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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, 2008

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 (Nasdaq Global Select Market)

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

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

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, 2008 was approximately $123.8 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 27, 2009, there were 59,657,321 shares of FBR Capital Markets Corporation common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                                                                           |  |                                     
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------
|Document                                                                                                                                   |  | Where Incorporated                  
|FBR Capital Markets Corporation 2009 Proxy Statement (to be filed with the Securities and Exchange Commission on or before April 30,
2009) |  | 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                                                                                                 |  | 13  
|Item 1B.                                           |  | Unresolved Staff Comments                                                                                    |  | 27  
|Item 2.                                            |  | Properties                                                                                                   |  | 27  
|Item 3.                                            |  | Legal Proceedings                                                                                            |  | 27  
|Item 4.                                            |  | Submission of Matters to a Vote of Security Holders                                                          |  | 28  
|                                                   |  |                                                                                                             
|PART II                                            |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 5.                                            |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 29  
|Item 6.                                            |  | Selected Financial Data                                                                                      |  | 32  
|Item 7.                                            |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 34  
|Item 7A.                                           |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 58  
|Item 8.                                            |  | Financial Statements and Supplementary Data                                                                  |  | 58  
|Item 9.                                            |  | Changes In and Disagreements with Accountants on Controls and Procedures                                     |  | 58  
|Item 9A.                                           |  | Controls and Procedures                                                                                      |  | 59  
|Item 9B.                                           |  | Other Information                                                                                            |  | 60  
|                                                   |  |                                                                                                             
|PART III                                           |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 10.                                           |  | Directors, Executive Officers and Corporate Governance                                                       |  | 61  
|Item 11.                                           |  | Executive Compensation                                                                                       |  | 61  
|Item 12.                                           |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 61  
|Item 13.                                           |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 61  
|Item 14.                                           |  | Principal Accountant Fees and Services                                                                       |  | 61  
|                                                   |  |                                                                                                             
|PART IV                                            |  |                                                                                                              |  |     
|                                                   |  |                                                                                                             
|Item 15.                                           |  | Exhibits and Financial Statement Schedules                                                                   |  | 62  
|Signatures                                         |  | 65                                                                                                          
|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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 factors 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. Risks affecting our business are described
throughout this Form 10-K. This entire Form 10-K, including the consolidated financial statements and the notes thereto and any other documents incorporated by reference into this Form 10-K, should be read for a complete understanding of our
business, an investment in our company and the risks 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 Securities Exchange Act of 1934, as amended (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 top-ranking U.S. investment bank for middle-market companies.

Through our principal operating subsidiaries, Friedman, Billings, Ramsey & Co., Inc. (FBR & Co.), an SEC-registered
broker-dealer, Friedman, Billings, Ramsey International, Ltd. (FBRIL), a broker-dealer registered with the United Kingdoms Financial Services Authority (FSA), FBR Investment Management, Inc. (FBRIM), an
SEC-registered investment adviser, FBR Fund Advisers, Inc. (FBR Fund Advisers), also 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, recapitalization and strategic alternative analysis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | institutional sales and trading services;
| | - |  | -----------------------------------------



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



| |  |  | asset management services through a group of proprietary mutual funds, hedge funds and funds of funds;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | private wealth management services to high net worth individuals, families, foundations, pension funds, endowments and other private entities; 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 seven broad industry
sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and telecommunications (TMT). We collectively refer to these seven sectors as our
core sectors. In 2008, we executed 35 banking assignments with a total transaction value of over $7.1 billion, including $2.0 billion in lead-managed capital raising transactions, and completed 15 M&A and advisory assignments. As of
December 31, 2008, we were a market-maker or trader in more than 1,200 securities, provided sales and trading services to more than 1,900 institutional clients and provided independent research on more than 375 companies.

Our asset management business manages a range of investment products for our clients, which includes a family of mutual funds, hedge funds and funds of
funds. Our private wealth group offers a broad array of services to high net worth investors and foundations. As of December 31, 2008, we had approximately $1.4 billion in assets under management.

We are a Virginia corporation that was formed as a consolidated subsidiary of Friedman, Billings, Ramsey Group, Inc. (FBR Group), now doing
business as Arlington Asset Investment Corporation, a publicly-traded corporation that invests primarily in mortgage-related assets (NYSE: FBR). In July 2006, FBR Group 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



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(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, although FBR Group has owned a majority of our issued and outstanding
common stock since the completion of our July 2006 private offering. We became a publicly-traded company listed on The NASDAQ Global Select Market (Nasdaq: FBCM) in June 2007 when FBR Group and certain other shareholders sold an aggregate of
12,960,950 shares of our common stock in an underwritten initial public offering. As a result of our initial public offering, FBR Group reduced its ownership in our company to just above 50%. As a result of repurchases of shares of our common stock
in the fourth quarter of 2008, FBR Group beneficially owned 57.3% of our outstanding shares of common stock as of December 31, 2008.

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 (sales, trading, and
research); asset management, which includes private wealth management; and principal investing, which includes merchant banking.

Financial
information concerning our company for the fiscal years ended December 31, 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 14 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 industry 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.

We believe that the current disruption in the financial services industry has created opportunities
for us to expand our existing business, and we are currently evaluating the addition of new capabilities in high yield debt sales and trading, restructuring and liability management advisory services, and prime brokerage services for underserved
money managers. As of December 31, 2008, we have not yet commenced these initiatives. We believe that these initiatives, if commenced, could meaningfully add to our revenue stream in the current year, although there can be no assurance that we
will be able to successfully establish one or more of these capabilities, or, if established, that they will perform as we expect. In addition, over the course of 2008 we have reduced our total number of employees and have made adjustment 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



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raising and financial advisory services. We provide capital raising services in industry specific investment banking teams that operate across our core
industry sectors: consumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, 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.

Over the past year 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 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 that end, in March 2008, we acquired the business and personnel of a boutique investment bank serving companies in the TMT sectors that expanded our
presence on the west coast of the United States, and in February 2007 we acquired the business and personnel of an independent investment banking and advisory firm in order to bolster our M&A capabilities and add key personnel with broad
industry experience and relationships.

As an investment bank with an ability to raise equity in the private capital markets and with a
merchant banking capability, 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. We maintain a dominant market share in private institutional equity
offerings pursuant to Rule 144A under the Securities Act, which we believe is a function of our institutional distribution capability and our experienced, client-focused investment bankers. During 2007, we were the lead or sole book-running manager
of 25 equity offerings and co-managed 23 other equity offerings raising proceeds of approximately $11.6 billion. 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 offerings and co-managed 15 other offerings, raising proceeds of approximately $7.1 billion.

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 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, 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 2008, we completed 15 strategic
advisory assignments.



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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.

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 1,900
institutional investor accounts as of December 31, 2008. 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 desk 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 and convertible securities. We make markets in Nasdaq and other securities, we trade listed securities, 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, 2008, our research analysts performed independent research on over 375 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 offer our clients three main services: mutual funds, alternative asset management, and private wealth advisory. 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, 2008, we had $1.4 billion in assets under management.



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Mutual Funds.At December 31, 2008, we managed client assets in excess of $1.2 billion
through our traditional asset class equity and our specialty mutual fund product lines, as well as our money market fund. Our four 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 five 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.

Alternative Asset Management.Our alternative asset management group manages hedge funds, including funds of funds, as well as private equity and
venture capital funds. We seek to expand our presence in this area by using our industry knowledge to identify alternative asset strategies and managers, within our company and externally. The dedicated sales, compliance, investor relations and
accounting personnel in our alternative asset management platform are supported by our corporate supervisory and risk management personnel.

Private Wealth Advisory.We provide comprehensive private wealth management services to high net worth individuals, families and foundations through our Private Wealth group. Our professionals provide investors with customized
financial solutions and access to select third party investment strategies.

Principal Investing

Our principal investing activity consists primarily of investments in short-term liquid instruments, merchant banking investments, and investments in
hedge and venture funds. We have historically made merchant banking investments in selected transactions that our investment banking group underwrites. This strategy involves putting our capital to work along side the capital of our institutional
and high net worth clients.

Our merchant banking investment strategy is to invest in companies that compete in industries where we have
investment expertise and a contextual understanding of industry dynamics. We rely on our investment banking group to provide us with potential investment opportunities. Our merchant banking investment decisions are primarily based on a fundamental
value-oriented approach. Almost all of our investments are in companies that are or will become investment banking clients of our company. Potential principal investments, including merchant banking investments, that we expect to evaluate include,
among others, preferred or common equity, senior secured and mezzanine loans, and interests in proprietary funds.

We are long-term
investors but do not seek to control the companies in which we invest. In most cases, we intend to hold our merchant banking investments for greater than six months. We follow a fundamental value-oriented investment approach and focus on the
intrinsic value of the underlying business. We also consider factors such as: strength of management; liquidity of the investment; and prices of similar or comparable securities and/or companies. Because of our broker-dealer affiliation, many of our
investments in companies that are investment banking clients are subject to lock-up restrictions which limit our ability to sell securities for a period of time.

Subject to maintaining our exemption from the registration requirements of the 1940 Act, we also invest our excess capital from time to time in highly liquid investments, which we utilize in our overall cash
management activities and are readily convertible to cash, including, among other investment types, U.S. Government and agency obligations and other investments that have a carried or implied AAA rating.

In 2008, we invested a material portion of our excess liquid capital in residential mortgage-backed securities (MBS), including
collateralized mortgage obligations, issued by a U.S. Government agency, or guaranteed as to principal and interest, but not market value, by U.S. Government agencies or U.S. Government sponsored entities.



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MBS differ from other forms of traditional fixed-income securities which normally provide for periodic
payments of interest in fixed amounts with principal payments at maturity. Instead, MBS provide for a monthly payment that consists of both interest and principal. In effect, these payments are a pass through of the monthly interest and
principal payments made by borrowers on their mortgage loans, net of any fees paid to the servicer or guarantor of the MBS securities. In addition, outstanding principal on the MBS may be prepaid at any time due to prepayments on the underlying
mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with more traditional fixed-income securities.

In the fourth quarter of 2008, we sold most of our MBS investments resulting in realized losses and other-than-temporary impairment losses on the remaining MBS as of December 31, 2008. We sold the remainder of
our MBS investments in the first quarter of 2009. We have no current plans to make any additional investments in MBS.

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

In 2008, 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. The events of 2008 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 year, 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
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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 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



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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.

Employees

As of December 31, 2008, we had 568 employees, in comparison to the 758 employees we had as of December 31, 2007. 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 (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.

FBRIM and FBR Fund Advisers 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



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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.

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, set to expire on July 31, 2009, which contains a firm delivery requirement for long and short sales, and the naked short selling anti-fraud rule.

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, or 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
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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.

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 or 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 the Financial Services Authority (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
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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 continuing in
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
during the past twelve months 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 for the past twelve to eighteen months has been extremely adverse for
many of our businesses and there can be no assurance that these conditions will improve in the near term. In 2009, it is expected that adverse economic conditions and the recession will persist, causing a continuation of the unfavorable economic and
market dynamics experienced in 2008, and possibly leading to a further decline in economic and market conditions. 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 the reduced transaction volumes, reduced revenue and reduced profitability that we
experienced in almost all of our main businesses in 2008 to continue throughout 2009.

It is difficult to predict how long these uncertain
and unfavorable market and economic conditions and the accompanying recession will continue, whether contagion from the global credit crisis will cause market and economic conditions to continue to deteriorate, and which of our markets, products and
businesses will continue



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to be adversely affected and to what degree. Currently, we anticipate these challenging market conditions will persist throughout 2009. we expect that equity
and debt financing and acquisition and disposition activity will remain depressed through 2009. Our financial performance will be negatively impacted by 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.

Recently, the residential 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 2009 and, combined with declining business and consumer confidence and increased unemployment, have precipitated an economic recession. These factors could continue beyond 2009. 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 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 the sustained market downturn. Our investment banking revenues could continue to be impacted in 2009 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



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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.

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.



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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 may decline
when underwriting activities in these industry sectors decline, the volume of trading on the Nasdaq, the 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, 2008, we had a net loss of $194.7 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 failure to acquire or internally develop the infrastructure needed to offer a complete range of
M&A and advisory services or to grow our asset management business could negatively affect the growth of our business.

Our
ability to expand our M&A business depends upon expanding and enhancing the investment banking services we presently offer. We intend to incur increased costs to expand this business. Our failure to acquire or hire additional M&A
professionals to offer additional M&A services or our failure to successfully integrate such M&A services into our existing business could have an adverse impact on our business. Furthermore, our failure to expand our M&A services
capabilities to satisfy anticipated near-term demand in our core sectors may harm our growth prospects.

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



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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 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 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.



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Our capital markets and strategic advisory engagements are singular in nature and our failure to capture repeat
business from existing clients 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 mergers and acquisitions 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.

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 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.

Although we have historically not engaged in proprietary trading, we may engage in proprietary trading in the future to maintain
trading positions in the equity 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.

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 United Kingdom Financial Services Authority, or 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



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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.

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
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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.

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

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 will 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 and other governmental authorities 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.



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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 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.

Use of leverage could adversely affect our operations.

Using debt to finance the purchase of securities held on our trading desk exposes us to the risk that margin calls will be made and
that we will not be able to meet those margin calls. To meet margin calls, we may sell the applicable securities and such sales could result in realized losses.

To the extent we were to leverage these investments, this leverage could expose us to the risk that margin calls will be made and that we will not be able to meet them. A leveraged companys income and net assets
will tend to increase or decrease at a greater rate than if borrowed money were not used.



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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 (including FBR Group) 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, FBR Group and our subsidiary, FBR & Co., or any combination
thereof, 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.

Risks Relating 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.



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Risks Related to Our Relationship with FBR Group

Because FBR Group controls a majority of the voting power of our common stock, investors will not be able to affect the outcome of any shareholder vote.

FBR Group, through FBR TRS Holdings, controls a majority of the voting power of our common stock. For as long as FBR Group beneficially
owns more than 50% of the outstanding shares of our common stock, it will be able to direct the election of all of the members of our board of directors (other than the two members of our board of directors that Crestview has the right to
designate), call a special meeting of shareholders at which our directors may be removed with or without cause and determine the outcome of all matters submitted to a vote of our shareholders, including matters involving mergers or other business
combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. FBR Group currently has and will
have the power to prevent or cause a change in control, and could take other actions that might be favorable to FBR Group but not to our other shareholders.

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

We currently have net operating loss (NOL) carryovers and net capital loss (NCL) carryovers. Our ability to use our NOL and NCL carryovers to offset our taxable income and gains may be limited by Sections 382 and 383
of the Internal Revenue Code if we undergo an ownership change. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership in our company by more than 50 percentage points looking
back over the relevant testing period. If an ownership change occurs, our ability to use our NOLs, NCLs and certain recognized built-in losses to reduce our taxable income in a future year would be limited to a Section 382 limitation equal to the
fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change. The long-term tax-exempt rate for March 2009 is 5.49%. In the event of an
ownership change, NOLs and 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 in each year. However, if the carryforward period for any NOL or NCL were to expire before that loss had been fully utilized, the unused portion of that loss would be lost. The carryforward
period for NOLs is 20 years from the year in which the losses giving rise to the NOLs were incurred, and the carryforward period for NCL 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 an ownership change would not be affected by the Section 382 limitation (unless there were another ownership change after those new losses arose).

Based on our knowledge of our stock ownership, including the stock ownership of FBR Group, we do not believe that an ownership change has occurred since
our losses were generated. Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs and NCLs to reduce future taxable income. The determination of whether an ownership change has occurred or will
occur is complicated and depends on changes in percentage stock ownership among stockholders. There are currently no restrictions on the transfer of our stock, or the stock of FBR Group, that would discourage or prevent transactions that could cause
an ownership change. If FBR Group were to sell all of its stock in our company, that would cause an ownership change, and no assurance can be provided that FBR Group will not engage in such a stock sale. In addition, we have not obtained, and
currently do not plan to obtain, a ruling from the Internal Revenue Service, or IRS, regarding our conclusion as to whether our losses are subject to any such limitations. Furthermore, we may decide in the future that it is necessary or in our
interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will occur in the future.



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Because FBR Group beneficially owns a majority of the outstanding shares of our common stock, we are a
controlled company within the meaning of the Nasdaq Marketplace Rules and, as a result, we are not subject to all of the Nasdaq corporate governance requirements.

Because FBR Group controls more than 50% of the voting power of our common stock, we are a controlled company within the meaning of the Nasdaq
Marketplace Rules. Under the Nasdaq Marketplace Rules, a controlled company may elect not to comply with certain Nasdaq corporate governance requirements, including requirements that (1) a majority of the board of directors consist of
independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and
(3) director nominees be selected or recommended by a majority of the independent directors or by a nominating committee composed solely of independent directors. Despite our status as a controlled company, we comply with the Nasdaq corporate
governance requirements relating to director independence, and we currently expect to do so in the future. However in the event we decide to take advantage of the controlled company exemption to certain Nasdaq corporate governance requirements, our
shareholders would not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.

A failure of FBR Group to qualify as a REIT for one or more years prior to or including 2006 may expose us to joint and several liability for FBR Groups past federal income tax liability.

FBR Group has historically elected to be taxed as a REIT for United States federal income tax purposes. In the event FBR Group failed to qualify as a REIT
for any year or years prior to or including 2006, FBR Group could have a federal tax liability in respect of its income for such years, and any such liability could be substantial. FBR Groups failure to qualify as a REIT for a given year could
cause certain of our subsidiaries to have been part of a consolidated group with FBR Group and its affiliates for federal income tax purposes for a period of one or more years. As a general matter, corporations that are members of a consolidated
group have joint and several liability for the federal income tax liability of the entire consolidated group during any tax year for which it is consolidated. As a result, if FBR Group failed to qualify as a REIT for one or more years prior to or
including 2006, certain of our subsidiaries could potentially be subject to joint and several liability with respect to such tax liability.

Our
tax sharing agreement may result in conflicts of interest between our company and FBR TRS Holdings.

Under our tax sharing
agreement, FBR TRS Holdings has sole authority to respond to and conduct all income tax proceedings, including tax audits, relating to prior tax periods of the consolidated group of which FBR TRS Holdings is the parent corporation. This arrangement
may result in conflicts of interest between our company and FBR TRS Holdings with respect to prior taxable years, including taxable years prior to or including 2006. For example, under the tax sharing agreement, FBR TRS Holdings may choose to
contest, compromise, or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to FBR TRS Holdings and detrimental to one or more of our subsidiaries and our shareholders (other than FBR TRS
Holdings).

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.



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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
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 be 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.

Through certain agreements that FBR Group, FBR TRS Holdings and our company entered into with Crestview, Crestview has the right to designate two of its 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 Crestviews interests are in conflict with the interests of our other shareholders, Crestviews ability to influence our board of
directors could result in a conflict of interest for members of our board.

At the closing of our 2006 private offering, FBR Group,
FBR TRS Holdings and our company entered into agreements with Crestview that provide Crestview, among other things, with the right to designate two of its representatives for election to our board of directors. Subject to certain conditions,
Crestview also has the right to designate one of its representatives 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 (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 Crestviews interests are in conflict with the interests of our other shareholders,
Crestviews ability to influence our board of directors could result in a conflict of interest for members of our board.

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
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 and state attorneys general.
Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement



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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.

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.

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 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 mergers and acquisitions 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 shareholders 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. 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 significant reputational harm to us, which could seriously harm our
business and prospects.

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
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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 more than nine 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 and asset managers are exposed to liability under federal and state securities laws, other federal and state statutes 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. 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 operating results and financial condition. Pursuant to the corporate agreement that we entered into with FBR Group upon completion of our 2006 private
offering, FBR Group has agreed to indemnify us against claims related to the businesses contributed to us prior to the completion of our 2006 private offering and that arise out of actions or events that occurred prior to that offering. See
Item 13. Certain Relationships and Related TransactionsAgreements and Arrangements with FBR GroupCorporate Agreement.

FBR & Co., our U.S. broker-dealer subsidiary, 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



27



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investment banking client is required to indemnify FBR & Co. against certain claims or liabilities, including claims or liabilities under the
Securities Act, or contribute to payments which FBR & Co. is required to make as a result of the litigation. 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 the Companys financial condition or results of operations.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



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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 Market under 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, 2009, there were 59,657,321 shares of our
common stock outstanding and approximately 15 holders of record. The table below shows the high and low sales prices for our common stock on The Nasdaq Global Select Market for the periods indicated.



|                                   |  |                            |       |     |   |      
|---------------------------------- |  | -------------------------- | ----- | --- | - | -----
|                                   |  | 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 
|                                   | 
|                                   |  | Price Range ofCommon Stock
|                                   |  | High                       |       | Low
|Year Ended December 31, 2007:      |  |                            |       |     |   |      
|Fourth Quarter                     |  | $                          | 14.33 |     | $ | 8.93 
|Third Quarter                      |  |                            | 17.40 |     |   | 11.70
|Second Quarter (from June 8, 2007) |  |                            | 18.25 |     |   | 16.90

Before our common stock was listed and
traded on The Nasdaq Global Select Market, shares of our common stock were eligible for trading in the PORTALSMMarket (PORTAL) of the
NASD (now FINRA). Individuals and institutions that sold shares of our common stock before our common stock was listed and traded on The Nasdaq Global Select Market were not obligated to report their sales to PORTAL. Therefore, the last sales price
that was reported on PORTAL may not have been reflective of sales of our common stock that occurred and were not reported.

The table below
reflects the high and low prices for trades of our shares of common stock on PORTAL known to us for each of the quarterly periods indicated.



|                                           |  |                            |       |     |   |      
|------------------------------------------ |  | -------------------------- | ----- | --- | - | -----
|                                           |  | Price Range ofCommon Stock
|Quarter                                    |  | High                       |       | Low
|Second Quarter 2007 (through June 7, 2007) |  | $                          |      |     | $ |     
|First Quarter 2007                         |  |                            | 15.35 |     |   | 15.00

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.



29



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Share Repurchases

The following table provides information on the Companys share repurchases during the fourth quarter of 2008:



|                                |  |                               |  |                            |      |                                                                              |           |                                                                                                             |          
|------------------------------- |  | ----------------------------- |  | -------------------------- | ---- | ---------------------------------------------------------------------------- | --------- | ----------------------------------------------------------------------------------------------------------- | ---------
|Period                          |  | TotalNumber ofSharesPurchased |  | AveragePrice Paidper Share |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |           | Maximum Number of (orApproximate Dollar Value)of Shares that May Yet BePurchased Under the
Plansor Programs
|October 1 to October 31, 2008   |  | 6,711,136                     |  | $                          | 5.02 |                                                                              | 6,711,136 |                                                                                                             | 3,434,595
|November 1 to November 30, 2008 |  | 15,710                        |  | $                          | 4.71 |                                                                              | 6,726,846 |                                                                                                             | 3,418,885
|December 1 to December 31, 2008 |  |                              |  | $                          |     |                                                                              | 6,726,846 |                                                                                                             | 3,418,885
|                                |  |                               |  |                            |      |                                                                              |           |                                                                                                             |          
|Total                           |  | 6,726,846                     |  | $                          | 5.02 |                                                                              | 6,726,846 |                                                                                                             | 3,418,885



|(1) | 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 ten million shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2008. 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 |     | 06/29/07 |   | 09/28/07 |  | 12/31/07 |     | 03/31/08 |   | 6/30/08 |  | 09/30/08 |    | 12/31/08
|FBCM Common Stock     |  | $        | 100 |          | $ | 94       |  | $        | 72  |          | $ | 53      |  | $        | 38 |          | $ | 28 |  | $ | 36 |  | $ | 27
|S&P 500 Index         |  |          | 100 |          |   | 100      |  |          | 102 |          |   | 98      |  |          | 89 |          |   | 87 |  |   | 79 |  |   | 62
|FBCM Peer Group Index |  |          | 100 |          |   | 94       |  |          | 89  |          |   | 78      |  |          | 65 |          |   | 61 |  |   | 79 |  |   | 56



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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.



31



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



|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|--------------------------------------------------------------------------------------- | ---- | ----------------------- | -------- | ---- |  | - | ------- | - |  | ---- | ------- | - | ---- | - | ------- | - |  | - | -------
|                                                                                        |      | Year Ended December 31,
|                                                                                        | 2008 |                         |          | 2007 |  |   | 2006    |   |  | 2005 |         |   | 2004
|Consolidated Statements of Operations (dollars in thousands, except per share
amounts): |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Revenues:                                                                               |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Investment banking:                                                                     |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Capital raising                                                                         |      | $                       | 76,377   |      |  | $ | 289,545 |   |  | $    | 190,576 |   |      | $ | 374,658 |   |  | $ | 397,940
|Advisory                                                                                |      |                         | 20,573   |      |  |   | 34,063  |   |  |      | 24,148  |   |      |   | 17,759  |   |  |   | 30,115 
|Institutional brokerage:                                                                |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Principal transactions                                                                  |      |                         | 20,261   |      |  |   | 10,152  |   |  |      | 5,814   |   |      |   | 15,980  |   |  |   | 20,445 
|Agency commissions                                                                      |      |                         | 118,314  |      |  |   | 104,633 |   |  |      | 100,855 |   |      |   | 82,551  |   |  |   | 89,492 
|Mortgage trading interest income                                                        |      |                         |         |      |  |   |        |   |  |      | 51,148  |   |      |   | 30,859  |   |  |   |       
|Mortgage trading net investment loss                                                    |      |                         |         |      |  |   |        |   |  |      | (3,298  | ) |      |   | (3,820  | ) |  |   |       
|Asset management:                                                                       |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Base management fees                                                                    |      |                         | 15,335   |      |  |   | 23,549  |   |  |      | 19,871  |   |      |   | 22,080  |   |  |   | 19,045 
|Incentive allocations and fees                                                          |      |                         |         |      |  |   | 401     |   |  |      | 1,327   |   |      |   | 1,929   |   |  |   | 10,940 
|Net investment (loss) income                                                            |      |                         | (81,335  | )    |  |   | (4,497  | ) |  |      | 3,372   |   |      |   | 4,611   |   |  |   | 6,116  
|Interest income                                                                         |      |                         | 23,382   |      |  |   | 25,760  |   |  |      | 20,934  |   |      |   | 26,006  |   |  |   | 6,691  
|Other                                                                                   |      |                         | 1,458    |      |  |   | 1,290   |   |  |      | 3,892   |   |      |   | 2,826   |   |  |   | 1,613  
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Total revenues                                                                          |      |                         | 194,365  |      |  |   | 484,896 |   |  |      | 418,639 |   |      |   | 575,439 |   |  |   | 582,397
|Interest expense                                                                        |      |                         | 12,457   |      |  |   | 5,337   |   |  |      | 54,543  |   |      |   | 42,630  |   |  |   | 988    
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Revenue, net of interest expense                                                        |      |                         | 181,908  |      |  |   | 479,559 |   |  |      | 364,096 |   |      |   | 532,809 |   |  |   | 581,409
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Non-interest expenses:                                                                  |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Compensation and benefits                                                               |      |                         | 227,114  |      |  |   | 287,752 |   |  |      | 225,712 |   |      |   | 277,698 |   |  |   | 304,984
|Professional services                                                                   |      |                         | 34,895   |      |  |   | 45,303  |   |  |      | 43,712  |   |      |   | 53,834  |   |  |   | 40,021 
|Business development                                                                    |      |                         | 30,057   |      |  |   | 37,356  |   |  |      | 33,772  |   |      |   | 39,335  |   |  |   | 43,456 
|Clearing and brokerage fees                                                             |      |                         | 14,010   |      |  |   | 12,373  |   |  |      | 11,715  |   |      |   | 8,690   |   |  |   | 8,894  
|Occupancy and equipment                                                                 |      |                         | 33,244   |      |  |   | 33,197  |   |  |      | 30,039  |   |      |   | 23,379  |   |  |   | 13,743 
|Communications                                                                          |      |                         | 24,183   |      |  |   | 22,434  |   |  |      | 20,039  |   |      |   | 17,354  |   |  |   | 13,044 
|Other operating expenses                                                                |      |                         | 16,625   |      |  |   | 15,868  |   |  |      | 12,219  |   |      |   | 18,500  |   |  |   | 7,997  
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Total non-interest expenses                                                             |      |                         | 380,128  |      |  |   | 454,283 |   |  |      | 377,208 |   |      |   | 438,790 |   |  |   | 432,139
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|(Loss) income before income taxes                                                       |      |                         | (198,220 | )    |  |   | 25,276  |   |  |      | (13,112 | ) |      |   | 94,019  |   |  |   | 149,270
|Income tax (benefit) provision                                                          |      |                         | (3,490   | )    |  |   | 20,032  |   |  |      | (3,271  | ) |      |   | 45,934  |   |  |   | 59,516 
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Net (loss) income                                                                       |      | $                       | (194,730 | )    |  | $ | 5,244   |   |  | $    | (9,841  | ) |      | $ | 48,085  |   |  | $ | 89,754 
|                                                                                        |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Basic and diluted (loss) earnings per share                                             |      | $                       | (3.09    | )    |  | $ | 0.08    |   |  | $    | (0.18   | ) |      | $ | 1.05    |   |  | $ | 1.95   
|Weighted-average shares (in thousands):(1)                                              |      |                         |          |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|Basic                                                                                   |      |                         | 63,056   |      |  |   | 64,123  |   |  |      | 54,137  |   |      |   | 46,000  |   |  |   | 46,000 
|Diluted                                                                                 |      |                         | 63,056   |      |  |   | 64,187  |   |  |      | 54,137  |   |      |   | 46,000  |   |  |   | 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 years ended December 31, 2005 and 2004. 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,      |        
|                                                                     | 2008 |                         |         | 2007 |      |   | 2006    |      |  | 2005 |         |    | 2004 |     
|Consolidated Balance Sheet Data (in thousands):                      |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Assets:                                                              |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Cash and cash equivalents                                            |      | $                       | 207,801 |      |      | $ | 383,558 |      |  | $    | 151,417 |    |      | $    | 162,434   |   |  | $ | 199,111 |  
|Mortgage-backed securities, at fair value                            |      |                         | 454,339 |      |      |   |        |      |  |      | 415,391 |    |      |      |          |   |  |   |        |  
|Trading securities, at fair value                                    |      |                         | 17,954  |      |      |   | 19,057  |      |  |      | 18,180  |    |      |      | 1,034,388 |   |  |   | 7,744   |  
|Reverse repurchase agreements                                        |      |                         |        |      |      |   |        |      |  |      |        |    |      |      | 283,825   |   |  |   | 183,375 |  
|Long-term investments                                                |      |                         | 41,174  |      |      |   | 84,076  |      |  |      | 32,343  |    |      |      | 34,456    |   |  |   | 50,595  |  
|Other                                                                |      |                         | 79,101  |      |      |   | 122,041 |      |  |      | 142,088 |    |      |      | 167,884   |   |  |   | 245,888 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Total assets                                                         |      | $                       | 800,369 |      |      | $ | 608,732 |      |  | $    | 759,419 |    |      | $    | 1,682,987 |   |  | $ | 686,713 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Liabilities:                                                         |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Trading account securities sold but not yet purchased, at fair value |      | $                       | 8,325   |      |      | $ | 206     |      |  | $    | 202     |    |      | $    | 150,547   |   |  | $ | 17,176  |  
|Commercial paper                                                     |      |                         |        |      |      |   |        |      |  |      |        |    |      |      | 136,016   |   |  |   | 183,644 |  
|Repurchase agreements                                                |      |                         | 416,037 |      |      |   |        |      |  |      | 189,155 |    |      |      | 929,363   |   |  |   |        |  
|Accounts payable and other liabilities                               |      |                         | 72,280  |      |      |   | 101,786 |      |  |      | 85,674  |    |      |      | 218,093   |   |  |   | 240,828 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Total liabilities                                                    |      |                         | 496,642 |      |      |   | 101,992 |      |  |      | 275,031 |    |      |      | 1,434,019 |   |  |   | 441,648 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Shareholders equity                                                 |      |                         | 303,727 |      |      |   | 506,740 |      |  |      | 484,388 |    |      |      | 248,968   |   |  |   | 245,065 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Total liabilities and shareholders equity                           |      | $                       | 800,369 |      |      | $ | 608,732 |      |  | $    | 759,419 |    |      | $    | 1,682,987 |   |  | $ | 686,713 |  
|                                                                     |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|                                                                     |     
|                                                                     |      | Year ended December 31, |        
|                                                                     |      | 2008                    |         |      | 2007 |   |         | 2006 |  |      | 2005    |    |      | 2004 |          
|Statistical Data:                                                    |      |                         |         |      |      |   |         |      |  |      |         |    |      |      |           |   |  |   |         |  
|Total employees(1)                                                   |      |                         | 568     |      |      |   | 758     |      |  |      | 702     |    |      |      | 761       |   |  |   | 664     |  
|Net revenue per employee                                             |      | $                       | 320     |      |      | $ | 633     |      |  | $    | 519     |    |      | $    | 700       |   |  | $ | 876     |  
|Pre-tax (loss) return on average equity                              |      |                         | (49     | )%   |      |   | 5       | %    |  |      | (4      | )% |      |      | 38        | % |  |   | 71      | %
|Compensation and benefits expense as a percentage of net revenues    |      |                         | 125     | %    |      |   | 60      | %    |  |      | 62      | %  |      |      | 52        | % |  |   | 52      | %



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



33



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##### Table of Contents

|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 top-ranking U.S. investment bank for
middle-market companies.

Through our principal operating subsidiaries, FBR & Co. (an SEC-registered broker-dealer), FBRIL, (a
broker-dealer registered with the United Kingdoms FSA), FBRIM, (an SEC-registered investment adviser) and FBR Fund Advisers, (also 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, recapitalization and strategic alternative analysis;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | institutional sales and trading services;
| | - |  | -----------------------------------------



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



| |  |  | asset management services through a group of proprietary mutual funds, hedge funds and funds of funds;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | private wealth management services to high net worth individuals, families, foundations, pension funds, endowments and other private entities; 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 seven broad industry
sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and telecommunications (TMT). We collectively refer to these seven sectors as our
core sectors. In 2008, we executed 35 banking assignments with a total transaction value of over $7.1 billion, including $2.0 billion in lead-managed capital raising transactions, and completed 15 M&A and advisory assignments. As of
December 31, 2008, we were a market-maker or trader in more than 1,200 securities, provided sales and trading services to more than 1,900 institutional clients and provided independent research on more than 375 companies.

On the asset management side of our business, through FBRIM and FBR Fund Advisers, our SEC-registered investment adviser subsidiaries, we provide clients
with a range of investment choices that includes a family of mutual funds, hedge funds and funds of funds. Our private wealth group offers a broad array of services to high net worth investors, institutions, and foundations. As of December 31,
2008, we had $1.4 billion in assets under management.

We are a consolidated subsidiary of Friedman, Billings, Ramsey Group, Inc.
(FBR Group), now doing business as Arlington Asset Investment Corporation, a publicly-traded corporation that invests primarily in mortgage-related assets. In July 2006, FBR Group 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



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independent company with a separate board of directors, although FBR Group has owned a majority of our issued and outstanding common stock since the
completion of our July 2006 private offering. We became a publicly- traded company listed on The NASDAQ Global Select Market (Nasdaq: FBCM) in June 2007 when FBR Group and certain other shareholders sold an aggregate of 12,960,950 in an underwritten
initial public offering. As a result of our initial public offering, FBR Group reduced its ownership in our company to just above 50%. As a result of repurchases of shares of our common stock in the fourth quarter of 2008, FBR Group beneficially
owned approximately 57% of our outstanding shares of common stock as of December 31, 2008.

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, which includes private wealth management; and principal investing
(including merchant banking). Prior to our July 2006 private offering, we reported our business in two segments, capital markets and asset management. Subsequent to our July 2006 private offering, we initiated certain principal investing activities.
In conjunction with the initiation of principal investing activities, we reclassified certain of our long-term investments, including equity securities and fund investments previously included in capital markets and asset management, respectively,
to the principal investing segment. Accordingly, segment information for prior years has been revised to conform to the current presentation.

Business
Environment

A severe downturn in the economy in 2008 led to price declines and a period of unprecedented volatility across various
asset classes, and the downturn has continued into 2009. Losses that had previously been limited largely to the subprime mortgage sector during much of 2007 spread to residential and commercial mortgages as property prices declined rapidly. The
effect of the economic and market downturn also spread to other areas of the credit market, including investment grade and non-investment grade corporate debt, convertible securities, emerging market debt and equity, and leveraged loans. The
magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions.

The U.S. entered into a recession in December 2007, and over the course of 2008 credit conditions worsened considerably in the U.S. and globally. The
landscape of the financial services industry changed dramatically, especially during the second half of the year. Many major financial institutions consolidated, were forced to merge or were put into conservatorship by the Federal Government, and
employment in the financial services industry dropped substantially. The overall unemployment rate at the end of 2008 reached the highest level in the last fifteen years. Equity market indices ended the year significantly lower. Concerns about
future economic growth, the adverse developments in the credit markets, mixed views about the Federal Governments response to the economic crisis, lower levels of consumer spending, a high rate of unemployment and lower corporate earnings
continued to challenge the economy and the equity markets. Asset managers faced a large volume of redemptions over the course of the year. Adverse developments in the credit markets, including failed auctions for auction rate securities, rising
default rates on residential mortgages, extremely high implied default rates on commercial mortgages and liquidity issues underlying short-term investment products, such as structured investment vehicles and money market funds, weighed heavily as
well on equity markets. Oil prices also reached record levels during 2008 before declining sharply, partly due to lower demand and weaker economic conditions.

During 2008, the Federal Reserve announced a number of initiatives aimed to provide additional liquidity and stability to the financial markets, and it continues to focus its efforts on mitigating the negative
economic impact related to the credit markets. The Fed lowered both the federal funds benchmark rate and the discount rate by 3.50% during 2008, and at year end the federal funds target rate was 0-0.25% and the discount rate was 0.5%. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted. On October 14, 2008, the Department of the Treasury announced its intention to inject capital into nine large financial institutions and since has injected
capital into many other financial institutions. The Federal Governments initiatives to restore confidence in the financial markets and address the current economic turmoil have continued into 2009, and include the passage of the American
Recovery and Reinvestment Act of 2009, a fiscal stimulus bill that was signed into law on February 17, 2009.



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Executive Summary

For the year ended December 31, 2008, our total revenues, net of interest expense, were $181.9 million with a net loss of $194.7 million, compared to total net revenues of $479.6 million and net income of
$5.2 million for the year ended December 31, 2007. Our 2008 total revenues, net of interest expense includes a net investment loss of $81.3 million reflecting impairment and realized losses on our long-term investments and investments in
agency-backed collateralized mortgage obligations (MBS). For the year ended December 31, 2006, our total revenues, net of interest expense, were $364.1 million and a net loss of $9.8 million.

The current year net loss reflects the effects of the difficult environment in which the capital markets industry has been operating as a result of the
global economic conditions discussed above. These conditions have had a significant negative impact on our 2008 operating results, in particular a 70% decline in our investment banking revenue reflecting the limited number of capital raising
transactions completed industry-wide and by our firm. These conditions also had a negative impact on our portfolio of equity investments resulting in significant other-than-temporary impairments on much of our investment portfolio during 2008. In
addition, during 2008, we had invested a portion of our excess liquid capital in MBS. In the fourth quarter we determined based on market conditions to reduce and ultimately eliminate our exposure to these leveraged investments, resulting in
realized losses and other-than-temporary impairment losses on the remaining MBS as of December 31, 2008.

Our 2008 results include the
impact of several actions taken during the year to improve our operating leverage and position the Company for improved results in future periods. These include severance and other costs associated with a 25% reduction in employees during 2008 to
better align our cost structure to current market conditions. These actions along with adjustments to our variable expense structure and the addition of new employees and lines of business which complement our core strengths will reduce our cost
structure, and provide additional avenues to generate revenues as the Company moves forward.

The following is an analysis of our operating
results by segment for the years ended December 31, 2008, 2007 and 2006.

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, 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, |         
|                                   | 2008 |                                 |          | 2007 |  | 2006 |        
|Revenues, net of interest expense: |      |                                 |          |      |  |      |         |  |   |         |  
|Investment banking                 |      | $                               | 96,950   |      |  | $    | 323,608 |  | $ | 214,724 |  
|Institutional brokerage            |      |                                 | 137,263  |      |  |      | 112,351 |  |   | 107,622 |  
|Net interest income                |      |                                 | 2,116    |      |  |      | 9,451   |  |   | 4,292   |  
|Other                              |      |                                 | (321     | )    |  |      | 1,396   |  |   | 5,606   |  
|                                   |      |                                 |          |      |  |      |         |  |   |         |  
|Total                              |      |                                 | 236,008  |      |  |      | 446,806 |  |   | 332,244 |  
|                                   |      |                                 |          |      |  |      |         |  |   |         |  
|Operating Expenses:                |      |                                 |          |      |  |      |         |  |   |         |  
|Variable                           |      |                                 | 121,270  |      |  |      | 220,154 |  |   | 160,415 |  
|Fixed                              |      |                                 | 224,789  |      |  |      | 197,575 |  |   | 186,052 |  
|                                   |      |                                 |          |      |  |      |         |  |   |         |  
|Total                              |      |                                 | 346,059  |      |  |      | 417,729 |  |   | 346,467 |  
|                                   |      |                                 |          |      |  |      |         |  |   |         |  
|Pre-tax (loss) income              |      | $                               | (110,051 | )    |  | $    | 29,077  |  | $ | (14,223 | )
|                                   |      |                                 |          |      |  |      |         |  |   |         |  



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The pre-tax income from our capital markets segment decreased from $29.1 million for the year ended
December 31, 2007 to a pre-tax loss of $110.1 million for the year ended December 31, 2008. This decrease is 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 reflects the continued effect that the dislocation in credit markets and a world-wide recession has 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 is attributable to increases in overall trading volume, the increased volatility in the equity markets due to the economic environment during the current year, and the integration of a
convertible securities business. Variable 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 is attributable to severance costs associated with a reduction in our workforce, increased stock-based compensation, and our international operations.

The pre-tax income from our capital markets segment increased to $29.1 million for the year ended December 31, 2007 from a loss of $14.2 million for
the year ended December 31, 2006. This increase was primarily attributable to a $108.9 million increase in investment banking revenues during 2007, reflecting a higher volume of capital raising activity, primarily during the first six months of
2007, in our real estate, financial services and TMT sectors. Through June 30, 2007, we had generated $226.8 million in investment banking revenues. However, due to the disruption in the credit markets in August 2007, market conditions
deteriorated significantly during the last five months of 2007. As a result of these conditions, we were unable to maintain the level of revenue achieved in the first six months of 2007 and for the full year, generated $323.6 million of
investment banking revenues. Of this total revenue in 2007, we recognized $195.5 million related to sole-managed private placement transactions. This compared to total investment banking revenues of $214.7 million in 2006, of which $130.4 million
related to sole-managed private placement transactions. Our institutional brokerage sales and trading net revenues increased $4.7 million, or 4.3%, for the year ended December 31, 2007 compared to the prior year. Our variable costs increased by
37.2% or $59.7 million, which was directly related to an increase in variable compensation of 40.3% or $49.3 million due to the increased revenues year over year. Our fixed expenses increased by 6.2% or $11.5 million during 2007. This increase was
primarily related to the cost of restricted stock awards granted in June 2007 at the time of our initial public offering as well as costs associated with our efforts to expand our business activities internationally.

Investment Banking

Our investment
banking activities consist of a broad range of services, including underwritings, public and private capital raising transactions that include a wide variety of securities, and financial advisory services in merger, acquisition, restructuring and
strategic partnering transactions. As a result of market conditions discussed above, revenues from our investment banking operations totaled $97.0 million for the year ended December 31, 2008, representing a decrease of 70.0% from the prior
year. In 2008, our investment banking team executed 35 banking assignments with a total transaction value of over $7.1 billion, including $2.0 billion in lead-managed capital raising transactions. In addition, during 2008, our M&A group
completed 15 successful mergers, acquisitions and advisory assignments.



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The following table shows details of our investment banking revenues for the years indicated (dollars in
thousands):



|                                                              |  |      |        |      |   |         |  |   |        
|------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- |  | - | -------
|                                                              |  | 2008 |        | 2007 |   | 2006   
|Capital raising:                                              |  |      |        |      |   |         |  |   |        
|Institutional private equity offerings and private placements |  | $    | 60,004 |      | $ | 197,219 |  | $ | 139,276
|Initial public offerings                                      |  |      | 1,058  |      |   | 39,164  |  |   | 13,727 
|Follow-on, secondary and preferred public equity offerings    |  |      | 15,315 |      |   | 52,414  |  |   | 35,121 
|Asset-backed securities and high yield debt offerings         |  |      |       |      |   | 748     |  |   | 2,452  
|                                                              |  |      |        |      |   |         |  |   |        
|Total capital raising                                         |  |      | 76,377 |      |   | 289,545 |  |   | 190,576
|Advisory services                                             |  |      | 20,573 |      |   | 34,063  |  |   | 24,148 
|                                                              |  |      |        |      |   |         |  |   |        
|Total investment banking                                      |  | $    | 96,950 |      | $ | 323,608 |  | $ | 214,724
|                                                              |  |      |        |      |   |         |  |   |        

Institutional Brokerage

In addition to our investment banking activities, we also offer institutional brokerage services to customers. Revenues from institutional brokerage
(principal transactions and agency commissions) were up 20.7% on a year-to-year basis, increasing to $138.6 million in 2008 from $114.8 million in 2007, including certain revenues attributed to our asset management segment. The increase in revenue
is the result of increases in overall trading volume, increased volatility in the equity markets, and integration of a convertible securities business partially offset by increased losses on trading securities.

Revenues, net of related interest expense related to institutional brokerage activities are (dollars in thousands):



|                                                          |  |      |         |      |   |         |  |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                          |  | 2008 |         | 2007 |   | 2006   
|Principal transactions                                    |  | $    | 20,261  |      | $ | 10,152  |  | $ | 5,814  
|Agency commissions                                        |  |      | 118,314 |      |   | 104,633 |  |   | 100,855
|Mortgage trading interest and net investment loss(1)      |  |      |        |      |   |        |  |   | 47,850 
|                                                          |  |      |         |      |   |         |  |   |        
|                                                          |  |      | 138,575 |      |   | 114,785 |  |   | 154,519
|Interest expense(1)                                       |  |      |        |      |   |        |  |   | 44,472 
|                                                          |  |      |         |      |   |         |  |   |        
|Institutional brokerage revenues, net of interest expense |  | $    | 138,575 |      | $ | 114,785 |  | $ | 110,047
|                                                          |  |      |         |      |   |         |  |   |        



|(1) | In May 2005, we initiated certain fixed income trading activities, primarily related to mortgage-backed, asset-backed and other structured securities. These fixed income trading
activities continued through October 2006. During the third quarter of 2006, we made a decision to sell our trading positions and we do not expect to resume these types of fixed income trading activities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Asset Management

Our asset management segment consists of managing a broad range of pooled investment vehicles, including mutual funds, hedge funds, venture capital and
private equity funds and separate accounts. Reflecting the significant downturn in the equity markets during 2008, our net assets under management decreased 44.0% from $2.5 billion at December 31, 2007 to $1.4 billion at December 31, 2008.
The following tables provide a summary of our results within the asset management segment (dollars in thousands).



|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  
|---------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                   |  | For the year ended December 31, |        
|                                   |  | 2008                            |         |   | 2007 |   |        | 2006 | 
|Revenues, net of interest expense: |  |                                 |         |   |      |   |        |      |  |   |        |  
|Base management fees               |  | $                               | 15,335  |   |      | $ | 23,549 |      |  | $ | 19,871 |  
|Incentive allocations and fees     |  |                                 |        |   |      |   | 401    |      |  |   | 1,327  |  
|Other                              |  |                                 | 1,938   |   |      |   | 2,500  |      |  |   | 1,518  |  
|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  
|Total                              |  |                                 | 17,273  |   |      |   | 26,450 |      |  |   | 22,716 |  
|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  
|Operating Expenses:                |  |                                 |         |   |      |   |        |      |  |   |        |  
|Variable                           |  |                                 | 11,304  |   |      |   | 16,171 |      |  |   | 12,496 |  
|Fixed                              |  |                                 | 20,880  |   |      |   | 17,360 |      |  |   | 18,097 |  
|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  
|Total                              |  |                                 | 32,184  |   |      |   | 33,531 |      |  |   | 30,593 |  
|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  
|Pre-tax loss                       |  | $                               | (14,911 | ) |      | $ | (7,081 | )    |  | $ | (7,877 | )
|                                   |  |                                 |         |   |      |   |        |      |  |   |        |  

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 base management fees (including mutual fund administrative 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 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.

The
pre-tax loss from our asset management activities decreased to $7.1 million in 2007 from a pre-tax loss of $7.9 million in 2006 based primarily on the increase in net assets under management noted above and the fees earned on those assets. We
recorded $23.5 million in base management fees (including mutual fund administrative fees) for the year ended December 31, 2007, as compared to $19.9 million for the year ended December 31, 2006. Variable costs for this segment,
primarily subadvisory fees, increased as a result of an increase in net assets under management. The increase in variable costs was offset by a 4% decrease in fixed expenses, primarily support services costs.

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



|                              |  |                   |         |        |   |        
|----------------------------- |  | ----------------- | ------- | ------ | - | -------
|                              |  | December 31, 2008
|                              |  | Gross(1)          |         | Net(2)
|Managed accounts              |  | $                 | 216.6   |        | $ | 216.6  
|Mutual funds                  |  |                   |         |        |   |        
|Equity                        |  |                   | 1,088.6 |        |   | 1,079.6
|Fixed income and money market |  |                   | 100.0   |        |   | 99.8   
|Hedge and offshore funds      |  |                   | 23.6    |        |   | 21.0   
|Private equity funds          |  |                   | 17.1    |        |   | 15.9   
|                              |  |                   |         |        |   |        
|Total                         |  | $                 | 1,445.9 |        | $ | 1,432.9
|                              |  |                   |         |        |   |        



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|                              |  |                   |         |        |   |        
|----------------------------- |  | ----------------- | ------- | ------ | - | -------
|                              |  | December 31, 2007
|                              |  | Gross(1)          |         | Net(2)
|Managed accounts              |  | $                 | 347.1   |        | $ | 347.1  
|Mutual funds                  |  |                   |         |        |   |        
|Equity                        |  |                   | 1,870.5 |        |   | 1,859.3
|Fixed income and money market |  |                   | 176.0   |        |   | 175.3  
|Hedge and offshore funds      |  |                   | 52.1    |        |   | 50.7   
|Private equity funds          |  |                   | 23.8    |        |   | 22.6   
|                              |  |                   |         |        |   |        
|Total                         |  | $                 | 2,469.5 |        | $ | 2,455.0
|                              |  |                   |         |        |   |        



|(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, 2008, our principal investing activity consists of investments in merchant banking and long-term equity investments, MBS and
investments in mutual, hedge and venture funds. Our MBS are comprised entirely of floating-rate collateralized mortgage obligations, guaranteed as to principal and interest by U.S. government sponsored entities. The market value of these securities,
however, is not guaranteed by these entities.

The following tables provide a summary of our results within the principal investing segment
(dollars in thousands):



|                                   |  |                                |         |   |      |   |        |      |  |   |      
|---------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | -----
|                                   |  | For the year endedDecember 31,
|                                   |  | 2008                           |         |   | 2007 |   |        | 2006
|Revenues, net of interest expense: |  |                                |         |   |      |   |        |      |  |   |      
|Net investment (loss) income       |  | $                              | (79,551 | ) |      | $ | (4,507 | )    |  | $ | 3,136
|Net interest income                |  |                                | 7,455   |   |      |   | 10,096 |      |  |   | 6,000
|Other                              |  |                                | 723     |   |      |   | 714    |      |  |   |     
|                                   |  |                                |         |   |      |   |        |      |  |   |      
|Total                              |  |                                | (71,373 | ) |      |   | 6,303  |      |  |   | 9,136
|                                   |  |                                |         |   |      |   |        |      |  |   |      
|Operating Expenses:                |  |                                |         |   |      |   |        |      |  |   |      
|Variable                           |  |                                | 55      |   |      |   | 105    |      |  |   | 148  
|Fixed                              |  |                                | 1,830   |   |      |   | 2,918  |      |  |   |     
|                                   |  |                                |         |   |      |   |        |      |  |   |      
|Total                              |  |                                | 1,885   |   |      |   | 3,023  |      |  |   | 148  
|                                   |  |                                |         |   |      |   |        |      |  |   |      
|Pre-tax (loss) income              |  | $                              | (73,258 | ) |      | $ | 3,280  |      |  | $ | 8,988
|                                   |  |                                |         |   |      |   |        |      |  |   |      



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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 is primarily attributable to the net investment loss incurred in the year ended December 31, 2008 shown in the table above compared to 2007. The following table details
the components of net investment loss for the periods (dollars in thousands):



|                                                                                     |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                     |  | For the year endedDecember 31, |        
|                                                                                     |  | 2008                           |         |   | 2007 |  
|Other-than-temporary impairment losses on merchant banking and long-term investments |  | $                              | (41,458 | ) |      | $ | (11,331 | )
|Realized (loss) income on MBS                                                        |  |                                | (21,853 | ) |      |   | 1,961   |  
|Other-than-temporary impairment losses on MBS                                        |  |                                | (11,174 | ) |      |   |        |  
|(Loss) income on long-term equity investments and managed funds                      |  |                                | (5,066  | ) |      |   | 4,863   |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Total                                                                                |  | $                              | (79,551 | ) |      | $ | (4,507  | )
|                                                                                     |  |                                |         |   |      |   |         |  

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 is a result of
economic and market conditions during the period and our assessment of these conditions, as well as other company-specific factors, relative to the various investments. Also, as a result of market conditions, investments in managed funds, including
mutual funds, incurred losses of $5.5 million for the year ended December 31, 2008 compared to net investment income of $2.2 million in 2007.

During the year ended December 31, 2008, we had invested a portion of our excess liquid capital in MBS. We originally deployed this capital into these investments based on our available liquidity and our assessment of our ability and
intent to hold these securities to withstand interim market value fluctuations due to market and interest rate risks. We have continually assessed our leverage and liquidity risk relevant to our 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, we determined that the risks to us associated
with continuing to hold these investments exceeded the potential benefits. As such, in December 2008, we initiated sales of MBS that reduced our exposure, which resulted in realized losses of $21.8 million. In addition, as a result of our change in
intent, we recognized other-than-temporary impairment losses of $11.2 million relating to MBS held as of December 31, 2008. Subsequent to year end, in the first quarter of 2009, we sold our remaining MBS positions and retired the repurchase
agreements financing these positions resulting in additional realized losses of $1.5 million in the first quarter of 2009.

In addition,
the decrease in net interest income on our liquid capital contributed to the decrease in pre-tax income. For the years ended December 31, 2008 and 2007, we recorded net interest income of $7.5 million and $10.1 million, respectively, from
liquid capital invested in our principal investing segment. This decrease in net interest income is 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.

The pre-tax income from our principal investing activities decreased to $3.3
million in 2007 from $9.0 million in 2006. The decrease in pre-tax income was attributable to the $4.5 million net investment loss recorded in 2007, reflecting $11.3 million of impairment losses recorded relating to certain merchant banking and
other investments, offset by interest income earned from the investment of the proceeds received from our July 2006 private offering and gains from the sale of merchant banking investments and MBS. Pre-tax income in 2007 also included $2.9 million
of fixed expenses in this segment. These costs are not comparable to the year ended December 31, 2006 as direct costs were not attributed to this segment until 2007.



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Merchant Banking

The total value of our merchant banking portfolio and other long-term investments was $41.2 million as of December 31, 2008. Of this total, $26.4 million was held in the merchant banking portfolio, $12.5 million
was held in investment funds, and $2.3 million was held in other long-term investments.

The following table provides additional detail
regarding our merchant banking and other long-term investments as of December 31, 2008 (dollars in thousands):

Merchant Banking and
Other Long-Term Investments



|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|---------------------------------------------- |  | ----------------- |  | ------------------ | ------ | ----------------- | - | ------------------------- |  | - | ------
|                                               |  | December 31, 2008
|                                               |  | Numberof Shares   |  | OriginalCost Basis |        | Adjusted(1) Basis |   | Fair Value/Carrying Value
|Long-term investments, at fair value:          |  |                   |  |                    |        |                   |   |                           |  |   |       
|Merchant bankingmarketable equity securities: |  |                   |  |                    |        |                   |   |                           |  |   |       
|Grubb & Ellis Company                          |  | 236,558           |  | $                  | 1,519  |                   | $ | 293                       |  | $ | 293   
|Maiden Holdings, Ltd.                          |  | 145,946           |  |                    | 674    |                   |   | 674                       |  |   | 457   
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|Total long-term investments, at fair value     |  |                   |  | $                  | 2,193  |                   | $ | 967                       |  | $ | 750   
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|Other long-term investments:                   |  |                   |  |                    |        |                   |   |                           |  |   |       
|Merchant bankingnon-public securities(2):     |  |                   |  |                    |        |                   |   |                           |  |   |       
|Cohen Financial                                |  | 112,892           |  | $                  | 5,000  |                   | $ | 790                       |  | $ | 790   
|Cypress Sharpridge Investments, Inc.           |  | 89,600            |  |                    | 2,500  |                   |   | 896                       |  |   | 896   
|Ellington Financial LLC                        |  | 1,438,750         |  |                    | 27,049 |                   |   | 21,581                    |  |   | 21,581
|FSI Realty Trust                               |  | 376,344           |  |                    | 3,312  |                   |   |                          |  |   |      
|Muni Funding of America, LLC                   |  | 527,290           |  |                    | 4,249  |                   |   | 527                       |  |   | 527   
|Star Asia Finance, Limited                     |  | 67,750            |  |                    | 4,270  |                   |   |                          |  |   |      
|Thornburg Mortgage, Inc.(3)                    |  | N/A               |  |                    | 3,900  |                   |   |                          |  |   |      
|Thunderbird Resorts, Inc.                      |  | 1,249,914         |  |                    | 10,722 |                   |   | 1,875                     |  |   | 1,875 
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|Total                                          |  |                   |  | $                  | 61,002 |                   | $ | 25,669                    |  | $ | 25,669
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|Investment funds                               |  |                   |  |                    |        |                   |   |                           |  |   | 12,505
|Other investments                              |  |                   |  |                    |        |                   |   |                           |  |   | 2,250 
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       
|Total other long-term investments              |  |                   |  |                    |        |                   |   |                           |  | $ | 40,424
|                                               |  |                   |  |                    |        |                   |   |                           |  |   |       



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

|(2) | As of December 31, 2008 these shares cannot be traded in a public market (e.g., NYSE or Nasdaq) but may be sold in private transactions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents an investment in senior subordinated debt securities.
|--- | ----------------------------------------------------------------

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 incentive allocations and 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



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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 and the amount and performance of capital on which we have the potential
to generate incentive income. Our asset management vehicles are subject to market risk in the markets in which they would seek to sell or buy financial instruments. Revenue earned from these activities, including unrealized gains that are included
in the incentive income portion of our asset management revenues and in net investment income, may fluctuate as a result. 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.

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 are financed by repurchase agreement borrowings are subject to market risk and risks related to the terms and conditions of the financing agreements. Subsequent to December 31, 2008, we sold our remaining leveraged
MBS and retired the related repurchase agreement borrowings used to finance these securities. We do not intend to purchase additional MBS.

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 the securities trading
activities of FBR & Co. as principal in listed and other equity securities and convertible debt securities, and are primarily derived from FBR & Co.s activities as a market-maker. Trading gains and losses on equity securities
and convertible debt securities 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 FBR & Co.s trading
security inventory.

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

Historically, mortgage trading activities included buying and selling mortgage-backed securities and other
structured securities in various financial transactions (which included forward trades, dollar rolls and reverse repurchase transactions). We had managed market risk associated with these securities positions primarily through forward purchases and
sales of such securities. We engaged in these activities through October 2006. These transactions resulted in interest income and net investment gain/loss.



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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 several hedge, private equity and venture capital investment
partnerships and as administrator to mutual funds. Management fees and incentive income on investment partnerships have been earned from entities that have invested primarily in the securities of companies engaged in the financial services and
technology sectors. Incentive income is likely to fluctuate with the performance of securities of these sectors.

Net Investment Income

Net investment income includes net realized gains or losses on sale of equity securities and MBS, impairment losses related to
investments in marketable and non-public equity securities and MBS, unrealized gains and losses on 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.

Interest Income

Interest income unrelated to brokerage activities includes interest earned on treasury management
investments, which includes interest income earned on MBS and other interest-bearing accounts. Historically, interest income also included interest income earned on our reverse repurchase agreements issued to mortgage originators through our
warehouse lending facility. We engaged in warehouse lending activities through September 2006.

Other Revenue

Other revenue primarily includes miscellaneous dividends and fees.

Expenses

Interest expense includes the costs of our repurchase agreement borrowings, as well
as costs of subordinated credit lines and other financings. Historically, interest expense also included costs associated with commercial paper borrowings.

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

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 PGA TOURs FBR Open.
Expenses that are directly related to investment banking transactions are variable with revenue.



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

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 prior periods.



|                                     |  |                                |    |  |       |    |  |       |   
|------------------------------------ |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                     |  | For the Year EndedDecember 31, |   
|                                     |  | 2008                           |    |  | 2007  |    |  | 2006  |   
|Revenues:                            |  |                                |    |  |       |    |  |       |   
|Investment banking:                  |  |                                |    |  |       |    |  |       |   
|Capital raising                      |  | 42.0                           | %  |  | 60.4  | %  |  | 52.3  | % 
|Advisory                             |  | 11.3                           | %  |  | 7.1   | %  |  | 6.6   | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Subtotal                             |  | 53.3                           | %  |  | 67.5  | %  |  | 58.9  | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Institutional brokerage:             |  |                                |    |  |       |    |  |       |   
|Principal transactions               |  | 11.1                           | %  |  | 2.1   | %  |  | 1.6   | % 
|Agency commissions                   |  | 65.0                           | %  |  | 21.8  | %  |  | 27.7  | % 
|Mortgage trading interest income     |  |                               |    |  |      |    |  | 14.1  | % 
|Mortgage trading net investment loss |  |                               |    |  |      |    |  | (0.9  | )%
|                                     |  |                                |    |  |       |    |  |       |   
|Subtotal                             |  | 76.1                           | %  |  | 23.9  | %  |  | 42.5  | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Asset management:                    |  |                                |    |  |       |    |  |       |   
|Base management fees                 |  | 8.4                            | %  |  | 4.9   | %  |  | 5.5   | % 
|Incentive allocations and fees       |  |                               |    |  | 0.1   | %  |  | 0.4   | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Subtotal                             |  | 8.4                            | %  |  | 5.0   | %  |  | 5.9   | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Net investment (loss) income         |  | (44.7                          | )% |  | (0.9  | )% |  | 0.9   | % 
|Interest income                      |  | 12.9                           | %  |  | 5.4   | %  |  | 5.7   | % 
|Other                                |  | 0.8                            | %  |  | 0.2   | %  |  | 1.1   | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Total revenues                       |  | 106.8                          | %  |  | 101.1 | %  |  | 115.0 | % 
|Interest expense                     |  | 6.8                            | %  |  | 1.1   | %  |  | 15.0  | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Revenues, net of interest expense    |  | 100.0                          | %  |  | 100.0 | %  |  | 100.0 | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Non-interest expenses:               |  |                                |    |  |       |    |  |       |   
|Compensation and benefits            |  | 124.9                          | %  |  | 60.0  | %  |  | 62.0  | % 
|Professional services                |  | 19.2                           | %  |  | 9.4   | %  |  | 12.0  | % 
|Business development                 |  | 16.5                           | %  |  | 7.8   | %  |  | 9.3   | % 
|Clearing and brokerage fees          |  | 7.7                            | %  |  | 2.6   | %  |  | 3.2   | % 
|Occupancy and equipment              |  | 18.3                           | %  |  | 6.9   | %  |  | 8.3   | % 
|Communications                       |  | 13.3                           | %  |  | 4.7   | %  |  | 5.5   | % 
|Other operating expenses             |  | 9.1                            | %  |  | 3.3   | %  |  | 3.3   | % 
|                                     |  |                                |    |  |       |    |  |       |   
|Total non-interest expenses          |  | 209.0                          | %  |  | 94.7  | %  |  | 103.6 | % 
|                                     |  |                                |    |  |       |    |  |       |   
|(Loss) income before income taxes    |  | (109.0                         | )% |  | 5.3   | %  |  | (3.6  | )%
|                                     |  |                                |    |  |       |    |  |       |   



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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 MBS, 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 carry-backs.

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 base management fees decreased 34.9% from $23.5 million in 2007 to $15.3 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 MBS, and a decrease in income from investment funds as a result of negative fund performance during 2008 as
compared to 2007.

Net interest income decreased 46.6% from $20.4 million in 2007 to $10.9 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 compared to 2007.

Other revenues increased 15.4% from $1.3 million in 2007 to $1.5 million in 2008. This increase is primarily the result of 12b-1 fees associated with our acquisition of a mutual fund distribution business at the end of the third quarter,
offset by a decrease in dividends on trading positions.



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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.

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 FBR Group, 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 FBR Group 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 carry-backs. 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 SFAS No. 109, Accounting for Income Taxes. 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 SFAS No. 123(R), Share-Based Payments
(SFAS 123R) 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.

Comparison of the Years Ended
December 31, 2007 and 2006

Net income increased from a loss of $9.8 million during 2006 to income of $5.2 million during 2007. The
increase in net income was primarily the result of the performance of our capital markets segment where, due to the substantial increase in capital raising revenue primarily in the first six months of 2007, pre-tax income increased from a loss of
$14.2 million in 2006 to income of $29.1 million in 2007. This increase was offset in our principal investing segment where pre-tax income decreased from $9.0 million during 2006 to $3.3 million



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during 2007, primarily as a result of impairment losses which were recorded on certain merchant banking investments. The impairment losses incurred in 2007
related primarily to investments in equity securities of companies impacted by the then current dislocation in the credit markets. Pre-tax loss from our asset management segment decreased from $7.9 million during 2006 to a pre-tax loss of $7.1
million during 2007. Our provision for income taxes was $20.0 million during 2007 as compared to a tax benefit of $3.3 million during 2006.

Revenues

Our net revenues increased 31.7% from $364.1 million during 2006 to $479.6 million during 2007 due to the changes in revenues and
interest expense discussed below.

Capital raising revenue increased 51.9% from $190.6 million in 2006 to $289.5 million in 2007. The
increase was attributable to an increase in amounts raised in sole-managed private placement transactions completed in 2007 as compared to 2006. The higher volume of capital raising activity related primarily to our real estate, financial services,
and TMT sectors. We completed 12 private placements during 2007 generating $197.2 million in capital raising revenues as compared to 17 private placements during 2006 generating $139.3 million in capital raising revenue. In addition, we
completed eight public transactions as lead manager raising capital of $1.4 billion in 2007 compared to eight public transactions as lead manager raising capital of $600 million in 2006.

Advisory revenue increased 41.5% from $24.1 million in 2006 to $34.1 million in 2007 as a result of increased merger and acquisition and advisory
assignments. We completed 40 merger and acquisition and advisory assignments in 2007 as compared to 28 in 2006. The increase in assignments was due, in part, to our transaction during the first quarter of 2007, with Legacy Partners, in which we
acquired a team of more than two dozen investment banking professionals and a pipeline of certain advisory transactions.

Institutional
brokerage revenue from agency commissions and principal transactions increased 7.6% from $106.7 million in 2006 to $114.8 million in 2007 as a result of increases in trading volume due to our expansion of sales and trading personnel in 2007 and
a reduction in trading losses. In addition, during 2006, our mortgage sales and trading activities contributed revenues net of interest expense of $3.3 million, reflecting $51.1 million in interest income, a net investment loss of $3.3 million
and $44.5 million of interest expense. There was no comparable activity during 2007 as we sold our mortgage trading positions during the third quarter of 2006 and made a decision not to redeploy capital to this trading activity.

Asset management base management fees increased 18.1% from $19.9 million in 2006 to $23.5 million in 2007. The increase was primarily attributable to the
increase in average net assets under management in 2007 due in large part to an increase in average mutual fund assets, primarily as a result of inflows to the FBR Focus Fund. Asset management incentive allocations and fees decreased 69.2% from $1.3
million in 2006 to $0.4 million in 2007 as a result of fund performance during the period.

Net investment income includes gains/losses on
merchant banking investments, income from investment funds reflecting our allocated earnings/losses from investments in proprietary investment partnerships and other managed investments and gains and losses on mark-to-market investment securities
received in connection with capital raising activities. The decrease in net investment income from $3.4 million in 2006 to a loss of $4.5 million in 2007 was primarily due to impairment charges and losses on our long term investment portfolio of
$9.3 million recorded during 2007. Impairment losses of $8.3 million in our merchant banking and long term investments related primarily to investments in equity securities of companies impacted by the then current dislocation in the credit markets.

Net interest income from non-brokerage activities increased 72.9% from $10.9 million in 2006 to $20.4 million in 2007. This increase was
primarily attributable to our investment of the proceeds received from our July 2006 private offering in short-term liquid investments.



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Other revenues decreased 66.7% from $3.9 million in 2006 to $1.3 million in 2007 primarily due to a
decrease in dividends on trading positions.

Expenses

Total non-interest expenses increased 20.4% from $377.2 million in 2006 to $454.3 million in 2007. This increase was caused by the changes in non-interest expenses described below.

Compensation and benefits expense increased 27.5% from $225.7 million in 2006 to $287.8 million in 2007. This increase was primarily due to a $50.1
million, or 39.0%, increase in variable compensation associated primarily with increased investment banking revenues as well as increased stock compensation and severance costs incurred during 2007. Stock compensation expense in 2007 reflected the
full-year effects of stock options granted in August 2006.

Professional services expenses increased 3.7% from $43.7 million in 2006 to
$45.3 million in 2007 primarily due to increases in subadvisory fees due to the increase in certain mutual fund assets under management as well as services associated with investment banking transactions partially offset by a decrease in corporate
legal costs related to litigation settled in 2006.

Business development expenses increased 10.7% from $33.8 million in 2006 to $37.4
million in 2007. This increase was primarily due to an increase in expenses associated with investment banking transactions.

Clearing and
brokerage fees increased 6.0% from $11.7 million in 2006 to $12.4 million in 2007. The increase was due to increased equity trading volumes.

Occupancy and equipment expense increased 10.7% from $30.0 million in 2006 to $33.2 million in 2007. This increase was primarily due to the investments made in upgrading our technology and office space.

Communications expense increased 12.0% from $20.0 million in 2006 to $22.4 million in 2007 primarily due to increased costs related to market data and
customer trading services. In addition, the increase reflected our investments in technology infrastructure including our data center and disaster recovery systems.

Other operating expenses increased 30.3% from $12.2 million in 2006 to $15.9 million in 2007. This increase was due primarily to the increased costs associated with becoming a public company in the second quarter of
2007, such as insurance costs, directors costs and financial printing costs. Other operating expenses in 2007 included $4.5 million in costs indemnified and funded through capital contributions by FBR Group as compared to $3.0 million of such costs
in 2006. Prospectively, we do not expect such items to be significant.

The total income tax provision changed from a $3.3 million tax
benefit in 2006 to a $20.0 million tax provision in 2007 due to increased pre-tax income. Our effective tax rate was 79.3% in 2007 as compared to 24.9% in 2006. The disparity between the effective tax rates was due primarily to the discrete period
reporting of the tax effects of restricted stock vesting as required under SFAS 123R as restricted stock awards vested at share prices lower than original grant date prices. Without these and other discrete items, our effective income tax rate would
have been 48.7% and 32.6%, respectively, for the years ended December 31, 2007 and 2006.

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. In addition, regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. The primary sources of funds for liquidity consist of proceeds from sales of securities, internally
generated funds, dividends on equity securities, equity capital contributions, and credit provided by repurchase agreement counterparties, banks, clearing brokers,



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and affiliates of our principal clearing broker. Potential future sources of liquidity for us include existing cash balances (i.e., available liquid capital
not invested in our operating businesses), internally generated funds, borrowing capacity through margin accounts and under repurchase agreements and corporate lines of credit, and future issuances of common stock, preferred stock or debt
securities.

Cash Flows

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 MBS 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. 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 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 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 MBS, which were partially financed with repurchase agreement borrowings, while the 2007 activity reflects the net sale of MBS 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 partial financing of the MBS discussed above, as compared to sales of MBS 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.

Subsequent to December 31, 2008, we sold the
$454.3 million of MBS held at December 31, 2008 and retired the repurchase agreement borrowings used to finance these securities (see discussion below under Assets).

As of December 31, 2007, our cash and cash equivalents were $383.6 million representing a net increase in the balance of $232.1 million for the year
ended December 31, 2007. The increase was attributable to $356.9 million of cash provided by investing activities and cash provided by operating activities of $73.7 million, offset by cash used in financing activities of $198.5 million.

The Companys operating activities generated net cash inflows for the year ended December 31, 2007 of $73.7 million. Our cash
inflows from operating activities reflected the impact of the increase in capital raising revenues and the resulting increase in accrued variable compensation as of December 31, 2007 due to increased investment banking transactions during the
year ended December 31, 2007 as compared to 2006.

The cash provided by investing activities primarily related to the sale, during the
first quarter 2007, of mortgage-backed securities which totaled $415.4 million as of December 31, 2006. These proceeds were used to



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paydown related repurchase agreement financings with the remainder invested in short-term liquid investments such as money market funds. During the year
ended December 31, 2007, we also invested $75.3 million in equity securities as part of our merchant banking portfolio and other long-term investments.

The cash used in financing activities primarily related to the repayment during the first quarter 2007 of the repurchase agreements financing the mortgage-backed securities held as of December 31, 2006. Also, we
repurchased 1 million shares of our common stock during the third quarter of 2007 for $13.0 million in accordance with a repurchase program approved by our board of directors.

Sources of Funding

We believe that
our existing cash and cash equivalents balances (totaling $207.8 million at December 31, 2008) 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 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, 2008 and
2007, our liabilities totaled $496.6 million and $102.0 million, respectively, which resulted in a leverage ratio (liabilities to equity) of 1.6 to 1 and 0.2 to 1, respectively. The increase in our total assets and liabilities as of
December 31, 2008 reflects the effect of our purchases during 2008 of MBS partially financed by repurchase agreement borrowings. As of December 31, 2008, we had $416.0 million of outstanding borrowings under repurchase agreement
obligations with a weighted average interest rate of 0.65% and a weighted average remaining term to maturity of 26 days.

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, 2008, we had $246.1 million of available liquid capital. We believe this liquid capital, a
portion of which is allocated specifically to our leveraged investments in MBS, provides us with sufficient short-term liquidity and that the amount of our overall leverage is within our targeted range.

Subsequent to December 31, 2008, we sold our remaining leveraged MBS included in the above available liquid capital balance and retired the
repurchase agreement borrowings used to finance these securities (see discussion below under Assets). We do not intend to use our available liquid capital to purchase additional MBS.

Our repurchase agreements include provisions contained in the standard master repurchase agreements as published by the Bond Market Association and may
be amended and supplemented in accordance with industry standards for repurchase facilities. As provided in the standard master repurchase agreements, upon the occurrence of an event of default or a termination event, the counterparty has the option
to terminate the repurchase transaction under such counterpartys repurchase agreement and to demand immediate payment of any amount due from us to the counterparty.

Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such



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agreement declines and such lender demands additional collateral (i.e., a margin call), which may take the form of additional securities or cash. Margin
calls on repurchase agreements related to mortgage-backed securities primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates or prepayments. We did not have any
margin calls on our repurchase agreements that we were not able to satisfy with cash.

Assets

As of December 31, 2008, our principal assets consist of cash and cash equivalents, receivables, MBS, securities held for trading purposes and
long-term investments.

As of December 31, 2008 and 2007, liquid assets consisted primarily of cash and cash equivalents of $207.8
million and $383.6 million, respectively.

The increase in our total assets to $800.4 million as of December 31, 2008 compared to
$608.7 million as of December 31, 2007, is primarily the result of our decision during 2008 to invest a portion of our liquid capital in a leveraged portfolio of MBS with a fair value of $454.3 million at December 31, 2008. We originally
deployed capital into these investments based on our available liquidity and our assessment of our ability and intent to hold these securities to withstand interim market value fluctuations due to market and interest rate risks. We have continually
assessed our leverage and liquidity risk relevant to our 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, we determined that the risks to us associated with continuing to hold these investments exceeded the potential benefits. As such, in December 2008, we initiated sales of MBS that
reduced our exposure, which resulted in realized losses of $21.9 million. In addition, as a result of our change in intent, we recognized other-than-temporary impairment losses of $11.2 million relating to MBS held as of December 31, 2008.
Subsequent to year end, in the first quarter of 2009, we sold our remaining MBS positions and retired the repurchase agreements financing these positions resulting in additional losses of $1.5 million in the first quarter of 2009.

As of December 31, 2008, our long-term investments primarily consist of investments in marketable equity and non-public equity securities, mutual
funds and managed partnerships (including hedge, private equity, and venture capital funds), in which we serve as managing partner. Although our investments in hedge, private equity and venture capital funds are mostly illiquid, the underlying
investments of such entities are, in the aggregate, mostly publicly-traded, liquid equity and debt securities, some of which may be restricted due to contractual lock-up requirements.

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 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.

Regulatory Capital

FBR &
Co., our principal U.S. broker-dealer, is registered with the SEC and is a member of the 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, 2008, FBR & Co. had total regulatory net capital of $48.9 million, which exceeded its required net capital of $6.1 million by $42.8 million. In addition,
FBRIL had regulatory capital as defined in excess of



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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.

Share Repurchases

On October 6, 2008, our Board of Directors approved an increase in the number of shares of our common stock that we are authorized to repurchase to 10,167,431 shares. During the year ended December 31,
2008, we 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 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.

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 various investment partnerships that may be called over the next ten
years. The following table sets forth these contractual obligations by fiscal year (dollars in thousands):



|                                 |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       
|-------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------ |  | - | ------
|                                 |  | 2009 |        | 2010 |   | 2011   |  | 2012 |        | 2013 |   | Thereafter |  | Total
|Long-term debt obligations       |  | $    |       |      | $ |       |  | $    |       |      | $ |           |  | $     |       |  | $ |       |  | $ |      
|Minimum rental commitments(1)    |  |      | 3,088  |      |   | 2,960  |  |      | 2,791  |      |   | 2,421      |  |       | 2,413  |  |   | 8,323  |  |   | 21,996
|Related party commitments(2)     |  |      | 7,682  |      |   | 7,841  |  |      | 7,776  |      |   | 7,601      |  |       | 7,657  |  |   | 7,961  |  |   | 46,518
|Capital commitments and other(3) |  |      |       |      |   |       |  |      |       |      |   |           |  |       |       |  |   |       |  |   |      
|                                 |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       
|Total Contractual Obligations    |  | $    | 10,770 |      | $ | 10,801 |  | $    | 10,567 |      | $ | 10,022     |  | $     | 10,070 |  | $ | 16,284 |  | $ | 68,514
|                                 |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       



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

|(2) | These commitments include annual payments on multiple facilities leased by FBR Group that are maintained by the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | The table above excludes $0.7 million of uncalled capital commitments to various investment partnerships 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 $1.3 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also have short term repurchase agreement liabilities of $416.0 million as of December 31, 2008. As noted above these liabilities were retired in the first quarter of 2009. Also, see Note 7 to the financial statements for further
information.

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, merchant banking and other activities. We review, among other things, business and transactional risks
associated with potential investment banking 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.



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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.

Equity Price Risk. Equity price risk represents the potential loss in value of a position or portfolio due to adverse changes in the level or volatility of equity prices. We believe that our primary market risk
exposure is to equity price changes and the resulting impact on securities held as a result of our daily trading activities and our principal investments. We generally attempt to limit exposure to equity price risk on securities held as a result of
our daily 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 which factors may affect the prices of equity and equity-linked securities and how much the effect might be, the impact of a ten-percent increase and a ten-percent decrease in
the prices of the securities held, as well as sold but not yet purchased, by our company would be as follows (dollars in thousands):



|                                                                         |  |                       |        |   |                           |   |        |                           |  |   |        |  
|------------------------------------------------------------------------ |  | --------------------- | ------ | - | ------------------------- | - | ------ | ------------------------- |  | - | ------ | -
|                                                                         |  | As ofDecember 31,2008 |        |   | With 10%Increasein Prices |   |        | With 10%Decreasein Prices | 
|Convertible and fixed income debt securities                             |  | $                     | 14,035 |   |                           | $ | 14,751 |                           |  | $ | 13,319 |  
|Marketable and non-public equity securities                              |  |                       | 3,919  |   |                           |   | 4,311  |                           |  |   | 3,527  |  
|                                                                         |  |                       |        |   |                           |   |        |                           |  |   |        |  
|Total trading account securities                                         |  |                       | 17,954 |   |                           |   | 19,062 |                           |  |   | 16,846 |  
|                                                                         |  |                       |        |   |                           |   |        |                           |  |   |        |  
|Securities sold but not yet purchased                                    |  |                       | (8,325 | ) |                           |   | (9,158 | )                         |  |   | (7,493 | )
|                                                                         |  |                       |        |   |                           |   |        |                           |  |   |        |  
|Trading account securities, net of securities sold but not yet purchased |  | $                     | 9,629  |   |                           | $ | 9,904  |                           |  | $ | 9,354  |  
|                                                                         |  |                       |        |   |                           |   |        |                           |  |   |        |  

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,
investment securities-marked to market, as well as trading securities will directly affect our earnings.

Interest Rate Risk.
Interest rate risk represents the potential loss in value of a position or portfolio from adverse changes in market interest rates and credit spreads. We currently have limited exposure to interest rate risk, but in the event we engage in future
principal investing, underwriting, trading or market making activity in fixed income securities, we will be exposed to the risk that potential changes in an issuers credit rating or credit perception could affect the value of its financial
instruments. 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. Credit risk
resulting from default on counterparty obligations is discussed in the Credit Risk section.

We have invested a portion of our
excess liquidity in floating-rate agency mortgage-backed securities and have financed those investments in part with repurchase agreements. As of December 31, 2008, we held floating-rate agency mortgage-backed securities (collateralized mortgage
obligations, for which the principal and interest payments on the underlying securities are guaranteed by a U.S. government-sponsored entity) with a fair value of $454.3 million that was financed by cash and $416.0 million of repurchase agreement
borrowings. These floating-rate agency-backed collateralized mortgage obligations have coupon rates that are indexed to LIBOR and reset on a monthly basis. Similarly, the rates on our repurchase agreement borrowings are indexed to LIBOR and reset
monthly. As noted above (see Liquidity and Capital ResourcesAssets), in the first quarter of 2009, we sold the $454.3 million of MBS held as of December 31, 2008, retired the repurchase agreements financing



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these positions and do not intend to purchase additional MBS. In addition to our available liquid capital, the value of our direct investments in other
companies may be affected by significant changes in interest rates. For example, certain of the companies in our merchant banking portfolio and in the portfolios of hedge, venture and mutual funds in which we invest are exposed to interest rate
risk. Additionally, changes in interest rates often affect market prices of equity securities. It is not feasible for us to quantify the potential impact that interest rate changes would have on the equity price or the future dividend payments by
any of these companies.

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, 2008 and 2007, we
have recorded no liabilities with regard to this right. During the year ended December 31, 2008 and 2007, 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.

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 $3.8 million of liabilities as of December 31, 2008, 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.

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 it operates. 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, 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.

Long-Term Investments

We
account for our long-term investments in marketable equity securities and MBS that are held in non-broker dealer entities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 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



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available-for-sale or trading. All of our long-term marketable equity securities and MBS 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 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 (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, 2008, we held $455.1 million of long-term investments accounted for under SFAS 115 and $27.9 million of non-public equity
securities held in non-broker dealer entities. Subsequent to December 31, 2008, we sold the $454.3 million of leveraged MBS held at December 31, 2008 (see discussion in Liquidity and Capital ResourcesAssets) and do
not intend to purchase additional MBS.

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, it is more likely than not that they will not be realized. Our 2008 tax benefit reflects a full valuation allowance on tax
benefits attributable to losses that are not realizable through loss carry-backs. At December 31, 2008, our net deferred tax assets totaled approximately $76.7 million offset by a full valuation allowance.

Intangible Assets

We account
for our intangible assets consisting primarily of acquired mutual fund management contracts (see Note 6 to our consolidated financial statements) in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS 142,
the values of the acquired management contracts are amortized in proportion to their expected economic benefit of 15 years and 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 net value of these intangible assets was $8.9 million as of December 31, 2008. As of December 31, 2008, there were no
significant indicators of impairment relating to the mutual fund management contracts underlying this value.

Valuation of Private
and Restricted Public Company Investments

The private investment funds that we manage 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



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(in the case of privately held companies) or due to contractual or regulatory restrictions on disposition (in the case of publicly held companies). 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
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. Our total
investment in these private investment funds totaled $4.2 million as of December 31, 2008. Prospectively, this investment value will be adjusted to reflect our proportionate share of the funds income or loss, including realized and
unrealized gains and losses on the funds underlying investments.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) expands the definition of
transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in operating
results, rather than goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for business combinations in fiscal years beginning after
December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. Adoption of SFAS 141(R) will not impact our financial condition or operating results, but may have an
effect on accounting for future business combinations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest
in Consolidated Financial Statements (SFAS 160). SFAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive
application of SFAS 160 to fiscal years preceding the effective date are not permitted. Adoption of SFAS 160 will not impact our financial condition or operating results.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires specific disclosures regarding the location and
amounts of derivative instruments in our financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect our financial position, financial performance, and
cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Early application is permitted. Because SFAS 161 impacts our disclosure and not
its accounting treatment for derivative instruments and related hedged items, our adoption of SFAS 161 will not impact our financial condition or operating results.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the Hierarchy). The
Hierarchy within SFAS 162 is consistent with that previously defined in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles (SAS 69). SFAS 162 is effective 60 days following the United States Securities and Exchange Commissions (the SEC) approval of the Public Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

In February 2008,
the FASB issued Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP FAS140-3). FSP FAS 140-3 provides guidance on whether a transfer of a financial asset and a
repurchase agreement financing entered into with the same



57



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counterparty should be accounted for as separate transactions. FSP FAS 140-3 requires that such transactions be considered part of the same arrangement
(i.e., a linked transaction) under FASB Statement 140, unless certain criteria are met. FSP FAS 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal
years. Adoption of FSP FAS 140-3 will not impact our financial condition or operating results.

In April 2008, the FASB issued Staff
Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of
determining the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is intended to improve the consistency between the useful life of
a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other generally accepted accounting principles in the United States. FSP FAS 142-3 is effective for
fiscal years beginning after December 15, 2008. Earlier application is not permitted. Adoption of FSP FAS 142-3 will not impact on financial condition or operating results, but may have an effect on accounting for future transactions.

In June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities. The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings
per share under the two-class method described in SFAS No. 128, Earnings per Share. The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a
separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Earlier application is not permitted. We do not anticipate that the adoption of FSP EITF No. 03-6-1 will have a material impact on our
consolidated financial statements.

In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including for prior periods for which financial statements have not
been issued. Our adoption of FSP FAS 157-3 did not impact our financial condition or operating results.



|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.



|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 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.



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|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) under the Exchange Act) pursuant to
Rule 13a-15(b) of the Securities Exchange Act of 1934 (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, 2008, 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.

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) under the Securities Exchange Act of 1934, as amended).
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, 2008, 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, 2008.

The effectiveness
of the Companys internal control over financial reporting as of December 31, 2008 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, 2008.

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, 2008 that has materially affected, or is reasonably likely to materially affect, our companys internal control over financial reporting.



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|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 2008 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 2008 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 2008 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 2008 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 2008 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            |  | 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)              
|               | 
|4.5            |  | 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)
|               | 
|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)                                                              



62



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|               |  |                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                          
|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)                                                         
|               | 
|21.1           |  | Subsidiaries of the Registrant.*                                                                                                                     
|               | 
|23.1           |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                              
|               | 
|24.1           |  | Power of Attorney (included on this signature page to this report on Form 10-K and incorporated by reference herein).*                               
|               | 
|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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



64



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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, 2009 |  | By: |  | /S/    RICHARD J. HENDRIX      
|                     |  |     |  | Richard J. Hendrix             
|                     |  |     |  | Chief Executive Officer        

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints RICHARD J. HENDRIX and BRADLEY J. WRIGHT
and each of them as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form
10-K, and to file the same, with all exhibits thereto, and any other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.

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, 2009
|                                                 |  |                                                                                              
|/S/    BRADLEY J.
WRIGHT BRADLEY J. WRIGHT       |  | Executive Vice President and Chief Financial Officer (principal financial officer)            |  | March 16, 2009
|                                                 |  |                                                                                              
|/S/    ROBERT J.
KIERNAN ROBERT J. KIERNAN       |  | Senior Vice President, Controller and Chief Accounting Officer (principal accounting officer) |  | March 16, 2009
|                                                 |  |                                                                                              
|/S/    ERIC F.
BILLINGS ERIC F. BILLINGS         |  | Chairman and Director                                                                         |  | March 16 2009 
|                                                 |  |                                                                                              
|/S/    ANDREW M.
ALPER ANDREW M. ALPER           |  | Director                                                                                      |  | March 16, 2009
|                                                 |  |                                                                                              
|/S/    RICHARD M.
DEMARTINI RICHARD M. DEMARTINI |  | Director                                                                                      |  | March 16, 2009
|                                                 |  |                                                                                              
|/S/    THOMAS J. HYNES,
JR. THOMAS J. HYNES, JR. |  | Director                                                                                      |  | March 16, 2009



65



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|                                                   |  |          |  |               
|-------------------------------------------------- |  | -------- |  | --------------
|SIGNATURE                                          |  | TITLE    |  | DATE          
|/S/    RICHARD A.
KRAEMER RICHARD A. KRAEMER       |  | Director |  | March 16, 2009
|                                                   |  |         
|/S/    THOMAS S. MURPHY,
JR. THOMAS S. MURPHY, JR. |  | Director |  | March 16, 2009
|                                                   |  |         
|/S/    ARTHUR J.
REIMERS ARTHUR J. REIMERS         |  | Director |  | March 16, 2009
|                                                   |  |         
|/S/    JOHN T.
WALL JOHN T. WALL                   |  | Director |  | March 16, 2009



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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, 2008 and 2007                                                     |  | F-3 
|                                                                                                                 | 
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006                       |  | F-4 
|                                                                                                                 | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 
31, 2008, 2007 and 2006 |  | F-5 
|                                                                                                                 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006                       |  | F-6 
|                                                                                                                 | 
|Notes to Consolidated Financial Statements                                                                       |  | F-7 



F-1



---

##### 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, 2008 and 2007, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2008 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, 2008, 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 audit (which were integrated audits in 2008 and 2007). 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, 2009



F-2



---

##### Table of Contents

FBR CAPITAL MARKETS CORPORATION

Consolidated Balance Sheets

(Dollars in thousands)



|                                                                                                                                     |  |              |          |   |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------
|                                                                                                                                     |  | December 31,
|                                                                                                                                     |  | 2008         |          |   | 2007
|Assets                                                                                                                               |  |              |          |   |      |   |        
|Cash and cash equivalents                                                                                                            |  | $            | 207,801  |   |      | $ | 383,558
|Receivables:                                                                                                                         |  |              |          |   |      |   |        
|Investment banking                                                                                                                   |  |              | 2,196    |   |      |   | 3,717  
|Asset management fees                                                                                                                |  |              | 1,091    |   |      |   | 1,991  
|Due from affiliates                                                                                                                  |  |              | 3,208    |   |      |   | 7,306  
|Other                                                                                                                                |  |              | 25,615   |   |      |   | 17,909 
|Investments:                                                                                                                         |  |              |          |   |      |   |        
|Mortgage-backed securities, at fair value                                                                                            |  |              | 454,339  |   |      |   |       
|Long-term investments, at fair value                                                                                                 |  |              | 750      |   |      |   | 20,370 
|Trading account securities, at fair value                                                                                            |  |              | 17,954   |   |      |   | 19,057 
|Other long-term investments                                                                                                          |  |              | 40,424   |   |      |   | 63,706 
|Derivative assets, at fair value                                                                                                     |  |              | 264      |   |      |   |       
|Intangible assets, net                                                                                                               |  |              | 8,943    |   |      |   | 9,837  
|Furniture, equipment, software, and leasehold improvements, net of accumulated depreciation and amortization                         |  |              | 24,442   |   |      |   | 29,092 
|Prepaid expenses and other assets                                                                                                    |  |              | 13,342   |   |      |   | 52,189 
|                                                                                                                                     |  |              |          |   |      |   |        
|Total assets                                                                                                                         |  | $            | 800,369  |   |      | $ | 608,732
|                                                                                                                                     |  |              |          |   |      |   |        
|Liabilities and Shareholders Equity                                                                                                 |  |              |          |   |      |   |        
|Liabilities                                                                                                                          |  |              |          |   |      |   |        
|Securities sold but not yet purchased, at fair value                                                                                 |  | $            | 8,325    |   |      | $ | 206    
|Repurchase agreements                                                                                                                |  |              | 416,037  |   |      |   |       
|Accrued compensation and benefits                                                                                                    |  |              | 43,919   |   |      |   | 45,432 
|Accounts payable, accrued expenses and other liabilities                                                                             |  |              | 25,352   |   |      |   | 48,778 
|Due to affiliates                                                                                                                    |  |              |         |   |      |   | 64     
|Due to clearing broker                                                                                                               |  |              | 3,009    |   |      |   | 7,512  
|                                                                                                                                     |  |              |          |   |      |   |        
|Total liabilities                                                                                                                    |  |              | 496,642  |   |      |   | 101,992
|                                                                                                                                     |  |              |          |   |      |   |        
|Commitments and Contingencies (Note 11)                                                                                              |  |              |          |   |      |   |        
|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, 59,791,914 and 66,002,838 shares issued and outstanding,
respectively |  |              | 60       |   |      |   | 66     
|Additional paid-in capital                                                                                                           |  |              | 396,059  |   |      |   | 412,805
|Restricted stock units                                                                                                               |  |              | 9,309    |   |      |   |       
|Accumulated other comprehensive (loss) income, net of taxes                                                                          |  |              | (218     | ) |      |   | 622    
|(Accumulated deficit) retained earnings                                                                                              |  |              | (101,483 | ) |      |   | 93,247 
|                                                                                                                                     |  |              |          |   |      |   |        
|Total shareholders equity                                                                                                           |  |              | 303,727  |   |      |   | 506,740
|                                                                                                                                     |  |              |          |   |      |   |        
|Total liabilities and shareholders equity                                                                                           |  | $            | 800,369  |   |      | $ | 608,732
|                                                                                                                                     |  |              |          |   |      |   |        

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



F-3



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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, |           
|                                            |  | 2008                    |            |   | 2007 |   |            | 2006 | 
|Revenues:                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Investment banking:                         |  |                         |            |   |      |   |            |      |  |   |            |  
|Capital raising                             |  | $                       | 76,377     |   |      | $ | 289,545    |      |  | $ | 190,576    |  
|Advisory                                    |  |                         | 20,573     |   |      |   | 34,063     |      |  |   | 24,148     |  
|Institutional brokerage:                    |  |                         |            |   |      |   |            |      |  |   |            |  
|Principal transactions                      |  |                         | 20,261     |   |      |   | 10,152     |      |  |   | 5,814      |  
|Agency Commissions                          |  |                         | 118,314    |   |      |   | 104,633    |      |  |   | 100,855    |  
|Mortgage trading interest income            |  |                         |           |   |      |   |           |      |  |   | 51,148     |  
|Mortgage trading net investment loss        |  |                         |           |   |      |   |           |      |  |   | (3,298     | )
|Asset management:                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Base management fees                        |  |                         | 15,335     |   |      |   | 23,549     |      |  |   | 19,871     |  
|Incentive allocations and fees              |  |                         |           |   |      |   | 401        |      |  |   | 1,327      |  
|Net investment (loss) income                |  |                         | (81,335    | ) |      |   | (4,497     | )    |  |   | 3,372      |  
|Interest income                             |  |                         | 23,382     |   |      |   | 25,760     |      |  |   | 20,934     |  
|Other                                       |  |                         | 1,458      |   |      |   | 1,290      |      |  |   | 3,892      |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Total revenues                              |  |                         | 194,365    |   |      |   | 484,896    |      |  |   | 418,639    |  
|Interest expense                            |  |                         | 12,457     |   |      |   | 5,337      |      |  |   | 54,543     |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Revenues, net of interest expense           |  |                         | 181,908    |   |      |   | 479,559    |      |  |   | 364,096    |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Non-Interest Expenses:                      |  |                         |            |   |      |   |            |      |  |   |            |  
|Compensation and benefits                   |  |                         | 227,114    |   |      |   | 287,752    |      |  |   | 225,712    |  
|Professional services                       |  |                         | 34,895     |   |      |   | 45,303     |      |  |   | 43,712     |  
|Business development                        |  |                         | 30,057     |   |      |   | 37,356     |      |  |   | 33,772     |  
|Clearing and brokerage fees                 |  |                         | 14,010     |   |      |   | 12,373     |      |  |   | 11,715     |  
|Occupancy and equipment                     |  |                         | 33,244     |   |      |   | 33,197     |      |  |   | 30,039     |  
|Communications                              |  |                         | 24,183     |   |      |   | 22,434     |      |  |   | 20,039     |  
|Other operating expenses                    |  |                         | 16,625     |   |      |   | 15,868     |      |  |   | 12,219     |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Total non-interest expenses                 |  |                         | 380,128    |   |      |   | 454,283    |      |  |   | 377,208    |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|(Loss) income before income taxes           |  |                         | (198,220   | ) |      |   | 25,276     |      |  |   | (13,112    | )
|Income tax (benefit) provision              |  |                         | (3,490     | ) |      |   | 20,032     |      |  |   | (3,271     | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net (loss) income                           |  | $                       | (194,730   | ) |      | $ | 5,244      |      |  | $ | (9,841     | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic and diluted (loss) earnings per share |  | $                       | (3.09      | ) |      | $ | 0.08       |      |  | $ | (0.18      | )
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic weighted average shares outstanding   |  |                         | 63,055,707 |   |      |   | 64,122,797 |      |  |   | 54,136,986 |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Diluted weighted average shares outstanding |  |                         | 63,055,707 |   |      |   | 64,187,264 |      |  |   | 54,136,986 |  
|                                            |  |                         |            |   |      |   |            |      |  |   |            |  

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 in thousands)



|                                                                                           |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------ |  | ----------------- | - |  | ----------------- | -- | - | ------------------------ | - | ------- | -------------------- |  | ------------------------------------------ | ----- |  | ------------------------------------ | ---- | - | ----- | - | -------- | -------------------------- |  | - | -------- | - |  | - | -------- | -
|                                                                                           |  | CommonStockShares |   |  | CommonStockAmount |    |   | AdditionalPaid-inCapital |   |         | RestrictedStockUnits |  | AccumulatedOtherComprehensiveIncome (Loss) |       |  | RetainedEarnings(AccumulatedDeficit) |      |   | Total |   |          | ComprehensiveIncome (Loss) | 
|Balances at December 31, 2005                                                              |  | 46,000,000        |   |  | $                 | 46 |   |                          | $ | 130,458 |                      |  | $                                          |      |  | $                                    | 620  |   |       | $ | 117,844  |                            |  | $ | 248,968  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  
|Net loss                                                                                   |  |                  |   |  |                   |   |   |                          |   |        |                      |  |                                            |      |  |                                      |     |   |       |   | (9,841   | )                          |  |   | (9,841   | ) |  | $ | (9,841   | )
|Contribution from FBR TRS Holdings, Inc.                                                   |  |                  |   |  |                   |   |   |                          |   | 3,899   |                      |  |                                            |      |  |                                      |     |   |       |   |         |                            |  |   | 3,899    |   |  |   |          |  
|Distributions to FBR TRS Holdings, Inc.                                                    |  |                  |   |  |                   |   |   |                          |   |        |                      |  |                                            |      |  |                                      |     |   |       |   | (20,000  | )                          |  |   | (20,000  | ) |  |   |          |  
|Issuance of common stock in private equity offerings                                       |  | 18,000,000        |   |  |                   | 18 |   |                          |   | 259,720 |                      |  |                                            |      |  |                                      |     |   |       |   |         |                            |  |   | 259,738  |   |  |   |          |  
|Stock compensation expense for options granted to purchase common stock                    |  |                  |   |  |                   |   |   |                          |   | 1,701   |                      |  |                                            |      |  |                                      |     |   |       |   |         |                            |  |   | 1,701    |   |  |   |          |  
|Other comprehensive loss:                                                                  |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  
|Change in unrealized gain (loss) on available-for-sale investment securities, net of taxes |  |                  |   |  |                   |   |   |                          |   |        |                      |  |                                            |      |  |                                      | (77  | ) |       |   |         |                            |  |   | (77      | ) |  |   | (77      | )
|                                                                                           |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                         |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  | $ | (9,918   | )
|                                                                                           |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  
|Balances at December 31, 2006                                                              |  | 64,000,000        |   |  | $                 | 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                                                                   |  | 3,002,838         |   |  |                   | 3  |   |                          |   | 19,286  |                      |  |                                            |      |  |                                      |     |   |       |   |         |                            |  |   | 19,289   |   |  |   |          |  
|Repurchase of common stock                                                                 |  | (1,000,000        | ) |  |                   | (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                                                              |  | 66,002,838        |   |  | $                 | 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                                                                   |  | 537,622           |   |  |                   | 1  |   |                          |   | 11,453  |                      |  |                                            |      |  |                                      |     |   |       |   |         |                            |  |   | 11,454   |   |  |   |          |  
|Repurchase of common stock                                                                 |  | (6,748,546        | ) |  |                   | (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                                                              |  | 59,791,914        |   |  | $                 | 60 |   |                          | $ | 396,059 |                      |  | $                                          | 9,309 |  | $                                    | (218 | ) |       | $ | (101,483 | )                          |  | $ | 303,727  |   |  |   |          |  
|                                                                                           |  |                   |   |  |                   |    |   |                          |   |         |                      |  |                                            |       |  |                                      |      |   |       |   |          |                            |  |   |          |   |  |   |          |  

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



F-5



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##### Table of Contents

FBR CAPITAL MARKETS CORPORATION

Consolidated Statements of Cash Flows

(Dollars in thousands)



|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                  |  | Year Ended December 31, |         
|                                                                                                  |  | 2008                    |          |   | 2007 |   |          | 2006 | 
|Cash flows from operating activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Net (loss) income                                                                                 |  | $                       | (194,730 | ) |      | $ | 5,244    |      |  | $ | (9,841   | )
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                     |  |                         | 10,814   |   |      |   | 10,531   |      |  |   | 8,872    |  
|Income tax provision (benefit)deferred                                                           |  |                         | 17,698   |   |      |   | (6,997   | )    |  |   | (2,223   | )
|Net investment loss (income) from long-term securities.                                           |  |                         | 81,335   |   |      |   | 3,703    |      |  |   | (2,112   | )
|Stock-based compensation                                                                          |  |                         | 18,953   |   |      |   | 12,442   |      |  |   | 1,701    |  
|Other                                                                                             |  |                         | 451      |   |      |   | 169      |      |  |   | 316      |  
|Changes in operating assets                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Receivables                                                                                       |  |                         |          |   |      |   |          |      |  |   |          |  
|Clearing broker                                                                                   |  |                         |         |   |      |   | 28,692   |      |  |   | 42,235   |  
|Affiliates                                                                                        |  |                         | 3,493    |   |      |   | (6,974   | )    |  |   | 2,039    |  
|Investment banking                                                                                |  |                         | (6,237   | ) |      |   | 8,274    |      |  |   | (619     | )
|Asset management fees                                                                             |  |                         | 885      |   |      |   | 206      |      |  |   | (152     | )
|Interest, dividends and other                                                                     |  |                         | (7,607   | ) |      |   | 9,508    |      |  |   | (20,574  | )
|Trading account securities, at fair value                                                         |  |                         | (10,067  | ) |      |   | (5,053   | )    |  |   | 984,427  |  
|Reverse repurchase agreements related to broker-dealer activities                                 |  |                         |         |   |      |   |         |      |  |   | 147,919  |  
|Prepaid expenses and other assets                                                                 |  |                         | 2,502    |   |      |   | (4,129   | )    |  |   | (7,975   | )
|Changes in operating liabilities                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Securities sold but not yet purchased, at fair value                                              |  |                         | 8,118    |   |      |   | 4        |      |  |   | (150,345 | )
|Repurchase agreements related to broker-dealer activities                                         |  |                         |         |   |      |   |         |      |  |   | (929,363 | )
|Accounts payable, accrued expenses and other liabilities                                          |  |                         | (5,288   | ) |      |   | (718     | )    |  |   | (5,328   | )
|Accrued compensation and benefits                                                                 |  |                         | 4,785    |   |      |   | 11,330   |      |  |   | (29,782  | )
|Due to clearing broker                                                                            |  |                         | (3,988   | ) |      |   | 7,512    |      |  |   |         |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by operating activities                                               |  |                         | (78,883  | ) |      |   | 73,744   |      |  |   | 29,195   |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Purchases of mortgage-backed securities                                                           |  |                         | (899,953 | ) |      |   | (565,076 | )    |  |   | (420,501 | )
|Receipt of principal payments on mortgage-backed securities                                       |  |                         | 54,380   |   |      |   | 17,961   |      |  |   | 5,629    |  
|Proceeds from sales of mortgage-backed securities                                                 |  |                         | 360,930  |   |      |   | 963,754  |      |  |   |         |  
|Repayments by FBR Group                                                                           |  |                         |         |   |      |   |         |      |  |   | 8,417    |  
|Purchases of long-term investments                                                                |  |                         | (6,748   | ) |      |   | (75,296  | )    |  |   | (6,107   | )
|Proceeds from sales of investment securities                                                      |  |                         | 16,894   |   |      |   | 22,826   |      |  |   | 35,189   |  
|Purchases of furniture, equipment, software, and leasehold improvements                           |  |                         | (4,780   | ) |      |   | (6,256   | )    |  |   | (3,758   | )
|Proceeds from disposals of furniture, equipment, software, and leasehold improvements             |  |                         |         |   |      |   |         |      |  |   | 683      |  
|Proceeds from reverse repurchase agreements, net                                                  |  |                         |         |   |      |   |         |      |  |   | 135,906  |  
|Acquisition of net assets                                                                         |  |                         | (461     | ) |      |   | (1,000   | )    |  |   |         |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by investing activities                                               |  |                         | (479,738 | ) |      |   | 356,913  |      |  |   | (244,542 | )
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities                                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Contributions from Parent company                                                                 |  |                         |         |   |      |   | 3,425    |      |  |   | 4,017    |  
|Distributions to Parent company                                                                   |  |                         |         |   |      |   |         |      |  |   | (13,993  | )
|Decrease in due to affiliates, net                                                                |  |                         | (64      | ) |      |   | (4,097   | )    |  |   | (23,572  | )
|Proceeds from (repayment of) repurchase agreements, net                                           |  |                         | 416,037  |   |      |   | (189,153 | )    |  |   | 189,156  |  
|Repayment of commercial paper, net                                                                |  |                         |         |   |      |   |         |      |  |   | (136,016 | )
|Repurchases of common stock                                                                       |  |                         | (33,900  | ) |      |   | (13,017  | )    |  |   |         |  
|Repayments of short term borrowings                                                               |  |                         |         |   |      |   |         |      |  |   | (75,000  | )
|Proceeds from issuance of common stock                                                            |  |                         | 791      |   |      |   | 4,326    |      |  |   | 259,738  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                               |  |                         | 382,864  |   |      |   | (198,516 | )    |  |   | 204,330  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                              |  |                         | (175,757 | ) |      |   | 232,141  |      |  |   | (11,017  | )
|Cash and cash equivalents, beginning of period                                                    |  |                         | 383,558  |   |      |   | 151,417  |      |  |   | 162,434  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of period                                                          |  | $                       | 207,801  |   |      | $ | 383,558  |      |  | $ | 151,417  |  
|                                                                                                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Supplemental cash flows disclosures                                                               |  |                         |          |   |      |   |          |      |  |   |          |  
|Income tax payments                                                                               |  | $                       | 563      |   |      | $ | 38,647   |      |  | $ | 7,828    |  
|Interest payments                                                                                 |  |                         | 12,384   |   |      |   | 4,734    |      |  |   | 53,036   |  
|Non-cash operating activities                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Securities received in exchange for services provided, fair value at receipt date                 |  | $                       | 5,000    |   |      | $ |         |      |  | $ |         |  
|Securities distributed to FBR Group, Inc. and FBR TRS Holdings, Inc.                              |  |                         |         |   |      |   |         |      |  |   | 6,007    |  
|Net assets contributed by FBR Group, Inc. and FBR TRS Holdings, Inc.                              |  |                         |         |   |      |   |         |      |  |   | 231,407  |  

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 Friedman, Billings, Ramsey & Co., Inc. (FBR & Co), Friedman, Billings, Ramsey
International, Ltd. (FBRIL), FBR Investment Management, Inc. (FBRIM), FBR Fund Advisers, Inc. (FBRFA), and FBR Investment Services, Inc. (FBRIS). The Company is a majority-owned subsidiary of FBR TRS
Holdings, Inc. (FBR TRS Holdings), which is a wholly-owned subsidiary of Friedman, Billings, Ramsey Group, Inc. (FBR Group). The Company is a consolidated subsidiary of FBR Group.

The Company was formed in June 2006 to be the holding company for FBR & Co., FBRIL, FBRIM, and FBRFA. On June 9, 2006, FBR TRS Holdings
purchased 1,000 shares of the Companys common stock for $0.10 per share.

In July 2006, the Company entered into a contribution
agreement with FBR TRS Holdings pursuant to which FBR TRS Holdings contributed to the Company 100% of the outstanding capital stock of FBR Capital Markets Holdings, Inc. (the sole stockholder of FBR & Co. and FBRIL) and FBR Asset Management
Holdings, Inc. (the sole stockholder of FBRIM and FBRFA) in exchange for the issuance of 45,999,000 shares of the Companys common stock. This transaction resulted in the contribution of $231,047 of net assets to the Company.

Prior to the contribution transactions described above, FBR & Co., FBRIM and FBRFA distributed $20,000 in the aggregate, consisting of a $13,993
in cash dividend and a distribution of investment securities valued at $6,007, to FBR TRS Holdings.

FBR & Co. is an
SEC-registered broker-dealer and member of Financial Institutions Regulatory Authority (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. During the periods presented, FBR & Co.s capital raising and advisory activities were concentrated primarily on financial services, real estate,
energy, and technology companies.

FBRIM, established in March 2003 from contributions from FBR Group to the Company, is an SEC- registered
investment adviser that manages and acts as general partner, managing member or manager of various proprietary hedge and private equity funds. FBRIM also manages separate investment accounts. FBRFA is an SEC- registered investment adviser that
manages The FBR Family of Funds.

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 the financial services, real estate, technology, energy, consumer and diversified industries 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.



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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.

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, 2008, 2007 and 2006 investment banking revenue accounted for 53.3%, 67.5% and 59.0%, 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 prior years.

Note 2. Summary of Significant Accounting Policies:

Principles of Consolidated Financial Statements

The consolidated financial statements include the accounts of the
Company and FBR & Co., FBRIL, FBRIM, FBRFA, and FBRIS, as well as Arlington Funding, LLC (Arlington Funding), a variable interest entity, of which the Company is determined to be the primary beneficiary in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities an Interpretation of ARB No. 51 (FIN 46R). All significant intercompany accounts and transactions
have been eliminated.

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, 2008 and 2007, approximately 86% and 87%, 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

Mortgage-backed security transactions are recorded as purchases and sales on the date the securities are settled unless the transaction qualifies as a regular-way trade, in which case the transactions are accounted
for as purchases or sales on a trade date basis. Any amounts payable or receivable for unsettled trades are recorded as securities sold or securities purchased in the Companys balance sheets.

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 Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity



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Securities (SFAS 115). 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 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.

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 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.

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.



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In connection with certain capital raising transactions, the Company has received and holds 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 SFAS No. 133, Accounting for Derivative Instruments and for Hedging Activities, as amended (SFAS 133), 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.

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.

Fair Value of Financial Instruments

The Company adopted Statement SFAS No. 157, Fair Value Measurements (SFAS 157) as of January 1, 2008. SFAS 157 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. SFAS 157 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 is 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:

Mortgage-backed securities, at fair valueThe Companys agency mortgage-backed securities, which are guaranteed by Fannie
Mae, 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 sources with reasonable levels of price transparency. The independent brokers and
dealers providing market prices are those who make markets in these financial instruments.

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. 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 securities and trading account securities sold but not yet purchased, at fair valueThe Companys trading
securities and trading account securities sold but not yet purchased, at fair value, are



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securities owned or sold by the Companys broker-dealer subsidiaries and consist of marketable and non-public equity and convertible debt securities.
The Company classifies marketable equity securities within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Convertible debt securities 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.

Derivative instrumentsIn the normal course of the Companys operations, the Company is a party to various financial
instruments that are accounted for as derivatives in accordance with SFAS 133. These derivatives are generally classified within Level 2 of the fair value hierarchy because they are valued using broker or dealer quotations, which are model-based
calculations based on market-based inputs, including, but not limited to, contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs.

OtherCash and cash equivalents, interest receivable, repurchase agreements, accounts payable, accrued expenses and other
liabilities are reflected in the consolidated balance sheets at their amortized cost, which approximates fair value because of the short term nature of these instruments.

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



|                                                     |  |                   |         |                     |   |                |  |                     |         |  |   |        
|---------------------------------------------------- |  | ----------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                                     |  | December 31, 2008 |         | December 31, 2007  
|                                                     |  | CarryingAmount    |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets                                     |  |                   |         |                     |   |                |  |                     |         |  |   |        
|Cash and cash equivalents                            |  | $                 | 207,801 |                     | $ | 207,801        |  | $                   | 383,558 |  | $ | 383,558
|Non-interest bearing receivables                     |  |                   | 32,110  |                     |   | 32,110         |  |                     | 30,923  |  |   | 30,923 
|Mortgage-backed securities, at fair value            |  |                   | 454,339 |                     |   | 454,339        |  |                     |        |  |   |       
|Long-term investments, at fair value                 |  |                   | 750     |                     |   | 750            |  |                     | 20,370  |  |   | 20,370 
|Other long-term investments                          |  |                   | 40,424  |                     |   | 40,424         |  |                     | 63,706  |  |   | 63,706 
|Trading account securities, at fair value            |  |                   | 17,954  |                     |   | 17,954         |  |                     | 19,057  |  |   | 19,057 
|Financial liabilities                                |  |                   |         |                     |   |                |  |                     |         |  |   |        
|Securities sold but not yet purchased, at fair value |  |                   | 8,325   |                     |   | 8,325          |  |                     | 206     |  |   | 206    
|Repurchase agreements                                |  |                   | 416,037 |                     |   | 416,037        |  |                     |        |  |   |       

Clearing Broker Receivables and Payables

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.

Intangible Assets

The Company accounts for its intangible assets consisting of acquired mutual fund management contracts in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under SFAS 142, the values of the acquired management contracts are amortized in proportion to their expected economic benefit of 15 years and 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.



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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 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
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 equity and equity-linked security transactions. Revenues generated from securities transactions and related commission income and expenses are recorded on a trade date
basis.

Asset Management Revenues

The Company records two types of asset management revenue:

(1) Certain of the
Companys subsidiaries act as investment advisers and receive management fees for the management of proprietary investment funds, mutual funds based upon the amount of capital committed or assets under management. This revenue is recognized
over the period in which services are performed and is recorded in base management fees in the Companys statements of operations.

(2) The Company also receives incentive income based upon the operating results of the funds. Incentive income represents a share of the gains in the investment, and is recorded in incentive allocations and fees in
the statements of operations. The Company recognizes incentive income from the funds based on what would be due to the Company if the fund terminated on the balance sheet date. Incentive allocations may be based on unrealized gains and losses, and
could vary significantly based on the ultimate realization of the gains or losses. The Company may therefore reverse previously recorded incentive allocation in future periods.

Investment Funds

The
Companys subsidiary 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.



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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

A significant
component of compensation expense relates to incentive bonuses. Incentive bonuses are accrued based on the contribution of key business units and are reviewed and evaluated on a quarterly basis.

Stock-Based Compensation

The
Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). The Company adopted SFAS 123R on January 1, 2006 using the modified-prospective
transition method. SFAS 123R requires companies to recognize expense in the income statement for the grant-date fair value of awards of equity instruments to employees. Pursuant to SFAS 123R, expense is recognized over the period during which
employees are required to provide service. The expense is recorded using an estimated forfeiture of 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, it is more likely than not that they will not be realized.

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.



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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. The following table presents the computations of basic and diluted earnings per share for the periods indicated:



|                                                                                |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  
|------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | --------------------------- | - | --------------------------- | ----- |  | ------- | ------ | ----- | - | ------ | ------- | - | ------ | - |  | - | ------ | -
|                                                                                |  | Year EndedDecember 31, 2008 |          |   | Year EndedDecember 31, 2007 |   | Year EndedDecember 31, 2006 |      
|                                                                                |  | Basic                       |          |   | Diluted                     |   |                             | Basic |  | Diluted |        | Basic |   |        | Diluted |  
|Weighted average shares outstanding:                                            |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  
|Common stock (in thousands)                                                     |  |                             | 63,056   |   |                             |   | 63,056                      |       |  |         | 64,123 |       |   | 64,123 |         |   | 54,137 |   |  |   | 54,137 |  
|Stock options, unvested restricted stock and RSUs (in thousands)                |  |                             |         |   |                             |   |                            |       |  |         |       |       |   | 64     |         |   |       |   |  |   |       |  
|                                                                                |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  
|Weighted average common and common equivalent shares outstanding (in thousands) |  |                             | 63,056   |   |                             |   | 63,056                      |       |  |         | 64,123 |       |   | 64,187 |         |   | 54,137 |   |  |   | 54,137 |  
|                                                                                |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  
|Net (loss) earnings applicable to common stock                                  |  | $                           | (194,730 | ) |                             | $ | (194,730                    | )     |  | $       | 5,244  |       | $ | 5,244  |         | $ | (9,841 | ) |  | $ | (9,841 | )
|                                                                                |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  
|(Loss) earnings per common share                                                |  | $                           | (3.09    | ) |                             | $ | (3.09                       | )     |  | $       | 0.08   |       | $ | 0.08   |         | $ | (0.18  | ) |  | $ | (0.18  | )
|                                                                                |  |                             |          |   |                             |   |                             |       |  |         |        |       |   |        |         |   |        |   |  |   |        |  

For the year ended December 31, 2006, the weighted average share calculation assumes that the
issuance of 46,000,000 shares of common stock to FBR TRS Holdings in July 2006 was outstanding since the beginning of the period and the effect of 18,000,000 shares of common stock that were sold in a private offering in July 2006 (see Note 12).

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



|                                                                                                       |  |                         |  |       |  |      
|------------------------------------------------------------------------------------------------------ |  | ----------------------- |  | ----- |  | -----
|                                                                                                       |  | Year Ended December 31,
|                                                                                                       |  | 2008                    |  | 2007  |  | 2006 
|Number of antidilutive stock options, unvested restricted stock,and RSUs, end of period (in thousands) |  | 16,220                  |  | 8,912 |  | 5,976

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) expands the definition of
transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in operating
results, rather than goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for business combinations in fiscal years beginning after
December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. Adoption of SFAS 141(R) will not impact the Companys financial condition or operating results,
but may have an effect on accounting for future business combinations.

In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial Statements (SFAS 160). SFAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority
interests as a component of equity. Under SFAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The



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effective date for SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of SFAS 160 to
fiscal years preceding the effective date are not permitted. Adoption of SFAS 160 will not impact the Companys financial condition or operating results.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires specific disclosures regarding the location and
amounts of derivative instruments in the Companys financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Companys financial
position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Early application is permitted. Because
SFAS 161 impacts the Companys disclosure and not its accounting treatment for derivative instruments and related hedged items, the Companys adoption of SFAS 161 will not impact the Companys financial condition or operating results.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS
162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States (the Hierarchy). The Hierarchy within SFAS 162 is consistent with that previously defined in the American Institute of Certified Public Accountants Statement on Auditing Standards
No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (SAS 69). SFAS 162 is effective 60 days following the United States Securities and Exchange Commissions (the
SEC) approval of the Public Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

In February 2008, the FASB issued Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions (FSP FAS140-3). FSP FAS 140-3 provides guidance on whether a transfer of a financial asset and a repurchase agreement financing entered into with the same counterparty should be accounted for as separate transactions.
FSP FAS 140-3 requires that such transactions be considered part of the same arrangement (i.e., a linked transaction) under FASB Statement 140, unless certain criteria are met. FSP FAS 140-3 is effective for financial statements issued for fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. Adoption of FSP FAS 140-3 will not impact its financial condition or operating results.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS
142-3). FSP FAS 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141(R) and other generally accepted accounting principles in the United States. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted.
Adoption of FSP FAS 142-3 will not impact the Companys financial condition or operating results, but may have an effect on accounting for future transactions.

In June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP addresses whether instruments
granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128,
Earnings per Share. The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP
is effective for fiscal years beginning after December 15, 2008. All prior-period EPS data



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presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the
provisions of this FSP. Earlier application is not permitted. The Company does not anticipate that the adoption of FSP EITF No. 03-6-1 will have a material impact on its consolidated financial statements.

In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is
Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the
fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including for prior periods for which financial statements have not been issued. The Companys adoption of FSP FAS
157-3 did not impact the Companys financial condition or operating results.

Note 3. Related-Party Transactions:

The Company is a member of an operating group of affiliates that may provide or receive services to and from each other. In July 2006, the Company entered
into various inter-company and other contractual arrangements with FBR Group and Crestview Partners, a New York-based private equity firm (Crestview), including a services agreement, a management services agreement, and other related
party contractual arrangements.

Services Agreement

Under the services agreement with FBR Group, the Company will provide, or cause one or more of its subsidiaries to provide, to FBR Group certain services,
including various corporate overhead services, for fees based on costs incurred by the Company and its subsidiaries in providing the services. Similarly, FBR Group will agree to provide to the Company and its subsidiaries under the same services
agreement certain services, including corporate development and certain asset management services, for fees based on costs incurred by FBR Group 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.

In addition, the Company will perform certain administrative services, including calculating and arranging for payment on behalf of FBR Group certain
general expenses, including incentive compensation, long-term incentive compensation, insurance expenses and audit fees.

During the years
ended December 31, 2008, 2007 and 2006, the Company decreased its other operating expenses by $2,134, $5,636 and $10,295, respectively, representing overhead costs allocated to affiliates. In addition, FBR Group allocated $-0-, $-0- and $3,782,
respectively, of costs to the Company associated with corporate governance overhead costs for the years ended December 31, 2008, 2007 and 2006.

Management Services Agreement

Under a management services agreement with FBR Group, which was
terminated effective January 1, 2008, FBR Group allocated to the Company certain costs relating to executive compensation during the years ended December 31, 2007 and 2006. 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 FBR Group, plus a $1,500 flat fee grossed up for tax purposes and certain employee benefit expenses. For the year ended December 31, 2006, the Company paid FBR Group an annual amount equal to 8.0% of the
Companys consolidated pre-tax earnings, plus an additional amount equal to



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3.0% of the pre-tax earnings of the Companys investment banking unit, in each case before deducting the amount payable to FBR Group.

During the years ended December 31, 2008, 2007 and 2006, the Company was allocated $-0-, $4,089 and $-0-, respectively, in compensation and benefits
expense related to executive compensation for officers of FBR Group.

Corporate Agreement

Under the corporate agreement with FBR Group, FBR Group has 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 arise out of actions or events that occurred prior to the contribution. During the years ended December 31, 2008, 2007 and 2006, FBR Group (recovered)/incurred costs of
$(183), $3,425, and $4,136, respectively, net of taxes pursuant to these indemnification provisions. Pursuant to SEC Staff Accounting Bulletin No. 79, Accounting for Expenses or Liabilities Paid by Principal Stockholder(s), the
Company includes such amounts in its consolidated statements of operations and reflects a corresponding capital contribution from or (reimbursement to) FBR Group through its wholly-owned subsidiary, FBR TRS Holdings.

Professional Services Agreement

Under a 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. These options were issued with an exercise price of $5.30 per share and had an aggregate fair value at the date of
grant of $1,180.

Receivables and Payables

The Company had a revolving credit agreement with FBR Group for a loan amount of up to $200,000. FBR Group could borrow funds from the Company under this credit agreement to provide for its working capital needs. The
loan was terminated in March 2008 and there were no advances made to FBR Group during 2008 and 2007 under this agreement. During the year ended December 31, 2006, the Company recorded interest revenue of $1,208 related to this agreement. The
Company also had a subordinated revolving loan agreement with FBR Group (see Note 7).

In addition, from time to time, the Company may
provide funding to other affiliates that are wholly-owned subsidiaries of FBR Group to be used for general operating purposes and are settled in cash on a regular basis.

Receivable from affiliates consisted of the following as of the specified dates:



|                                                              |  |                  |       |                  |   |      
|------------------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                                              |  | December 31,2008 |       | December 31,2007
|Receivable from wholly-owned subsidiaries of FBR TRS Holdings |  | $                |      |                  | $ | 3,219
|Receivable from other affiliates                              |  |                  | 3,208 |                  |   | 4,087
|                                                              |  |                  |       |                  |   |      
|                                                              |  | $                | 3,208 |                  | $ | 7,306
|                                                              |  |                  |       |                  |   |      

As of December 31, 2008 and 2007, the Company had $-0- and $64, respectively, that was due to
wholly-owned subsidiaries of FBR Group.



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Capital Markets Activity

In June 2007, FBR TRS Holdings sold 12,666,951 shares of the Companys common stock as part of the Companys initial public offering. The
Companys broker-dealer subsidiary, FBR & Co., acted as co-lead underwriter of this sale by FBR TRS Holdings and other shareholders and generated investment banking revenues of $7,040 during the year ended December 31, 2007. As of
December 31, 2008, FBR TRS Holdings owned 57.3% of the Companys outstanding common stock.

During 2006, an affiliate of the
Company issued an asset-backed security representing its residual interest in a securitization trust. The Company acted as lead-manager and underwriter on the transaction and recorded $398 in underwriting revenue on its statements of operations.

Distributions and Contributions

During the year ended December 31, 2006, the Company distributed cash and equity securities valued at $20,000 to FBR TRS Holdings in conjunction with its contributions to the Company (see Note 1) and the
private equity offering described in Note 12.

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 SFAS 157 as of December 31, 2008. As required by SFAS 157, 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 31,2008 |         |   | 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 securities and trading account securities sold but not yet purchased, at fair value: |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      
|Marketable and non-public equity securities                                                  |  | $                | 3,919   |   |         | $ | 976    |         |  | $ |        |   |  | $ | 2,943
|Convertible and fixed income debt securities                                                 |  |                  | 14,035  |   |         |   |       |         |  |   | 13,771  |   |  |   | 264  
|Marketable equity securities sold but not yet purchased                                      |  |                  | (8,325  | ) |         |   | (8,325 | )       |  |   |        |   |  |   |     
|                                                                                             |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      
|Total                                                                                        |  | $                | 9,629   |   |         | $ | (7,349 | )       |  | $ | 13,771  |   |  | $ | 3,207
|                                                                                             |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      
|Derivative instruments, at fair value:                                                       |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      
|Assets                                                                                       |  | $                | 264     |   |         |   |       |         |  | $ | 264     |   |  |   |     
|Liabilities                                                                                  |  |                  | (56     | ) |         |   |       |         |  |   | (56     | ) |  |   |     
|                                                                                             |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      
|Total                                                                                        |  | $                | 208     |   |         | $ |       |         |  | $ | 208     |   |  | $ |     
|                                                                                             |  |                  |         |   |         |   |        |         |  |   |         |   |  |   |      

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 table below sets 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 year ended December 31, 2008. As of December 31, 2008, the Company did not have any net unrealized gains (losses) included in accumulated other comprehensive income on Level 3 financial assets.



|                                                                                                                                                                                                                |  |                      |        |   |                          |   |         |       |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------------------ | - | ------- | ----- |  | - | ------- | -
|                                                                                                                                                                                                                |  | 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 (or changes in net assets) 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 year
ended December 31, 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 year ended December 31, 2008, are reported in the following line descriptions on the Companys statement of operations:



|                                                                                        |  |                           |        |   |                       |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | --------------------- | - | ------ | -
|                                                                                        |  | Netinvestment(loss)income |        |   | Principaltransactions |  
|Total losses included in earnings (or changes in net assets) for the period             |  | $                         | (1,367 | ) |                       | $ | (4,003 | )
|                                                                                        |  |                           |        |   |                       |   |        |  
|Change in unrealized gains or losses relating to assets still held at December 31, 2008 |  | $                         |       |   |                       | $ | (2,274 | )
|                                                                                        |  |                           |        |   |                       |   |        |  

Items Measured at Fair Value on a Non-Recurring Basis

In addition, the Company also measures certain financial 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 writedowns of individual assets. Due to the nature of these financial assets, enterprise values are primarily used to value these financial assets. In determining the
enterprise value, the Company analyzes various financial, performance and market factors to estimate the fair value, including where applicable, market trading activity. As a result, these financial assets are classified within Level 3 of the fair
value hierarchy.

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 31,2008 |        | Level 1 |                | Level 2 |  | Level 3 |   | Year EndedDecember 31, 2008 |  
|                             |  |                  |        |         | Gains (Losses) |        
|Non-public equity securities |  | $                | 27,919 |         | $              |        |  | $       |  |                             | $ | 27,919 |  | $ | (40,016 | )
|                             |  |                  |        |         |                |         |  |         |   |                             |   |        |  |   |         |  



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

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



|                                           |  |                  |         |                  |   |       
|------------------------------------------ |  | ---------------- | ------- | ---------------- | - | ------
|                                           |  | December 31,2008 |         | December 31,2007
|Mortgage-backed securities, at fair value: |  |                  |         |                  |   |       
|Fannie Mae(1)                              |  | $                | 454,339 |                  | $ |      
|                                           |  |                  |         |                  |   |       
|Long-term investments, at fair value:      |  |                  |         |                  |   |       
|Marketable equity securities               |  | $                | 750     |                  | $ | 12,627
|Investment securitiesmarked-to-market     |  |                  |        |                  |   | 7,743 
|                                           |  |                  |         |                  |   |       
|Total                                      |  | $                | 750     |                  | $ | 20,370
|                                           |  |                  |         |                  |   |       



|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2008, the Company had investments in agency mortgage-backed and marketable equity securities held by other than the Companys broker-dealer subsidiaries that are classified as
available-for-sale securities. In accordance with SFAS No. 115 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, 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
|--- | ----------------------------------------------------



|                             |                         |                   |            |           |       |            |    |   |  |   |       
|---------------------------- | ----------------------- | ----------------- | ---------- | --------- | ----- | ---------- | -- | - |  | - | ------
|                             |                         | December 31, 2007
|                             | AmortizedCost/CostBasis |                   | Unrealized |           |       | Fair Value
|                             |                         | Gains             |            | Losses(1) |       |           
|Marketable equity securities |                         | $                 | 11,609     |           | 1,020 |            | (2 | ) |  | $ | 12,627



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

As
of December 31, 2008, $454,339 (representing fair value) of the mortgage-backed securities position was pledged as collateral for repurchase agreement borrowings (see Note 7).

During the year ended December 31, 2008, the Company 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 has 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 mortgage-backed securities to reduce its exposure. Accordingly, in evaluating the Companys



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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. See Note 16 regarding mortgage-backed securities sold and repurchase agreements retired subsequent to
December 31, 2008.

During 2008, the Company received $360,930 from sales of mortgage-backed securities resulting in gross losses of
$(21,853). During 2007, the Company received $963,754 from sales of mortgage-backed securities resulting in gross gains and losses of $1,963 and $(2), respectively. During 2006, the company did not sell any mortgage-backed securities.

The Company also evaluated its portfolio of marketable equity securities for impairment. For the securities with unrealized losses, as of each reporting
date, the Company reviewed the underlying cause for the impairments, as well as the severity and duration of the impairments. The Company evaluated the near-term prospects for the investments in an unrealized loss position in relation to the
severity and duration of the impairments. During the year ended December 31, 2008, the Company recorded $1,537 of other-than-temporary impairment losses relating to two marketable equity securities with a cost basis of $293 as of Decemberr 31,
2008. During the years ended December 31, 2007 and 2006, the Company recorded $358 and $-0-, respectively, of other-than-temporary impairment losses in the statements of operations relating to marketable equity securities. Regarding one remaining
marketable equity security in an unrealzied loss position as of December 31, 2008, based on its recovery in value subsequent to year end the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2008.

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 2006, the Company did not sell any marketable equity securities.

Trading 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, 2008 |        | December 31, 2007       
|                                             |  | Owned             |        | Sold ButNot YetPurchased |   | Owned |  | Sold ButNot YetPurchased
|Marketable and non-public equity securities  |  | $                 | 3,919  |                          | $ | 8,325 |  | $                        | 18,787 |  | $ | 154
|Convertible and fixed income debt securities |  |                   | 14,035 |                          |   |      |  |                          | 270    |  |   | 52 
|                                             |  |                   |        |                          |   |       |  |                          |        |  |   |    
|                                             |  | $                 | 17,954 |                          | $ | 8,325 |  | $                        | 19,057 |  | $ | 206
|                                             |  |                   |        |                          |   |       |  |                          |        |  |   |    

Other Long-Term Investments

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



|                             |  |                  |        |                  |   |       
|---------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                             |  | December 31,2008 |        | December 31,2007
|Non-public equity securities |  | $                | 27,919 |                  | $ | 46,748
|Investment funds             |  |                  | 12,505 |                  |   | 16,958
|                             |  |                  |        |                  |   |       
|                             |  | $                | 40,424 |                  | $ | 63,706
|                             |  |                  |        |                  |   |       



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The Company evaluated its portfolio of non-public equity and debt 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
other-than-temporary impairment losses of $36,116, $7,951, and $-0- during the years ended December 31, 2008, 2007 and 2006, respectively, relating to investments in thirteen and three non-public equity securities, respectively. The carrying
value of investments impaired, during the years ended December 31, 2008, totaled $27,919 subsequent to the recognition of these impairment losses. 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. Subsequent to the recognition of this impairment loss, this investment
had a carrying value of $-0- as of December 31, 2008.

Investment Funds

The private investment funds, from which the Company earns management, incentive and investment income 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 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.

FBRIM, through various wholly-owned limited liability corporations, is the general partner, managing member, or manager of various hedge and private
equity funds. All of these entities were formed for the purpose of investing in public and private securities; therefore, their assets principally consist of investment securities accounted for at fair value. 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. The Company accounts for its
investments in these entities under the equity method of accounting and the Companys proportionate share of income or loss (income allocation including realized and unrealized gains or losses) is reflected in net investment income in the
statement of operations.

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



|                               |  |              |        |      |   |       
|------------------------------ |  | ------------ | ------ | ---- | - | ------
|                               |  | December 31,
|                               |  | 2008         |        | 2007
|Mutual funds                   |  | $            | 8,286  |      | $ | 10,945
|Hedge funds                    |  |              | 3,913  |      |   | 5,872 
|Private equity funds and other |  |              | 306    |      |   | 141   
|                               |  |              |        |      |   |       
|                               |  | $            | 12,505 |      | $ | 16,958
|                               |  |              |        |      |   |       



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##### 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,
|                                                                                    |  | 2008         |           |   | 2007 |   | 2006   
|Total assets                                                                        |  | $            | 1,133,194 |   |      | $ | 130,339 |  | $ | 192,014
|Total liabilities                                                                   |  |              | 11,447    |   |      |   | 3,108   |  |   | 10,138 
|Total equity                                                                        |  |              | 1,121,747 |   |      |   | 127,231 |  |   | 181,876
|Total revenue                                                                       |  |              | 20,753    |   |      |   | 2,947   |  |   | 3,310  
|Total expenses                                                                      |  |              | 22,628    |   |      |   | 2,967   |  |   | 3,153  
|Realized gains                                                                      |  |              | 72,068    |   |      |   | 3,802   |  |   | 422    
|Unrealized gains (losses)                                                           |  |              | (616,564  | ) |      |   | 3,158   |  |   | 9,426  
|Net income (losses)                                                                 |  |              | (546,371  | ) |      |   | 6,490   |  |   | 10,005 
|FBR Capital Markets Corporations share of total equity                             |  |              | 12,505    |   |      |   | 16,958  |  |   | 11,474 
|FBR Capital Market Corporations share of net income-net investment income          |  |              | (5,554    | ) |      |   | 1,928   |  |   | 805    
|FBR Capital Market Corporations share of net income-incentive allocations and fees |  |              |          |   |      |   | 409     |  |   | 448    

As of December 31, 2008 and 2007, the Company had receivables of $2,195 and $492,
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, |        
|                                                                                              |  | 2008                    |         |   | 2007 |   | 2006 | 
|Beginning balance                                                                             |  | $                       | 622     |   |      | $ | 543  |  | $ | 620 |  
|Net unrealized investment gains (losses) during the period:                                   |  |                         |         |   |      |   |      |  |   |     |  
|Unrealized holding gains (losses), net of taxes                                               |  |                         | (34,691 | ) |      |   | 79   |  |   | (77 | )
|Reclassification adjustment for recognized (gains) lossesincluded in net income, net of taxes |  |                         | 33,851  |   |      |   |     |  |   |    |  
|                                                                                              |  |                         |         |   |      |   |      |  |   |     |  
|Ending balance                                                                                |  | $                       | (218    | ) |      | $ | 622  |  | $ | 543 |  
|                                                                                              |  |                         |         |   |      |   |      |  |   |     |  

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

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



|                                                |  |              |         |   |      |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                |  | December 31, |        
|                                                |  | 2008         |         |   | 2007 |  
|Furniture and equipment                         |  | $            | 21,983  |   |      | $ | 20,460  |  
|Software                                        |  |              | 14,496  |   |      |   | 13,341  |  
|Leasehold improvements                          |  |              | 27,908  |   |      |   | 27,823  |  
|                                                |  |              |         |   |      |   |         |  
|                                                |  |              | 64,387  |   |      |   | 61,624  |  
|Less: Accumulated depreciation and amortization |  |              | (39,945 | ) |      |   | (32,532 | )
|                                                |  |              |         |   |      |   |         |  
|                                                |  | $            | 24,442  |   |      | $ | 29,092  |  
|                                                |  |              |         |   |      |   |         |  

For the years ended December 31, 2008, 2007 and 2006, depreciation expense was $9,320, $8,368
and $7,751, respectively.



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##### Table of Contents

Note 6. Intangible Assets:

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



|                            |  |                  |         |   |                  |   |        |  
|--------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                            |  | December 31,2008 |         |   | December 31,2007 |  
|Management contracts:       |  |                  |         |   |                  |   |        |  
|Cost                        |  | $                | 18,465  |   |                  | $ | 18,465 |  
|Accumulated amortization    |  |                  | (9,790  | ) |                  |   | (8,628 | )
|                            |  |                  |         |   |                  |   |        |  
|Net                         |  | $                | 8,675   |   |                  | $ | 9,837  |  
|                            |  |                  |         |   |                  |   |        |  
|Acquired revenue contracts: |  |                  |         |   |                  |   |        |  
|Cost                        |  | $                | 600     |   |                  | $ |       |  
|Accumulated amortization    |  |                  | (332    | ) |                  |   |       |  
|                            |  |                  |         |   |                  |   |        |  
|Net                         |  | $                | 268     |   |                  | $ |       |  
|                            |  |                  |         |   |                  |   |        |  
|Total:                      |  |                  |         |   |                  |   |        |  
|Cost                        |  | $                | 19,065  |   |                  | $ | 18,465 |  
|Accumulated amortization    |  |                  | (10,122 | ) |                  |   | (8,628 | )
|                            |  |                  |         |   |                  |   |        |  
|Net                         |  | $                | 8,943   |   |                  | $ | 9,837  |  
|                            |  |                  |         |   |                  |   |        |  

For the years ended December 31, 2008, 2007 and 2006, amortization expense recognized was
$1,495, $1,163 and $1,214, respectively.

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



|     |  |       
|---- |  | ------
|     |  | Amount
|2009 |  | 1,431 
|2010 |  | 1,163 
|2011 |  | 1,163 
|2012 |  | 1,163 
|2013 |  | 1,163 

During the years ended December 31, 2008, 2007 and 2006, the Company has not recorded any
impairment charges relating to the acquired management contracts and acquired revenue contracts.

Note 7. 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 |  



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##### Table of Contents

As of December 31, 2008, the amount at risk under repurchase agreements was not greater than 10% of
stockholders equity for any one counterparty. As of December 31, 2007, there were no outstanding repurchase agreement borrowings. See Note 16 regarding mortgage-backed securities sold and repurchase agreement borrowings retired subsequent
to December 31, 2008.

During the years ended December 31, 2008, 2007 and 2006, interest expense related to repurchase agreement
borrowings totaled $12,428, $4,361, and $535, respectively.

Subordinated Loans

As of January 1, 2008, the Company had an unsecured revolving subordinated loan agreement with FBR Group with an available credit line of $500,000
and an expiration date of March 31, 2008. The Company did not make any borrowings under this agreement during 2008. The agreement expired on March 31, 2008 and was not renewed. Proceeds from these borrowings were allowable in computing net
capital under the SECs Uniform Net Capital Rule. During the year ended, December 31, 2007, the Company incurred interest expense of $30 related to borrowings under this agreement. As of December 31, 2007, there were no outstanding
balances under this line of credit. The Company did not make any borrowings under this agreement in 2006.

8. Derivative Financial Instruments and
Hedging Activities:

In the normal course of its operations, the Company is a party to financial instruments that are accounted for as
derivative financial instruments in accordance with SFAS 133.

The following table summarizes these derivative positions as of the dates
indicated:



|                                |  |                   |         |                   |   |                 |  |            |   |  |   |  
|------------------------------- |  | ----------------- | ------- | ----------------- | - | --------------- |  | ---------- | - |  | - | -
|                                |  | December 31, 2008 |         | December 31, 2007
|                                |  | 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 are U.S. and international financial institutions. The Company assesses and monitors the counterparties non-performance and credit risk on a regular basis. During
the current year, 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 SFAS 133, the gains and losses on the interest rate caps are recognized in earnings and the changes in fair value of the hedged items attributable to the hedged risk are 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.

See
Note 16 regarding the sale of the remaining agency mortgage-backed securities and interest rate cap agreements subsequent to December 31, 2008.



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##### Table of Contents

Note 9. Income Taxes:

The Company historically joined in the filing of a consolidated Federal income tax return with FBR TRS Holdings, Inc. 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. During the years ended December 31, 2008, 2007 and 2006, the Company recorded
tax (benefit) provision of $(3,490), $20,032 and $(3,271), respectively.

As of December 31, 2008, tax years subsequent to
December 31, 2004 remain open under the statute of limitations. In October 2008, the IRS commenced its examination of tax years 2006 to 2007. No adjustments have been proposed to date.

The (benefit) provision for income taxes consists of the following for the years ended December 31, 2008, 2007 and 2006:



|         |  |      |         |   |      |   |        |      |  |   |        |  
|-------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | 2008 |         |   | 2007 |   |        | 2006 | 
|Federal  |  | $    | (3,675  | ) |      | $ | 15,056 |      |  | $ | (2,937 | )
|State    |  |      | 276     |   |      |   | 5,512  |      |  |   | (1,163 | )
|Foreign  |  |      | (91     | ) |      |   | (536   | )    |  |   | 829    |  
|         |  |      |         |   |      |   |        |      |  |   |        |  
|         |  | $    | (3,490  | ) |      | $ | 20,032 |      |  | $ | (3,271 | )
|         |  |      |         |   |      |   |        |      |  |   |        |  
|Current  |  | $    | (21,188 | ) |      | $ | 25,315 |      |  | $ | (6,140 | )
|Deferred |  |      | 17,698  |   |      |   | (5,283 | )    |  |   | 2,869  |  
|         |  |      |         |   |      |   |        |      |  |   |        |  
|         |  | $    | (3,490  | ) |      | $ | 20,032 |      |  | $ | (3,271 | )
|         |  |      |         |   |      |   |        |      |  |   |        |  

Deferred tax assets and liabilities consisted of the following as of December 31, 2008 and
2007:



|                                                                                |  |      |         |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                                |  | 2008 |         |   | 2007 |  
|Unrealized investment gains, recorded in accumulated other comprehensive income |  | $    | 85      |   |      | $ | (396   | )
|Unrealized investment gains                                                     |  |      |        |   |      |   | (5,982 | )
|Accrued compensation                                                            |  |      | 25,399  |   |      |   | 14,974 |  
|Depreciation and amortization                                                   |  |      | 2,797   |   |      |   | 872    |  
|Other-than-temporary investment write downs                                     |  |      | 24,616  |   |      |   | 520    |  
|Capital loss carry forward                                                      |  |      | 8,505   |   |      |   |       |  
|AMT credit carryover                                                            |  |      | 1,314   |   |      |   |       |  
|Other, net                                                                      |  |      | 487     |   |      |   | 5,097  |  
|Net operating loss                                                              |  |      | 13,492  |   |      |   | 1,306  |  
|                                                                                |  |      |         |   |      |   |        |  
|Subtotal                                                                        |  |      | 76,695  |   |      |   | 16,391 |  
|Valuation Allowance                                                             |  |      | (76,695 | ) |      |   | (1,534 | )
|                                                                                |  |      |         |   |      |   |        |  
|Net deferred tax asset                                                          |  | $    |        |   |      | $ | 14,857 |  
|                                                                                |  |      |         |   |      |   |        |  

The deferred tax expense in 2008 includes $14,857 of increase in valuation allowance related to
the net deferred tax asset balance as of December 31, 2007.



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##### Table of Contents

Deferred taxes of $(396) and $(62) were provided through other comprehensive income in 2008 and 2007,
respectively.

As of December 31, 2008, the Company has domestic federal net operating loss carryovers of $15,214 which will expire in
2028 and related state net operating loss carryovers. For the year ended December 31, 2008, the Company recorded a current federal tax benefit related to net operating losses of $54,508, but the state tax benefit of these net operating losses
is available for certain states in the future and will expire by 2028. As of December 31, 2008, the Companys net operating losses related to FBRIL and its operations in the United Kingdom are $16,608. These net operating losses can be
carried forward indefinitely to offset future income at FBRIL. The net operating loss carryovers are not limited by Section 382.

As of
December 31, 2008, the Company has net capital loss carryovers of $22,114 and charitable contribution carryovers of $375 which will expire in 2013. The Company also has $1,314 of alternative minimum tax credit carryovers which can be carried forward
indefinitely.

The Companys effective tax rate for the years ended December 31, 2008, 2007 and 2006 was 1.76%, 79.25% and
24.95%, 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:



|                                                               |  |              |         |   |      |   |        |  |   |        |  
|-------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ |  | - | ------ | -
|                                                               |  | December 31, |        
|                                                               |  | 2008         |         |   | 2007 |   | 2006   | 
|Federal income tax (benefit) provision, at statutory rate      |  | $            | (69,377 | ) |      | $ | 8,847  |  | $ | (4,650 | )
|State income taxes (benefit) provision, net of Federal benefit |  |              | (10,741 | ) |      |   | 1,904  |  |   | (1,167 | )
|Effect of SFAS 123R                                            |  |              | 2,327   |   |      |   | 5,209  |  |   | 1,681  |  
|Nondeductible expenses                                         |  |              | 1,657   |   |      |   | 1,555  |  |   | 1,542  |  
|Gain on warrants                                               |  |              | (3,783  | ) |      |   |       |  |   |       |  
|Investment write-down                                          |  |              | 722     |   |      |   |       |  |   |       |  
|Rate change                                                    |  |              | 380     |   |      |   |       |  |   |       |  
|Other, net                                                     |  |              | 249     |   |      |   | 1,240  |  |   | (677   | )
|Valuation allowance                                            |  |              | 75,076  |   |      |   | 1,277  |  |   |       |  
|                                                               |  |              |         |   |      |   |        |  |   |        |  
|Effective income tax (benefit) provision                       |  | $            | (3,490  | ) |      | $ | 20,032 |  | $ | (3,271 | )
|                                                               |  |              |         |   |      |   |        |  |   |        |  

During the years ended December 31, 2008 and 2007, the Companys valuation allowance
changed by $75,161 and $1,534, respectively.

At December 31, 2008, the Companys net deferred tax assets totaled $76,695. The
Company has established a valuation allowance against these assets since the Company believes that, based on the criteria in SFAS No. 109, Accounting for Income Taxes, it is more likely than not that the benefits of these assets will not
be realized in the future.

The Company adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48) effective January 1, 2007. Adoption of FIN 48 did not have a material effect on the consolidated financial statements. The total
unrecognized tax benefit as of January 1, 2007, that, if recognized, would affect the Companys effective tax rate was immaterial. The Company continues to record interest and penalties in other expenses/other income in the statements of
operations. The total amount of accrued interest and penalties related to the uncertain tax positions, as of the date of adoption was immaterial.



F-27



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##### Table of Contents

The following table displays the change in our unrecognized tax benefits for the year ended
December 31, 2008:



|                                            |  |      |        |  
|------------------------------------------- |  | ---- | ------ | -
|                                            |  | 2008 |       
|Balance at January 1, 2008                  |  | $    |       |  
|Additions to tax positions for prior years  |  |      | (832   | )
|Additions to tax positions for current year |  |      | (469   | )
|                                            |  |      |        |  
|Balance at December 31, 2008                |  | $    | (1,301 | )
|                                            |  |      |        |  

The net amount of these unrecognized tax benefits of $1,083 that, if recognized, would affect the
effective tax rate in the future. The Company recognized interest of $41 related to the uncertain tax positions for the year ended December 31, 2008.

Note 10. Regulatory Capital Requirements:

FBR & Co. is registered with the SEC and is a member of FINRA.
Additionally, FBRIL is registered with the Financial Services Authority (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, 2008 and 2007,
FBR & Co. had net capital of $48,876 and $102,421, respectively, that was $42,779 and $97,443, respectively, in excess of its required net capital of $6,097 and $4,978, respectively. As of December 31, 2008 and 2007, FBRIL had net
capital in excess of required amounts.

Note 11. 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 uncalled capital commitments to various investment partnerships that may be called over the next ten years. The following table sets forth these contractual
obligations by fiscal year:



|                              |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------ |  | - | ------
|                              |  | 2009 |        | 2010 |   | 2011   |  | 2012 |        | 2013 |   | Thereafter |  | Total
|Minimum rental commitments(1) |  | $    | 3,088  |      | $ | 2,960  |  | $    | 2,791  |      | $ | 2,421      |  | $     | 2,413  |  | $ | 8,323  |  | $ | 21,996
|Related party commitments(2)  |  |      | 7,682  |      |   | 7,841  |  |      | 7,776  |      |   | 7,601      |  |       | 7,657  |  |   | 7,961  |  |   | 46,518
|Capital commitments(3)        |  |      |       |      |   |       |  |      |       |      |   |           |  |       |       |  |   |       |  |   |      
|                              |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       
|Total Contractual Obligations |  | $    | 10,770 |      | $ | 10,801 |  | $    | 10,567 |      | $ | 10,022     |  | $     | 10,070 |  | $ | 16,284 |  | $ | 68,514
|                              |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |       



|(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, 2008, 2007 and 2006 were $13,843, $13,874 and $12,724, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These commitments include annual payments on multiple facilities leased by FBR Group that are maintained by the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | The table above excludes $700 of uncalled capital commitments to various investment partnerships 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Clearing Broker

FBR & Co. clears all of its securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreements
between FBR & Co. and the clearing broker, the clearing broker has the right to charge FBR & Co. 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 FBR & Co. 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, 2008 and 2007, the Company has recorded no liabilities, and during the years ended December 31, 2008, 2007 and 2006, the
Company did not incur any significant costs, with regard to this right.

Litigation

As of December 31, 2008, except as described below, the Company was neither a defendant or plaintiff in any lawsuits or arbitrations nor involved in
any governmental or self-regulatory organization (SRO) matters that are expected to have a material adverse effect on the Companys financial condition, results of operations or liquidity. The Company is a defendant in a small
number of civil lawsuits and arbitrations (together, litigation) relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and
SROs. 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., the Companys U.S. broker-dealer subsidiary, 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, or contribute to payments which FBR & Co. is required to make as a result of the litigation. 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 the Companys financial condition or results of operations. 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 SROs
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 the Companys financial condition, operating results and liquidity.

Regulatory Charges and Related Matters

On December 20, 2006, the SEC and the predecessor to FINRA, the National Association of Securities Dealers (NASD), accepted settlement offers made by FBR & Co. with respect to alleged violations relating to
FBR & Co.s trading in a company account and the offering of a private investment in public equity on behalf of CompuDyne, Inc, in October 2001.

In the SEC settlement, FBR & Co., without admitting or denying any wrongdoing, proposed to pay disgorgement, civil penalties and interest totaling approximately $3,700 and to consent to the entry of a
permanent injunction with respect to violations of the antifraud provisions of the federal securities laws. FBR & Co. also agreed to consent to an administrative proceeding under Section 15(b) of the Exchange Act in which
FBR & Co. would be subjected to a censure and agreed to certain additional undertakings, including review by an independent consultant of its Chinese Wall procedures and the implementation of any recommended



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improvements. In the parallel NASD settlement, FBR & Co. agreed to the same undertakings provided for in the SEC settlement approved by the staff of
the Division of Enforcement of the SEC, including agreeing to an independent consultant to review its Chinese Wall procedures and implementing any recommended improvements, and also agreed pay a fine of $4,000 to NASD.

Note 12. Shareholders Equity:

Equity Offering

On July 20, 2006, the Company closed a private offering to institutional investors of common equity and a concurrent private
placement to two affiliates of Crestview. These two concurrent transactions in the aggregate resulted in the issuance of 18,000,000 shares of common stock at $15.00 per share. Proceeds to the Company, after deducting a placement fee payable to an
affiliate of Crestview with respect to the shares purchased by the Crestview affiliates and other issuance costs, were $259,738 in cash.

As part of these transactions, the Company and FBR TRS Holdings entered into a series of agreements, including a contribution agreement, a corporate agreement, a services agreement, a management services agreement, a trademark license
agreement and a tax sharing agreement. In addition, the Company and FBR TRS Holdings entered into a series of agreements with affiliates of Crestview, including an investment agreement, a governance agreement, a voting agreement, a registration
rights agreement, a professional services agreement and option agreements to purchase additional shares.

Pursuant to the option
agreements, affiliates of Crestview may purchase up to 2,600,000 shares of the Companys common stock. Based on the provisions of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys own Stock, and the terms and conditions of the option agreements, these options have been accounted for as permanent equity.

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 joins 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 2008.

Employee Stock
Purchase Plan

The Company initiated the Employee Stock Purchase Plan (the Purchase Plan) on January 1, 2007. Under
this 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 SFAS 123R, the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. For the years ended December 31, 2008 and 2007, the Company recognized compensation
expense of $376 and $508, respectively, related to the Purchase Plan.

Stock Compensation Plans

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

The Company adopted and FBR TRS Holdings, as the Companys sole shareholder at that time, approved the FBR Capital Markets Long-Term Incentive Plan
in July 2006. In the fourth quarter of 2007, the Company adopted, and the shareholders approved, an amendment to the FBR Capital Markets Long-term Incentive plan to



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increase by 16,500,000 the shares of common stock authorized for issuance under that 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 and restricted and unrestricted stock 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 fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted for the periods indicated:



|                            |  |                         |           |   |      |   |           |      |  |   |           |  
|--------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                            |  | Year Ended December 31, |          
|                            |  | 2008                    |           |   | 2007 |   |           | 2006 | 
|Volatility                  |  |                         | 56.6      | % |      |   | 30.0      | %    |  |   | 30.0      | %
|Risk-free interest rate     |  |                         | 3.0       | % |      |   | 4.7       | %    |  |   | 4.8       | %
|Expected life               |  |                         | 5.5 years |   |      |   | 4.3 years |      |  |   | 4.5 years |  
|Dividend yield              |  |                         |          |   |      |   |          |      |  |   |          |  
|Weighted average fair value |  | $                       | 2.99      |   |      | $ | 4.90      |      |  | $ | 5.00      |  

Compensation expense recognized by the Company for stock options for the years ended
December 31, 2008, 2007 and 2006 was $3,485, $6,061 and $1,701, respectively, and a related tax benefit of $61, $2,402 and $672, respectively, related to FBR Capital Markets Long-Term Incentive Plan. Stock compensation expense related to stock
options for the year ended December 31, 2008 reflects a reversal of compensation expense related to forfeitures of unvested stock options issued to employees in prior periods that exceeded its historical forfeiture assumption used to calculate
stock compensation expense. This increased volume of forfeitures was due to a reduction in the number of the Companys employees during 2008.

A summary of option activity under the FBR Capital Markets Long Term Incentive Plan as of December 31, 2008, and changes during the year then ended is presented below:



|                                            |  |                 |   |  |                                 |       |                                           |    
|------------------------------------------- |  | --------------- | - |  | ------------------------------- | ----- | ----------------------------------------- | ---
|                                            |  | Number ofShares |   |  | Weighted-averageExercise Prices |       | Weighted-averageRemainingContractual Life
|Share Balance as of December 31, 2005       |  |                |   |  | $                               |      |                                           |   
|Granted                                     |  | 3,385,000       |   |  |                                 | 15.00 |                                           |    
|Forfeitures                                 |  | (9,000          | ) |  |                                 | 15.00 |                                           |    
|                                            |  |                 |   |  |                                 |       |                                           |    
|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
|                                            |  |                 |   |  |                                 |       |                                           |    
|Options Exercisable as of December 31, 2008 |  | 141,371         |   |  | $                               | 13.61 |                                           | 7.7
|                                            |  |                 |   |  |                                 |       |                                           |    

As of December 31, 2008 and 2007, there was $8,354 and $13,186, respectively, of total
unrecognized compensation cost related to 5,770,589 and 4,419,254, respectively, non-vested options granted under the FBR Capital Markets Long Term Incentive Plan as described above. The total unrecognized cost is expected to be recognized over a
weighted-average period of 2.2 and 1.6 years, respectively.



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The Company also grants 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. For the year ended December 31, 2008 and 2007, the Company recognized compensation expense related to grants of
restricted shares of common stock of $6,373 and $5,049, respectively. The Company did not grant any restricted shares of common stock prior to January 1, 2007. For the year ended December 31, 2008, the Company recognized $8,063 of
compensation expense related to RSUs. The Company did not grant any RSUs prior to January 1, 2008.

A summary of unvested restricted
stock awards as of December 31, 2008, and changes during the twelve months then ended is 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
|                                      |  |                 |   |  |                                      |       |                                        |    

In August 2008, the Companys Board of Directors approved the modification of certain RSUs
with a market condition issued in February 2008 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 SFAS 123R, 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 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, 2008, and changes during the year then ended
is 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
|                                      |  |                 |   |  |                                      |      |                                        |    

As of December 31, 2008, a total of 1,625,769 restricted shares of common stock were
outstanding with total unrecognized compensation cost related to unvested shares of $13,769. The total unrecognized cost is expected to be recognized over a weighted-average period of 2.9 years as of December 31, 2008. As of



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December 31, 2008, a total of 5,579,544 of RSUs were outstanding with total unrecognized compensation cost related to unvested units of $23,161. The
total unrecognized cost is expected to be recognized over a weighted-average period of 4.1 years as of December 31, 2008.

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.
A summary of restricted stock irrevocable trust awards as of December 31, 2008, and changes during the twelve months then ended is 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                               |  | 704,464         |   |  |                                      | 7.31  |                                        |    
|Vestings                              |  | (253,313        | ) |  |                                      | 12.73 |                                        |    
|Cancelled and reissued as RSUs        |  | (5,691          | ) |  |                                      | 13.33 |                                        |    
|                                      |  |                 |   |  |                                      |       |                                        |    
|Share Balance as of December 31, 2008 |  | 1,173,424       |   |  | $                                    | 9.86  |                                        | 1.9
|                                      |  |                 |   |  |                                      |       |                                        |    

A summary of restricted stock unit irrevocable trust awards as of December 31, 2008, and
changes during the twelve months then ended is 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 |                                        | 2.57
|                                      |  |                 |   |  |                                      |      |                                        |     

Share Repurchases

In July 2007, in order to offset dilution resulting from employee restricted stock and employee stock options granted under the FBR Capital Markets
Long-Term Incentive Plan, the Companys Board of Directors authorized a share repurchase program under which the Company could repurchase up to one million shares of the Companys outstanding shares of common stock. During 2007, the
Company, in accordance with its share repurchase program, repurchased one million shares at a weighted average price of $13.01 per share for a total cost of $13,017.

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 has 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. As of December 31, 2008, the Company has the remaining authority to repurchase up to 3,418,885 shares of common stock.



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Note 13. Financial Instruments with Off-Balance-Sheet Risk and Credit Risk:

Financial Instruments

The
Company invested in mortgage securities and equity securities that are primarily traded in United States markets. The Company funded its investments in mortgage-backed securities and historically, reverse repurchase agreements (associated with
Arlington Funding) through repurchase agreement and commercial paper borrowings, respectively. Accordingly, the Company was subject to leverage and interest rate risk.

The Companys asset management entities trade and invest in public and non-public securities. As of December 31, 2008 and 2007, as discussed above, the Company had not entered into any transactions involving
financial instruments that would expose the Company to significant related off-balance-sheet risk.

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 partnerships 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 debt transactions.

Positions taken and commitments made by the Company, including those made in connection with venture capital and investment banking activities, have
resulted 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 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.

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,
2008 and 2007, the Company has recorded no liabilities with regard to the right. During the years ended December 31, 2008, 2007 and 2006, 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.



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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 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.

General Partnership and Managing Member Interests

As general partner of investment partnerships (or managing member of limited liability companies), certain of the Companys subsidiaries may be exposed to liabilities that exceed the balance sheet value of the
Companys investment in the relevant vehicles. To limit the Companys exposure to such excess liabilities the Company has formed limited liability companies, which are wholly owned by the relevant subsidiary, to hold the respective general
partner or managing member interest. The hedge funds and other partnerships that the Company manages through subsidiaries as a general partner or managing member had $3,809 and $2,605 of liabilities as of December 31, 2008 and 2007,
respectively, primarily margin debt, not reflected on our balance sheet.

Note 14. 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. The Company initiated certain principal investing activities subsequent to the July 2006 private offering. Prior to this offering, the
Company had no comparable principal investing activities. In conjunction with the initiation of principal investing activities during 2006, the Company reclassified its long-term investments, including equity securities and fund investments
previously included in capital markets and asset management, respectively, to the principal investing segment. Accordingly, segment information for prior years has been revised to conform to the current presentation.

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 $18,069, $27,046, and $22,201 for the years ended December 31, 2008, 2007 and 2006, respectively. The following tables illustrate the financial information for
the Companys segments for the periods indicated.



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|                                   |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|---------------------------------- |  | -------------------------------- | -------- | - | --------------- | - | ------- | ------------------ |  | - | ------- | - |  | - | -------- | -
|                                   |  | 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  |  
|Base management fees               |  |                                  |         |   |                 |   | 15,335  |                    |  |   |        |   |  |   | 15,335   |  
|Incentive allocations and fees     |  |                                  |         |   |                 |   |        |                    |  |   |        |   |  |   |         |  
|Net investment loss                |  |                                  |         |   |                 |   |        |                    |  |   | (79,551 | ) |  |   | (79,551  | )
|Net interest income                |  |                                  | 2,116    |   |                 |   |        |                    |  |   | 7,455   |   |  |   | 9,571    |  
|Other                              |  |                                  | (321     | ) |                 |   | 1,938   |                    |  |   | 723     |   |  |   | 2,340    |  
|                                   |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|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  |  
|Base management fees               |  |                                  |         |   |                 |   | 23,549  |                    |  |   |        |   |  |   | 23,549   |  
|Incentive allocations and fees     |  |                                  |         |   |                 |   | 401     |                    |  |   |        |   |  |   | 401      |  
|Net investment income              |  |                                  |         |   |                 |   |        |                    |  |   | (4,507  | ) |  |   | (4,507   | )
|Net interest income                |  |                                  | 9,451    |   |                 |   |        |                    |  |   | 10,096  |   |  |   | 19,547   |  
|Other                              |  |                                  | 1,396    |   |                 |   | 2,500   |                    |  |   | 714     |   |  |   | 4,610    |  
|                                   |  |                                  |          |   |                 |   |         |                    |  |   |         |   |  |   |          |  
|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-36



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##### Table of Contents

|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|---------------------------------- |  | -------------------------------- | ------- | - | --------------- | - | ------ | ------------------ |  | ----- | ------- |  | - | ------- | -
|                                   |  | For year ended December 31, 2006 |        
|                                   |  | CapitalMarkets                   |         |   | AssetManagement |   |        | PrincipalInvesting |  | Total |        
|Revenues, net of interest expense: |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Investment banking                 |  | $                                | 214,724 |   |                 | $ |       |                    |  | $     |        |  | $ | 214,724 |  
|Institutional brokerage            |  |                                  | 107,622 |   |                 |   |       |                    |  |       |        |  |   | 107,622 |  
|Base management fees               |  |                                  |        |   |                 |   | 19,871 |                    |  |       |        |  |   | 19,871  |  
|Incentive allocations and fees     |  |                                  |        |   |                 |   | 1,327  |                    |  |       |        |  |   | 1,327   |  
|Net investment income              |  |                                  |        |   |                 |   |       |                    |  |       | 3,136   |  |   | 3,136   |  
|Net interest income                |  |                                  | 4,292   |   |                 |   |       |                    |  |       | 6,000   |  |   | 10,292  |  
|Other                              |  |                                  | 5,606   |   |                 |   | 1,518  |                    |  |       |        |  |   | 7,124   |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Total                              |  |                                  | 332,244 |   |                 |   | 22,716 |                    |  |       | 9,136   |  |   | 364,096 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Operating Expenses:                |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Variable                           |  |                                  | 160,415 |   |                 |   | 12,496 |                    |  |       | 148     |  |   | 173,059 |  
|Fixed                              |  |                                  | 186,052 |   |                 |   | 18,097 |                    |  |       |        |  |   | 204,149 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Total                              |  |                                  | 346,467 |   |                 |   | 30,593 |                    |  |       | 148     |  |   | 377,208 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Pre-tax (loss) income              |  | $                                | (14,223 | ) |                 | $ | (7,877 | )                  |  | $     | 8,988   |  | $ | (13,112 | )
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Compensation and benefits:         |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Variable                           |  | $                                | 122,476 |   |                 | $ | 5,992  |                    |  | $     | 8       |  | $ | 128,476 |  
|Fixed                              |  |                                  | 89,396  |   |                 |   | 7,840  |                    |  |       |        |  |   | 97,236  |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Total                              |  | $                                | 211,872 |   |                 | $ | 13,832 |                    |  | $     | 8       |  | $ | 225,712 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Total assets                       |  | $                                | 271,689 |   |                 | $ | 45,587 |                    |  | $     | 442,143 |  | $ | 759,419 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  
|Total net assets                   |  | $                                | 194,830 |   |                 | $ | 36,898 |                    |  | $     | 252,660 |  | $ | 484,388 |  
|                                   |  |                                  |         |   |                 |   |        |                    |  |       |         |  |   |         |  

Note 15. Quarterly Data (Unaudited):

The following tables set forth selected information for each of the fiscal quarters during the years ended December 31, 2008 and 2007. 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 |      
|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 | )
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|               |  |               |         |   |                                  
|2007           |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|First Quarter  |  | $             | 147,823 |   |                                   | $ | 25,843   |                  |  | $ | 11,006                        |   |  | $                               | 0.17  |   |  | $ | 0.17  |  
|Second Quarter |  |               | 169,759 |   |                                   |   | 36,642   |                  |  |   | 21,760                        |   |  |                                 | 0.34  |   |  |   | 0.34  |  
|Third Quarter  |  |               | 106,488 |   |                                   |   | 2,031    |                  |  |   | 267                           |   |  |                                 |      |   |  |   |      |  
|Fourth Quarter |  |               | 60,826  |   |                                   |   | (39,240  | )                |  |   | (27,789                       | ) |  |                                 | (0.43 | ) |  |   | (0.43 | )
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  
|Total Year     |  | $             | 484,896 |   |                                   | $ | 25,276   |                  |  | $ | 5,244                         |   |  | $                               | 0.08  |   |  | $ | 0.08  |  
|               |  |               |         |   |                                   |   |          |                  |  |   |                               |   |  |                                 |       |   |  |   |       |  



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##### Table of Contents

Note 16. Subsequent Events:

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. As a result of the sale of the securities and interest-rate caps, the Company recognized an aggregate net investment loss of $1,043 in the first quarter of 2009.



F-38