash used in operating activities.

Net cash used in investing activities of $479.7 million during 2008 compares to net cash provided by investing activities of $356.9 million
during 2007, reflecting the difference in investing activity during the periods. The activity during 2008 reflects the net purchase of mortgage-backed securities, which were partially financed with repurchase agreement borrowings, while the 2007
activity reflects the net sale of mortgage-backed securities and other investment securities.

Similarly, the primary
difference between the net cash provided by financing activities of $382.9 million during 2008, as compared to net cash used in financing activities of $198.5 million during 2007, relates to the



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partial financing of the mortgage-backed securities discussed above, as compared to sales of mortgage-backed securities and repayment of related repurchase agreement financings during 2007. Also,
during 2008, we repurchased 6.7 million shares of our common stock for $33.9 million, or an average price of $5.02.

Sources of Funding

We believe that our existing cash and cash equivalents balances (totaling $275.5 million at
December 31, 2009) comprised primarily of investments in money market funds investing in short-term U.S. Treasury securities, cash flows from operations, borrowing capacity, other sources of liquidity and execution of our financing strategies
will be sufficient to meet our cash requirements. We have obtained, and believe we will be able to continue to obtain, short-term financing, such as margin financing and temporary subordinated financing, in amounts and at interest rates consistent
with our financing objectives. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures,
alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be
able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we
believe that most of our investments could be sold, in most circumstances, to provide cash.

As of December 31, 2009 and
2008, our liabilities totaled $236.8 million and $496.6 million, respectively, which resulted in a leverage ratio (liabilities to equity) of 0.7 to 1 and 1.6 to 1, respectively. The decrease in our total assets and liabilities as of
December 31, 2009 reflect the net effects of our sales during 2009 of agency mortgage-backed securities held as December 31, 2008, and the retirement of the related repurchase agreement borrowings and investments made during 2009 in our
convertible securities and credit-related trading businesses.

We monitor and manage our leverage and liquidity risk through
various committees and processes we have established. We assess our leverage and liquidity risk based on considerations and assumptions of market factors, as well as factors specific to us, including the amount of our available liquid capital (i.e.,
the amount of our cash and cash equivalents not invested in our operating business). At December 31, 2009, we had $275.5 million of available liquid capital and no outstanding borrowings.

Assets

As
of December 31, 2009, our principal assets consist of cash and cash equivalents, receivables, securities held for trading purposes and long-term investments. As of December 31, 2009 and 2008, liquid assets consisted primarily of cash and
cash equivalents of $275.5 million and $207.8 million, respectively.

The decrease in our total assets to $556.3 million as of
December 31, 2009 compared to $800.4 million as of December 31, 2008, is primarily the result of our sale during 2009 of agency mortgage-backed securities with a fair value of $454.3 million at December 31, 2008. This decrease in
assets was partially offset by the addition during 2009 of $173.0 million of trading-related assets primarily associated with our convertible securities and credit-related trading activities.

As of December 31, 2009, our $43.6 million of long-term investments primarily consist of investments in non-public equity securities,
marketable equity securities and mutual funds. Our investment portfolio is exposed to potential future downturns in the markets and private equity securities are exposed to deterioration of credit quality, defaults, and downward valuations. On a
quarterly basis, we review the valuations of our private equity investments carried at cost, for impairment. If and when we determine that a decline in fair value less than our carrying value is other-than-temporary, we will reflect the
reduction as an investment loss. Similarly, we review our portfolio of marketable equity securities on a quarterly basis. If we determine that a decline in value



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of an investment in a marketable equity security accounted for as available-for-sale below our cost basis is other-than-temporary, the loss will be recognized in the statement of
operations during the period in which the liquidation or determination is made.

Our due from and to brokers, dealers, and
clearing organizations balances primarily represent unsettled trades associated with our credit sales and trading platform. These transactions include trades in certain sectors of the corporate bond and syndicated loan markets. As part of this
activity, we incur market and counterparty credit risk due to the extended settlement nature of most par and distressed bank loan transactions. Par loan and distressed loan trades have extended settlement periods due to the administrative and legal
requirements associated with transferring title of such instruments. During this period whereby a trade has been executed but not settled, we are at risk if one of our counterparties defaults on a trade obligation and we have to meet this obligation
at market prices that are adverse relative to the original trade. We manage this exposure by calculating the current and potential default exposure on each trade and by maintaining risk limits for each counterparty with whom we have outstanding bank
loan trades. The total amount of outstanding unsettled trade receivables and payables related to these instruments was $92.5 million and $90.2 million, respectively, as of December 31, 2009. The remaining components of the due from and to
brokers, dealers, and clearing organizations includes receivables related to commissions and receivables and payables related to unsettled trades that are settled on a regular basis.

Regulatory Capital

FBR & Co., our principal U.S. broker-dealer, is registered with the SEC and is a member of FINRA. Additionally, FBRIL, our U.K. broker-dealer, is registered with the FSA of the United Kingdom. As such, they are subject to the
minimum net capital requirements promulgated by the SEC and FSA, respectively. As of December 31, 2009, FBR & Co. had total regulatory net capital of $54.6 million, which exceeded its required net capital of $5.2 million by $49.4
million. In addition, FBRIL had regulatory capital as defined in excess of required amounts. Regulatory net capital requirements increase when the broker-dealers are involved in underwriting activities based upon a percentage of the amount being
underwritten.

Equity Transactions

In May 2009, we repurchased 16.7 million shares of our common stock from Arlington Asset at $4.35 per share, for a total cost of $72.5 million. In June 2009, we completed a follow-on public
offering in which we sold 20.0 million shares, at $4.65 per share, which raised $90.1 million in new capital and in which Arlington Asset sold 1.5 million shares of our common stock at the same price. Together, these two transactions along
with a subsequent exercise of an overallotment in July 2009, in which an additional 411 thousand shares owned by Arlington Asset were sold, reduced Arlington Assets ownership stake to approximately 23%.

In October 2009, Arlington Asset and related affiliates, our former majority shareholder, sold 14,755,017 shares of our common stock in an
underwritten public offering. This transaction represented the sale of the remainder of their ownership position in us. FBR & Co. acted as a book-running manager for the offering.



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Contractual Obligations

We have contractual obligations to make future payments in connection with non-cancelable lease agreements and other contractual commitments
as well as uncalled capital commitments to an investment partnership that may be called over the next ten years. The following table sets forth these contractual obligations by fiscal year (dollars in thousands):



|                                 |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|-------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | ------
|                                 |  | 2010 |        | 2011 |   | 2012   |  | 2013 |       | 2014 |   | Thereafter |  | Total
|Minimum rental commitments(1)    |  | $    | 11,630 |      | $ | 10,523 |  | $    | 9,352 |      | $ | 9,317      |  | $     | 8,599 |  | $ | 5,483 |  | $ | 54,904
|Capital commitments and other(2) |  |      |       |      |   |       |  |      |      |      |   |           |  |       |      |  |   |      |  |   |      
|                                 |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|Total Contractual Obligations    |  | $    | 11,630 |      | $ | 10,523 |  | $    | 9,352 |      | $ | 9,317      |  | $     | 8,599 |  | $ | 5,483 |  | $ | 54,904
|                                 |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       



|(1) | These commitments are for operating leases of the Company. The Company currently has no commitments associated with capital leases.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(2) | The table above excludes $0.6 million of uncalled capital commitments to an investment partnership that may be called over the next ten years. This amount was excluded
because the Company cannot currently determine when, if ever, the commitments will be called. Also, the table above does not include reserves for income taxes of $2.0 million that are not contractual obligations by nature. We cannot determine, with
any degree of certainty, the amount that would be payable or the period of cash settlement to the respective taxing jurisdiction.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Quantitative and Qualitative Disclosures about Market Risk

Overall Risk Management

We monitor market and business risk, including credit risk, operations, liquidity, compliance, legal, and reputational risk through a
number of control procedures designed to identify and evaluate the various risks to which our business and investments are exposed. We have established various committees and processes to assess and to manage risk associated with our investment
banking, trading, and merchant banking activities. We review, among other things, business and transactional risks associated with potential investment banking clients and engagements as well as our capital subjected to risk through our trading
activities. We seek to manage the risks associated with our investment banking and merchant banking activities by review and approval of transactions by the relevant committee, prior to accepting an engagement or pursuing a material investment
transaction.

Market Risk

Market risk is the risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as market liquidity, will result in losses for a position or portfolio. Our
activities as an underwriter, market maker and principal investor, as well as our activities as a financial intermediary in customer trading transactions, expose us to market risk.

We use a number of quantitative measures to manage our exposure to market risk in our trading businesses. These measures include:

Inventory position limitswe establish inventory position limits on gross and net positions, at both the trading desk and
individual position level, and we monitor exposures against limits on a daily basis.

Scenario analysiswe apply stress
tests and scenario analysis to estimate the potential impact on our trading revenues of highly stressful market environments in both the credit and equity markets.

Value at Riskwe utilize a statistical measure of potential trading loss, called Value at Risk (VaR), to estimate the potential loss from adverse market moves in an ordinary market
environment. We also establish VaR limits, as appropriate.



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Value at Risk. We calculate VaR for our trading business using a historical
simulation model that isolates various risk elements associated with each of our trading positions over a one-day time horizon and at a 95% confidence level. The simulation is based on data for the previous twelve months. This approach assumes that
historical changes in market values are representative of future changes.

Using the results of this simulation, VaR measures
the potential gains and losses on net trading positions at a 95% confidence level over a one-day time horizon. A 95% confidence level implies that, on average, we anticipate that 5% of the time we may realize trading losses in excess of our VaR
amount. Our one-day 95% VaR at December 31, 2009 was approximately $730 thousand.

VaR is a model that quantifies
potential losses using historical data. We could incur losses greater than the reported VaR because the historical market prices used may not be an accurate measure of future market events and conditions, especially in highly stressful market
environments. In addition, the VaR model measures the risk of the current net trading positions and does not take into account future position changes arising from transaction and/or hedging activity.

The comparison of actual daily trading revenue fluctuations with a daily VaR estimate is the primary method used to test the reasonableness
of the VaR measure. The following table provides the distribution of daily trading revenues and losses during the year ended December 31, 2009. The table shows data reflecting that the actual lowest 5 percentile daily trading revenues during
the year ended December 31, 2009 was $100 thousand. Over the same period, the worst one day trading loss was $161 thousand which is below the $730 thousand daily trading loss implied by the one-day VaR.

LOGO

Equity Price Risk. Equity price risk represents the potential loss in value of a position due to
adverse changes in the level or volatility of equity prices. We generally attempt to limit exposure to equity price risk on securities held as a result of our daily equity trading activities by limiting our intra-day and overnight inventory of
trading securities to that needed to provide the appropriate level of liquidity in the securities for which we are a market maker. We also seek to manage these risks by diversifying exposures, controlling position sizes, and establishing economic
hedges in related securities, principally through short sale transactions.

While it is impossible to exactly project what
factors may affect the prices of equity securities and how much the effect might be, the impact of a ten percent increase and a ten percent decrease in the price of equities held by us would be as follows as of December 31, 2009. The fair value
of the $35.9 million of trading portfolio equity securities held would increase or decrease to $39.5 million and $32.3 million, respectively, and the fair value of the $43.6 million of long-term investments would increase or decrease to $48.0
million and $39.2 million respectively.



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Except to the extent that we sell our marketable equity securities or other long term
investments, or a decrease in their fair value is deemed to be other-than-temporary, an increase or decrease in the fair value of those assets will not directly affect our earnings. However, an increase or decrease in the value of equity method
investments as well as trading securities will directly affect our earnings.

Credit Risk.Our broker-dealer
subsidiaries clear all of their securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreements between our broker-dealer subsidiaries and the clearing broker, the clearing broker has the right
to charge us for losses that result from a counterpartys failure to fulfill its contractual obligations. As the right to charge us has no maximum amount and applies to all trades executed through the clearing broker, we believe there is no
maximum amount assignable to this right. At December 31, 2009 and 2008, we have recorded no liabilities with regard to this right. During the years ended December 31, 2009 and 2008, amounts paid to the clearing broker related to these
guarantees have been immaterial. In addition, we have the right to pursue collection of performance from the counterparties who do not perform under their contractual obligations.

We attempt to limit our credit spread risk by offsetting long or short positions in various related securities, but may also hedge credit
risk exposure through the use of credit derivatives such as credit default swaps.

In addition, we have the right to pursue
collection of performance from the counterparties who do not perform under their contractual obligations. We monitor the credit standing of the clearing broker and all counterparties with which we conduct business.

The securities industry is subject to numerous risks, including the risk of loss associated with the underwriting, ownership, and trading of
securities, and the risk of reduced revenues in periods of reduced demand for security offerings and activity in secondary trading markets. Changing economic and markets trends may negatively impact the liquidity and value of our investments and the
level of security offerings underwritten by us, which may adversely affect our revenues and profitability.

Our equity and
debt investments include non-investment grade securities of privately held issuers with no ready markets. The concentration and illiquidity of these investments expose us to a higher degree of risk than associated with readily marketable securities.

Interest Rate Risk. Interest rate risk represents the potential loss in value of a position or portfolio from adverse
changes in market interest rates. We are exposed to interest rate risk through our trading activities in convertible and fixed income securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to
interest rate risk in these activities.

Off-Balance Sheet Arrangements

Through indemnification provisions in agreements with clearing organizations, customer activities may expose us to off-balance sheet credit
risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle on a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to
fully cover customer obligations. We seek to manage the risks associated with customer activities through customer screening and selection procedures as well as through requirements on customers to maintain margin collateral in compliance with
various regulations and clearing organization policies.

The hedge funds and other investment partnerships that we manage
through subsidiaries as general partner or managing member had $0.9 million of liabilities as of December 31, 2009, primarily margin debt not reflected on our balance sheet. We believe that our maximum potential exposure to a catastrophic loss
(defined for these purposes as a 40% decline in the asset value of each partnership) would not exceed the value of our investment in these entities.



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Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP) and follow general
practices within the industries in which we operate. The preparation of our financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Although we base our estimates and assumptions on historical experience, when available, market information, and on various other factors that we
believe to be reasonable under the circumstances, management exercises significant judgment in the final determination of our estimates. Actual results may differ from these estimates.

Our significant accounting policies are presented in Note 2 to our consolidated financial statements. Our most critical policies that are
both very important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective or complex judgments or estimates are discussed below.

Fair Value of Financial Instruments

ASC 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

Level 1 InputsUnadjusted quoted prices in active markets for identical assets or liabilities that are
accessible by us;

Level 2 InputsQuoted prices in markets that are not active or financial
instruments for which all significant inputs are observable, either directly or indirectly;

Level 3 InputsUnobservable inputs for the asset or liability, including significant assumptions of us and other market participants.

We determine fair values for the following assets and liabilities:

Long-term investments, at fair valueOur long-term investments, at fair value, consists of marketable equity securities and investment securitiesmarked-to-market. Our marketable equity securities are classified within
Level 1 of the fair value hierarchy as they are valued using quoted market prices from an exchange. For the year ended December 31, 2008 and prior, investment securitiesmarked-to-market consisted of warrants and equity securities received
in connection with certain capital raising transactions. Warrants are generally exercisable at the respective offering price of the transaction. Such investments are classified within Level 3 of the fair value hierarchy as the value is determined by
management based on valuation models and enterprise value, taking into consideration the financial performance of the companies relative to projections, trends within sectors, underlying business models and expected exit timing and strategy.

Trading account securities and securities sold but not yet purchased, at fair valueOur trading
securities, at fair value, are securities owned by our broker-dealer subsidiaries and consist of marketable and non-public equity, convertible and fixed income debt, and listed-options. Our securities sold but not yet purchased, at fair value, are
trading securities sold by our broker-dealer subsidiaries and exchange-traded funds sold as part of our principal investing segment and consist of marketable equity, convertible and fixed income debt, listed-options and exchange-traded funds. We
classify marketable equity, listed options, and exchange-traded funds within Level 1 of the fair value hierarchy because quoted market prices are used to



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value these securities. Convertible and fixed income debt instruments are classified within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker
or dealer, or alternative pricing services that provide reasonable levels of price transparency. Non-public equity and debt securities are classified within Level 3 of the fair value hierarchy if enterprise values are used to value these securities.
In determining the enterprise value, we analyze various financial, performance and market factors to estimate the value, including where applicable market trading activity, which may be reported by The PORTAL MarketSM, a subsidiary of The NASDAQ Stock Market, Inc.

Long-Term Investments

We account for our long-term investments in marketable equity securities that are held in non-broker dealer entities under ASC 320 InvestmentsDebt and Equity Securities (ASC
320). ASC 320 requires that investments in debt securities be designated at the time of acquisition as held-to-maturity, available-for-sale or trading, and investments in equity securities be designated as
either available-for-sale or trading. All of our long-term marketable equity securities are designated as available-for-sale and are carried at their estimated fair values with unrealized gains and losses excluded from
earnings and reported in accumulated other comprehensive income or loss, a component of shareholders equity. Long-term investments in equity securities of non-public companies that are held in non-broker dealer entities are carried at cost.

We evaluate available-for-sale securities and securities of non-public companies carried at cost for other-than-temporary
impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The value of our long-term investments in marketable equity securities designated as available for sale can fluctuate
significantly. The value of our long term investments in non-public securities can also fluctuate significantly. Such values may be based on unobservable inputs, including significant assumptions of us and consideration of the liquidity and size of
our position. In evaluating these investments for other-than-temporary impairment, consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the severity of the decline
in fair value, (3) the financial condition and near-term prospects of the issuer, and (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If
it is determined that an investment impairment is other-than-temporary then the amount that the fair value is below its current basis is recorded as an impairment charge and recorded through earnings (as opposed to through other comprehensive income
in the case of marketable equity securities, as such temporary changes in fair value would be).

For unrealized losses that
are determined to be temporary, we continue to evaluate these at each reporting date. If we determine at a future date that an impairment is other-than-temporary, the applicable unrealized loss will be reclassified from accumulated other
comprehensive income and recorded as a realized loss at the time the determination is made.

As of December 31, 2009, we
held $0.3 million of long-term investments in marketable equity securities accounted for under ASC 320 and $34.0 million of non-public equity securities held in non-broker dealer entities.

Accounting for Income Taxes

Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax
assets is adjusted by a valuation allowance if, based on our evaluation and our consideration of the guidance in ASC 740, it is more likely than not that they will not be realized. Our 2009 tax benefit reflects a full valuation allowance on tax
benefits attributable to losses that are not realizable through loss carrybacks. At December 31, 2009, our net deferred tax assets totaled $82.4 million offset by a full valuation allowance. In addition, we have a $0.1 million net deferred tax
liability due to the existence of a deferred tax liability on an indefinite-lived intangible which cannot serve as a source of future income for determination of our valuation allowance.



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Intangible Assets

Our intangible assets consist of goodwill from a business combination completed in August 2009 and intangible assets with finite useful
lives. Goodwill is not amortized but is tested annually for impairment (during the fourth quarter) or more frequently if an adverse event occurs that may indicate impairment. The assessment of goodwill is performed at the reporting unit level. The
values of the intangible assets with finite useful lives are amortized in proportion to their expected economic benefit over their estimated useful life or straight-line if the economic benefit cannot be reliably determined. These intangible assets
are periodically tested for impairment by comparing expected future gross cash flows to the assets carrying amount. If the expected gross cash flows are less than the carrying amount, the asset is impaired and is written-down to its fair
value. The carrying value of goodwill and intangible assets with finite useful lives was $5.8 million and $2.5 million, respectively, as of December 31, 2009. As of December 31, 2009, there were no significant indicators of impairment
relating to these assets.

Recently Issued Accounting Pronouncements

See Note 2. Summary of Significant Accounting PoliciesRecent Accounting Pronouncements included in our financial
statements attached to this Form 10-K.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

See Part II, Item 7, of this Form 10-K Managements Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures about Market
Risk.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The information required by Part II, Item 8, of this Form 10-K appears in a subsequent section of this report. See Index to Audited Consolidated Financial Statements of FBR Capital Markets
Corporation on page F-1.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-K, our management carried
out an evaluation, with the participation of our Chief Executive Officer, Richard J. Hendrix, and our Chief Financial Officer, Bradley J. Wright, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of
the Securities Exchange Act of 1934, as amended ( the Exchange Act)) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures, as of December 31, 2009, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding disclosure.



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Managements Annual Report on Internal Control Over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act). The Companys internal control over financial reporting is designed under the supervision of the firms Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally accepted accounting principles.

The Companys internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of the Companys assets that could have a material effect on our financial statements.

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

As of December 31, 2009, management conducted an assessment of the effectiveness of the Companys internal control over financial reporting based on the framework established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2009.

The effectiveness of the Companys internal control over financial reporting as of December 31, 2009 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page F-2, which expresses an unqualified opinion on the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009 that has materially
affected, or is reasonably likely to materially affect, our companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

The information required by Part III, Item 10, of this report on Form 10-K will be provided in our 2009 Proxy Statement and is hereby incorporated by reference.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by Part III, Item 11, of this report on Form 10-K will be provided in our 2009 Proxy Statement and is hereby incorporated by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by Part III, Item 12, of this report on Form 10-K will be provided in our 2009 Proxy Statement and is hereby
incorporated by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information required by Part III, Item 13, of this report on Form 10-K will be provided in our 2009 Proxy Statement and is hereby
incorporated by reference.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The information required by Part III, Item 14, of this report on Form 10-K will be provided in our 2009 Proxy Statement and is hereby incorporated by reference.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

We have filed the following documents as part of this report on Form 10-K:

1.
Financial Statements. The audited consolidated financial statements of FBR Capital Markets Corporation required by Part II, Item 8, of this report on Form 10-K, which are listed on page F-1 of this report on Form 10-K, including the
notes thereto and the report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, thereon.

2.
Financial Statement Schedules. We have not filed any financial statement schedules as part of this report on Form 10-K because these schedules are not required or because the information required to be included in these schedules has been
included in the audited consolidated financial statements of FBR Capital Markets Corporation or the notes thereto.

3.
Exhibits. The following exhibits have been filed as part of or incorporated by reference in this report on Form 10-K:



|               |  |                                                                                                                                                                                                                                                          
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                              
|3.1            |  | Amended and Restated Articles of Incorporation of the Registrant.(1)                                                                                                                                                                                     
|               | 
|3.2            |  | Amended and Restated Bylaws of the Registrant.(1)                                                                                                                                                                                                        
|               | 
|4.1            |  | Form of Certificate for Common Stock.(3)                                                                                                                                                                                                                 
|               | 
|4.2            |  | Registration Rights Agreement, dated as of July 20, 2006, between the Registrant and Friedman, Billings, Ramsey & Co., Inc.(1)                                                                                                                           
|               | 
|4.3            |  | Registration Rights Agreement, dated as of July 20, 2006, between the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)                                                                                                                
|               | 
|4.4            |  | Registration Rights Agreement, dated January 26, 2009, between the Registrant and Friedman, Billings, Ramsey Group, Inc.(9)                                                                                                                              
|               | 
|4.5            |  | Governance Agreement, dated as of July 20, 2006, among Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., Forest Holdings LLC and Forest Holdings (ERISA)
LLC.(1)                                                                           
|               | 
|4.6            |  | Voting Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., the Registrant, Forest Holdings LLC and Forest Holdings (ERISA)
LLC.(1)                                                             
|               | 
|4.7            |  | Form of Amended and Restated Voting Agreement, dated as of May 20, 2009, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., FBR Capital Markets Corporation,
Forest Holdings LLC and Forest Holdings (ERISA) LLC.(10)               
|               | 
|4.8            |  | Form of Senior Indenture.(12)                                                                                                                                                                                                                            
|               | 
|4.9            |  | Form of Subordinated Indenture.(12)                                                                                                                                                                                                                      
|               | 
|4.10           |  | Form of Subscription Agreement by and between FBR Capital Markets Corporation and purchasers of common stock of FBR Capital Markets Corporation in connection with the closing of the
transactions contemplated by the Watch Hill Purchase Agreement.(13)
|               | 
|10.1           |  | 2006 Long-Term Incentive Plan.(1)                                                                                                                                                                                                                       
|               | 
|10.2           |  | Form of Incentive Stock Option Agreement.(1)                                                                                                                                                                                                            
|               | 
|10.3           |  | Form of Non-Qualified Stock Option Agreement.(1)                                                                                                                                                                                                        



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|               |  |                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                       
|10.4           |  | Contribution Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)                                                                                          
|               | 
|10.5           |  | Corporate Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                             
|               | 
|10.6           |  | Services Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                              
|               | 
|10.7           |  | Tax Sharing Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)                                                                                           
|               | 
|10.8           |  | Trademark License Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                     
|               | 
|10.9           |  | Investment Agreement, dated as of July 19, 2006, among the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)                                                                    
|               | 
|10.10          |  | Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings LLC.(1)                                                                                                   
|               | 
|10.11          |  | Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings (ERISA) LLC.(1)                                                                                           
|               | 
|10.12          |  | Professional Services Agreement, dated as of July 20, 2006, between the Registrant and Crestview Advisors, L.L.C.(1)                                                                              
|               | 
|10.13          |  | Form of Subscription Agreement with respect to the Registrants Director Stock Purchase Plan.(2)                                                                                                 
|               | 
|10.14          |  | 2007 Employee Stock Purchase Plan, amended as of April 23, 2007.(2)                                                                                                                              
|               | 
|10.15          |  | Form of resolution of the Registrants Board of Directors with respect to the Registrants Director Stock Purchase Plan.(2)                                                                      
|               | 
|10.16          |  | Amendment No. 1 to Corporate Agreement, dated April 5, 2007, between the Registrant and Friedman, Billings Ramsey Group. Inc.(2)                                                                  
|               | 
|10.17          |  | Form of Amendment No. 1 to FBR Capital Markets Corporation 2006 Long-Term Incentive Plan.(4)                                                                                                     
|               | 
|10.18          |  | Description of the Registrants 2008 Incentive Compensation Program.(5)                                                                                                                          
|               | 
|10.19          |  | Retention Incentive Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(6)                                                                                    
|               | 
|10.20          |  | Employment Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(6)                                                                                             
|               | 
|10.21          |  | Form of Amendment to Original 2008 Performance RSU Award Agreement.(7)                                                                                                                           
|               | 
|10.22          |  | Form of August 2008 Performance RSU Award Agreement.(7)                                                                                                                                          
|               | 
|10.23          |  | Form of Stock Option Agreement.(7)                                                                                                                                                               
|               | 
|10.24          |  | Form of Restrictive Covenant Agreement.(7)                                                                                                                                                       
|               | 
|10.25          |  | Retirement Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(8)                                                                                                    
|               | 
|10.26          |  | Director Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(8)                                                                                                      
|               | 
|10.27          |  | Stock Repurchase Agreement, dated as of May 18, 2009, by and among the Registrant, Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.), and FBR TRS
Holdings, Inc.(10)



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|               |  |                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                       
|10.28          |  | Form of Transition Services Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)      
|               | 
|10.29          |  | Form of Assignment and Assumption Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)
|               | 
|10.30          |  | Form of Trademark and Copyright Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10) 
|               | 
|10.31          |  | Form of Domain Name Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)             
|               | 
|10.32          |  | Form of Trademark License Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)        
|               | 
|10.33          |  | Form of LTIP RSU Award Agreement.(11)                                                                                                                            
|               | 
|10.34          |  | RSU Award Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(11)                                                                  
|               | 
|10.35          |  | Stock Option Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(11)                                                               
|               | 
|10.36          |  | FBR Capital Markets Corporation 2010 Partner Leveraged Stock Purchase Program, as amended and restated.(11)                                                      
|               | 
|12.1           |  | Statement regarding Computation of Ratio of Earnings to Fixed Charges.*                                                                                           
|               | 
|21.1           |  | Subsidiaries of the Registrant.*                                                                                                                                  
|               | 
|23.1           |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                           
|               | 
|24.1           |  | Power of Attorney.*                                                                                                                                               
|               | 
|24.2           |  | New York Power of Attorney.*                                                                                                                                      
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*             
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*             
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*               
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*               



|(1) | Previously filed as an exhibit to the Registrants Registration Statement on Form S-1 (Registration No. 333-138824), which was filed with the SEC on
November 17, 2006, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 10, 2007, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 21, 2007, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Previously filed as Appendix A to the Registrants Definitive Information Statement on Schedule 14C, which was filed with the SEC on November 20, 2007,
and incorporated by reference herein.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference to the description of such program included in Item 5.02 of the Registrants Current Report on Form 8-K, which was filed with
the SEC on February 26, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was filed with the SEC
on May 12, 2008, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on August 21, 2008, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on December 22, 2008, and incorporated herein by
reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, which was filed with the SEC
on May 8, 2009, and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on May 19, 2009, and incorporated herein by
reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on February 16, 2010, and incorporated herein by
reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-138824), which was
filed with the SEC on May 22, 2009, and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-161416), which was
initially filed with the SEC on August 18, 2009, as amended, and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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SIGNATURES

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



|                     |  |  |  |     |  |                                
|-------------------- |  |  |  | --- |  | -------------------------------
|                     |  |  |  |     |  | FBR CAPITAL MARKETS CORPORATION
|                     |  |  | 
|Date: March 16, 2010 |  |  |  | By: |  | /S/    RICHARD J.
HENDRIX      
|                     |  |  |  |     |  | Richard J. Hendrix             
|                     |  |  |  |     |  | Chief Executive Officer        

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



|                                                   |  |                                                                                                                  |  |               
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------------
|SIGNATURE                                          |  | TITLE                                                                                                            |  | DATE          
|                                                   |  |                                                                                                                 
|/S/    RICHARD J.
HENDRIX RICHARD J. HENDRIX       |  | Chief Executive Officer and Director (principal executive officer)                                               |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    BRADLEY J.
WRIGHT BRADLEY J. WRIGHT         |  | Executive Vice President, Chief Financial Officer and Chief Administrative Officer (principal financial officer) |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    ROBERT J.
KIERNAN ROBERT J. KIERNAN         |  | Senior Vice President, Controller and Chief Accounting Officer (principal accounting officer)                    |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    ERIC F.
BILLINGS ERIC F. BILLINGS           |  | Chairman and Director                                                                                            |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    THOMAS J. HYNES,
JR. THOMAS J. HYNES, JR.   |  | Director                                                                                                         |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    ADAM J.
KLEIN ADAM J. KLEIN                 |  | Director                                                                                                         |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    RICHARD A.
KRAEMER RICHARD A. KRAEMER       |  | Director                                                                                                         |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    RALPH S. MICHAEL,
III RALPH S. MICHAEL, III |  | Director                                                                                                         |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    THOMAS S. MURPHY,
JR. THOMAS S. MURPHY, JR. |  | Director                                                                                                         |  | March 16, 2010
|                                                   |  |                                                                                                                 
|/S/    ARTHUR J.
REIMERS ARTHUR J. REIMERS         |  | Director                                                                                                         |  | March 16, 2010



60



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FBR CAPITAL MARKETS CORPORATION

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                 |  |     
|---------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                 |  | Page
|Report of Independent Registered Public Accounting Firm                                                          |  | F-2 
|                                                                                                                 | 
|Consolidated Balance Sheets as of December 31, 2009 and 2008                                                     |  | F-3 
|                                                                                                                 | 
|Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and
2007                       |  | F-4 
|                                                                                                                 | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 
31, 2009, 2008 and 2007 |  | F-5 
|                                                                                                                 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007                       |  | F-6 
|                                                                                                                 | 
|Notes to Consolidated Financial Statements                                                                       |  | F-7 



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

FBR Capital Markets Corporation:

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of operations, of changes in shareholders equity and of cash flows present fairly, in all material respects, the financial position of FBR Capital Markets Corporation and its subsidiaries
(the Company) at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Managements Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is
to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 16, 2010



F-2



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##### Table of Contents

FBR CAPITAL MARKETS CORPORATION

Consolidated Balance Sheets

(Dollars in thousands)



|                                                                                                                                     |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                     |  | December 31, |         
|                                                                                                                                     |  | 2009         |          |   | 2008 |  
|Assets                                                                                                                               |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                            |  | $            | 275,506  |   |      | $ | 207,801  |  
|Receivables:                                                                                                                         |  |              |          |   |      |   |          |  
|Investment banking                                                                                                                   |  |              | 4,846    |   |      |   | 2,196    |  
|Asset management fees                                                                                                                |  |              | 958      |   |      |   | 1,091    |  
|Due from affiliates                                                                                                                  |  |              | 567      |   |      |   | 3,208    |  
|Other                                                                                                                                |  |              | 9,380    |   |      |   | 25,615   |  
|Investments:                                                                                                                         |  |              |          |   |      |   |          |  
|Mortgage-backed securities, at fair value                                                                                            |  |              |         |   |      |   | 454,339  |  
|Long-term investments, at fair value                                                                                                 |  |              | 317      |   |      |   | 750      |  
|Trading account securities, at fair value                                                                                            |  |              | 94,478   |   |      |   | 17,954   |  
|Other long-term investments                                                                                                          |  |              | 43,303   |   |      |   | 40,424   |  
|Due from brokers, dealers and clearing organizations                                                                                 |  |              | 96,477   |   |      |   |         |  
|Goodwill                                                                                                                             |  |              | 5,882    |   |      |   |         |  
|Intangible assets, net                                                                                                               |  |              | 2,542    |   |      |   | 8,943    |  
|Furniture, equipment, software, and leasehold improvements, net of accumulated depreciation and amortization                         |  |              | 15,172   |   |      |   | 24,442   |  
|Prepaid expenses and other assets                                                                                                    |  |              | 6,897    |   |      |   | 13,606   |  
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Total assets                                                                                                                         |  | $            | 556,325  |   |      | $ | 800,369  |  
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Liabilities and Shareholders Equity                                                                                                 |  |              |          |   |      |   |          |  
|Liabilities                                                                                                                          |  |              |          |   |      |   |          |  
|Securities sold but not yet purchased, at fair value                                                                                 |  | $            | 51,669   |   |      | $ | 8,325    |  
|Repurchase agreements                                                                                                                |  |              |         |   |      |   | 416,037  |  
|Accrued compensation and benefits                                                                                                    |  |              | 72,537   |   |      |   | 43,919   |  
|Accounts payable, accrued expenses and other liabilities                                                                             |  |              | 22,452   |   |      |   | 25,352   |  
|Due to brokers, dealers and clearing organizations                                                                                   |  |              | 90,168   |   |      |   | 3,009    |  
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Total liabilities                                                                                                                    |  |              | 236,826  |   |      |   | 496,642  |  
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Commitments and Contingencies (Note 12)                                                                                              |  |              |          |   |      |   |          |  
|Shareholders equity                                                                                                                 |  |              |          |   |      |   |          |  
|Preferred Stock, $0.001 par value 100,000,000 authorized, none issued and outstanding                                                |  |              |         |   |      |   |         |  
|Common stock, $0.001 par value, 300,000,000 shares authorized, 64,064,784 and 59,791,914 shares issued and outstanding,
respectively |  |              | 64       |   |      |   | 60       |  
|Additional paid-in capital                                                                                                           |  |              | 429,052  |   |      |   | 396,059  |  
|Employee stock loan receivable, including accrued interest (57,500 and 0 share, respectively)                                        |  |              | (391     | ) |      |   |         |  
|Restricted stock units                                                                                                               |  |              | 19,979   |   |      |   | 9,309    |  
|Accumulated other comprehensive loss, net of taxes                                                                                   |  |              | (71      | ) |      |   | (218     | )
|Accumulated deficit                                                                                                                  |  |              | (129,134 | ) |      |   | (101,483 | )
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Total shareholders equity                                                                                                           |  |              | 319,499  |   |      |   | 303,727  |  
|                                                                                                                                     |  |              |          |   |      |   |          |  
|Total liabilities and shareholders equity                                                                                           |  | $            | 556,325  |   |      | $ | 800,369  |  
|                                                                                                                                     |  |              |          |   |      |   |          |  

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



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##### Table of Contents

FBR CAPITAL MARKETS CORPORATION

Consolidated Statements of Operations

(Dollars in thousands except per share amounts)



|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|---------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                           |  | Year Ended December 31, |        
|                                                           |  | 2009                    |         |   | 2008 |   |          | 2007 | 
|Revenues:                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Investment banking:                                        |  |                         |         |   |      |   |          |      |  |   |         |  
|Capital raising                                            |  | $                       | 121,007 |   |      | $ | 76,377   |      |  | $ | 289,545 |  
|Advisory                                                   |  |                         | 17,716  |   |      |   | 20,573   |      |  |   | 34,063  |  
|Institutional brokerage:                                   |  |                         |         |   |      |   |          |      |  |   |         |  
|Principal transactions                                     |  |                         | 40,271  |   |      |   | 20,261   |      |  |   | 10,152  |  
|Agency commissions                                         |  |                         | 92,864  |   |      |   | 118,314  |      |  |   | 104,633 |  
|Asset management fees                                      |  |                         | 13,244  |   |      |   | 15,883   |      |  |   | 23,950  |  
|Net investment income (loss)                               |  |                         | 1,577   |   |      |   | (81,335  | )    |  |   | (4,497  | )
|Interest income, dividends, and other                      |  |                         | 5,806   |   |      |   | 24,292   |      |  |   | 27,050  |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Total revenues                                             |  |                         | 292,485 |   |      |   | 194,365  |      |  |   | 484,896 |  
|Interest expense                                           |  |                         | 252     |   |      |   | 12,457   |      |  |   | 5,337   |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Revenues, net of interest expense                          |  |                         | 292,233 |   |      |   | 181,908  |      |  |   | 479,559 |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Non-Interest Expenses:                                     |  |                         |         |   |      |   |          |      |  |   |         |  
|Compensation and benefits                                  |  |                         | 193,017 |   |      |   | 227,114  |      |  |   | 287,752 |  
|Professional services                                      |  |                         | 23,971  |   |      |   | 34,895   |      |  |   | 45,303  |  
|Business development                                       |  |                         | 13,770  |   |      |   | 30,057   |      |  |   | 37,356  |  
|Clearing and brokerage fees                                |  |                         | 13,945  |   |      |   | 14,010   |      |  |   | 12,373  |  
|Occupancy and equipment                                    |  |                         | 33,655  |   |      |   | 33,244   |      |  |   | 33,197  |  
|Communications                                             |  |                         | 21,304  |   |      |   | 24,183   |      |  |   | 22,434  |  
|Impairment of intangible assets                            |  |                         | 5,350   |   |      |   |         |      |  |   |        |  
|Other operating expenses                                   |  |                         | 16,210  |   |      |   | 16,625   |      |  |   | 15,868  |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Total non-interest expenses                                |  |                         | 321,222 |   |      |   | 380,128  |      |  |   | 454,283 |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|(Loss) income before income taxes                          |  |                         | (28,989 | ) |      |   | (198,220 | )    |  |   | 25,276  |  
|Income tax (benefit) provision                             |  |                         | (1,338  | ) |      |   | (3,490   | )    |  |   | 20,032  |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Net (loss) income                                          |  | $                       | (27,651 | ) |      | $ | (194,730 | )    |  | $ | 5,244   |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Basic and diluted (loss) earnings per share                |  | $                       | (0.46   | ) |      | $ | (3.09    | )    |  | $ | 0.08    |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Basic weighted average shares outstanding (in thousands)   |  |                         | 60,094  |   |      |   | 63,056   |      |  |   | 64,123  |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  
|Diluted weighted average shares outstanding (in thousands) |  |                         | 60,094  |   |      |   | 63,056   |      |  |   | 64,187  |  
|                                                           |  |                         |         |   |      |   |          |      |  |   |         |  

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



F-4



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##### Table of Contents

FBR CAPITAL MARKETS CORPORATION

Consolidated Statements of Changes in Shareholders Equity

(Dollars and shares in thousands)



|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------ |  | ----------------- | - |  | ----------------- | --- | - | ------------------------ | - | ------- | -------------------- |  | - | --------------------------- | - |  | ------------------------------------------ | ---- | - | ------------------------------------ | - | ---- | ----- |  | - | -------------------------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                           |  | CommonStockShares |   |  | CommonStockAmount |     |   | AdditionalPaid-inCapital |   |         | RestrictedStockUnits |  |   | EmployeeStockLoanReceivable |   |  | AccumulatedOtherComprehensiveIncome (Loss) |      |   | RetainedEarnings(AccumulatedDeficit) |   |      | Total |  |   | ComprehensiveIncome (Loss) |  
|Balances at December 31, 2006                                                              |  | 64,000            |   |  | $                 | 64  |   |                          | $ | 395,778 |                      |  | $ |                            |   |  | $                                          |     |   |                                      | $ | 543  |       |  | $ | 88,003                     |   |  | $ | 484,388  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Net income                                                                                 |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   | 5,244                      |   |  |   | 5,244    |   |  | $ | 5,244    |  
|Contribution from FBR TRS Holdings, Inc.                                                   |  |                  |   |  |                   |    |   |                          |   | 3,425   |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 3,425    |   |  |   |          |  
|Issuance of common stock, net of forfeitures                                               |  | 3,003             |   |  |                   | 3   |   |                          |   | 19,286  |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 19,289   |   |  |   |          |  
|Repurchase of common stock                                                                 |  | (1,000            | ) |  |                   | (1  | ) |                          |   | (13,017 | )                    |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | (13,018  | ) |  |   |          |  
|Stock compensation expense for options granted to purchase common stock                    |  |                  |   |  |                   |    |   |                          |   | 7,333   |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 7,333    |   |  |   |          |  
|Other comprehensive income:                                                                |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   | 79   |       |  |   |                           |   |  |   | 79       |   |  |   | 79       |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Comprehensive income                                                                       |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  | $ | 5,323    |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Balances at December 31, 2007                                                              |  | 66,003            |   |  | $                 | 66  |   |                          | $ | 412,805 |                      |  | $ |                            |   |  | $                                          |     |   |                                      | $ | 622  |       |  | $ | 93,247                     |   |  | $ | 506,740  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Net loss                                                                                   |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   | (194,730                   | ) |  |   | (194,730 | ) |  | $ | (194,730 | )
|Reimbursement to affiliates.                                                               |  |                  |   |  |                   |    |   |                          |   | (183    | )                    |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | (183     | ) |  |   |          |  
|Issuance of common stock, net of forfeitures                                               |  | 538               |   |  |                   | 1   |   |                          |   | 11,453  |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 11,454   |   |  |   |          |  
|Repurchase of common stock                                                                 |  | (6,749            | ) |  |                   | (7  | ) |                          |   | (33,893 | )                    |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | (33,900  | ) |  |   |          |  
|Stock compensation expense for options granted to purchase common stock                    |  |                  |   |  |                   |    |   |                          |   | 5,877   |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 5,877    |   |  |   |          |  
|Issuance of restricted stock units                                                         |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   | 9,309                       |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 9,309    |   |  |   |          |  
|Other comprehensive loss:                                                                  |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   | (840 | )     |  |   |                           |   |  |   | (840     | ) |  |   | (840     | )
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                         |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  | $ | (195,570 | )
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Balances at December 31, 2008                                                              |  | 59,792            |   |  | $                 | 60  |   |                          | $ | 396,059 |                      |  | $ | 9,309                       |   |  | $                                          |     |   |                                      | $ | (218 | )     |  | $ | (101,483                   | ) |  | $ | 303,727  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Net loss                                                                                   |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   | (27,651                    | ) |  |   | (27,651  | ) |  | $ | (27,651  | )
|Contribution from FBR TRS Holdings, Inc.                                                   |  |                  |   |  |                   |    |   |                          |   | 34      |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 34       |   |  |   |          |  
|Issuance of common stock, net of forfeitures                                               |  | 20,940            |   |  |                   | 21  |   |                          |   | 100,852 |                      |  |   | (1,540                      | ) |  |                                            | (391 | ) |                                      |   |     |       |  |   |                           |   |  |   | 98,942   |   |  |   |          |  
|Repurchase of common stock                                                                 |  | (16,667           | ) |  |                   | (17 | ) |                          |   | (73,455 | )                    |  |   |                            |   |  |                                            |      |   |                                      |   |     |       |  |   |                           |   |  |   | (73,472  | ) |  |   |          |  
|Stock compensation expense for options granted to purchase common stock                    |  |                  |   |  |                   |    |   |                          |   | 5,562   |                      |  |   |                            |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 5,562    |   |  |   |          |  
|Issuance of restricted stock units                                                         |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   | 12,210                      |   |  |                                            |     |   |                                      |   |     |       |  |   |                           |   |  |   | 12,210   |   |  |   |          |  
|Other comprehensive income:                                                                |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes |  |                  |   |  |                   |    |   |                          |   |        |                      |  |   |                            |   |  |                                            |     |   |                                      |   | 147  |       |  |   |                           |   |  |   | 147      |   |  |   | 147      |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                         |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  | $ | (27,504  | )
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  
|Balances at December 31, 2009                                                              |  | 64,065            |   |  | $                 | 64  |   |                          | $ | 429,052 |                      |  | $ | 19,979                      |   |  | $                                          | (391 | ) |                                      | $ | (71  | )     |  | $ | (129,134                   | ) |  | $ | 319,499  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |     |   |                          |   |         |                      |  |   |                             |   |  |                                            |      |   |                                      |   |      |       |  |   |                            |   |  |   |          |   |  |   |          |  

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



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FBR CAPITAL MARKETS CORPORATION

Consolidated Statements of Cash Flows

(Dollars in thousands)



|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                  |  | Year Ended December 31, |         
|                                                                                                  |  | 2009                    |          |   | 2008 |   |          | 2007 | 
|Cash flows from operating activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net (loss) income                                                                                 |  | $                       | (27,651  | ) |      | $ | (194,730 | )    |  | $ | 5,244    |  
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                     |  |                         | 10,983   |   |      |   | 10,814   |      |  |   | 10,531   |  
|Income tax provision (benefit)deferred                                                           |  |                         | 356      |   |      |   | 17,698   |      |  |   | (6,997   | )
|Net investment (income) loss from long-term and mortgage-backed securities.                       |  |                         | (1,577   | ) |      |   | 81,335   |      |  |   | 3,703    |  
|Stock compensation                                                                                |  |                         | 20,200   |   |      |   | 18,953   |      |  |   | 12,442   |  
|Impairment of intangible assets                                                                   |  |                         | 5,350    |   |      |   |         |      |  |   |         |  
|Other                                                                                             |  |                         | 1,704    |   |      |   | 451      |      |  |   | 169      |  
|Changes in operating assets                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Receivables                                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Brokers, dealers and clearing organizations                                                       |  |                         | (96,476  | ) |      |   |         |      |  |   | 28,692   |  
|Investment banking                                                                                |  |                         | (3,086   | ) |      |   | (6,237   | )    |  |   | 8,274    |  
|Asset management fees                                                                             |  |                         | 134      |   |      |   | 885      |      |  |   | 206      |  
|Affiliates                                                                                        |  |                         | 2,506    |   |      |   | 3,493    |      |  |   | (6,974   | )
|Interest, dividends and other                                                                     |  |                         | 16,487   |   |      |   | (7,607   | )    |  |   | 9,508    |  
|Trading account securities, at fair value                                                         |  |                         | (76,525  | ) |      |   | (10,067  | )    |  |   | (5,053   | )
|Prepaid expenses and other assets                                                                 |  |                         | 7,167    |   |      |   | 2,502    |      |  |   | (4,129   | )
|Changes in operating liabilities                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Trading account securities sold but not yet purchased, at fair value                              |  |                         | 35,788   |   |      |   | 8,118    |      |  |   | 4        |  
|Accounts payable, accrued expenses and other liabilities                                          |  |                         | (4,495   | ) |      |   | (5,288   | )    |  |   | (718     | )
|Accrued compensation and benefits                                                                 |  |                         | 31,282   |   |      |   | 4,785    |      |  |   | 11,330   |  
|Brokers, dealers and clearing organizations                                                       |  |                         | 87,159   |   |      |   | (3,988   | )    |  |   | 7,512    |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities                                               |  |                         | 9,306    |   |      |   | (78,883  | )    |  |   | 73,744   |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Purchases of mortgage-backed securities                                                           |  |                         |         |   |      |   | (899,953 | )    |  |   | (565,076 | )
|Receipt of principal payments on mortgage-backed securities                                       |  |                         | 2,441    |   |      |   | 54,380   |      |  |   | 17,961   |  
|Proceeds from sales of mortgage-backed securities                                                 |  |                         | 450,396  |   |      |   | 360,930  |      |  |   | 963,754  |  
|Purchases of long-term investments                                                                |  |                         | (10,150  | ) |      |   | (6,748   | )    |  |   | (75,296  | )
|Proceeds from sales of and distributions from investments                                         |  |                         | 12,009   |   |      |   | 16,894   |      |  |   | 22,826   |  
|Proceeds from securities sold but not yet purchased, net                                          |  |                         | 5,933    |   |      |   |         |      |  |   |         |  
|Purchases of furniture, equipment, software, and leasehold improvements                           |  |                         | (1,336   | ) |      |   | (4,780   | )    |  |   | (6,256   | )
|Acquisition of net assets                                                                         |  |                         | (3,311   | ) |      |   | (461     | )    |  |   | (1,000   | )
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                               |  |                         | 455,982  |   |      |   | (479,738 | )    |  |   | 356,913  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Contributions from Arlington Asset Investment Corp.                                               |  |                         |         |   |      |   |         |      |  |   | 3,425    |  
|Decrease in due to affiliates, net                                                                |  |                         |         |   |      |   | (64      | )    |  |   | (4,097   | )
|(Repayment of) proceeds from repurchase agreements, net                                           |  |                         | (416,037 | ) |      |   | 416,037  |      |  |   | (189,153 | )
|Repurchases of common stock                                                                       |  |                         | (73,472  | ) |      |   | (33,900  | )    |  |   | (13,017  | )
|Proceeds from sales of common stock                                                               |  |                         | 91,926   |   |      |   | 791      |      |  |   | 4,326    |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by financing activities                                               |  |                         | (397,583 | ) |      |   | 382,864  |      |  |   | (198,516 | )
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                         | 67,705   |   |      |   | (175,757 | )    |  |   | 232,141  |  
|Cash and cash equivalents, beginning of period                                                    |  |                         | 207,801  |   |      |   | 383,558  |      |  |   | 151,417  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of period                                                          |  | $                       | 275,506  |   |      | $ | 207,801  |      |  | $ | 383,558  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Supplemental cash flows disclosures                                                               |  |                         |          |   |      |   |          |      |  |   |          |  
|Income tax payments                                                                               |  | $                       | 25       |   |      | $ | 563      |      |  | $ | 38,647   |  
|Interest payments                                                                                 |  |                         | 255      |   |      |   | 12,384   |      |  |   | 4,734    |  
|Non-cash operating activities                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Securities received in exchange for services provided, fair value at receipt date                 |  | $                       |         |   |      | $ | 5,000    |      |  | $ |         |  

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



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FBR CAPITAL MARKETS CORPORATION

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Note 1. Organization and
Nature of Operations:

Organization

FBR Capital Markets Corporation (the Company), a Virginia corporation, is a holding Company of which the principal operating
companies are FBR Capital Markets & Co. (FBR & Co), FBR Capital Markets International, Ltd. (FBRIL), FBR Capital Markets LT, Inc. (FBRLT), FBR Fund Advisers, Inc. (FBRFA), FBR
Investment Services, Inc. (FBRIS) and FBR Capital Markets PT, Inc. (FBRPT).

FBR & Co. is an
SEC-registered broker-dealer and member of Financial Institutions Regulatory Authority Inc. (FINRA). FBR & Co. acts as an introducing broker and forwards all transactions to clearing brokers on a fully disclosed basis.
FBR & Co. does not hold funds or securities for, nor owe funds or securities to, customers. In addition, FBR & Co. provides capital raising and advisory services. FBRIL, headquartered in United Kingdom, is an introducing
broker-dealer registered with the Financial Services Authority (FSA) of the United Kingdom. The Company conducts its syndicated loan trading activity at FBRLT.

FBRFA is an SEC-registered investment adviser that manages The FBR Funds, a family of mutual funds. FBRIS, an SEC-registered broker-dealer
and member of FINRA, is the Distributor of The FBR Funds.

FBRPT holds and manages the Companys long-term and merchant
banking investments.

Prior to May 2009, the Company was a majority-owned subsidiary of Arlington Asset Investment Corp.
(Arlington Asset), a separate publicly-traded corporation (NYSE:AI). In May 2009, the Company repurchased 16,667,000 of its common stock at a share price of $4.35 from Arlington Asset. Subsequent to this share repurchase, Arlington Asset
was no longer the majority-owner of the Company.

In October 2009, Arlington Asset sold its remaining 14,755,017 shares of the
Companys common stock at $6.00 per share in a secondary public offering. As a result of the repurchase and secondary offering of shares of the Companys common stock, Arlington Asset no longer maintains any ownership interest in the
Company.

Nature of Operations

The Companys principal business activities, including capital raising, securities sales and trading, merger, acquisition and advisory services, proprietary investments, and venture capital and other
asset management services, are all linked to the capital markets.

The Companys investment banking and institutional
brokerage business activities are primarily focused on small- and mid-cap stocks in eight broad industry sectors: consumer, diversified industrials, energy and natural resources, financial institutions, healthcare, insurance, real estate, and
technology, media and telecommunications (TMT). sectors. By their nature, the Companys business activities are conducted in markets which are highly competitive and are subject to general market conditions, volatile trading markets
and fluctuations in the volume of market activity, as well as conditions affecting the companies and markets in the Companys areas of focus.

The Companys revenues from investment banking and fees from asset management are subject to substantial fluctuations due to a variety of factors that cannot be predicted with great certainty,
including the overall condition of the economy and the securities markets as a whole and of the sectors on which the Company focuses. Fluctuations also occur due to the level of market activity, which, among other things, affects the flow of
investment dollars and the size, number and timing of transactions. As a result, net income and revenues in any particular period may vary significantly from period to period and year-to-year.



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Concentration of Risk

A substantial portion of the Companys investment banking revenues may be derived from a small number of transactions or issues or may
be concentrated in a particular industry. For the years ended December 31, 2009, 2008 and 2007 investment banking revenue accounted for 47.5%, 53.3% and 67.5%, respectively, of the Companys revenues, net of interest expense. For the year
ended December 31, 2008, revenues net of interest expense includes a net investment loss of $81,335. This net investment loss has a significant impact on the comparability of the 2008 percentage to other years.

Note 2. Summary of Significant Accounting Policies:

Principles of Consolidated Financial Statements

The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Certain reclassifications have been made to previously reported balances on the statements of operations to conform to the current presentation. These reclassifications had no impact on Revenues,
Revenues, net of interest expense, Net (loss) income, or (Loss) earnings per share for the years ended December 31, 2009, 2008, 2007.

Use of Estimates

The preparation of the Companys financial
statements, in conformity with accounting principles generally accepted in the United States of America, requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Although we base our estimates and assumptions on historical experience, when available, market information, and on various other factors that we believe to be reasonable
under the circumstances, management exercises significant judgment in the final determination of our estimates. Actual results may differ from these estimates.

Cash Equivalents

Cash equivalents include demand deposits with
banks, money market accounts and highly liquid investments with original maturities of three months or less that are not held for sale in the ordinary course of business. As of December 31, 2009 and 2008, approximately 74% and 86%,
respectively, of the Companys cash equivalents were invested in money market funds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.

Securities and Principal Investments

Long-term investments in marketable equity securities and mortgage-backed securities that are held in non-broker-dealer entities are classified as either available-for-sale or trading investments pursuant
to Accounting Standards Codification (ASC) 320 InvestmentsDebt and Equity Securities (ASC 320). These investments are carried at fair value with resulting unrealized gains and losses on available-for-sale
securities reflected in accumulated other comprehensive income (loss) in the balance sheets and unrealized gains and losses on trading securities reflected in net investment income in the statements of operations. Long-term investments in equity
securities of non-public companies that are held in non-broker dealer entities are carried at cost.

The Company evaluates
available-for-sale securities and investments in securities of non-public companies carried at cost for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The
value of our long-term investments in marketable equity securities designated as available for sale can fluctuate significantly. The value of our long term investments in non-public securities can also fluctuate significantly. Such values may be
based on unobservable



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inputs, including significant assumptions of the Company and consideration of the liquidity and size of the Companys position. In evaluating these investments for other-than-temporary
impairment, consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the severity of the decline in fair value, (3) the financial condition and near-term prospects
of the issuer, and (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If it is determined that an investment impairment is other-than-temporary
then the amount that the fair value is below its current basis is recorded as an impairment charge and recorded through earnings in net investment income (loss) in the statement of operations.

For unrealized losses that are determined to be temporary, we continue to evaluate these at each reporting date. If we determine at a future
date that an impairment of a marketable equity security is other-than-temporary, the applicable unrealized loss will be reclassified from accumulated other comprehensive income and recorded as a realized loss at the time the determination is made.

Trading securities and long term investments owned by the Companys broker-dealer subsidiaries and securities sold but
not yet purchased are recorded on a trade-date basis and carried at fair value. Realized and unrealized gains and losses from trading securities are reflected in principal transactions in the statements of operations. Realized and unrealized losses
from such long term investments are reflected in net investment income in the statements of operations.

Realized gains and
losses on sales of non-mortgage-backed securities are determined using the specific identification method. Realized gains and losses on mortgage-backed securities transactions are determined based on average cost.

In connection with certain capital raising transactions, the Company has received and held warrants for the stock of the issuing companies,
which are generally exercisable at the respective offering price of the transaction. These instruments are accounted for as derivatives with changes in fair value recorded to net investment income in the statement of operations under ASC 815
Derivatives and Hedging (ASC 815), and the balance is included in long-term investments in the balance sheet. Similarly, the Company may receive and hold shares of the issuing companies. The Company held warrants for the
periods ended December 31, 2008 and prior.

For restricted warrants and shares, including private company warrants and
shares, these investments by their nature have limited or no price transparency. Adjustments to carrying value may be based on third-party transactions evidencing a change in value and output from the Companys valuation models and estimates of
fair value. In reaching that determination, the Company may consider factors such as, but not limited to, the financial performance of the companies relative to projections, trends within sectors, underlying business models and expected exit timing
and strategy. Due to the restrictions on the warrants and the underlying securities, and the subjectivity of these valuations, these warrants may have nominal values. The Company values warrants to purchase publicly traded stocks, where the
restriction periods have lapsed, using an option valuation model.

Investments in proprietary investment funds, including
hedge, private equity and venture funds, in which the Company is the general partner or has a significant limited partner interest or is the managing member or manager, are accounted for using the equity method and the Companys proportionate
share of income or loss (including realized and unrealized gains and losses) is reflected in net investment income in the statements of operations.

The private investment funds are non-registered investment companies that record their investments in securities at fair value. Certain investments consist of equity investments in securities of
development-stage and early-stage privately and publicly held companies. The disposition of these investments may be restricted due to the lack of a ready market or due to contractual or regulatory restrictions on disposition. In addition, these
securities may represent significant portions of the issuers equity and carry special contractual privileges not available to other security holders. As a result of these factors, precise valuation for the restricted public



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securities and private company securities is a matter of judgment, and the determination of fair value must be considered only an approximation and may vary significantly from the amounts that
could be realized if the investment were sold or from the value that would have been used had a ready market existed for the securities and those differences could be material.

Fair Value of Financial Instruments

ASC 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

Level 1 InputsUnadjusted quoted prices in active markets for identical assets or liabilities that are
accessible by the Company;

Level 2 InputsQuoted prices in markets that are not active or
financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 3 InputsUnobservable inputs for the asset or liability, including significant assumptions of the Company and other market participants.

The Company determines fair values for the following assets and liabilities:

Long-term investments, at fair valueThe Companys long-term investments, at fair value, consists of marketable equity securities and investment securitiesmarked-to-market. The
Companys marketable equity securities are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices from an exchange. For the year ended December 31, 2008 and prior, investment
securitiesmarked-to-market consists of warrants and equity securities received in connection with certain capital raising transactions. Warrants are generally exercisable at the respective offering price of the transaction. Such investments
are classified within Level 3 of the fair value hierarchy as the value is determined by management based on valuation models and enterprise value, taking into consideration the financial performance of the companies relative to projections, trends
within sectors, underlying business models and expected exit timing and strategy.

Trading account securities and securities sold but not yet purchased, at fair valueThe Companys trading securities, at fair value, are securities owned by the Companys broker-dealer subsidiaries and consist of
marketable and non-public equity, convertible and fixed income debt, and listed options. The Companys securities sold but not yet purchased, at fair value, are trading securities sold by the Companys broker-dealer subsidiaries and
exchange-traded funds sold as part of the Companys principal investing segment and consist of marketable equity, convertible and fixed income debt, listed options, and exchange-traded funds. The Company classifies marketable equity, listed
options, and exchange-traded funds within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Convertible and fixed income debt instruments are classified within Level 2 of the fair value hierarchy as
they are valued using quoted market prices provided by a broker or dealer, or alternative pricing services that provide reasonable levels of price transparency. Non-public equity and debt securities are classified within Level 3 of the fair value
hierarchy if enterprise values are used to value these securities. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable market trading activity,
which may be reported by The PORTAL MarketSM, a subsidiary
of The NASDAQ Stock Market, Inc.



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##### Table of Contents

The estimated fair values of the Companys financial instruments are as follows:



|                                                     |  |                   |         |                     |   |                |  |                     |         |  |   |        
|---------------------------------------------------- |  | ----------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                                     |  | December 31, 2009 |         | December 31, 2008  
|                                                     |  | CarryingAmount    |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets                                     |  |                   |         |                     |   |                |  |                     |         |  |   |        
|Cash and cash equivalents                            |  | $                 | 275,506 |                     | $ | 275,506        |  | $                   | 207,801 |  | $ | 207,801
|Non-interest bearing receivables                     |  |                   | 15,751  |                     |   | 15,751         |  |                     | 32,110  |  |   | 32,110 
|Mortgage-backed securities, at fair value            |  |                   |        |                     |   |               |  |                     | 454,339 |  |   | 454,339
|Long-term investments, at fair value                 |  |                   | 317     |                     |   | 317            |  |                     | 750     |  |   | 750    
|Other long-term investments                          |  |                   | 43,303  |                     |   | 43,303         |  |                     | 40,424  |  |   | 40,424 
|Trading account securities, at fair value            |  |                   | 94,478  |                     |   | 94,478         |  |                     | 17,954  |  |   | 17,954 
|Financial liabilities                                |  |                   |         |                     |   |                |  |                     |         |  |   |        
|Securities sold but not yet purchased, at fair value |  |                   | 51,669  |                     |   | 51,669         |  |                     | 8,325   |  |   | 8,325  
|Repurchase agreements                                |  |                   |        |                     |   |               |  |                     | 416,037 |  |   | 416,037

Due from/to
Brokers, Dealers, and Clearing Organizations

The Company clears all of its proprietary and customer transactions
through another broker-dealer on a fully disclosed basis. Based on the terms and conditions of the Companys agreements with its clearing broker, the amount receivable from the clearing broker represents cash on hand with the clearing broker
plus proceeds from unsettled securities sold and less amounts payable for unsettled securities purchased by the Company. The amounts payable are collateralized by securities owned by the Company. In addition, these balances include unsettled trades
associated with our credit sales and trading platform. These transactions include trades in certain sectors of the corporate bond and syndicated loan markets.

Intangible Assets

The Companys intangible assets consist of
goodwill from a business combination completed in August 2009 and intangible assets with finite useful lives. Goodwill is not amortized but is tested annually for impairment (during the fourth quarter) or more frequently if an adverse event occurs
that may indicate impairment. The assessment of goodwill is performed at the reporting unit level. The values of the intangible assets with finite useful lives are amortized in proportion to their expected economic benefit over their estimated
useful life or straight-line if the economic benefit cannot be reliably determined. These intangible assets are periodically tested for impairment by comparing expected future gross cash flows to the assets carrying amount. If the expected
gross cash flows are less than the carrying amount, the asset is impaired and is written-down to its fair value.

Furniture, Equipment, Software and Leasehold Improvements

Furniture and equipment are depreciated using
the straight-line method over their estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life or lease term. Amortization of purchased software is recorded
over the estimated useful lives of three to five years.

Repurchase Agreements

Securities sold under agreements to repurchase, which are treated as financing transactions for financial reporting purposes, are
collateralized primarily by government agency securities.

Investment Banking Revenues

Capital raising revenues represent fees earned from private placements and from public offerings of securities in which the Company acts as
placement agent or underwriter. These revenues are comprised of selling concessions, underwriting fees, and management fees. Advisory revenues represent fees earned from mergers



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##### Table of Contents

and acquisitions, mutual conversions, financial restructuring and other advisory services provided to clients. Capital raising revenues are recorded as revenue at the time the private placement
or underwriting is completed. Advisory fees are recorded as revenue when the related service has been rendered and the client is contractually obligated to pay. Certain fees received in advance of services rendered are deferred and recognized as
revenue over the service period.

Institutional Brokerage Agency and Principal Revenues

Agency commissions consist of commissions earned from executing the trade of stock exchange-listed securities and other transactions as an
agent and principal transactions consist of sales credits and trading gains or losses from securities transactions. Revenues generated from securities transactions and related commission income and expenses are recorded on a trade-date basis.

Asset Management Revenues

The Company receives fees for the management, administration, and distribution of mutual funds based upon the amount of assets under management. This revenue is recognized over the period in which
services are performed and is recorded in asset management fees in the Companys statements of operations.

Investment Funds

The Companys subsidiary FBR Investment Management, Inc. (FBRIM),
through various wholly-owned limited liability corporations, is the general partner, managing member, or manager of various hedge and private equity funds. Under the terms of the funds applicable governance agreements, FBRIM can be removed as
the general partner, managing member, or manager of these entities by a simple majority vote of the unaffiliated limited partners or non-managing members. Accordingly, the Company accounts for its investments in these entities using the equity
method of accounting.

The Company records allocations for its proportionate share of the earnings or losses of certain hedge
and private equity funds. Income or loss allocations are recorded in net investment income in the Companys statements of operations. The funds record their investments at fair value with changes in fair value reported in the funds
earnings at each reporting date. Accordingly, capital accounts at each reporting date include all applicable allocations of the funds realized and unrealized gains and losses.

Compensation and Benefits

Compensation and benefits includes base salaries, incentive compensation, stock-based compensation, employee benefit costs, and employer taxes. Incentive compensation is a significant component of
compensation expense and is accrued based on the contribution of key business units using certain pre-defined formulas. The Companys compensation accruals are reviewed and evaluated on a quarterly basis. The Company recognizes stock-based
compensation expense in the income statement based on the grant-date fair value of awards of equity instruments issued to employees. The expense is recognized over the period during which employees are required to provide service. The expense is
recorded using an estimated forfeiture rate for awards on the date of grant.

Income Taxes

Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities
using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on our evaluation and our consideration of the criteria in ASC 740, Income Taxes (ASC 740), it is more likely
than not that they will not be realized. The Companys policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of other operating expenses in the statement of operations.



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##### Table of Contents

Other Comprehensive Income

Comprehensive income includes net income as currently reported by the Company on the consolidated statements of operations adjusted for other
comprehensive income. Other comprehensive income for the Company represents changes in unrealized gains and losses related to the Companys equity and mortgage-backed securities accounted for as available-for-sale with changes in fair value
recorded through shareholders equity.

Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share includes the impact of dilutive securities such as stock options, unvested shares of restricted stock and restricted stock units (RSUs), all of which
are subject to forfeiture. Due to the Companys reported net loss for the years ended December 31, 2009 and 2008, all stock options, unvested shares of restricted stock and unvested RSUs were considered anti-dilutive for these periods. The
following table presents the computations of basic and diluted earnings per share for the periods indicated:



|                                                                                |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------- | - | ------- | --------------------------- |  | - | -------- | - |  | ----- | -------- | ------- |  | - | ------ |  | - | ------
|                                                                                |  | Year EndedDecember 31, 2009 |         |   | Year EndedDecember 31, 2008 |   |         | Year EndedDecember 31, 2007
|                                                                                |  | Basic                       |         |   | Diluted                     |   |         | Basic                       |  |   | Diluted  |   |  | Basic |          | Diluted
|Weighted average shares outstanding:                                            |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       
|Common stock (in thousands)                                                     |  |                             | 60,094  |   |                             |   | 60,094  |                             |  |   | 63,056   |   |  |       | 63,056   |         |  |   | 64,123 |  |   | 64,123
|Stock options, unvested restricted stock and RSUs (in thousands)                |  |                             |        |   |                             |   |        |                             |  |   |         |   |  |       |         |         |  |   |       |  |   | 64    
|                                                                                |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       
|Weighted average common and common equivalent shares outstanding (in thousands) |  |                             | 60,094  |   |                             |   | 60,094  |                             |  |   | 63,056   |   |  |       | 63,056   |         |  |   | 64,123 |  |   | 64,187
|                                                                                |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       
|Net (loss) earnings applicable to common stock                                  |  | $                           | (27,651 | ) |                             | $ | (27,651 | )                           |  | $ | (194,730 | ) |  | $     | (194,730 | )       |  | $ | 5,244  |  | $ | 5,244 
|                                                                                |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       
|(Loss) earnings per common share                                                |  | $                           | (0.46   | ) |                             | $ | (0.46   | )                           |  | $ | (3.09    | ) |  | $     | (3.09    | )       |  | $ | 0.08   |  | $ | 0.08  
|                                                                                |  |                             |         |   |                             |   |         |                             |  |   |          |   |  |       |          |         |  |   |        |  |   |       

The following table present the number of antidilutive
stock options, unvested restricted stock and RSUs for the periods indicated:



|                                                                                                       |  |                         |  |        |  |      
|------------------------------------------------------------------------------------------------------ |  | ----------------------- |  | ------ |  | -----
|                                                                                                       |  | Year Ended December 31,
|                                                                                                       |  | 2009                    |  | 2008   |  | 2007 
|Number of antidilutive stock options, unvested restricted stock,and RSUs, end of period (in thousands) |  | 19,278                  |  | 16,220 |  | 8,912

Recent
Accounting Pronouncements

In April 2009, the Financial Accounting Standard Board (FASB) issued changes to
the guidance for fair value accounting. These changes provide guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased. It reaffirms that the objectives for fair value
measurements in accordance with previous fair value accounting guidance have remained the same. It also provides additional guidance in determining whether a transaction is not orderly. These changes were effective for interim reporting periods
ending after June 15, 2009. The Company adopted these changes beginning with the reporting period ended June 30, 2009. Adoption of these changes did not impact the Companys financial condition or operating results.

In April 2009, the FASB issued changes to the guidance for recognition and presentation of other-than-temporary impairments. These changes
revise the guidance for the recognition and reporting requirements for other-than-temporary impairments of debt securities. It eliminates the ability and intent to hold provision for



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debt securities only and now requires that an impairment be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to
sell the security before recovering its cost, or (3) does not expect to recover the securitys entire amortized cost basis (even if the entity does not intend to sell). It also requires additional disclosures for interim and annual
reporting periods for both debt and equity securities. These changes were effective for interim reporting periods ending after June 15, 2009. The Company adopted these changes for the reporting period ended June 30, 2009. Adoption of these
changes did not impact the Companys financial condition or operating results.

In April 2009, the FASB issued changes to
the guidance for business combinations. These changes apply to all assets acquired and all liabilities assumed in a business combination that arise from contingencies. These changes state that the acquirer will recognize such an asset or liability
if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if the
following criteria, consistent with guidance for accounting for contingencies, are met: (1) information available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred
at the acquisition date, and (2) the amount of the asset or liability can be reasonably estimated. These changes were effective for contingencies resulting from business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning after December 15, 2008. The adoption did not have a material impact on the Companys financial statements.

In May 2009, the FASB issued changes to the guidance for subsequent events. These changes establish principles and requirements for subsequent events. In particular, these changes set forth the period
after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall
recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. These changes were effective
for interim or annual financial periods ending after June 15, 2009. The adoption did not have a material effect on the Companys financial statements. The Company evaluated subsequent events through the date of filing of its Annual Report
on Form 10-K for the fiscal year ended December 31, 2009 and noted no items that require additional disclosure.

In June
2009, the FASB issued changes to the guidance for accounting for transfers of financial assets. These changes improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its
financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement in transferred financial assets. These changes are
effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The recognition and measurement provisions of these changes shall be applied to transfers that occur on or after the effective date. The Company has assessed the impact of the adoption of these changes
on its financial statements and does not believe these will have a material effect.

In June 2009, the FASB issued changes to
the guidance for variable interest entities. These changes are to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These
changes are effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited. In January 2010, the FASB issued a deferral of these requirements for asset managers who are not obligated to fund significant losses incurred by the variable interest entities. The Company has
assessed the impact of the adoption of these changes on its financial statements and does not believe these will have a material effect.

In August 2009, the FASB issued changes to the guidance for fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market
for the



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identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an
identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements. This change in the guidance also states that both a quoted price in an active market for the
identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. These changes became effective for
the Company as of October 1, 2009. The adoption of these changes did not have a material impact on the Companys financial statements.

Note 3. Related-Party Transactions:

In October 2009, Arlington Asset and related affiliates, the
Companys former majority shareholder, sold 14,755,017 shares of the Companys common stock in an underwritten public offering. As a result of this sale, Arlington Asset no longer maintains an ownership interest in the Company. Subsequent
to this sale, the Companys prospective relationship with Arlington Asset is limited to subleasing certain office space to Arlington Asset at a market rate. The paragraphs that follow provide additional detail regarding our historical
relationship with Arlington Asset.

In July 2006, the Company entered into various inter-company and other contractual
arrangements with Arlington Asset and Crestview Partners, L.P., a New York-based private equity firm (Crestview), including a professional services agreement and other related party contractual arrangements. In May 2009, the Company
entered into a stock repurchase agreement with Arlington Asset (Repurchase Agreement) pursuant to which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35. As a result of this
transaction, Arlington Asset ceased being the majority shareholder of the Company (also see Note 13). Concurrently, the Company and Arlington Asset agreed to terminate various inter-company and other contractual arrangements between them.

Services Agreement

Under the services agreement with Arlington Asset, the Company was to provide or cause one or more of its subsidiaries to provide to Arlington Asset certain services, including various corporate overhead
services, for fees based on costs incurred by the Company and its subsidiaries in providing the services. Similarly, Arlington Asset was to provide to the Company and its subsidiaries under the same services agreement certain services, including
certain asset management services, for fees based on costs incurred by Arlington Asset in providing the services. The costs being allocated under each of these agreements primarily consists of total compensation and benefits of the employees
providing the services, professional services, including consulting and legal fees, and facility costs for the employees providing the services.

This services agreement was terminated in connection with the Repurchase Agreement in May 2009 and replaced by a Transition Services Agreement pursuant to which the Company agreed to provide Arlington
Asset certain services for a fixed dollar amount. The services that the Company agreed to provide include the following: employee benefit services, human resources and financial related services, data and network services and infrastructure, and
facilities services, in each case subject to reductions in services (and associated costs) as requested by Arlington Asset. Arlington Asset agreed to use all commercially reasonable efforts to transition away from the services provided by the
Company as soon as practicable and, in any event, no later than one year after the date of agreement. As of December 31, 2009, all such services had been transitioned between the entities and services will not be provided between the entities
in future periods.

In connection with the services agreement and the transition services agreement, during the years ended
December 31, 2009, 2008 and 2007, the Companys operating expenses are reported net of $370, $2,134 and $5,636, respectively, representing overhead costs allocated to affiliates.



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Management Services Agreement

Under a management services agreement with Arlington Asset, which was terminated effective January 1, 2008, Arlington Asset allocated to
the Company certain costs relating to executive compensation during the year ended December 31, 2007. Upon termination of this agreement, compensation and benefits expense and other costs associated with the Companys executive management
team are borne directly by the Company. Executive compensation costs allocated to the Company during 2007 totaled 8% of the Companys consolidated pre-tax earnings before deducting the amount payable to Arlington Asset, plus a $1,500 flat fee
grossed up for tax purposes and certain employee benefit expenses.

In connection with the management services agreement,
during the years ended December 31, 2009, 2008 and 2007, the Company was allocated $-0-, $-0- and $4,089, respectively, in compensation and benefits expense related to executive compensation for officers of Arlington Asset.

Corporate Agreement

Under the corporate agreement with Arlington Asset, Arlington Asset agreed to indemnify the Company against claims related to the businesses contributed to the Company prior to the contribution of those
businesses in July 2006 and that arose out of actions or events that occurred prior to the contribution. During the years ended December 31, 2009, 2008 and 2007, Arlington Asset incurred/(recovered) costs of $34, $(183) and $3,425,
respectively, net of taxes pursuant to these indemnification provisions. The Company includes such amounts in its consolidated statements of operations and reflects a corresponding capital contribution from or (reimbursement to) Arlington Asset.
This agreement was terminated in connection with the Repurchase Agreement.

Professional Services Agreement

Under the professional services agreement with Crestview, the Company agreed to pay Crestview Advisors, L.L.C. a $1,000 annual
strategic advisory fee plus reimbursement of reasonable out-of-pocket expenses as long as Crestview continues to own at least 50% of the shares purchased by certain Crestview affiliates in our 2006 private offering. In September 2008, the Company
and Crestview agreed to issue 502,268 options to purchase common shares of the Company to Crestview Advisors L.L.C. in lieu of cash payments for the strategic advisory fee for the period beginning October 1, 2008 through December 31, 2009.
During the year ended December 31, 2009, the Company recognized $944 of non-cash expense associated with these options.

Receivables and Payables

From time to time, the Company has made advances to affiliates that were used
for general operating purposes and are settled in cash on a regular basis. As of December 31, 2009, as previously noted, the Company is no longer affiliated with Arlington Asset. Receivables from affiliates, including private equity and hedge
funds, totaled $567 as of December 31, 2009.

Receivable from affiliates consisted of the following as of
December 31, 2008:



|                                                                    |  |   |      
|------------------------------------------------------------------- |  | - | -----
|Receivable from affiliated private equity and hedge funds and other |  | $ | 2,388
|Receivable from Arlington Asset and wholly-owned subsidiaries       |  |   | 820  
|                                                                    |  |   |      
|                                                                    |  | $ | 3,208
|                                                                    |  |   |      

Capital Markets Activity

In October 2009, Arlington Asset and related affiliates, the Companys former majority shareholder, sold 14,755,017 shares of the
Companys common stock in an underwritten public offering. FBR & Co. acted as a book-running manager for this offering and earned investment banking revenues of $2,735. As a result of this sale, Arlington Asset, the Companys
former majority shareholder, no longer maintains an ownership interest in the Company.



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##### Table of Contents

In June 2007, Arlington Asset and related affiliates sold 12,666,951 shares of the
Companys common stock as part of the Companys initial public offering. FBR & Co., acted as co-lead underwriter of this sale by Arlington Asset and other shareholders and generated investment banking revenues of $7,040 during the
year ended December 31, 2007.

Note 4. Investments:

Fair Value Hierarchy

The following tables set forth, by level
within the fair value hierarchy, financial instruments and long-term investments accounted for under ASC 820 as of December 31, 2009 and 2008, respectively. As required by ASC 820, assets and liabilities that are measured at fair value are
classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Items
Measured at Fair Value on a Recurring Basis



|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       
|------------------------------------------------------ |  | ---------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------
|                                                       |  | December 31,2009 |        | Level 1 |   | Level 2 |  | Level 3
|Long-term investments, at fair value:                  |  |                  |        |         |   |         |  |         |        |  |   |       
|Marketable equity securities                           |  | $                | 317    |         | $ | 317     |  | $       |       |  | $ |      
|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       
|Trading account securities, at fair value:             |  |                  |        |         |   |         |  |         |        |  |   |       
|Marketable and non-public equity securities            |  | $                | 35,941 |         | $ | 20,463  |  | $       |       |  | $ | 15,478
|Listed options                                         |  |                  | 4,086  |         |   | 4,086   |  |         |       |  |   |      
|Convertible and fixed income debt instruments          |  |                  | 54,451 |         |   |        |  |         | 54,448 |  |   | 3     
|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       
|Total                                                  |  | $                | 94,478 |         | $ | 24,549  |  | $       | 54,448 |  | $ | 15,481
|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       
|Securities sold but not yet purchased, at fair value:  |  |                  |        |         |   |         |  |         |        |  |   |       
|Marketable equity securities and exchange-traded funds |  | $                | 35,530 |         | $ | 35,530  |  | $       |       |  | $ |      
|Listed options                                         |  |                  | 1,098  |         |   | 1,098   |  |         |       |  |   |      
|Convertible and fixed income debt instruments          |  |                  | 15,041 |         |   |        |  |         | 15,041 |  |   |      
|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       
|Total                                                  |  | $                | 51,669 |         | $ | 36,628  |  | $       | 15,041 |  | $ |      
|                                                       |  |                  |        |         |   |         |  |         |        |  |   |       

As of December 31, 2009, financial assets
measured and reported at fair value on a recurring basis and classified within Level 3 were $15,481, or 2.8% of the Companys total assets at that date.



|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      
|----------------------------------------------------- |  | ---------------- | ------- | ------- | - | ------- |  | ------- | ------- |  | - | -----
|                                                      |  | December 31,2008 |         | Level 1 |   | Level 2 |  | Level 3
|Mortgage-backed securities, at fair value:            |  |                  |         |         |   |         |  |         |         |  |   |      
|Agency mortgage-backed securities                     |  | $                | 454,339 |         | $ |        |  | $       | 454,339 |  | $ |     
|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      
|Long-term investments, at fair value:                 |  |                  |         |         |   |         |  |         |         |  |   |      
|Marketable equity securities                          |  | $                | 750     |         | $ | 750     |  | $       |        |  | $ |     
|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      
|Trading account securities, at fair value:            |  |                  |         |         |   |         |  |         |         |  |   |      
|Marketable and non-public equity securities           |  | $                | 3,919   |         | $ | 976     |  | $       |        |  | $ | 2,943
|Convertible and fixed income debt instruments         |  |                  | 14,035  |         |   |        |  |         | 13,771  |  |   | 264  
|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      
|Total                                                 |  | $                | 17,954  |         | $ | 976     |  | $       | 13,771  |  | $ | 3,207
|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      
|Securities sold but not yet purchased, at fair value: |  |                  |         |         |   |         |  |         |         |  |   |      
|Marketable equity securities                          |  | $                | 8,325   |         | $ | 8,325   |  | $       |        |  | $ |      
|                                                      |  |                  |         |         |   |         |  |         |         |  |   |      

As of December 31, 2008, financial assets
measured and reported at fair value on a recurring basis and classified within Level 3 were $3,207, or 0.4% of the Companys total assets at that date.



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Level 3 Gains and Losses

The tables below set forth a summary of changes in the fair value of the Companys Level 3 financial assets that are measured at fair
value on a recurring basis for the years ended December 31, 2009 and 2008. As of December 31, 2009 and 2008, the Company did not have any net unrealized gains (losses) included in accumulated other comprehensive income on Level 3 financial
assets.



|                                                                                                                                                                                     |  |                   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------
|                                                                                                                                                                                     |  | TradingSecurities
|Beginning balance, January 1, 2009                                                                                                                                                   |  | $                 | 3,207 
|Total net losses (realized/unrealized)                                                                                                                                               |  |                   |       
|Included in earnings                                                                                                                                                                 |  |                   | 55    
|Included in other comprehensive income                                                                                                                                               |  |                   |      
|Net purchases, issuances, settlements, and principal payoffs                                                                                                                         |  |                   | 12,219
|                                                                                                                                                                                     |  |                   |       
|Ending balance, December 31, 2009                                                                                                                                                    |  | $                 | 15,481
|                                                                                                                                                                                     |  |                   |       
|The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date |  | $                 | 363   
|                                                                                                                                                                                     |  |                   |       



|                                                                                                                                                                                     |  |                      |        |   |                          |   |         |       |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ------ | - | ------------------------ | - | ------- | ----- |  | - | ------- | -
|                                                                                                                                                                                     |  | Long-TermInvestments |        |   | TradingSecurities& Other |   |         | Total | 
|Beginning balance, January 1, 2008                                                                                                                                                   |  | $                    | 3,146  |   |                          | $ | 18,567  |       |  | $ | 21,713  |  
|Total net losses (realized/unrealized)                                                                                                                                               |  |                      |        |   |                          |   |         |       |  |   |         |  
|Included in earnings                                                                                                                                                                 |  |                      | (1,367 | ) |                          |   | (4,003  | )     |  |   | (5,370  | )
|Included in other comprehensive income                                                                                                                                               |  |                      |       |   |                          |   |        |       |  |   |        |  
|Net purchases, issuances, settlements, and principal payoffs                                                                                                                         |  |                      | (1,779 | ) |                          |   | (11,357 | )     |  |   | (13,136 | )
|                                                                                                                                                                                     |  |                      |        |   |                          |   |         |       |  |   |         |  
|Ending balance, December 31, 2008                                                                                                                                                    |  | $                    |       |   |                          | $ | 3,207   |       |  | $ | 3,207   |  
|                                                                                                                                                                                     |  |                      |        |   |                          |   |         |       |  |   |         |  
|The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date |  | $                    |       |   |                          | $ | (2,274  | )     |  | $ | (2,274  | )
|                                                                                                                                                                                     |  |                      |        |   |                          |   |         |       |  |   |         |  

There were no transfers of securities in to, or out of, Level 3 financial assets during the years ended
December 31, 2009 and 2008.

Gains and losses from Level 3 financial assets that are measured at fair value on a
recurring basis, that are included in earnings for the years ended December 31, 2009 and 2008, are reported in the following line descriptions on the Companys statements of operations:



|                                                                                                       |  |                             |     |                             |   |        |                             |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | --- | --------------------------- | - | ------ | --------------------------- |  | - | ------ | -
|                                                                                                       |  | Year EndedDecember 31, 2009 |     | Year EndedDecember 31, 2008 |  
|                                                                                                       |  | Principaltransactions       |     | Principaltransactions       |   |        | Net investmentincome (loss) | 
|Total gains and losses included in earnings for the period                                             |  | $                           | 55  |                             | $ | (4,003 | )                           |  | $ | (1,367 | )
|                                                                                                       |  |                             |     |                             |   |        |                             |  |   |        |  
|Change in unrealized gains or losses relating to assets still held at the end of the respective period |  | $                           | 363 |                             | $ | (2,274 | )                           |  | $ |       |  
|                                                                                                       |  |                             |     |                             |   |        |                             |  |   |        |  

Items Measured at Fair Value on a Non-Recurring Basis

In addition, the Company also measures certain financial assets and other assets at fair value on a non-recurring basis. Adjustments to the
fair value of these assets usually result from the application of lower-of-cost-or-market accounting or impairments of individual assets. Due to the nature of these assets, enterprise values are primarily used to value these assets. In determining
the enterprise value, the Company analyzes various financial, performance and market factors to estimate the fair value, including where applicable, market activity. As a result, these assets are classified within Level 3 of the fair value
hierarchy.



F-18



---

##### Table of Contents

The following tables present the change in carrying value of those assets measured at fair
value on a non-recurring basis, for which a change in fair value was recognized in the period indicated:



|                  |  |                  |   |         |                |         |  |         |   |                             |   |   |  |   |        |  
|----------------- |  | ---------------- | - | ------- | -------------- | ------- |  | ------- | - | --------------------------- | - | - |  | - | ------ | -
|                  |  | December 31,2009 |   | Level 1 |                | Level 2 |  | Level 3 |   | Year EndedDecember 31, 2009 |  
|                  |  |                  |   |         | Gains (Losses) |        
|Intangible assets |  | $                |  |         | $              |        |  | $       |  |                             | $ |  |  | $ | (5,350 | )
|                  |  |                  |   |         |                |         |  |         |   |                             |   |   |  |   |        |  

In assessing the management contract intangible assets as of June 30, 2009, as discussed in Note 7, the
Company determined that adverse market conditions had resulted in a triggering event requiring assessment of the fair value of the intangible asset related to a money market mutual fund managed by the Company that is included in the Companys
asset management segment.

Long-term Investments and Mortgage-Backed Securities, at Fair Value

Long-term investments and mortgage-backed securities, at fair value, consisted of the following as of the dates indicated:



|                                           |  |                  |     |                  |   |        
|------------------------------------------ |  | ---------------- | --- | ---------------- | - | -------
|                                           |  | December 31,2009 |     | December 31,2008
|Long-term investments, at fair value:      |  |                  |     |                  |   |        
|Marketable equity securities               |  | $                | 317 |                  | $ | 750    
|                                           |  |                  |     |                  |   |        
|Mortgage-backed securities, at fair value: |  |                  |     |                  |   |        
|Fannie Mae(1)                              |  | $                |    |                  | $ | 454,339
|                                           |  |                  |     |                  |   |        



|(1) | As of December 31, 2008, the Companys mortgage-backed securities, at fair value, consisted of investments in floating-rate collateralized mortgage
obligations for which the principal and interest payments are guaranteed by Fannie Mae. The weighted average coupon of these securities was 1.34% as of December 31, 2008. During the year ended December 31, 2009, the Company sold its
remaining mortgage-backed securities held as of December 31, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2009, the
Company has investments in marketable equity securities held by other than the Companys broker-dealer subsidiaries that are classified as available-for-sale securities. In accordance with ASC 320 these securities are carried at fair value with
resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities as of the dates indicated were as follows:



|                             |  |                   |     |            |   |   |            |     |   |  |   |    
|---------------------------- |  | ----------------- | --- | ---------- | - | - | ---------- | --- | - |  | - | ---
|                             |  | December 31, 2009
|                             |  | CostBasis         |     | Unrealized |   |   | Fair Value
|                             |  | Gains             |     | Losses(1)  |   |  
|Marketable equity securities |  | $                 | 388 |            | $ |  |            | (71 | ) |  | $ | 317



|(1) | Duration of unrealized losses is less than 12 months
|--- | ----------------------------------------------------



|                                  |                         |       |                   |           |   |            |  |   |      |   |  |   |        
|--------------------------------- | ----------------------- | ----- | ----------------- | --------- | - | ---------- |  | - | ---- | - |  | - | -------
|                                  |                         |       | December 31, 2008
|                                  | AmortizedCost/CostBasis |       | Unrealized        |           |   | Fair Value
|                                  |                         | Gains |                   | Losses(1) |   |           
|Agency mortgage-backed securities |                         | $     | 454,339           |           | $ |           |  | $ |     |   |  | $ | 454,339
|Marketable equity securities      |                         |       | 968               |           |   |           |  |   | (218 | ) |  |   | 750    
|                                  |                         |       |                   |           |   |            |  |   |      |   |  |   |        
|                                  |                         | $     | 455,307           |           | $ |           |  | $ | (218 | ) |  | $ | 455,089
|                                  |                         |       |                   |           |   |            |  |   |      |   |  |   |        



|(1) | Duration of unrealized losses is less than 12 months
|--- | ----------------------------------------------------



F-19



---

##### Table of Contents

The Company evaluates its portfolio of marketable equity securities for impairment as of
each reporting date. For the securities with unrealized losses, the Company will review the underlying cause for the impairments, as well as the severity and duration of the impairments. If the impairment is determined to be other-than-temporary,
the Company will recognize other-than-temporary impairment loss in its statement of operations. During the years ended December 31, 2009, 2008 and 2007, the Company recorded other-than-temporary impairment losses of $-0-, $1,537, and $358,
respectively, in the statements of operations relating to marketable equity securities. As of December 31, 2009, the Company held one marketable equity security in an unrealized loss position, and based on its recovery in value subsequent to
year end the Company does not consider this investment to be other than temporarily impaired.

During the year ended
December 31, 2009, the Company received $1,084 from sales of marketable equity securities resulting in gross gains of $116. During the year ended December 31, 2008, the Company received $12,281 from sales of marketable equity securities,
resulting in gross gains and losses of $911 and $239, respectively. During 2007, the Company received $11,130 from sales of marketable equity securities, resulting in gross gains of $2,030.

During the year ended December 31, 2008, the Company had invested a portion of its excess liquid capital in agency mortgage-backed
securities. The Company originally deployed this capital into these investments based on its available liquidity and its assessment of its ability and intent to hold these securities to withstand interim market value fluctuations due to market and
interest rate risks. The Company had continually assessed its leverage and liquidity risk relevant to its ability and intent to hold these securities. However, based on the unprecedented severity of market conditions during the fourth quarter of
2008 related to the liquidity and value of these assets, including conditions related to the available financing the Company determined that the risks to it associated with continuing to hold these investments exceeded the potential benefits. As
such, in December 2008, the Company sold its investment in mortgage-backed securities to reduce its exposure. Accordingly, in evaluating the Companys investments in mortgage-backed securities for other-than-temporary impairments as of
December 31, 2008, as a result of its change in intent, the Company recognized other-than-temporary impairment losses of $11,174 relating to mortgage-backed securities held as of December 31, 2008.

During the year ended December 31, 2009, the Company received $450,396 from sales of mortgage-backed securities, which had been
previously impaired as of December 31, 2008, resulting in additional gross losses of $1,502. During the year ended December 31, 2008, the Company received $360,930 from sales of mortgage-backed securities resulting in gross losses of
$21,853. During the year ended December 31, 2007, the Company received $963,754 from sales of mortgage-backed securities resulting in gross gains and losses of $1,963 and $2, respectively.

Trading Account Securities and Securities Sold but Not Yet Purchased, at Fair Value

Securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, and
thereby create a liability to purchase the security in the market at prevailing prices. These transactions when unrelated to over-allotments result in off-balance-sheet risk as the Companys ultimate obligation to satisfy the sale of securities
sold but not yet purchased may exceed the current value recorded in the consolidated balance sheets.

Institutional brokerage
trading related securities consisted of the following as of the dates indicated:



|                                                                      |  |                   |        |                          |   |        |  |                          |        |  |   |      
|--------------------------------------------------------------------- |  | ----------------- | ------ | ------------------------ | - | ------ |  | ------------------------ | ------ |  | - | -----
|                                                                      |  | December 31, 2009 |        | December 31, 2008       
|                                                                      |  | Owned             |        | Sold ButNot YetPurchased |   | Owned  |  | Sold ButNot YetPurchased
|Marketable and non-public equity securities and exchange-traded funds |  | $                 | 35,941 |                          | $ | 35,530 |  | $                        | 3,919  |  | $ | 8,325
|Listed options                                                        |  |                   | 4,086  |                          |   | 1,098  |  |                          |       |  |   |     
|Convertible and fixed income debt instruments                         |  |                   | 54,451 |                          |   | 15,041 |  |                          | 14,035 |  |   |     
|                                                                      |  |                   |        |                          |   |        |  |                          |        |  |   |      
|                                                                      |  | $                 | 94,478 |                          | $ | 51,669 |  | $                        | 17,954 |  | $ | 8,325
|                                                                      |  |                   |        |                          |   |        |  |                          |        |  |   |      



F-20



---

##### Table of Contents

Other Long-Term Investments

Other long-term investments consisted of the following as of the dates indicated:



|                             |  |                  |        |                  |   |       
|---------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                             |  | December 31,2009 |        | December 31,2008
|Non-public equity securities |  | $                | 33,662 |                  | $ | 27,919
|Investment funds             |  |                  | 9,329  |                  |   | 12,505
|Other                        |  |                  | 312    |                  |   |      
|                             |  |                  |        |                  |   |       
|                             |  | $                | 43,303 |                  | $ | 40,424
|                             |  |                  |        |                  |   |       

The Company evaluated its portfolio of non-public
equity securities, carried at cost, for impairment as of each reporting date. Based on its evaluations, including consideration of the severity and duration of factors affecting the fair values of the Companys investments in non-public equity
securities, the Company recorded no impairment losses during the year ended December 31, 2009. During the year ended December 31, 2008 and 2007, the Company recorded other-than-temporary impairment losses of $36,116 and $7,951,
respectively, relating to investments in non-public equity securities. Also, based on its evaluations of its one non-public debt security, including consideration of the diminishment in the credit quality of the underlying issuer, the Company
recorded an other-than-temporary impairment loss of $3,899 during the year ended December 31, 2008.

During 2009, the
Company received $5,278 from sales of, or distributions from, non-public equity securities, resulting in gross gains of $1,805. During 2008, the Company received $1,543 of distributions from non-public equity and debt securities, resulting in no
gains or losses. During 2007, the Company did not receive any comparable proceeds.

During 2009, the Company received $5,647
from the redemption of investments in several investment funds. During 2008, the Company received $3,022 from the redemption of investments in several investment funds and proceeds from sales of other long-term investments. During 2007, the Company
received $11,696 from the redemption of investments in several investment funds and proceeds from sales of other long-term investments.

Investment Funds

The following table specifies the Companys
investments in investment funds:



|                               |  |              |       |      |   |       
|------------------------------ |  | ------------ | ----- | ---- | - | ------
|                               |  | December 31,
|                               |  | 2009         |       | 2008
|Mutual funds                   |  | $            | 8,415 |      | $ | 8,286 
|Private equity funds and other |  |              | 914   |      |   | 4,219 
|                               |  |              |       |      |   |       
|                               |  | $            | 9,329 |      | $ | 12,505
|                               |  |              |       |      |   |       



F-21



---

##### Table of Contents

The following table summarizes certain financial information of these investment funds,
including the Companys minority investments in the investment funds.



|                                                                                    |  |              |           |      |   |           |      |  |   |        
|----------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | ---- |  | - | -------
|                                                                                    |  | December 31,
|                                                                                    |  | 2009         |           | 2008 |   |           | 2007
|Total assets                                                                        |  | $            | 1,340,178 |      | $ | 1,133,194 |      |  | $ | 130,339
|Total liabilities                                                                   |  |              | 13,471    |      |   | 11,447    |      |  |   | 3,108  
|Total equity                                                                        |  |              | 1,326,707 |      |   | 1,121,747 |      |  |   | 127,231
|Total revenue                                                                       |  |              | 3,151     |      |   | 20,753    |      |  |   | 2,947  
|Total expenses                                                                      |  |              | 4,904     |      |   | 22,628    |      |  |   | 2,967  
|Realized gains                                                                      |  |              | 8,294     |      |   | 72,068    |      |  |   | 3,802  
|Unrealized gains (losses)                                                           |  |              | 359,447   |      |   | (616,564  | )    |  |   | 3,158  
|Net income (losses)                                                                 |  |              | 365,988   |      |   | (546,371  | )    |  |   | 6,490  
|FBR Capital Markets Corporations share of total equity                             |  |              | 9,329     |      |   | 12,505    |      |  |   | 16,958 
|FBR Capital Market Corporations share of net income (losses)-net investment income |  |              | 2,292     |      |   | (5,554    | )    |  |   | 1,928  
|FBR Capital Market Corporations share of net income-incentive allocations and fees |  |              |          |      |   |          |      |  |   | 409    

As of December 31,
2009 and 2008, the Company had receivables of $419 and $2,195, respectively, due from these affiliates.

Accumulated
Other Comprehensive Income

The following provides detail of the amounts included in accumulated other comprehensive
income and reclassified to earnings during the specified periods.



|                                                                                               |  |                         |      |   |      |   |         |      |  |   |    
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ------- | ---- |  | - | ---
|                                                                                               |  | Year ended December 31,
|                                                                                               |  | 2009                    |      |   | 2008 |   |         | 2007
|Beginning balance                                                                              |  | $                       | (218 | ) |      | $ | 622     |      |  | $ | 543
|Net unrealized investment gains (losses) during the period:                                    |  |                         |      |   |      |   |         |      |  |   |    
|Unrealized holding gains (losses), net of taxes                                                |  |                         | (71  | ) |      |   | (34,691 | )    |  |   | 79 
|Reclassification adjustment for recognized (gains) losses included in net income, net of taxes |  |                         | 218  |   |      |   | 33,851  |      |  |   |   
|                                                                                               |  |                         |      |   |      |   |         |      |  |   |    
|Ending balance                                                                                 |  | $                       | (71  | ) |      | $ | (218    | )    |  | $ | 622
|                                                                                               |  |                         |      |   |      |   |         |      |  |   |    

Note 5. Furniture, Equipment, Software and Leasehold Improvements:

Furniture, equipment, software and leasehold improvements, summarized by major classification, were:



|                                                |  |              |         |   |      |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                |  | December 31, |        
|                                                |  | 2009         |         |   | 2008 |  
|Furniture and equipment                         |  | $            | 21,787  |   |      | $ | 21,983  |  
|Software                                        |  |              | 14,878  |   |      |   | 14,496  |  
|Leasehold improvements                          |  |              | 23,193  |   |      |   | 27,908  |  
|                                                |  |              |         |   |      |   |         |  
|                                                |  |              | 59,858  |   |      |   | 64,387  |  
|Less: Accumulated depreciation and amortization |  |              | (44,686 | ) |      |   | (39,945 | )
|                                                |  |              |         |   |      |   |         |  
|                                                |  | $            | 15,172  |   |      | $ | 24,442  |  
|                                                |  |              |         |   |      |   |         |  

For the years ended December 31, 2009, 2008 and 2007, depreciation expense was $9,227, $9,320 and
$8,368, respectively. In addition, the Company incurred a loss of $1,370 related to the write-off of leasehold improvements as a result of lease terminations.



F-22



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##### Table of Contents

Note 6. Acquisitions:

On August 31, 2009, the Company acquired Watch Hill Partners, LLC (Watch Hill) for a total purchase price of $6,419. The purchase price was comprised of $3,368 of cash and the issuance of
563,685 shares of the Companys common stock with a fair value of $3,051. Through the acquisition of Watch Hill, the Company added 14 professional employees specializing in corporate advisory services. The allocation of purchase price based on
the fair value of net assets acquired is as follows:



|                                                                                                       |  |   |       |  |   |      
|------------------------------------------------------------------------------------------------------ |  | - | ----- |  | - | -----
|Purchase Price:                                                                                        |  |   |       |  |   |      
|Cash paid                                                                                              |  | $ | 3,368 |  |   |      
|Fair value of common shares issued                                                                     |  |   | 3,051 |  |   |      
|                                                                                                       |  |   |       |  |   |      
|Total                                                                                                  |  |   |       |  | $ | 6,419
|                                                                                                       |  |   |       |  |   |      
|Fair Value of Assets Acquired:                                                                         |  |   |       |  |   |      
|Cash                                                                                                   |  | $ | 57    |  |   |      
|Accounts receivable                                                                                    |  |   | 245   |  |   |      
|Intangible assets related to a pipeline of engagements                                                 |  |   | 705   |  |   |      
|                                                                                                       |  |   |       |  |   |      
|Total                                                                                                  |  |   |       |  | $ | 1,007
|                                                                                                       |  |   |       |  |   |      
|Fair Value of Liabilities Assumed:                                                                     |  |   |       |  |   |      
|Accounts payable and accrued expenses                                                                  |  | $ | 134   |  |   |      
|Excess of current lease commitment over market rates                                                   |  |   | 336   |  |   |      
|                                                                                                       |  |   |       |  |   |      
|Total                                                                                                  |  |   |       |  | $ | 470  
|                                                                                                       |  |   |       |  |   |      
|Net assets acquired (Total fair value of assets acquired less total fair value of liabilities assumed) |  |   |       |  | $ | 537  
|                                                                                                       |  |   |       |  |   |      
|Remaining purchase price allocated to goodwill (Total purchase price less net assets acquired)         |  |   |       |  | $ | 5,882
|                                                                                                       |  |   |       |  |   |      

The goodwill balance of $5,882 is included in the
Companys capital markets segment. Of this balance, $5,546 of goodwill is expected to be deductible for tax purposes. As part of the acquisition, the Company acquired certain intangible assets related to engagements initiated by Watch Hill, all
of which have been fully amortized as of December 31, 2009. The Company expensed $604 in transaction costs associated with the acquisition for the year ended December 31, 2009.

Note 7. Intangible Assets:

The following table reflects the components of
intangible assets as of the dates indicated:



|                                                     |  |                  |        |   |                  |   |         |  
|---------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------- | -
|                                                     |  | December 31,2009 |        |   | December 31,2008 |  
|Management contracts and acquired revenue contracts: |  |                  |        |   |                  |   |         |  
|Cost                                                 |  | $                | 5,656  |   |                  | $ | 19,065  |  
|Accumulated amortization                             |  |                  | (3,114 | ) |                  |   | (10,122 | )
|                                                     |  |                  |        |   |                  |   |         |  
|Net                                                  |  | $                | 2,542  |   |                  | $ | 8,943   |  
|                                                     |  |                  |        |   |                  |   |         |  

For the years ended December 31, 2009, 2008 and 2007, amortization expense recognized was $1,756,
$1,495 and $1,163, respectively.



F-23



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##### Table of Contents

Estimated amortization expense for each of the next five years is as follows:



|     |  |        |    
|---- |  | ------ | ---
|     |  | Amount
|2010 |  | $      | 401
|2011 |  |        | 401
|2012 |  |        | 401
|2013 |  |        | 401
|2014 |  |        | 401

In assessing the
management contract intangible assets as of June 30, 2009, as discussed below, the Company determined that adverse market conditions had resulted in a triggering event requiring assessment of the fair value of the intangible asset related to a
money market fund managed by the Company that is included in the Companys asset management segment. As of December 31, 2009, the Company does not believe there have been any triggering events associated with the remaining intangible
assets.

Factors such as significantly reduced yields on short term government investments and the requirement for the Company
to both waive its management fees and reimburse certain expenses of the money market fund resulted in the management contract becoming unprofitable for the Company during the first half of 2009. In determining the fair value of this intangible
asset, the Company concluded that based on the cost structure of the money market fund, a forecasted continuation of a low rate environment for short term government investments and the forecasted ongoing waiver of its management fees and the
resulting negative cash flows of these conditions, the intangible asset should be valued at zero as of June 30, 2009. As a result, the Company recorded an impairment charge of $5,350 that is included in the statement of operations for the year
ended December 31, 2009. During the years ended December 31, 2008 and 2007, the Company did not record any impairment charges relating to the management contracts and acquired revenue contracts.

The Company acquired intangible assets with a fair value of $705 through its acquisition of Watch Hill. See Note 6 for additional
information regarding the acquisition of Watch Hill and these intangible assets.

Note 8. Borrowings:

Repurchase Agreements

The Company has entered into repurchase agreements with various financial institutions that have been used in conjunction with the Companys investments in agency mortgage-backed securities. The
following table provides information regarding the Companys outstanding repurchase agreement borrowings as of December 31, 2008:



|                                            |  |   |         |  
|------------------------------------------- |  | - | ------- | -
|Outstanding balance                         |  | $ | 416,037 |  
|Interest payable                            |  |   | 45      |  
|Fair value of assets pledged as collateral: |  |   |         |  
|Agency mortgage-backed securities           |  |   | 454,339 |  
|Cash deposits                               |  |   | 1,927   |  
|Weighted-average interest rate              |  |   | 0.65    | %
|Weighted-average term to maturity           |  |   | 26 days |  

As of
December 31, 2008, the amount at risk under repurchase agreements was not greater than 10% of stockholders equity for any individual counterparty. As of December 31, 2009, there were no outstanding repurchase agreement borrowings.

During the years ended December 31, 2009, 2008 and 2007, interest expense related to repurchase agreement borrowings
totaled $252, $12,428 and $4,361, respectively.

In January and February 2009, the Company sold its remaining mortgage-backed
securities and related interest-rate caps held as of December 31, 2008. Concurrent with the sale of these securities, the Company repaid all outstanding repurchase agreements used to finance these securities.



F-24



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##### Table of Contents

Note 9. Derivative Financial Instruments Used for Purposes Other Than Trading:

The following table summarizes derivative positions used for purposes other than trading associated with hedging activities as of the dates
indicated. The value of these positions is included in prepaid and other assets on the balance sheet.



|                                |  |                   |   |                   |   |                 |  |            |         |  |   |    
|------------------------------- |  | ----------------- | - | ----------------- | - | --------------- |  | ---------- | ------- |  | - | ---
|                                |  | December 31, 2009 |   | December 31, 2008
|                                |  | Notional Amount   |   | Fair Value        |   | Notional Amount |  | Fair Value
|No hedge designation:           |  |                   |   |                   |   |                 |  |            |         |  |   |    
|Interest rate cap agreements(1) |  | $                 |  |                   | $ |                |  | $          | 533,643 |  | $ | 264



|(1) | Comprised of four interest rate caps which mature in 2013 with a weighted average strike rate of 6.1%.
|--- | ------------------------------------------------------------------------------------------------------

In connection with its investments in agency mortgage-backed securities during the year ended December 31, 2008, the Company entered
into five interest rate cap agreements in which the counterparties to these instruments were U.S. and international financial institutions. The Company assessed and monitored the counterparties non-performance and credit risk on a regular
basis during 2008. During 2008, the Company designated these five interest rate cap agreements as fair value hedges of the Companys exposure to a decrease in the fair values of its mortgage-backed securities attributable to changes in LIBOR.
Accordingly, pursuant to ASC 815, the gains and losses on the interest rate caps were recognized in earnings and the changes in fair value of the hedged items attributable to the hedged risk were adjusted from the carrying amount of the hedged items
and recognized in earnings in the same period. As a result of the sale of agency mortgage-backed securities during 2008 and its intent to sell the remaining securities, the Company sold one of the interest cap agreements realizing a loss of $136 and
de-designated the remaining four positions recognizing an unrealized loss of $459, both of which are included in net investment loss in the statement of operations for the year ended December 31, 2008. The ineffective portion of these hedges
was not material for the year ended December 31, 2008. The Company had not entered into any interest rate caps prior to 2008.

In January and February 2009, the Company sold its remaining mortgage-backed securities and related interest-rate caps held as of December 31, 2008. As a result of the sale of the interest-rate caps, the Company recognized an
investment gain of $459 during the year ended December 31, 2009.

Note 10. Income Taxes:

The Company historically joined in the filing of a consolidated Federal income tax return with FBR TRS Holdings, Inc. (a subsidiary of
Arlington Asset). In June 2007, following its initial public offering, the Company became the parent company of a new consolidated Federal income tax return with its affiliated U.S. subsidiaries. Payments and refunds for all tax periods through June
2007 were settled with FBR TRS Holdings, Inc. pursuant to the written tax sharing agreement. Each companys current income tax expense or benefit is generally calculated on a separate company basis. Losses and benefits are included as utilized
in the consolidated return.

The (benefit) provision for income taxes consists of the following for the years ended
December 31, 2009, 2008 and 2007:



|         |  |      |        |   |      |   |         |      |  |   |        |  
|-------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|         |  | 2009 |        |   | 2008 |   |         | 2007 | 
|Federal  |  | $    | (3,169 | ) |      | $ | (3,675  | )    |  | $ | 15,056 |  
|State    |  |      | 1,711  |   |      |   | 276     |      |  |   | 5,512  |  
|Foreign  |  |      | 120    |   |      |   | (91     | )    |  |   | (536   | )
|         |  |      |        |   |      |   |         |      |  |   |        |  
|         |  | $    | (1,338 | ) |      | $ | (3,490  | )    |  | $ | 20,032 |  
|         |  |      |        |   |      |   |         |      |  |   |        |  
|Current  |  | $    | (1,694 | ) |      | $ | (21,188 | )    |  | $ | 25,315 |  
|Deferred |  |      | 356    |   |      |   | 17,698  |      |  |   | (5,283 | )
|         |  |      |        |   |      |   |         |      |  |   |        |  
|         |  | $    | (1,338 | ) |      | $ | (3,490  | )    |  | $ | 20,032 |  
|         |  |      |        |   |      |   |         |      |  |   |        |  



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The federal tax benefit includes a benefit for domestic federal net operating losses
utilized as a result of carryback of $6,862 and $17,764 for the periods ended December 31, 2009 and 2008, respectively.

On November 6, 2009, the opportunity to elect an extended carryback period for net operating losses was added by Section 13 of the Worker, Homeownership, and Business Act of 2009. The provision allows taxpayers to elect to carry
back an applicable net operating loss for a period of three, four or five years. The provision also suspends the 90-percent alternative minimum tax credit limitation for the carried back net operating loss. As a result of the provision, the Company
can utilize all of its net operating losses generated in 2008 to offset prior year taxable income without paying alternative minimum tax respective to the carryback years and has therefore reflected an additional federal current year tax benefit of
$6,862. The Company plans to carry back its losses to periods including periods in which it was part of the FBR TRS Holdings, Inc.s consolidated group and is entitled to receive the entire benefit of the net operating loss carryback to those
tax years under its tax sharing agreement with the FBR TRS Holdings, Inc. During 2009, the Company received a refund of its 2007 federal tax from a carryback claim from the 2008 tax year, which will be modified with the carryback under the new
provisions discussed above.

Deferred tax assets and liabilities consisted of the following as of December 31, 2009 and
2008:



|                                                                                |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                |  | 2009 |         |   | 2008 |  
|Unrealized investment gains, recorded in accumulated other comprehensive income |  | $    | 28      |   |      | $ | 85      |  
|Stock-based compensation                                                        |  |      | 29,774  |   |      |   | 25,399  |  
|Depreciation and amortization                                                   |  |      | 7,010   |   |      |   | 2,797   |  
|Other-than-temporary investment write downs                                     |  |      | 14,754  |   |      |   | 24,616  |  
|Capital loss carry forward                                                      |  |      | 20,114  |   |      |   | 8,505   |  
|AMT credit carryover                                                            |  |      |        |   |      |   | 1,314   |  
|Other, net                                                                      |  |      | 962     |   |      |   | 487     |  
|Net operating loss                                                              |  |      | 9,719   |   |      |   | 13,492  |  
|                                                                                |  |      |         |   |      |   |         |  
|Total deferred tax asset                                                        |  |      | 82,361  |   |      |   | 76,695  |  
|Valuation allowance                                                             |  |      | (82,361 | ) |      |   | (76,695 | )
|Goodwill amortization                                                           |  |      | (64     | ) |      |   |        |  
|                                                                                |  |      |         |   |      |   |         |  
|Net deferred tax liability                                                      |  | $    | (64     | ) |      | $ |        |  
|                                                                                |  |      |         |   |      |   |         |  

The net deferred tax liability is included in other liabilities in the consolidated balance sheet.

At December 31, 2009, the Companys net deferred tax assets totaled $82,361. The Company has established a full
valuation allowance against these assets since the Company believes that, based on the criteria in ASC 740, it is more likely than not that the benefits of these assets will not be realized in the future. The remaining deferred tax liability relates
to an indefinite-lived intangible asset which cannot serve as a source of future income for determination of the Companys valuation allowance. During the years ended December 31, 2009 and 2008, the Companys valuation allowance
changed by $5,665 and $75,161, respectively.

As a result of the federal net operating loss carryback the Company has no
remaining federal net operating loss carryovers as of December 31, 2009. The Company has deferred tax assets for state net operating loss carryovers of $3,744, on a tax effected basis (including the offset for federal taxes). These net
operating losses begin to expire in 2013.

As of December 31, 2009, the Companys net operating losses related to
FBRIL and its operations in the United Kingdom are $21,288. These net operating losses may be carried forward indefinitely to offset future income of FBRIL.

As of December 31, 2009, the Company has net capital loss carryovers of $51,888 on a tax return basis.



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Internal Revenue Code section 382 limits tax deductions for net operating losses, capital
losses and net unrealized built-in losses after there is a substantial change in ownership in a corporations stock involving a 50 percentage point increase in ownership by 5% or larger stockholders. On October 22, 2009, as a result of the
sale by Arlington Asset of the Companys stock, the Company incurred an ownership change as defined in Section 382. The ownership change will cause the future utilization of capital losses and net unrealized built-in losses incurred before
the change date to be subject to an annual limitation. The Company is in the process of determining the annual section 382 limitation.

The Companys effective tax rate for the years ended December 31, 2009, 2008 and 2007 was 4.6%, 1.8%, and 79.3%, respectively. The provision for income taxes results in effective tax rates that differ from the Federal statutory
rates. The reconciliation of the Companys reported amount of income tax (benefit) provision attributable to continuing operations to the amount of income tax expense that would result from applying domestic federal statutory tax rates to
income from continuing operations was:



|                                                               |  |                                 |         |   |      |   |         |      |  |   |       
|-------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------
|                                                               |  | For the year ended December 31,
|                                                               |  | 2009                            |         |   | 2008 |   |         | 2007
|Federal income tax (benefit) provision, at statutory rate      |  | $                               | (10,146 | ) |      | $ | (69,377 | )    |  | $ | 8,847 
|State income taxes (benefit) provision, net of Federal benefit |  |                                 | (261    | ) |      |   | (11,339 | )    |  |   | 1,904 
|Effect of rates different than statutory                       |  |                                 | 428     |   |      |   | 978     |      |  |   |      
|Nondeductible expenses                                         |  |                                 | 972     |   |      |   | 1,657   |      |  |   | 1,555 
|Effect of stock-based compensation                             |  |                                 | 2,748   |   |      |   | 2,327   |      |  |   | 5,209 
|Gain on warrants                                               |  |                                 |        |   |      |   | (3,783  | )    |  |   |      
|Investment write-down                                          |  |                                 |        |   |      |   | 722     |      |  |   |      
|Partnership deferred tax asset                                 |  |                                 | (1,192  | ) |      |   |        |      |  |   |      
|Other, net                                                     |  |                                 | 448     |   |      |   | 249     |      |  |   | 1,240 
|Valuation allowance                                            |  |                                 | 5,665   |   |      |   | 75,076  |      |  |   | 1,277 
|                                                               |  |                                 |         |   |      |   |         |      |  |   |       
|Effective income tax (benefit) provision                       |  | $                               | (1,338  | ) |      | $ | (3,490  | )    |  | $ | 20,032
|                                                               |  |                                 |         |   |      |   |         |      |  |   |       

The components of income (loss) before income taxes
were as follows:



|               |  |                                 |         |   |      |   |          |      |  |   |        |  
|-------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------ | -
|               |  | For the year ended December 31, |        
|               |  | 2009                            |         |   | 2008 |   |          | 2007 | 
|United States  |  | $                               | (22,482 | ) |      | $ | (184,263 | )    |  | $ | 32,972 |  
|United Kingdom |  |                                 | (6,507  | ) |      |   | (13,957  | )    |  |   | (7,696 | )
|               |  |                                 |         |   |      |   |          |      |  |   |        |  
|               |  | $                               | (28,989 | ) |      | $ | (198,220 | )    |  | $ | 25,276 |  
|               |  |                                 |         |   |      |   |          |      |  |   |        |  

The following table displays the change in unrecognized tax benefits for the years ended December 31,
2009 and 2008:



|                                            |  |                                |        |   |      |   |        |  
|------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                            |  | For the year endedDecember 31, |       
|                                            |  | 2009                           |        |   | 2008 |  
|Balance at beginning of period              |  | $                              | (1,301 | ) |      | $ |       |  
|Increases to tax positions for prior years  |  |                                | (769   | ) |      |   | (832   | )
|Decreases to tax positions for prior years  |  |                                | 81     |   |      |   |       |  
|Increases to tax positions for current year |  |                                |       |   |      |   | (469   | )
|                                            |  |                                |        |   |      |   |        |  
|Balance at end of period                    |  | $                              | (1,989 | ) |      | $ | (1,301 | )
|                                            |  |                                |        |   |      |   |        |  

The amount of unrecognized tax benefits that would provide a benefit to the effective tax rate, if
recognized, is $1,092.



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##### Table of Contents

The Company records interest and penalties in other operating expenses or other revenue in
the statements of operations. The total amount of interest related to tax uncertainties recognized in the statement of operations for the years ended December 31, 2009, December 31, 2008, and 2007 was $51, $41, and $-0-, respectively.
The total amount of accrued interest related to uncertain tax positions was $93 and $41 as of December 31, 2009 and December 31, 2008, respectively.

As of December 31, 2009, tax years subsequent to December 31, 2005 remain open under the federal statute of limitations, and for the Companys significant state jurisdictions of California,
Massachusetts, New York, Virginia and Texas. The IRS could propose assessments for prior year items by effectively adjusting the amount of refund claimed by the Company through the net operating loss carryback. In October 2008, the IRS commenced its
examination of tax years 2006 to 2007 and in January 2010, commenced its examination of the 2008 tax year. No adjustments have been proposed to date.

It is reasonably possible that the Company could have a decrease in unrecognized tax benefits of up to $1,989, excluding the federal benefit of state taxes, in the next 12 months due to the years in which
the unrecognized tax benefits arose being under audit by the IRS.

Note 11. Regulatory Capital Requirements:

FBR & Co. is registered with the SEC and is a member of FINRA. Additionally, FBRIL is registered with the FSA of the United Kingdom.
As such, they are subject to the minimum net capital requirements promulgated by the SEC and FSA. As of December 31, 2009 and 2008, FBR & Co. had net capital of $54,577 and $48,876, respectively, that was $49,338 and $42,779,
respectively, in excess of its required net capital of $5,239 and $6,097, respectively. As of December 31, 2009 and 2008, FBRIL had net capital in excess of required amounts.

Note 12. Commitments and Contingencies:

Contractual Obligations

The Company has contractual obligations to make future payments in connection with non-cancelable lease agreements and
other contractual commitments as well as an uncalled capital commitment to an investment partnership that may be called over the next ten years. The following table sets forth these contractual obligations by fiscal year:



|                              |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | ------
|                              |  | 2010 |        | 2011 |   | 2012   |  | 2013 |       | 2014 |   | Thereafter |  | Total
|Minimum rental commitments(1) |  | $    | 11,630 |      | $ | 10,523 |  | $    | 9,352 |      | $ | 9,317      |  | $     | 8,599 |  | $ | 5,483 |  | $ | 54,904
|Capital commitments(2)        |  |      |       |      |   |       |  |      |      |      |   |           |  |       |      |  |   |      |  |   |      
|                              |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       
|Total Contractual Obligations |  | $    | 11,630 |      | $ | 10,523 |  | $    | 9,352 |      | $ | 9,317      |  | $     | 8,599 |  | $ | 5,483 |  | $ | 54,904
|                              |  |      |        |      |   |        |  |      |       |      |   |            |  |       |       |  |   |       |  |   |       



|(1) | These commitments are for operating leases of the Company. The Company currently has no commitments associated with capital leases. Equipment and office rent expense
for the years ended December 31, 2009, 2008 and 2007 were $13,935, $13,843 and $13,874, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The table above excludes a $550 uncalled capital commitment to an investment partnership that may be called over the next ten years. This amount was excluded because
the Company cannot currently determine when, if ever, the commitment will be called.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Clearing Broker

Our broker-dealer subsidiaries clear all of their securities transactions through a clearing broker on a fully
disclosed basis. Pursuant to the terms of the agreements between our broker-dealer subsidiaries and their respective clearing brokers, the clearing broker has the right to charge our broker-dealer subsidiaries for losses that result from a
counterpartys failure to fulfill its contractual obligations.



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##### Table of Contents

As the right to charge our broker-dealer subsidiaries has no maximum amount and applies to
all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2009 and 2008, the Company has recorded no liabilities, and during the years ended December 31,
2009, 2008 and 2007, the Company did not incur any significant costs, with regard to this right.

Litigation

As of December 31, 2009, except as described below, the Company was neither a defendant nor plaintiff in any lawsuits or
arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material adverse effect on its financial condition, results of operations or liquidity. The Company has been named as a defendant in a
small number of civil lawsuits and arbitrations relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and self regulatory organizations.
There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Companys financial condition or results of operations in a future period. However, based on managements review with
counsel, resolution of these matters is not expected to have a material adverse effect on the Companys financial condition, results of operations or liquidity.

Many aspects of the Companys business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state
securities laws, other Federal and state laws and court decisions, including decisions with respect to underwriters liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example,
underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other
personnel. FBR & Co has been named as a defendant in a small number of securities claims involving investment banking clients of FBR & Co. as a result of FBR & Co.s role as an underwriter. In these cases, the
underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBR & Co. against certain claims or liabilities, including claims or liabilities under the Securities Act of 1933,
as amended (the Securities Act), or contribute to payments which FBR & Co. is required to make as a result of the litigation. There can be no assurance that such indemnification or contribution will ultimately be available to
the Company or that an investment banking client will be able to satisfy its indemnity or contribution obligations when due.

In May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBR & Co.) and
eight other underwriters as defendants. The lawsuit, styled In Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United States District Court for the District of New Mexico, was originally filed in August 2007 against
Thornburg Mortgage, Inc., or TMI, and certain of its officers and directors, alleging material misrepresentations and omissions about, inter alia, the financial position of TMI. The amended complaint now includes claims under Sections 11 and
12 of the Securities Act against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two offerings in January 2008). The allegations against FBR & Co. relate only to its role as
underwriter or member of the syndicate that underwrote TMIs total of three offerings in September 2007 and January 2008each of which occurred after the filing of the original complaintwith an aggregate offering price of
approximately $818,000. The plaintiffs seek restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although FBR & Co. is contractually entitled to be indemnified by TMI in connection with this
lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBR & Co. receives from TMI. On September 22, 2008, FBR & Co. filed a motion to dismiss the
consolidated class action complaint as to FBR & Co. The District Court granted that motion on January 27, 2010. FBR & Co. subsequently moved for entry of a final judgment in its favor. The plaintiffs have
opposed that motion and have filed a motion seeking clarification of the Courts dismissal order. The plaintiffs contend that the District Courts dismissal order is, or should be, without prejudice, and that they should be
permitted to file an amended complaint that attempts to re-plead dismissed claims. The Court has yet to rule on FBR & Co.s motion for entry of final



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##### Table of Contents

judgment, the plaintiffs motion for clarification, or the plaintiffs expressed interest in filing an amended complaint. Although these cases involving FBR & Co. are at a
preliminary stage, based on managements review with counsel and present information currently known by management, resolution of such matters is not expected to have a material effect on our financial condition, results of operations, or
liquidity.

In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for
losses sustained on investments. In recent years, there has been an increasing incidence of litigation and actions by government agencies and self regulatory organizations involving the securities industry, including class actions that seek
substantial damages. The Company is also subject to the risk of litigation, including litigation that may be without merit. As the Company intends to actively defend such litigation, significant legal expenses could be incurred. An adverse
resolution of any future litigation against the Company could materially affect its financial condition, operating results and liquidity.

Note 13. Shareholders Equity:

Equity Offering

In June 2009, the Company completed a public follow-on equity offering of 20,000,000 shares of its common stock at a per share price of
$4.65. As result of the offering, the Company received proceeds of $90,143, net of $2,857 in transaction costs.

Share
Repurchases

In May 2009, the Company entered into a Repurchase Agreement with Arlington Asset and Arlington
Assets direct, wholly-owned subsidiary, FBR TRS Holdings, Inc., pursuant to which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35 for a total cost of $72,501 plus transaction-related
expenses of $971. Along with this agreement, the companies agreed to terminate all of the agreements then in place between Arlington Asset and the Company, other than a Voting Agreement, dated as of July 20, 2006, by and among the Company and
certain of its subsidiaries, Arlington Asset and certain of its subsidiaries, and certain affiliates of Crestview, which agreement was amended and restated. At the same time, the Company entered into the following agreements with Arlington Asset: a
Transition Services Agreement, an Assignment and Assumption Agreement, a Trademark and Copyright Assignment, a Domain Name Assignment and a Trademark License Agreement.

In October 2008, the Companys Board of Directors approved an increase in the number of shares of the Companys common stock that the Company is authorized to repurchase to 10 million
shares. During the year ended December 31, 2008, the Company repurchased a total of 6,748,546 shares of common stock at a weighted average price of $5.02 per share. These repurchases included the repurchase by the Company on behalf of itself
and one of its subsidiaries of a total of 6,565,405 shares of common stock directly from Passport Capital LLCs Global Master Fund SPC LTD for and on behalf of Portfolio AGlobal Strategy (Passport) on October 7, 2008. The
repurchase from Passport was a privately negotiated transaction at a purchase price of $5.00 per share. No repurchases were made during the year ended December 31, 2009 under this authorization. As of December 31, 2009, the Company has the
remaining authority to repurchase up to 3,418,885 shares of common stock.

Director Stock Purchase Plan

Pursuant to the Companys Director Stock Purchase Plan, each of the Companys non-employee directors (other
than the directors designated by Crestview Partners) was offered an opportunity to subscribe for up to $1,000 of the Companys common stock at a purchase price equal to then-current fair market value of the common stock at the time he or she
joined the board of directors. Pursuant to the Director Stock Purchase Plan, during the year ended December 31, 2007 the non-employee directors of the Company purchased 173,334 shares of common stock providing cash proceeds to the Company of
$2,603. There were no purchases of common stock by non-employee directors of the Company during 2009 and 2008.



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##### Table of Contents

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (Purchase Plan), eligible employees may purchase common stock through payroll deductions
at a price that is 85% of the lower of the market value of the common stock on the first day of the offering period or the last day of the offering period. In accordance with the provisions of ASC 718, the Company is required to recognize
compensation expense relating to shares offered under the Purchase Plan. For the years ended December 31, 2009, 2008 and 2007, the Company recognized compensation expense of $465, $376, and $508, respectively, related to the Purchase Plan.

Partner Leveraged Stock Purchase Program

The Company initiated the Partner Leveraged Stock Purchase Program (PLSPP) in December 2009. Under the PLSPP, non-executive
officer employees who are members of the Companys Partnership Group were granted the right to purchase shares of the Companys common stock at four specific offering periods during 2009 and the first half of 2010. These participants were
initially granted the right to purchase either 25,000 shares or 50,000 shares. The Company has offered to provide a full recourse loan to each participant for up to 50% of the aggregate purchase price, collateralized by the shares purchased, bearing
interest at market rates, and maturing three years from the date of issuance. For each share purchased by the participant, the Company will grant two options to purchase the Companys common stock under the long-term incentive plan, discussed
below, that are subject to a 3-year cliff vesting requirement. For the year ended December 31, 2009, participants purchased 210,500 shares for an aggregate purchase price of $1,431. As of December 31, 2009, the Company had loans
outstanding to participants of $391.

Stock Compensation Plans

FBR Capital Markets Corporation 2006 Long-Term Incentive Plan (FBR Capital Markets Long-Term Incentive Plan)

Under the FBR Capital Markets Long-Term Incentive Plan, as amended, the Company may grant options to purchase stock, stock appreciation
rights, performance awards, restricted and unrestricted stock and RSUs for up to an aggregate of 22,069,985 shares of common stock, subject to increase under certain provisions of the plan, to eligible participants. Participants include employees,
officers and directors of the Company and its subsidiaries. The FBR Capital Markets Long-Term Incentive Plan has a term of 10 years and options granted may have an exercise period of up to 10 years. Options may be incentive stock options, as defined
by Section 422 of the Internal Revenue Code, or nonqualified stock options.

The Company grants options to purchase
stock, restricted shares of common stock and RSUs to employees that vest based on meeting specified service conditions of three to five years and in certain cases achievement of specified market conditions. The following table presents compensation
expense related to these awards for the periods indicated:



|                  |  |                         |       |      |   |       |  |   |      
|----------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                  |  | Year Ended December 31,
|                  |  | 2009                    |       | 2008 |   | 2007 
|Stock Options     |  | $                       | 5,096 |      | $ | 4,116 |  | $ | 6,679
|Restricted shares |  |                         | 5,153 |      |   | 6,373 |  |   | 5,049
|RSUs              |  |                         | 9,088 |      |   | 8,063 |  |   |     

The fair
value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Due to the relatively short period in which the Company has been publicly-traded, the Company has not based its volatility assumption solely
on historical data. The Company has used a combination of its historical volatility, historical industry comparisons, and other market data in order to determine the volatility assumption. The risk-free interest rate is based on the rates of the
U.S. Treasury with similar maturities as the expected life of the award. The expected life of the awards is based on the length of time from the grant date to the midpoint of



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##### Table of Contents

the vesting date and the contractual expiration date of the award. The Company uses this methodology for determining expected life as the Company does not have sufficient historical data to
estimate an expected life as a majority of the initial stock options issued by the Company since its inception became exercisable in the current year. The dividend yield is based on the expected dividend payout over the expected life of the award.
The following weighted average assumptions used for options granted for the periods indicated:



|                            |  |                         |      |   |      |   |      |      |  |   |      |  
|--------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                            |  | Year Ended December 31, |     
|                            |  | 2009                    |      |   | 2008 |   |      | 2007 | 
|Volatility                  |  |                         | 56.8 | % |      |   | 56.6 | %    |  |   | 30.0 | %
|Risk-free interest rate     |  |                         | 2.3  | % |      |   | 3.0  | %    |  |   | 4.7  | %
|Expected life (years)       |  |                         | 5.1  |   |      |   | 5.5  |      |  |   | 4.3  |  
|Dividend yield              |  |                         |     |   |      |   |     |      |  |   |     |  
|Weighted average fair value |  | $                       | 2.55 |   |      | $ | 2.99 |      |  | $ | 4.90 |  

The fair value of
each RSU with a market condition is estimated on the date of grant using a lattice-pricing model. The methodology for determining the assumptions used for these valuations is similar to those described above for stock options. The assumptions used
for the years ended December 31, 2009 and 2008 were a volatility of 56.8%, risk-free interest rate between 1.9% - 3.0%, and an expected term based on the applicable service condition. No RSUs with a market condition were issued during the year ended
December 31, 2007.

The following table presents the unrecognized compensation related to unvested options to purchase stock,
restricted shares of common stock, and RSUs and the weighted average vesting period in which the expense will be recognized:



|                                |  |                         |           |                  |   |           |  |   |          
|------------------------------- |  | ----------------------- | --------- | ---------------- | - | --------- |  | - | ---------
|                                |  | As of December 31, 2009
|                                |  | StockOptions            |           | RestrictedShares |   | RSUs     
|Unrecognized compensation       |  | $                       | 8,526     |                  | $ | 6,315     |  | $ | 23,503   
|Unvested awards                 |  |                         | 4,886,195 |                  |   | 1,360,832 |  |   | 7,337,685
|Weighted average vesting period |  |                         | 3.4 years |                  |   | 1.9 years |  |   | 3.5 years

Stock
Options

A summary of option activity under the FBR Capital Markets Long Term Incentive Plan as of December 31,
2009, and changes during the years ended December 31, 2009, 2008, and 2007 are presented below:



|                                            |  |                 |   |  |                                 |       |                                           |    
|------------------------------------------- |  | --------------- | - |  | ------------------------------- | ----- | ----------------------------------------- | ---
|                                            |  | Number ofShares |   |  | Weighted-averageExercise Prices |       | Weighted-averageRemainingContractual Life
|Share Balance as of December 31, 2006       |  | 3,376,000       |   |  | $                               | 15.00 |                                           | 5.6
|Granted                                     |  | 1,501,586       |   |  |                                 | 15.12 |                                           |    
|Forfeitures                                 |  | (444,832        | ) |  |                                 | 15.10 |                                           |    
|                                            |  |                 |   |  |                                 |       |                                           |    
|Share Balance as of December 31, 2007       |  | 4,432,754       |   |  | $                               | 15.03 |                                           | 5.0
|Granted                                     |  | 2,525,169       |   |  |                                 | 5.60  |                                           |    
|Forfeitures                                 |  | (1,045,963      | ) |  |                                 | 14.90 |                                           |    
|                                            |  |                 |   |  |                                 |       |                                           |    
|Share Balance as of December 31, 2008       |  | 5,911,960       |   |  | $                               | 11.03 |                                           | 5.2
|Granted                                     |  | 2,589,026       |   |  |                                 | 5.16  |                                           |    
|Forfeitures                                 |  | (1,023,833      | ) |  |                                 | 14.47 |                                           |    
|                                            |  |                 |   |  |                                 |       |                                           |    
|Share Balance as of December 31, 2009       |  | 7,477,153       |   |  | $                               | 8.52  |                                           | 5.1
|                                            |  |                 |   |  |                                 |       |                                           |    
|Options Exercisable as of December 31, 2009 |  | 2,590,958       |   |  | $                               | 14.26 |                                           | 3.3
|                                            |  |                 |   |  |                                 |       |                                           |    



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##### Table of Contents

Restricted Stock

A summary of unvested restricted stock awards as of December 31, 2009, and changes during the years ended December 31, 2009, 2008,
and 2007 are presented below:



|                                      |  |                 |   |  |                                      |       |                                        |    
|------------------------------------- |  | --------------- | - |  | ------------------------------------ | ----- | -------------------------------------- | ---
|                                      |  | Number ofShares |   |  | Weighted-averageGrant-date FairValue |       | Weighted-averageRemaining VestedPeriod
|Share Balance as of December 31, 2006 |  |                |   |  | $                                    |      |                                        |   
|Granted                               |  | 2,088,546       |   |  |                                      | 16.26 |                                        |    
|Forfeitures                           |  | (144,683        | ) |  |                                      | 15.90 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2007 |  | 1,943,863       |   |  | $                                    | 16.29 |                                        | 3.9
|Granted                               |  | 295,989         |   |  |                                      | 6.85  |                                        |    
|Vestings                              |  | (84,892         | ) |  |                                      | 15.01 |                                        |    
|Forfeitures                           |  | (529,191        | ) |  |                                      | 15.87 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2008 |  | 1,625,769       |   |  | $                                    | 14.68 |                                        | 2.9
|Granted                               |  |                |   |  |                                      |      |                                        |    
|Vestings                              |  | (110,040        | ) |  |                                      | 12.49 |                                        |    
|Forfeitures                           |  | (154,897        | ) |  |                                      | 15.63 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2009 |  | 1,360,832       |   |  | $                                    | 14.86 |                                        | 1.9
|                                      |  |                 |   |  |                                      |       |                                        |    

RSUs

In August 2008, the Companys Board of Directors approved the modification of certain RSUs with a market condition issued in February
2008 to 45 employees and outstanding as of the modification date. A total of 4,285,000 RSUs with a market condition issued in February 2008 were modified as part of this action by the Board of Directors. The modifications included (i) the
modification of 1,142,666 RSUs to require a service period only and (ii) the replacement of 3,142,334 RSUs with 1,142,666 RSUs with a revised market condition and 2,258,668 options to purchase the Companys common stock. In accordance with
ASC 718, the Company has accounted for both of the changes as a modification to the original award and has determined the compensation expense based on the total of unrecognized compensation of the original awards plus the incremental increase in
fair value of the new award compared to the fair value of the original award as of the modification date. The incremental cost of the modified awards totaled $9,890. The Company has included the modified awards in the issuance balances for RSUs and
stock options for the year ended December 31, 2008.

A summary of unvested restricted stock units as of December 31,
2009, and changes during the years ended December 31, 2009, 2008, and 2007 are presented below:



|                                      |  |                 |   |  |                                      |      |                                        |    
|------------------------------------- |  | --------------- | - |  | ------------------------------------ | ---- | -------------------------------------- | ---
|                                      |  | Number ofShares |   |  | Weighted-averageGrant-date FairValue |      | Weighted-averageRemaining VestedPeriod
|Share Balance as of December 31, 2007 |  |                |   |  | $                                    |     |                                        |   
|Granted                               |  | 9,455,725       |   |  |                                      | 5.65 |                                        |    
|Vestings                              |  | (3              | ) |  |                                      | 8.21 |                                        |    
|Forfeitures                           |  | (733,844        | ) |  |                                      | 3.71 |                                        |    
|Cancellations                         |  | (3,142,334      | ) |  |                                      | 2.10 |                                        |    
|                                      |  |                 |   |  |                                      |      |                                        |    
|Share Balance as of December 31, 2008 |  | 5,579,544       |   |  | $                                    | 5.61 |                                        | 4.1
|Granted                               |  | 2,203,388       |   |  |                                      | 4.85 |                                        |    
|Vestings                              |  | (171,005        | ) |  |                                      | 5.20 |                                        |    
|Forfeitures                           |  | (274,242        | ) |  |                                      | 5.35 |                                        |    
|                                      |  |                 |   |  |                                      |      |                                        |    
|Share Balance as of December 31, 2009 |  | 7,337,685       |   |  | $                                    | 5.38 |                                        | 3.5
|                                      |  |                 |   |  |                                      |      |                                        |    



F-33



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##### Table of Contents

Deferred Compensation Awards

In addition, as part of the Companys satisfaction of incentive compensation earned for past service under the Companys variable
compensation programs, employees may receive restricted shares of common stock or RSUs in lieu of cash payments. These shares and RSUs are issued to an irrevocable trust and are not returnable to the Company. For the years ended December 31,
2009, 2008, and 2007, the Company granted such stock-based awards with an aggregate fair value upon grant date of $3,048, $6,434, and $9,734, respectively. A summary of restricted stock irrevocable trust awards as of December 31, 2009, and
changes during the years ended December 31, 2009, 2008, and 2007 are presented below:



|                                      |  |                 |   |  |                                      |       |                                        |    
|------------------------------------- |  | --------------- | - |  | ------------------------------------ | ----- | -------------------------------------- | ---
|                                      |  | Number ofShares |   |  | Weighted-averageGrant-date FairValue |       | Weighted-averageRemaining VestedPeriod
|Share Balance as of December 31, 2006 |  |                |   |  | $                                    |      |                                        |   
|Granted                               |  | 729,107         |   |  |                                      | 13.35 |                                        |    
|Vestings                              |  | (1,143          | ) |  |                                      | 15.15 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2007 |  | 727,964         |   |  | $                                    | 13.35 |                                        | 2.6
|Granted                               |  | 700,374         |   |  |                                      | 7.30  |                                        |    
|Vestings                              |  | (253,313        | ) |  |                                      | 12.73 |                                        |    
|Cancelled and reissued as RSUs        |  | (5,691          | ) |  |                                      | 13.33 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2008 |  | 1,169,334       |   |  | $                                    | 9.86  |                                        | 1.9
|Granted                               |  |                |   |  |                                      |      |                                        |    
|Vestings                              |  | (412,806        | ) |  |                                      | 10.29 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2009 |  | 756,528         |   |  | $                                    | 9.64  |                                        | 0.9
|                                      |  |                 |   |  |                                      |       |                                        |    

A summary of restricted stock unit irrevocable trust
awards as of December 31, 2009, and changes during the years ended December 31, 2009, 2008, and 2007 are presented below:



|                                      |  |                 |   |  |                                      |      |                                        |    
|------------------------------------- |  | --------------- | - |  | ------------------------------------ | ---- | -------------------------------------- | ---
|                                      |  | Number ofShares |   |  | Weighted-averageGrant-date FairValue |      | Weighted-averageRemaining VestedPeriod
|Share Balance as of December 31, 2007 |  |                |   |  | $                                    |     |                                        |   
|Granted                               |  | 227,377         |   |  |                                      | 5.81 |                                        |    
|Vestings                              |  | (8,427          | ) |  |                                      | 9.36 |                                        |    
|                                      |  |                 |   |  |                                      |      |                                        |    
|Share Balance as of December 31, 2008 |  | 218,950         |   |  | $                                    | 5.67 |                                        | 2.6
|Granted                               |  | 888,569         |   |  |                                      | 3.43 |                                        |    
|Vestings                              |  | (113,127        | ) |  |                                      | 5.07 |                                        |    
|                                      |  |                 |   |  |                                      |      |                                        |    
|Share Balance as of December 31, 2009 |  | 994,392         |   |  | $                                    | 3.74 |                                        | 2.1
|                                      |  |                 |   |  |                                      |      |                                        |    

In the first quarter of 2010, the Company granted
983,694 RSUs with an aggregate fair value of $5,942 in satisfaction of incentive compensation earned during 2009 and accrued at December 31, 2009. These issuances are not included in the tables above.

Note 14. Financial Instruments with Off-Balance-Sheet Risk and Credit Risk:

Financial Instruments

The Companys trading and investment activities include equity securities and convertible debt securities that are primarily traded in United States markets. The Company previously invested in
mortgage-backed securities and partially funded its investments through repurchase agreement borrowings. Accordingly, the Company was subject to leverage and interest rate risk prior to the sale of its remaining mortgage-backed securities and
repayment of the related repurchase agreements in the first quarter of 2009.

The Companys asset management entities
trade and invest in public and non-public securities. As of December 31, 2009 and 2008, the Company had not entered into any transactions involving financial instruments that would expose the Company to significant related off-balance-sheet
risk.



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##### Table of Contents

In addition, in certain circumstances the Company sells securities it does not currently own
(securities sold, not yet purchasedsee Note 4). When the Company sells a security short and borrows the security to make a delivery, a gain, limited to the price at which the Company sold the security short, or a loss, unlimited in size, will
be realized upon the termination of the short sale.

Market Risk

Market risk is primarily caused by movements in market prices of the Companys trading and investment account securities and changes in
value of the underlying securities of the investment funds in which the Company invests. The Companys trading securities and investments are also subject to interest rate volatility and possible illiquidity in markets in which the Company
trades or invests. The Company seeks to manage market risk through monitoring procedures. The Companys principal transactions are primarily long and short equity and convertible debt transactions.

Positions taken and commitments made by the Company, including those made in connection with investment banking activities, may result in
substantial amounts of exposure to individual issuers and businesses, including non-investment grade issuers, securities with low trading volumes and those not readily marketable. These issuers and securities may expose the Company to a higher
degree of risk than associated with investment grade instruments.

Credit Risk

The Companys broker-dealer subsidiaries function as introducing brokers that place and execute customer orders. The orders are then
settled by an unrelated clearing organization that maintains custody of customers securities and provides financing to customers.

The Companys broker-dealer subsidiaries clear all of their securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreements between the
Companys broker-dealer subsidiaries and the clearing broker, the clearing broker has the right to charge the Company for losses that result from a counterpartys failure to fulfill its contractual obligations.

We attempt to limit our credit spread risk by offsetting long or short positions in various related securities, but may also hedge credit
risk exposure through the use of credit derivatives such as credit default swaps.

As the right to charge the Company has no
maximum amount and applies to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2009 and 2008, the Company has recorded no liabilities with regard to the
right. During the years ended December 31, 2009, 2008 and 2007, the Company paid the clearing broker a total less than twenty thousand dollars related to these guarantees.

In addition, the Company has the right to pursue collection of performance from the counterparties who do not perform under their
contractual obligations. The Company monitors the credit standing of the clearing broker and all counterparties with which it conducts business.

The securities industry is subject to numerous risks, including the risk of loss associated with the underwriting, ownership, and trading of securities, and the risk of reduced revenues in periods of
reduced demand for security offerings and activity in secondary trading markets. Changing economic and market trends may negatively impact the liquidity and value of the Companys investments and the level of security offerings underwritten by
the Company, which may adversely affect the Companys revenues and profitability.

Through indemnification provisions in
agreements with clearing organizations, customer activities may expose the Company to off-balance-sheet credit risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle a trade
on its original terms or in the event cash



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##### Table of Contents

and securities in customer margin accounts are not sufficient to fully cover customer obligations. The Company seeks to manage the risks associated with customer activities through customer
screening and selection procedures as well as through requirements on customers to maintain margin collateral in compliance with various regulations and clearing organization policies.

The Companys equity and debt investments include non-investment grade securities of privately held issuers with no ready markets. The
concentration and illiquidity of these investments expose the Company to a higher degree of risk than associated with readily marketable securities.

Note 15. Segment Information:

The Company considers its capital markets, asset management and principal
investing operations to be separate reportable segments. The capital markets segment includes the Companys investment banking and institutional sales, trading and research operations. These businesses operate as a single integrated unit to
deliver capital raising, advisory and sales and trading services to corporate and institutional clients. Asset management includes the Companys fee based asset management operations. Principal investing activity consists of investments in
merchant banking and long-term equity investments and investments in mutual, hedge and venture funds and management of the Companys liquid capital.

The accounting policies of these segments are the same as those described in Note 2. The Company has developed systems and methodologies to allocate overhead costs to its business units and, accordingly,
presents segment information consistent with internal management reporting. Revenue generating transactions between the individual segments have been included in the net revenue and pre-tax income of each segment. The Companys revenues from
foreign operations totaled $12,233, $18,069, and $27,046 for the years ended December 31, 2009, 2008 and 2007, respectively. The following tables illustrate the financial information for the Companys segments for the periods indicated.



|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|----------------------------------------- |  | -------------------------------- | ------- | - | --------------- | - | ------- | ------------------ |  | ----- | ------- |  | - | ------- | -
|                                          |  | For year ended December 31, 2009 |        
|                                          |  | CapitalMarkets                   |         |   | AssetManagement |   |         | PrincipalInvesting |  | Total |        
|Revenues, net of interest expense:        |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Investment banking                        |  | $                                | 138,723 |   |                 | $ |        |                    |  | $     |        |  | $ | 138,723 |  
|Institutional brokerage                   |  |                                  | 132,629 |   |                 |   |        |                    |  |       |        |  |   | 132,629 |  
|Asset management fees                     |  |                                  |        |   |                 |   | 13,245  |                    |  |       |        |  |   | 13,245  |  
|Net investment income                     |  |                                  |        |   |                 |   |        |                    |  |       | 1,577   |  |   | 1,577   |  
|Net interest income, dividends, and other |  |                                  | 1,358   |   |                 |   | 524     |                    |  |       | 4,177   |  |   | 6,059   |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Total                                     |  |                                  | 272,710 |   |                 |   | 13,769  |                    |  |       | 5,754   |  |   | 292,233 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Operating Expenses:                       |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Variable                                  |  |                                  | 116,159 |   |                 |   | 8,839   |                    |  |       | 109     |  |   | 125,107 |  
|Fixed                                     |  |                                  | 176,103 |   |                 |   | 13,027  |                    |  |       | 1,635   |  |   | 190,765 |  
|Impairment of intangible assets           |  |                                  |        |   |                 |   | 5,350   |                    |  |       |        |  |   | 5,350   |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Total                                     |  |                                  | 292,262 |   |                 |   | 27,216  |                    |  |       | 1,744   |  |   | 321,222 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Pre-tax (loss) income                     |  | $                                | (19,552 | ) |                 | $ | (13,447 | )                  |  | $     | 4,010   |  | $ | (28,989 | )
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Compensation and benefits:                |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Variable                                  |  | $                                | 89,404  |   |                 | $ | 3,128   |                    |  | $     | 97      |  | $ | 92,629  |  
|Fixed                                     |  |                                  | 94,046  |   |                 |   | 5,815   |                    |  |       | 527     |  |   | 100,388 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Total                                     |  | $                                | 183,450 |   |                 | $ | 8,943   |                    |  | $     | 624     |  | $ | 193,017 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Total assets                              |  | $                                | 369,739 |   |                 | $ | 20,689  |                    |  | $     | 165,897 |  | $ | 556,325 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  
|Total net assets                          |  | $                                | 142,917 |   |                 | $ | 18,241  |                    |  | $     | 158,341 |  | $ | 319,499 |  
|                                          |  |                                  |         |   |                 |   |         |                    |  |       |         |  |   |         |  



F-36



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##### Table of Contents

|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|----------------------------------------- |  | -------------------------------- | -------- | - | --------------- | - | ------- | ------------------ |  | - | ------- | - |  | - | -------- | -
|                                          |  | For year ended December 31, 2008 |         
|                                          |  | CapitalMarkets                   |          |   | AssetManagement |   |         | PrincipalInvesting |  |   | Total   |  
|Revenues, net of interest expense:        |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Investment banking                        |  | $                                | 96,950   |   |                 | $ |        |                    |  | $ |        |   |  | $ | 96,950   |  
|Institutional brokerage                   |  |                                  | 137,263  |   |                 |   |        |                    |  |   |        |   |  |   | 137,263  |  
|Asset management fees                     |  |                                  |         |   |                 |   | 15,883  |                    |  |   |        |   |  |   | 15,883   |  
|Net investment loss                       |  |                                  |         |   |                 |   |        |                    |  |   | (79,551 | ) |  |   | (79,551  | )
|Net interest income, dividends, and other |  |                                  | 1,795    |   |                 |   | 1,390   |                    |  |   | 8,178   |   |  |   | 11,363   |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  |                                  | 236,008  |   |                 |   | 17,273  |                    |  |   | (71,373 | ) |  |   | 181,908  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Operating Expenses:                       |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Variable                                  |  |                                  | 121,270  |   |                 |   | 11,304  |                    |  |   | 55      |   |  |   | 132,629  |  
|Fixed                                     |  |                                  | 224,789  |   |                 |   | 20,880  |                    |  |   | 1,830   |   |  |   | 247,499  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  |                                  | 346,059  |   |                 |   | 32,184  |                    |  |   | 1,885   |   |  |   | 380,128  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Pre-tax loss                              |  | $                                | (110,051 | ) |                 | $ | (14,911 | )                  |  | $ | (73,258 | ) |  | $ | (198,220 | )
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Compensation and benefits:                |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Variable                                  |  | $                                | 90,810   |   |                 | $ | 4,042   |                    |  | $ | 4       |   |  | $ | 94,856   |  
|Fixed                                     |  |                                  | 122,970  |   |                 |   | 9,053   |                    |  |   | 235     |   |  |   | 132,258  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  | $                                | 213,780  |   |                 | $ | 13,095  |                    |  | $ | 239     |   |  | $ | 227,114  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total assets                              |  | $                                | 218,574  |   |                 | $ | 34,607  |                    |  | $ | 547,188 |   |  | $ | 800,369  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total net assets                          |  | $                                | 144,428  |   |                 | $ | 30,789  |                    |  | $ | 128,510 |   |  | $ | 303,727  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|                                          | 
|                                          |  | For year ended December 31, 2007 |         
|                                          |  | CapitalMarkets                   |          |   | AssetManagement |   |         | PrincipalInvesting |  |   | Total   |  
|Revenues, net of interest expense:        |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Investment banking                        |  | $                                | 323,608  |   |                 | $ |        |                    |  | $ |        |   |  | $ | 323,608  |  
|Institutional brokerage                   |  |                                  | 112,351  |   |                 |   |        |                    |  |   |        |   |  |   | 112,351  |  
|Asset management fees                     |  |                                  |         |   |                 |   | 23,950  |                    |  |   |        |   |  |   | 23,950   |  
|Net investment loss                       |  |                                  |         |   |                 |   |        |                    |  |   | (4,507  | ) |  |   | (4,507   | )
|Net interest income, dividends, and other |  |                                  | 10,847   |   |                 |   | 2,500   |                    |  |   | 10,810  |   |  |   | 24,157   |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  |                                  | 446,806  |   |                 |   | 26,450  |                    |  |   | 6,303   |   |  |   | 479,559  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Operating Expenses:                       |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Variable                                  |  |                                  | 220,154  |   |                 |   | 16,171  |                    |  |   | 105     |   |  |   | 236,430  |  
|Fixed                                     |  |                                  | 197,575  |   |                 |   | 17,360  |                    |  |   | 2,918   |   |  |   | 217,853  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  |                                  | 417,729  |   |                 |   | 33,531  |                    |  |   | 3,023   |   |  |   | 454,283  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Pre-tax income (loss)                     |  | $                                | 29,077   |   |                 | $ | (7,081  | )                  |  | $ | 3,280   |   |  | $ | 25,276   |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Compensation and benefits:                |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Variable                                  |  | $                                | 171,810  |   |                 | $ | 6,707   |                    |  | $ | 61      |   |  | $ | 178,578  |  
|Fixed                                     |  |                                  | 99,939   |   |                 |   | 8,097   |                    |  |   | 1,138   |   |  |   | 109,174  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total                                     |  | $                                | 271,749  |   |                 | $ | 14,804  |                    |  | $ | 1,199   |   |  | $ | 287,752  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total assets                              |  | $                                | 306,262  |   |                 | $ | 41,242  |                    |  | $ | 261,228 |   |  | $ | 608,732  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|Total net assets                          |  | $                                | 227,227  |   |                 | $ | 18,703  |                    |  | $ | 260,810 |   |  | $ | 506,740  |  
|                                          |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  



F-37



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##### Table of Contents

Note 16. Quarterly Data (Unaudited):

The following tables set forth selected information for each of the fiscal quarters during the years ended December 31, 2009 and 2008.
The selected quarterly data is derived from unaudited financial statements of the Company and has been prepared on the same basis as the annual, audited financial statements to include, in the opinion of management, all adjustments (consisting of
only normal recurring adjustments) necessary for fair statement of the results for such periods.

Note: The sum of quarterly
earnings per share amounts may not equal full year earnings per share amounts due to differing average outstanding shares amounts for the respective periods.



|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|-------------- |  | ------------- | ------- | - | --------------------------------- | - | -------- | ---------------- |  | - | ----------------------------- | - |  | ------------------------------- | ----- | - |  | - | ----- | -
|               |  | TotalRevenues |         |   | NetIncome (Loss)BeforeIncomeTaxes |   |          | NetIncome (Loss) |  |   | BasicEarnings (Loss)Per Share |   |  | DilutedEarnings (Loss)Per Share |      
|2009           |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|First Quarter  |  | $             | 49,903  |   |                                   | $ | (15,558  | )                |  | $ | (16,167                       | ) |  | $                               | (0.27 | ) |  | $ | (0.27 | )
|Second Quarter |  |               | 47,328  |   |                                   |   | (21,640  | )                |  |   | (21,744                       | ) |  |                                 | (0.40 | ) |  |   | (0.40 | )
|Third Quarter  |  |               | 71,440  |   |                                   |   | (6,958   | )                |  |   | (6,970                        | ) |  |                                 | (0.11 | ) |  |   | (0.11 | )
|Fourth Quarter |  |               | 123,814 |   |                                   |   | 15,167   |                  |  |   | 17,230                        |   |  |                                 | 0.27  |   |  |   | 0.26  |  
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|Total Year     |  | $             | 292,485 |   |                                   | $ | (28,989  | )                |  | $ | (27,651                       | ) |  | $                               | (0.46 | ) |  | $ | (0.46 | )
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|               |  |               |         |   |                                  
|2008           |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|First Quarter  |  | $             | 104,079 |   |                                   | $ | (10,981  | )                |  | $ | (10,174                       | ) |  | $                               | (0.16 | ) |  | $ | (0.16 | )
|Second Quarter |  |               | 52,993  |   |                                   |   | (35,223  | )                |  |   | (25,249                       | ) |  |                                 | (0.39 | ) |  |   | (0.39 | )
|Third Quarter  |  |               | 50,694  |   |                                   |   | (46,682  | )                |  |   | (28,560                       | ) |  |                                 | (0.44 | ) |  |   | (0.44 | )
|Fourth Quarter |  |               | (13,401 | ) |                                   |   | (105,334 | )                |  |   | (130,747                      | ) |  |                                 | (2.23 | ) |  |   | (2.23 | )
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|Total Year     |  | $             | 194,365 |   |                                   | $ | (198,220 | )                |  | $ | (194,730                      | ) |  | $                               | (3.09 | ) |  | $ | (3.09 | )
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  



F-38



---

##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                          
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                              
|3.1            |  | Amended and Restated Articles of Incorporation of the Registrant.(1)                                                                                                                                                                                     
|               | 
|3.2            |  | Amended and Restated Bylaws of the Registrant.(1)                                                                                                                                                                                                        
|               | 
|4.1            |  | Form of Certificate for Common Stock.(3)                                                                                                                                                                                                                 
|               | 
|4.2            |  | Registration Rights Agreement, dated as of July 20, 2006, between the Registrant and Friedman, Billings, Ramsey & Co., Inc.(1)                                                                                                                           
|               | 
|4.3            |  | Registration Rights Agreement, dated as of July 20, 2006, between the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)                                                                                                                
|               | 
|4.4            |  | Registration Rights Agreement, dated January 26, 2009, between the Registrant and Friedman, Billings, Ramsey Group, Inc.(9)                                                                                                                              
|               | 
|4.5            |  | Governance Agreement, dated as of July 20, 2006, among Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., Forest Holdings LLC and Forest Holdings (ERISA)
LLC.(1)                                                                           
|               | 
|4.6            |  | Voting Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., the Registrant, Forest Holdings LLC and Forest Holdings (ERISA)
LLC.(1)                                                             
|               | 
|4.7            |  | Form of Amended and Restated Voting Agreement, dated as of May 20, 2009, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., FBR Capital Markets Corporation,
Forest Holdings LLC and Forest Holdings (ERISA) LLC.(10)               
|               | 
|4.8            |  | Form of Senior Indenture.(12)                                                                                                                                                                                                                            
|               | 
|4.9            |  | Form of Subordinated Indenture.(12)                                                                                                                                                                                                                      
|               | 
|4.10           |  | Form of Subscription Agreement by and between FBR Capital Markets Corporation and purchasers of common stock of FBR Capital Markets Corporation in connection with the closing of the
transactions contemplated by the Watch Hill Purchase Agreement.(13)
|               | 
|10.1           |  | 2006 Long-Term Incentive Plan.(1)                                                                                                                                                                                                                       
|               | 
|10.2           |  | Form of Incentive Stock Option Agreement.(1)                                                                                                                                                                                                            
|               | 
|10.3           |  | Form of Non-Qualified Stock Option Agreement.(1)                                                                                                                                                                                                        
|10.4           |  | Contribution Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)                                                                                                                                                 
|               | 
|10.5           |  | Corporate Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                                                                                    
|               | 
|10.6           |  | Services Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                                                                                     
|               | 
|10.7           |  | Tax Sharing Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)                                                                                                                                                  
|               | 
|10.8           |  | Trademark License Agreement, dated as of July 20, 2006, between Friedman, Billings, Ramsey Group, Inc. and the Registrant.(1)                                                                                                                            
|               | 
|10.9           |  | Investment Agreement, dated as of July 19, 2006, among the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)                                                                                                                           
|               | 
|10.10          |  | Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings LLC.(1)                                                                                                                                                          
|               | 
|10.11          |  | Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings (ERISA) LLC.(1)                                                                                                                                                  



---

##### Table of Contents

|               |  |                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                       
|               | 
|10.12          |  | Professional Services Agreement, dated as of July 20, 2006, between the Registrant and Crestview Advisors, L.L.C.(1)                                                                              
|               | 
|10.13          |  | Form of Subscription Agreement with respect to the Registrants Director Stock Purchase Plan.(2)                                                                                                 
|               | 
|10.14          |  | 2007 Employee Stock Purchase Plan, amended as of April 23, 2007.(2)                                                                                                                              
|               | 
|10.15          |  | Form of resolution of the Registrants Board of Directors with respect to the Registrants Director Stock Purchase Plan.(2)                                                                      
|               | 
|10.16          |  | Amendment No. 1 to Corporate Agreement, dated April 5, 2007, between the Registrant and Friedman, Billings Ramsey Group. Inc.(2)                                                                  
|               | 
|10.17          |  | Form of Amendment No. 1 to FBR Capital Markets Corporation 2006 Long-Term Incentive Plan.(4)                                                                                                     
|               | 
|10.18          |  | Description of the Registrants 2008 Incentive Compensation Program.(5)                                                                                                                          
|               | 
|10.19          |  | Retention Incentive Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(6)                                                                                    
|               | 
|10.20          |  | Employment Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(6)                                                                                             
|               | 
|10.21          |  | Form of Amendment to Original 2008 Performance RSU Award Agreement.(7)                                                                                                                           
|               | 
|10.22          |  | Form of August 2008 Performance RSU Award Agreement.(7)                                                                                                                                          
|               | 
|10.23          |  | Form of Stock Option Agreement.(7)                                                                                                                                                               
|               | 
|10.24          |  | Form of Restrictive Covenant Agreement.(7)                                                                                                                                                       
|               | 
|10.25          |  | Retirement Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(8)                                                                                                    
|               | 
|10.26          |  | Director Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(8)                                                                                                      
|               | 
|10.27          |  | Stock Repurchase Agreement, dated as of May 18, 2009, by and among the Registrant, Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.), and FBR TRS
Holdings, Inc.(10)
|10.28          |  | Form of Transition Services Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)                                      
|               | 
|10.29          |  | Form of Assignment and Assumption Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)                                
|               | 
|10.30          |  | Form of Trademark and Copyright Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)                                 
|               | 
|10.31          |  | Form of Domain Name Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)                                             
|               | 
|10.32          |  | Form of Trademark License Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(10)                                        
|               | 
|10.33          |  | Form of LTIP RSU Award Agreement.(11)                                                                                                                                                            
|               | 
|10.34          |  | RSU Award Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(11)                                                                                                  
|               | 
|10.35          |  | Stock Option Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(11)                                                                                               



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##### Table of Contents

|               |  |                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                          
|               | 
|10.36          |  | FBR Capital Markets Corporation 2010 Partner Leveraged Stock Purchase Program, as amended and restated.(11)                                         
|               | 
|12.1           |  | Statement regarding Computation of Ratio of Earnings to Fixed Charges.*                                                                              
|               | 
|21.1           |  | Subsidiaries of the Registrant.*                                                                                                                     
|               | 
|23.1           |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                              
|               | 
|24.1           |  | Power of Attorney.*                                                                                                                                  
|               | 
|24.2           |  | New York Power of Attorney.*                                                                                                                         
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  



|(1) | Previously filed as an exhibit to the Registrants Registration Statement on Form S-1 (Registration No. 333-138824), which was filed with the SEC on
November 17, 2006, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 10, 2007, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 21, 2007, and incorporated by reference herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Previously filed as Appendix A to the Registrants Definitive Information Statement on Schedule 14C, which was filed with the SEC on November 20, 2007,
and incorporated by reference herein.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference to the description of such program included in Item 5.02 of the Registrants Current Report on Form 8-K, which was filed with
the SEC on February 26, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was filed with the SEC
on May 12, 2008, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on August 21, 2008, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on December 22, 2008, and incorporated herein by
reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, which was filed with the SEC
on May 8, 2009, and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on May 19, 2009, and incorporated herein by
reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on February 16, 2010, and incorporated herein by
reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-138824), which was
filed with the SEC on May 22, 2009, and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-161416), which was
initially filed with the SEC on August 18, 2009, as amended, and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------