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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
Commission file number 001-33138
 KBW, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-4055775(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 787 Seventh Avenue, New York, New York 10019  (Address of principal executive offices)
 Registrants telephone number, including area code:
212-887-7777
 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 $0.01 per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 o þ
 o þ
 þ o
 o
  Large Accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   Documents incorporated by reference:




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##### 



TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    
    25Item 2.
    
    Properties
    
    
    25Item 3.
    
    Legal Proceedings
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    27Item 6.
    
    Selected Financial Data
    
    
    28Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    30Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 8.
    
    Financial Statements and Supplementary Data
    
    
    50Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    78Item 9A.
    
    Controls and Procedures
    
    
    78Item 9B.
    
    Other Information
    
    
    78PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    78Item 11.
    
    Executive Compensation
    
    
    78Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    78Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    79Item 14.
    
    Principal Accountant Fees and Services
    
    
    79PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    79Signatures
    
    
    
    
    80Exhibit Index
    
    
    
    
    E-1EX-10.10: FORM OF RESTRICTIVE STOCK AWARD AGREEMENTEX-10.15: CHANGE IN CONTROL AGREEMENTEX-10.16: CHANGE IN CONTROL AGREEMENTEX-23.1: CONSENT OF KPMG LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  i




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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
   ii




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When we use the terms KBW, KBW, Inc., the Company, we, us and our, we mean the
combined business of KBW, Inc., a Delaware corporation, and of its consolidated subsidiaries,
unless the context otherwise indicates. KBW, Inc. became the holding company for all other
subsidiary operating companies in August 2005. Prior to August 2005, Keefe, Bruyette & Woods, Inc.,
now an operating subsidiary, was the parent company and references to KBW or the Company or
we, us and our prior to August 2005 refer to the consolidated company structure prior to that
date. All data provided herein is as of or for the period ended December 31, 2007 unless otherwise
expressly noted.
 
 Item 1. Business.
 Overview
  ,
    1




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Our Principal Businesses
 Investment Banking
  
    
    M&A and other strategic advisory services,
    
    Equity and fixed income securities offerings,
    
    Structured finance for trust preferred securities and similar capital securities of financial
institutions, and
    
    Mutual thrift conversions.
   2




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M&A and Strategic Advisory Services.
 
    
    Evaluating potential acquisition targets,
    
    Providing valuation analyses,
    
    Evaluating and proposing financial and strategic alternatives,
    
    Rendering, if appropriate, fairness opinions,
    
    Providing advice regarding the timing, structure and pricing of a proposed acquisition, and
    
    Assisting in negotiating and closing the acquisition.
  
    
    Evaluating and recommending financial and strategic alternatives with respect to a sale,
    
    Advising on the appropriate sale process,
    
    Providing valuation analyses,
    
    Assisting in preparing an offering memorandum or other appropriate sales materials,
    
    Rendering, if appropriate, fairness opinions,
    
    Identifying and contacting selected qualified acquirors, and
    
    Assisting in negotiating and closing the proposed sale.
  Capital Raising Services.
 3




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Sales and Trading
 Equity
Sales and Trading.
     4




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Fixed Income Sales and Trading.
   Research
    5




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Number ofSector
    
    CompaniesRegional Banks and Thrifts
    
    
    178Large Cap Banks and Thrifts
    
    
    23Trust and Custody
    
    
    4Total Depositary Financial Services Companies
    
    
    205Property Casualty Insurance
    
    
    50Equity REITs
    
    
    35Broker-Dealers
    
    
    34Life Insurance
    
    
    22Specialty Finance
    
    
    21Asset Managers
    
    
    15Insurance Other
    
    
    15Processing/Business Information
    
    
    12Mortgage REITs
    
    
    9Total Other Financial Services Companies
    
    
    213Total Companies under coverage
    
    
    418
    Asset Management
  6




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Employees
  Competition
       7




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Regulation
     8




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Available Information
  
  9




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Executive Officers
  John G. Duffy (58).
 Andrew M. Senchak (61).
 Thomas B. Michaud (43).
 Robert Giambrone (53).
 Mitchell B. Kleinman (54).
 10




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11




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Item 1A. Risk Factors.
 Risks Related to Our Business
 Difficult market conditions generally, and in the financial services industry specifically,
could adversely affect our business in many ways.
     12




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Our risk management policies and procedures may leave us exposed to unidentified or
unanticipated risks.
  13




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Committing our own capital in our underwriting, trading and other businesses increases the
potential for significant losses.
    Our ability to retain our professionals is critical to the success of our business, and our
failure to do so may materially adversely affect our reputation, business and results of
operations.
  14




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We face strong competition, including from entities with significantly more financial and other
resources.
    15




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Pricing and other competitive pressures may impair the revenues and profitability of our sales
and trading business.
    Our capital markets and strategic advisory engagements are singular in nature and do not
generally provide for subsequent engagements.
  16




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A significant portion of our sales commissions are generated from a relatively small number of
institutional customers.
  Limitations on our access to funding could impair our liquidity and our ability to conduct our
businesses.
     17




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Our operations and infrastructure may malfunction or fail.
     18




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We may be adversely affected by changes in services and products provided by third parties and
increases in related costs.
  Our financial results may fluctuate substantially from period to period, which may impair our
stock price.
  Poor investment performance may reduce revenues and profitability of our asset management
operations.
   19




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Strategic investments, acquisitions, entry into new businesses and joint ventures may result in
additional risks and uncertainties in our business.
     Growth of our business could result in increased costs.
  20




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Investments by our directors, officers, employees and our employee profit sharing retirement
plan may conflict with the interests of our stockholders.
   Our policies and procedures may limit the investment opportunities for our company.
  21




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Risks Related to Our Industry
 Risks associated with regulatory impact on capital markets.
  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.
   22




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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 or regulatory action against us could
materially adversely affect our businesses.
  23




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Risks Related to Our Shares
 We are controlled by our employee stockholders whose interests may differ from those of other
stockholders.
  Provisions of our organizational documents may discourage an acquisition of our company.
  24




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Future sales of our common stock could cause our stock price to decline.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
   
 Item 3. Legal Proceedings.
  25




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Regulatory Inquiries and Investigations
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  26




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PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
    Sales PriceHigh
    
    Low2007Fourth Quarter
    
    $
    32.92
    
    
    $
    24.48Third Quarter
    
    
    30.87
    
    
    
    22.74Second Quarter
    
    
    35.19
    
    
    
    29.38First Quarter
    
    
    37.84
    
    
    
    28.332006Fourth Quarter (since November 9, 2006)
    
    $
    30.40
    
    
    $
    25.51
      27




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Item 6. Selected Financial Data.
  Years
Ended December 31,2007
    
    
    2006
    
    
    2005
    
    

2004
    
    
    2003(Dollars in thousands, except per share information)Revenues:Investment banking
    
    $
    226,464
    
    
    $
    210,026
    
    
    $
    149,332
    
    
    $
    163,114
    
    
    $
    156,869Commissions
    
    
    165,803
    
    
    
    116,625
    
    
    
    96,301
    
    
    
    66,081
    
    
    
    50,408Principal transactions, net
    
    
    (7,520
    )
    
    
    45,773
    (1)
    
    
    36,568
    
    
    
    44,637
    
    
    
    44,208Interest and dividend income
    
    
    37,612
    
    
    
    26,920
    
    
    
    17,984
    
    
    
    8,629
    
    
    
    8,656Investment advisory fees
    
    
    1,751
    
    
    
    5,036
    
    
    
    3,843
    
    
    
    4,896
    
    
    
    5,597Other
    
    
    3,418
    
    
    
    2,206
    
    
    
    3,838
    (2)
    
    
    12,941
    (2)
    
    
    5,859Total revenues
    
    
    427,528
    
    
    
    406,586
    
    
    
    307,866
    
    
    
    300,298
    
    
    
    271,597Expenses:Compensation and benefits
    
    
    257,070
    
    
    
    216,518
    
    
    
    187,428
    
    
    
    170,484
    
    
    
    145,668Occupancy and equipment
    
    
    18,722
    
    
    
    17,728
    
    
    
    16,877
    
    
    
    14,545
    
    
    
    10,108Communications and data
processing
    
    
    24,283
    
    
    
    19,465
    
    
    
    18,526
    
    
    
    15,462
    
    
    
    11,600Brokerage and clearance
    
    
    22,967
    
    
    
    19,728
    
    
    
    17,390
    
    
    
    15,289
    
    
    
    10,857Interest
    
    
    14,732
    
    
    
    11,023
    
    
    
    8,105
    
    
    
    872
    
    
    
    875Business development
    
    
    16,601
    
    
    
    13,218
    
    
    
    13,141
    
    
    
    11,772
    
    
    
    9,703Other
    
    
    23,748
    
    
    
    17,257
    
    
    
    15,257
    
    
    
    16,734
    
    
    
    14,548Total non-compensation expenses
    
    
    121,053
    
    
    
    98,419
    
    
    
    89,296
    
    
    
    74,674
    
    
    
    57,691Total expenses
    
    
    378,123
    
    
    
    314,937
    
    
    
    276,724
    
    
    
    245,158
    
    
    
    203,359Income before income taxes
    
    
    49,405
    
    
    
    91,649
    
    
    
    31,142
    
    
    
    55,140
    
    
    
    68,238Income taxes
    
    
    22,113
    
    
    
    38,365
    
    
    
    13,735
    
    
    
    23,867
    
    
    
    30,073Net income(3)
    
    $
    27,292
    
    
    $
    53,284
    
    
    $
    17,407
    
    
    $
    31,273
    
    
    $
    38,165Earnings per share(3) (4):Basic
    
    $
    0.89
    
    
    $
    1.94
    
    
    $
    0.64
    
    
    $
    1.24
    
    
    $
    1.70Diluted
    
    $
    0.86
    
    
    $
    1.93
    
    
    $
    0.64
    
    
    $
    1.24
    
    
    $
    1.70Weighted average number of
common shares outstanding(4):Basic
    
    
    30,654,058
    
    
    
    27,512,023
    
    
    
    27,194,404
    
    
    
    25,253,771
    
    
    
    22,393,454Diluted
    
    
    31,561,751
    
    
    
    27,565,453
    
    
    
    27,215,001
    
    
    
    25,296,556
    
    
    
    22,427,295Consolidated Statements of
Financial Condition Data:Total assets
    
    $
    864,450
    
    
    $
    804,865
    
    
    $
    661,161
    
    
    $
    574,564
    
    
    $
    436,819Stockholders equity(3)
    
    $
    448,426
    
    
    $
    397,414
    
    
    $
    265,709
    
    
    $
    269,122
    
    
    $
    206,536Other Data (Unaudited):Book value per common share
    
    $
    15.31
    
    
    $
    13.59
    
    
    $
    10.13
    
    
    $
    10.81
    
    
    $
    9.65
 28




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(1)
    
    Principal transactions, net for the year ended December 31, 2006
included a gain of approximately $5.4 million with respect to the
exchange of our New York Stock Exchange seat for cash and shares of
the merged NYSE Group, Inc.(2)
    
    Other revenues in 2004 include approximately $10.1 million in
insurance recoveries and government grants relating to the World Trade
Center attacks in 2001. In 2005, we received approximately $0.4
million of additional government grants relating to the same World
Trade Center attacks.(3)
    
    Prior to the date of the IPO and the termination of the 2005 amended
and restated stockholders agreement, common stock was classified as a
liability. See Note 9 to our audited Consolidated Financial Statements
included elsewhere in this report.(4)
    
    In calculating shares of common stock outstanding, we give retroactive
effect to a 43 for 1 stock split that we effected on November 1, 2006. 29




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion should be read in conjunction with our audited consolidated financial
statements and the related notes included elsewhere in this report. In addition to historical
information, this discussion includes forward-looking information that involves risks and
assumptions, which could cause actual results to differ materially from managements expectations.
See Cautionary Statement Regarding Forward-Looking Statements included in the beginning of this
report.
 Overview
 ,
     30




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Business Environment
     31




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Results of Operations
 Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
 Overview
    Year Ended December 31,
    
    
    Period to Period2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(dollars in thousands)Revenues:Investment banking
    
    $
    226,464
    
    
    $
    210,026
    
    
    $
    16,438
    
    
    
    7.8
    %Commissions
    
    
    165,803
    
    
    
    116,625
    
    
    
    49,178
    
    
    
    42.2Principal transactions, net
    
    
    (7,520
    )
    
    
    45,773
    
    
    
    (53,293
    )
    
    
    (116.4
    )Interest and dividend income
    
    
    37,612
    
    
    
    26,920
    
    
    
    10,692
    
    
    
    39.7Investment advisory fees
    
    
    1,751
    
    
    
    5,036
    
    
    
    (3,285
    )
    
    
    (65.2
    )Other
    
    
    3,418
    
    
    
    2,206
    
    
    
    1,212
    
    
    
    54.9Total revenues
    
    
    427,528
    
    
    
    406,586
    
    
    
    20,942
    
    
    
    5.2Expenses:Compensation and benefits
    
    
    257,070
    
    
    
    216,518
    
    
    
    40,552
    
    
    
    18.7Occupancy and equipment
    
    
    18,722
    
    
    
    17,728
    
    
    
    994
    
    
    
    5.6Communications and data processing
    
    
    24,283
    
    
    
    19,465
    
    
    
    4,818
    
    
    
    24.8Brokerage and clearance
    
    
    22,967
    
    
    
    19,728
    
    
    
    3,239
    
    
    
    16.4Interest
    
    
    14,732
    
    
    
    11,023
    
    
    
    3,709
    
    
    
    33.6Business development
    
    
    16,601
    
    
    
    13,218
    
    
    
    3,383
    
    
    
    25.6Other
    
    
    23,748
    
    
    
    17,257
    
    
    
    6,491
    
    
    
    37.6Total non-compensation expenses
    
    
    121,053
    
    
    
    98,419
    
    
    
    22,634
    
    
    
    23.0Total expenses
    
    
    378,123
    
    
    
    314,937
    
    
    
    63,186
    
    
    
    20.1Income before income taxes
    
    
    49,405
    
    
    
    91,649
    
    
    
    (42,244
    )
    
    
    (46.1
    )Income taxes
    
    
    22,113
    
    
    
    38,365
    
    
    
    (16,252
    )
    
    
    (42.4
    )Net income (Note 9)
    
    $
    27,292
    
    
    $
    53,284
    
    
    $
    (25,992
    )
    
    
    (48.8
    )%
 32




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2007 and 2006 Non-GAAP Financial Measures
 Share-Based Payment
  33




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(Dollars in thousands, except per share information)
 ReconciliationGAAP
    
    
    Amount
    
    
    Non-GAAPYear ended December 31, 2007:Compensation and benefits expense
    
    $
    257,070
    
    
    $
    (12,509
    )(a)
    
    $
    244,561Income before income tax expense
    
    $
    49,405
    
    
    $
    12,509
    (a)
    
    $
    61,914Income tax expense
    
    $
    22,113
    
    
    $
    5,599
    (b)
    
    $
    27,712Net income
    
    $
    27,292
    
    
    $
    6,910
    (c)
    
    $
    34,202Compensation ratio (d)
    
    
    60.1
    %
    
    
    
    
    
    
    57.2
    %Earnings per share:Basic
    
    $
    0.89
    
    
    $
    0.23
    
    
    $
    1.12Diluted
    
    $
    0.86
    
    
    $
    0.22
    
    
    $
    1.08Weighted average number of common
shares outstanding:Basic
    
    
    30,654,058
    
    
    
    
    (e)
    
    
    30,654,058Diluted
    
    
    31,561,751
    
    
    
    
    (e)
    
    
    31,561,751Year ended December 31, 2006:Compensation and benefits expense
    
    $
    216,518
    
    
    $
    (1,882
    )(a)
    
    $
    214,636Income before income tax expense
    
    $
    91,649
    
    
    
    1,882
    (a)
    
    $
    93,531Income tax expense
    
    $
    38,365
    
    
    $
    821
    (b)
    
    $
    39,186Net income
    
    $
    53,284
    
    
    $
    1,061
    (c)
    
    $
    54,345Compensation ratio (d)
    
    
    53.3
    %
    
    
    
    
    
    
    52.8
    %Earnings per share:Basic
    
    $
    1.94
    
    
    $
    0.04
    
    
    $
    1.98Diluted
    
    $
    1.93
    
    
    $
    0.04
    
    
    $
    1.97Weighted average number of common
shares outstanding:Basic
    
    
    27,512,023
    
    
    
    
    (e)
    
    
    27,512,023Diluted
    
    
    27,565,453
    
    
    
    
    (e)
    
    
    27,565,453
 
 (a)
    
    The non-GAAP adjustment represents the pre-tax expense with respect to the amortization
of the IPO restricted stock awards granted to employees on November 8, 2006.(b)
    
    The non-GAAP adjustment to income tax expense represents the elimination of the tax
benefit resulting from the amortization of the IPO restricted stock awards in the
period.(c)
    
    The non-GAAP adjustment to net income was the after-tax amortization of the IPO
restricted stock awards in the respective periods.(d)
    
    The twelve months ended December 31, 2007 and 2006 compensation ratios were calculated
by dividing compensation and benefits expense by total revenues of $427,528 and
$406,586, respectively.(e)
    
    Both the basic and diluted weighted average common shares outstanding were not adjusted. 34




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Revenues
 Investment Banking
  Commissions
  35




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Principal Transactions, Net
  Interest and Dividend Income
  Investment Advisory Fees
  Other
  Expenses
 Compensation and Benefits
   Occupancy and Equipment
  36




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Communications and Data Processing
  Brokerage and Clearance
  Interest
  Business Development
  Other
  Income Tax Expense
  37




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Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
 Overview
    Year Ended December 31,
    
    
    Period to Period2006
    
    
    2005
    
    
    $ Change
    
    
    % Change(dollars in thousands)Revenues:Investment banking
    
    $
    210,026
    
    
    $
    149,332
    
    
    $
    60,694
    
    
    
    40.6
    %Commissions
    
    
    116,625
    
    
    
    96,301
    
    
    
    20,324
    
    
    
    21.1Principal transactions, net
    
    
    45,773
    
    
    
    36,568
    
    
    
    9,205
    
    
    
    25.2Interest and dividend income
    
    
    26,920
    
    
    
    17,984
    
    
    
    8,936
    
    
    
    49.7Investment advisory fees
    
    
    5,036
    
    
    
    3,843
    
    
    
    1,193
    
    
    
    31.0Other
    
    
    2,206
    
    
    
    3,838
    
    
    
    (1,632
    )
    
    
    (42.5
    )Total revenues
    
    
    406,586
    
    
    
    307,866
    
    
    
    98,720
    
    
    
    32.1Expenses:Compensation and benefits
    
    
    216,518
    
    
    
    187,428
    
    
    
    29,090
    
    
    
    15.5Occupancy and equipment
    
    
    17,728
    
    
    
    16,877
    
    
    
    851
    
    
    
    5.0Communications and data processing
    
    
    19,465
    
    
    
    18,526
    
    
    
    939
    
    
    
    5.1Brokerage and clearance
    
    
    19,728
    
    
    
    17,390
    
    
    
    2,338
    
    
    
    13.4Interest
    
    
    11,023
    
    
    
    8,105
    
    
    
    2,918
    
    
    
    36.0Business development
    
    
    13,218
    
    
    
    13,141
    
    
    
    77
    
    
    
    0.6Other
    
    
    17,257
    
    
    
    15,257
    
    
    
    2,000
    
    
    
    13.1Total non-compensation expenses
    
    
    98,419
    
    
    
    89,296
    
    
    
    9,123
    
    
    
    10.2Total expenses
    
    
    314,937
    
    
    
    276,724
    
    
    
    38,213
    
    
    
    13.8Income before income taxes
    
    
    91,649
    
    
    
    31,142
    
    
    
    60,507
    
    
    
    194.3Income taxes
    
    
    38,365
    
    
    
    13,735
    
    
    
    24,630
    
    
    
    179.3Net income (Note 9)
    
    $
    53,284
    
    
    $
    17,407
    
    
    $
    35,877
    
    
    
    206.1
    %
 38




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##### Table of Contents



2006 Non-GAAP Financial Measures
   December 31, 2006
    
    
    December 31, 2005ReconciliationGAAP
    
    
    Amount
    
    
    Non-GAAP
    
    
    GAAPCompensation and benefits expense
    
    $
    216,518
    
    
    $
    (1,882
    )(a)
    
    $
    214,636
    
    
    $
    187,428Income before income tax expense
    
    $
    91,649
    
    
    $
    1,882
    (a)
    
    $
    93,531
    
    
    $
    31,142Income tax expense
    
    $
    38,365
    
    
    $
    821
    (b)
    
    $
    39,186
    
    
    $
    13,735Net income
    
    $
    53,284
    
    
    $
    1,061
    (c)
    
    $
    54,345
    
    
    $
    17,407Compensation ratio (d)
    
    
    53.3
    %
    
    
    
    
    
    
    52.8
    %
    
    
    60.9
    %Earnings per share:Basic
    
    $
    1.94
    
    
    $
    0.04
    
    
    $
    1.98
    
    
    $
    0.64Diluted
    
    $
    1.93
    
    
    $
    0.04
    
    
    $
    1.97
    
    
    $
    0.64Weighted average shares outstanding:Basic
    
    
    27,512,023
    
    
    
    
    (e)
    
    
    27,512,023
    
    
    
    27,194,404Diluted
    
    
    27,565,453
    
    
    
    
    (e)
    
    
    27,565,453
    
    
    
    27,215,001
 
 (a)
    
    The non-GAAP adjustment represents the pre-tax expense with respect to the amortization
of the IPO restricted stock awards granted to employees on November 8, 2006.(b)
    
    The non-GAAP adjustment to income tax expense represents the elimination of the tax
benefit resulting from the amortization of the IPO restricted stock awards in the
period.(c)
    
    The non-GAAP adjustment to net income was the after-tax amortization of the IPO
restricted stock awards in the respective periods.(d)
    
    The twelve months ended December 31, 2006 and 2005 compensation ratios were calculated
by dividing compensation and benefits expense by total revenues of $406,586 and
$307,866, respectively.(e)
    
    Both the basic and diluted weighted average common shares outstanding were not adjusted.  39




---



##### Table of Contents



Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
  
    
    Higher realized and unrealized gains from proprietary trading in equity securities.
    
    Decreased volume in transactions with customers in fixed-income securities, leading to
lower aggregate markups and markdowns.
    
    Lower realized and unrealized losses from market-making positions in equity securities.
    
    Gain of $5.4 million with respect to the exchange of our NYSE seat for cash and shares
of NYSE Group, Inc.
 Interest and Dividend Income
  Investment Advisory Fees
  40




---



##### Table of Contents



Other
  Expenses
 Compensation and Benefits
   Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Business Development
  41




---



##### Table of Contents



Other
  Income Tax Expense
  Liquidity and Capital Resources
      42




---



##### Table of Contents



Cash Flows
 Year ended December 31, 2007.
   Year ended December 31, 2006.
  43




---



##### Table of Contents



Year ended December 31, 2005.
 
  Critical Accounting Policies and Estimates
   44




---



##### Table of Contents




    
    The nature of the estimate or assumption is material due to the level
of subjectivity and judgment necessary to account for highly uncertain
matters or the susceptibility of such matters to change, and
    
    The impact of the estimate or assumption on our financial condition or
operating performance is material.
  Fair Value of Financial Instruments
 Fair Value Measurements
   Income Taxes
  45




---



##### Table of Contents



Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
 Contractual Obligations
  Payments due by Period2009-
    
    2011-
    
    2013 andTotal
    
    2008
    
    2010
    
    2012
    
    thereafterOperating lease obligations
    
    $
    119,654
    
    
    $
    12,376
    
    
    $
    28,469
    
    
    $
    28,573
    
    
    $
    50,236
  Off-Balance Sheet Arrangements
   Recently Issued Accounting Standards, Not Yet Adopted
 The Fair Value Option for Financial Assets and
Financial Liabilities
 46




---



##### Table of Contents



47




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 Market Risk
     High
    
    Low
    
    Average(dollars in thousands)Long Value:Equities
    
    $
    181,769
    
    
    $
    102,966
    
    
    $
    150,366Corporate and other debt
    
    
    323,765
    
    
    
    132,498
    
    
    
    243,293U.S. Government and agency securities
    
    
    45,591
    
    
    
    
    
    
    
    10,857Mortgage backed securities
    
    
    14,645
    
    
    
    
    
    
    
    1,772Other investments
    
    
    62,777
    
    
    
    41,556
    
    
    
    54,164Short Value:Equities
    
    $
    61,921
    
    
    $
    29,528
    
    
    $
    48,143Corporate and other debt
    
    
    9,936
    
    
    
    
    
    
    
    3,565U.S. Government and agency securities
    
    
    110,057
    
    
    
    23,780
    
    
    
    61,649Mortgage backed securities
    
    
    5,876
    
    
    
    
    
    
    
    452
 Interest Rate Risk
  48




---



##### Table of Contents



Credit Risk
  Inflation Risk
  Operational Risk
  49




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
 INDEX TO FINANCIAL STATEMENTS
 PageManagements Report on Internal Control over Financial Reporting.
    
    
    51Report of Independent Registered Public Accounting Firm.
    
    
    52Consolidated Statements of Financial Condition as of December 31, 2007 and 2006.
    
    
    55Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended
December 31, 2007.
    
    
    56Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income for
Each of the Years in the Three-Year Period Ended December 31, 2007.
    
    
    57Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period
Ended December 31, 2007.
    
    
    58Notes to Consolidated Financial Statements.
    
    
    59
 50




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Managements Report on Internal Control over Financial Reporting
      51




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal
Control  Integrated Framework
    Internal Control -
Integrated Framework
  52




---



##### Table of Contents



53




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    Internal Control  Integrated Framework
 
 54




---



##### Table of Contents



KBW, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2007 and 2006
(Dollars in thousands)
 2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    194,358
    
    
    $
    165,647Financial instruments owned, at fair value:Equities
    
    
    102,966
    
    
    
    117,285Corporate and other debt
    
    
    224,812
    
    
    
    135,744U.S. Government and agency securities
    
    
    
    
    
    
    15,905Mortgage backed securities
    
    
    
    
    
    
    14,645Other investments
    
    
    54,515
    
    
    
    47,158382,293
    
    
    
    330,737Securities purchased under resale agreements
    
    
    23,846
    
    
    
    62,319Receivables from clearing brokers
    
    
    191,234
    
    
    
    185,712Accounts receivable
    
    
    21,196
    
    
    
    25,740Furniture, equipment and leasehold improvements,
at cost, less accumulated depreciation and amortization
of $19,259 in 2007 and $18,297 in 2006
    
    
    19,801
    
    
    
    22,151Other assets
    
    
    31,722
    
    
    
    12,559Total assets
    
    $
    864,450
    
    
    $
    804,865LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Securities sold under repurchase agreements
    
    $
    94,784
    
    
    $
    84,536Short-term borrowings
    
    
    65,099
    
    
    
    28,500Financial instruments sold, not yet purchased, at fair
value:Equities
    
    
    48,061
    
    
    
    29,528Corporate and other debt
    
    
    5,000
    
    
    
    5,082U.S. Government and agency securities
    
    
    23,780
    
    
    
    76,36276,841
    
    
    
    110,972Accounts payable, accrued expenses, and other liabilities
    
    
    172,263
    
    
    
    166,671Income taxes payable
    
    
    7,037
    
    
    
    16,772Total liabilities
    
    
    416,024
    
    
    
    407,451Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    293
    
    
    
    292Paid-in capital
    
    
    114,014
    
    
    
    94,419Retained earnings
    
    
    337,368
    
    
    
    310,076Notes receivable from stockholders
    
    
    (5,254
    )
    
    
    (8,843
    )Accumulated other comprehensive income
    
    
    2,005
    
    
    
    1,470Total stockholders equity
    
    
    448,426
    
    
    
    397,414Total liabilities and stockholders equity
    
    $
    864,450
    
    
    $
    804,865
  55




---



##### Table of Contents



KBW Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands, except per share information)
 2007
    
    
    2006
    
    
    2005Revenues:Investment banking
    
    $
    226,464
    
    
    $
    210,026
    
    
    $
    149,332Commissions
    
    
    165,803
    
    
    
    116,625
    
    
    
    96,301Principal transactions, net
    
    
    (7,520
    )
    
    
    45,773
    
    
    
    36,568Interest and dividend income
    
    
    37,612
    
    
    
    26,920
    
    
    
    17,984Investment advisory fees
    
    
    1,751
    
    
    
    5,036
    
    
    
    3,843Other
    
    
    3,418
    
    
    
    2,206
    
    
    
    3,838Total revenues
    
    
    427,528
    
    
    
    406,586
    
    
    
    307,866Expenses:Compensation and benefits
    
    
    257,070
    
    
    
    216,518
    
    
    
    187,428Occupancy and equipment
    
    
    18,722
    
    
    
    17,728
    
    
    
    16,877Communications and data
processing
    
    
    24,283
    
    
    
    19,465
    
    
    
    18,526Brokerage and clearance
    
    
    22,967
    
    
    
    19,728
    
    
    
    17,390Interest
    
    
    14,732
    
    
    
    11,023
    
    
    
    8,105Business development
    
    
    16,601
    
    
    
    13,218
    
    
    
    13,141Other
    
    
    23,748
    
    
    
    17,257
    
    
    
    15,257Total expenses
    
    
    378,123
    
    
    
    314,937
    
    
    
    276,724Income before
income tax expense
    
    
    49,405
    
    
    
    91,649
    
    
    
    31,142Income tax expense
    
    
    22,113
    
    
    
    38,365
    
    
    
    13,735Net income (Note 9)
    
    $
    27,292
    
    
    $
    53,284
    
    
    $
    17,407Earnings per common share (Note
9):Basic
    
    $
    0.89
    
    
    $
    1.94
    
    
    $
    0.64Diluted
    
    $
    0.86
    
    
    $
    1.93
    
    
    $
    0.64Weighted average number of
common
shares outstanding:Basic
    
    
    30,654,058
    
    
    
    27,512,023
    
    
    
    27,194,404Diluted
    
    
    31,561,751
    
    
    
    27,565,453
    
    
    
    27,215,001
  56




---



##### Table of Contents



KBW, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands, except per share information)
 Notes
    
    
    AccumulatedCommon
    
    
    Receivable
    
    
    Other
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    from
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Stockholders
    
    
    Income (loss)
    
    
    EquityBalance at December 31, 2004
    
    $
    
    
    
    $
    38
    
    
    $
    201,709
    
    
    $
    340,872
    
    
    $
    (254,558
    )
    
    $
    (19,899
    )
    
    $
    960
    
    
    $
    269,122Net income (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,407Other comprehensive loss,
currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,815
    )
    
    
    (1,815
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,592Purchase of 242,520 shares of
common stock for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,564
    )
    
    
    
    
    
    
    
    
    
    
    (2,564
    )Issuance of 6,794 shares of
common stock from treasury
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    1,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,741Retirement of 24,613,802 shares
of
common stock from treasury
    
    
    
    
    
    
    (32
    )
    
    
    (192,328
    )
    
    
    (64,762
    )
    
    
    257,122
    
    
    
    
    
    
    
    
    
    
    
    Purchase of 215,301 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    (2,103
    )
    
    
    
    
    
    
    
    
    
    
    621
    
    
    
    
    
    
    
    (1,482
    )Issuance of 1,866,286 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    18,285
    
    
    
    
    
    
    
    
    
    
    
    (3,897
    )
    
    
    
    
    
    
    14,388Excess net tax benefit related
to delivery of restricted stock
units
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Repayment of notes receivable
from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,606
    
    
    
    
    
    
    
    5,606Payment to common stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,725
    )Balance at December 31, 2005
    
    
    
    
    
    
    6
    
    
    
    27,410
    
    
    
    256,792
    
    
    
    
    
    
    
    (17,644
    )
    
    
    (855
    )
    
    
    265,709Net income (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,284Other comprehensive income,
currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,325
    
    
    
    2,325Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,609Purchase of 1,182,328 shares of
common stock
    
    
    
    
    
    
    (12
    )
    
    
    (12,206
    )
    
    
    
    
    
    
    
    
    
    
    1,218
    
    
    
    
    
    
    
    (11,000
    )Issuance of 4,122,482 shares of
common stock
    
    
    
    
    
    
    41
    
    
    
    76,808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,849Forty-three for one stock split
effective November 1, 2006
    
    
    
    
    
    
    257
    
    
    
    (257
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    3,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,476Restricted stock units converted
    
    
    
    
    
    
    
    
    
    
    (1,175
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,175
    )Excess net tax benefit related
to delivery of restricted stock
units
    
    
    
    
    
    
    
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    363Repayment of notes receivable
from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,583
    
    
    
    
    
    
    
    7,583Balance at December 31, 2006
    
    
    
    
    
    
    292
    
    
    
    94,419
    
    
    
    310,076
    
    
    
    
    
    
    
    (8,843
    )
    
    
    1,470
    
    
    
    397,414Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,292Other comprehensive income,
currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535
    
    
    
    535Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,827Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    20,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,564Purchase of 79,172 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    (2,170
    )
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    (1,965
    )Issuance of 163,244 shares of
common stock
    
    
    
    
    
    
    1
    
    
    
    2,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,642Restricted stock units converted
    
    
    
    
    
    
    
    
    
    
    (1,078
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,078
    )Stock-based awards vested
    
    
    
    
    
    
    
    
    
    
    (1,564
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,564
    )Excess tax benefit related to
delivery of restricted stock
units
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,202Repayment of notes receivable
from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,384
    
    
    
    
    
    
    
    3,384Balance at December 31, 2007
    
    $
    
    
    
    $
    293
    
    
    $
    114,014
    
    
    $
    337,368
    
    
    $
    
    
    
    $
    (5,254
    )
    
    $
    2,005
    
    
    $
    448,426
  Number of SharesPar Value
    
    
    
    December 31,
    
    Authorized
    
    Issued
    
    Outstanding$
    0.01
    
    
    
    
    
    2007
    
    
    
    140,000,000
    
    
    
    29,289,013
    
    
    
    29,289,013$
    0.01
    
    
    
    
    
    2006
    
    
    
    140,000,000
    
    
    
    29,204,941
    
    
    
    29,204,941$
    0.01
    
    
    
    
    
    2005
    
    
    
    387,000,000
    
    
    
    26,264,787
    
    
    
    26,264,787
  Number of SharesPar Value
    
    
    
    December 31,
    
    Authorized
    
    Issued
    
    Outstanding$
    0.01
    
    
    
    
    
    2007
    
    
    
    10,000,000
    
    
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    2006
    
    
    
    10,000,000
    
    
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    2005
    
    
    
    1,000,000
    
    
    
    
    
    
    
    
  57




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KBW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    27,292
    
    
    $
    53,284
    
    
    $
    17,407Adjustments to reconcile net income to net cash provided by
operating activities:Non-monetary transaction
    
    
    (6,518
    )
    
    
    
    
    
    
    Amortization of stock-based compensation
    
    
    20,564
    
    
    
    3,476
    
    
    
    1,741Depreciation and amortization
    
    
    4,895
    
    
    
    5,906
    
    
    
    5,737Deferred income tax (benefit) expense
    
    
    (10,125
    )
    
    
    330
    
    
    
    (2,845
    )(Increase) decrease in operating assets:Financial instruments owned, at fair value
    
    
    (45,038
    )
    
    
    55,899
    
    
    
    (121,253
    )Securities purchased under resale agreements
    
    
    38,473
    
    
    
    (18,438
    )
    
    
    21,851Receivables from clearing brokers
    
    
    (5,522
    )
    
    
    (94,082
    )
    
    
    40,353Accounts receivable
    
    
    4,544
    
    
    
    47
    
    
    
    (14,315
    )Other assets
    
    
    (9,038
    )
    
    
    81
    
    
    
    5,971Increase (decrease) in operating liabilities:Financial instruments sold, not yet purchased, at fair value
    
    
    (34,131
    )
    
    
    13,973
    
    
    
    (41,310
    )Securities sold under repurchase agreements
    
    
    10,248
    
    
    
    82,261
    
    
    
    (25,540
    )Short-term borrowings
    
    
    36,599
    
    
    
    (35,250
    )
    
    
    63,750Payable to clearing broker
    
    
    
    
    
    
    (91,977
    )
    
    
    91,977Accounts payable, accrued expenses and other liabilities
    
    
    5,592
    
    
    
    36,285
    
    
    
    (1,349
    )Income taxes payable
    
    
    (9,735
    )
    
    
    6,707
    
    
    
    2,482Net cash provided by operating activities
    
    
    28,100
    
    
    
    18,502
    
    
    
    44,657Cash flows from investing activities:Purchase of furniture, equipment and leasehold improvements
    
    
    (2,545
    )
    
    
    (3,442
    )
    
    
    (6,136
    )Net cash used in investing activities
    
    
    (2,545
    )
    
    
    (3,442
    )
    
    
    (6,136
    )Cash flows from financing activities:Purchase of shares of common stock for treasury
    
    
    
    
    
    
    
    
    
    
    (2,564
    )Issuance of shares of common stock
    
    
    
    
    
    
    75,674
    
    
    
    18,285Purchase of shares of common stock
    
    
    (1,965
    )
    
    
    (11,000
    )
    
    
    (1,482
    )Excess tax benefit related to the delivery of restricted
stock units
    
    
    1,202
    
    
    
    363
    
    
    
    Issuance of notes receivable from stockholders
    
    
    
    
    
    
    
    
    
    
    (3,897
    )Payment to common stockholders
    
    
    
    
    
    
    
    
    
    
    (36,725
    )Repayment of notes receivable from stockholders
    
    
    3,384
    
    
    
    7,583
    
    
    
    5,606Net cash provided by (used in) financing activities
    
    
    2,621
    
    
    
    72,620
    
    
    
    (20,777
    )Currency adjustment:Effect of exchange rate changes on cash
    
    
    535
    
    
    
    2,325
    
    
    
    (1,815
    )Net increase in cash and cash equivalents
    
    
    28,711
    
    
    
    90,005
    
    
    
    15,929Cash and cash equivalents at the beginning of the year
    
    
    165,647
    
    
    
    75,642
    
    
    
    59,713Cash and cash equivalents at the end of the year
    
    $
    194,358
    
    
    $
    165,647
    
    
    $
    75,642Supplemental disclosures of cash flow information:Cash paid during the year for:Income taxes
    
    $
    47,546
    
    
    $
    29,334
    
    
    $
    7,899Interest
    
    $
    14,800
    
    
    $
    10,743
    
    
    $
    7,570
  58




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share information)
 (1) Organization
 Organization and Basis of Presentation
  (2) Summary of Significant Accounting Policies
 (a) Principles of Consolidation
  (b) Use of Estimates
  (c) Cash and Cash Equivalents
  (d) Fair Value of Financial Instruments
 Fair Value Measurements
 59




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
   (e) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
   (f) Receivables From and Payable to Clearing Brokers
  (g) Furniture, Equipment and Leasehold Improvements
  60




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KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  (h) Revenue Recognition
 Investment Banking
  
    
    Underwriting revenues are recorded, net of related syndicate expenses, at the time the
underwriting is completed. In syndicated underwritten transactions, management estimates
the Companys share of transaction-related expenses incurred by the syndicate, and the
Company recognizes revenue net of such expense. On final settlement, the Company adjusts
these amounts to reflect the actual transaction-related expenses and resulting
underwriting fee.
    
    Strategic advisory revenues are recorded when the transactions or the services (or, if
applicable, separate components thereof) to be performed are substantially complete, the
fees are determinable and collection is reasonably assured.
    
    Private placement revenues are recorded when the services related to the underlying
transaction are completed under the terms of the engagement. This is generally the
closing date of the transaction.
  Commissions
  Principal transactions
  Interest and dividend income
  (i) Securitization Activities
 61




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  (j) Stock-Based Compensation
 Share-Based Payments
 (k) Income Taxes
  Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
 (l) Earnings Per Share (EPS)
   62




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  (m) Foreign Currency Translation
  (n) Contributions
 Accounting For Contributions Received and Contributions Made
 (o) Reclassifications
  (3) Financial Instruments
   Level 1
    
    Quoted market prices in active markets for identical assets or liabilities.Level 2
    
    Observable market based inputs or unobservable inputs that are corroborated
by market data.Level 3
    
    Unobservable inputs that are not corroborated by market data.
 63




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KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
     64




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 Assets at Fair Value as of December 31, 2007
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments owned, at
fair value:Equities
    
    $
    76,581
    
    
    $
    2,741
    
    
    $
    23,541
    
    
    $
    102,863Corporate and other debt
    
    
    
    
    
    $
    131,052
    
    
    $
    93,760
    
    
    $
    224,812Other Investments
    
    
    
    
    
    
    
    
    
    
    54,515
    
    
    
    54,515Total non derivative trading assets
    
    
    76,581
    
    
    
    133,793
    
    
    
    171,816
    
    
    
    382,190Derivative financial instruments
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Total Assets at Fair Value
    
    $
    76,684
    
    
    $
    133,793
    
    
    $
    171,816
    
    
    $
    382,293
 Liabilities at Fair Value as of December 31, 2007
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments sold, but not yet
purchased,
at fair value:Equities
    
    $
    47,983
    
    
    $
    
    
    
    $
    
    
    
    $
    47,983Corporate and other debt
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    5,000U.S. Government and agency securities
    
    
    23,780
    
    
    
    
    
    
    
    
    
    
    
    23,780Total non derivative trading liabilities
    
    
    71,763
    
    
    
    5,000
    
    
    
    
    
    
    
    76,763Derivative financial instruments
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Total financial instruments sold, not
yet purchased
    
    $
    71,841
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    76,841
    Changes in unrealizedTotal gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    gains and (losses)Balance as of
    
    and (losses)
    
    
    
    
    
    Transfers
    
    Balance as of
    
    included in earningsDecember 31,
    
    (realized and
    
    Purchases/
    
    in/(out) of Level
    
    December 31,
    
    related to assets still2006
    
    unrealized)
    
    (sales), net
    
    3
    
    2007
    
    held at reporting dateNon-derivative
trading assets
    
    $
    56,227
    
    
    
    ($2,388
    )
    
    $
    23,832
    
    
    $
    94,145
    
    
    $
    171,816
    
    
    
    $1,814
 65




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
     (4) Short-Term Borrowings
  (5) Commitments and Contingencies
 (a) Leases
  66




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  Lease paymentsYear:2008
    
    $
    12,3762009
    
    
    14,3122010
    
    
    14,1572011
    
    
    14,0832012
    
    
    14,490Thereafter
    
    
    50,236Total
    
    $
    119,654
  (b) Litigation
 Accounting for Contingencies
 (c) Limited Partnership Commitments
  (6) Financial Instruments with Off-Balance-Sheet Risk
   67




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 (a) Broker-Dealer Activities
  (b) Derivative Financial Instruments
    Current
    
    
    
    
    
    End ofnotional
    
    Average fair
    
    period fairvalue
    
    value
    
    valueDecember 31, 2007:Purchased options
    
    $
    1,100
    
    
    $
    101
    
    
    $
    103Written options
    
    $
    2,600
    
    
    $
    100
    
    
    $
    78Short futures contracts
    
    $
    3,923
    
    
    $
    
    
    
    $
    December 31, 2006:Purchased options
    
    $
    500
    
    
    $
    92
    
    
    $
    160Written options
    
    $
    400
    
    
    $
    87
    
    
    $
    5Short futures contracts
    
    $
    2,375
    
    
    $
    
    
    
    $
    
 (7) Concentrations of Credit Risk
   68




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  (8) Notes Receivable from Stockholders
  (9) Common Stock
  (10) Securitization Activities
  (11) Non-Monetary Transaction
  (12) Stock-Based Compensation
  2006 Equity Incentive Plan:
 69




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
   Weighted AverageYear Ended
    
    
    Grant Date FairDecember 31, 2007
    
    
    ValueRestricted stock awards:Balance, beginning of year
    
    
    2,592,100
    
    
    $
    21.00Grants
    
    
    626,393
    
    
    $
    31.10Forfeited
    
    
    (144,643
    )
    
    $
    21.66Vested
    
    
    (50,025
    )
    
    $
    31.26Balance, end of year
    
    
    3,023,825
    
    
    $
    22.89
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Restricted stock awards:Balance, beginning of year
    
    
    2,592,100
    
    
    
    
    
    
    
    Grants
    
    
    626,393
    
    
    
    2,592,200
    
    
    
    Forfeited
    
    
    (144,643
    )
    
    
    (100
    )
    
    
    Vested
    
    
    (50,025
    )
    
    
    
    
    
    
    Balance, end of year
    
    
    3,023,825
    
    
    
    2,592,100
   Restricted Stock Units:
  70




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 Year Ended
    
    
    Weighted AverageDecember 31, 2007
    
    
    Grant Date Fair ValueFuture
    
    
    No Future
    
    
    Future
    
    
    No FutureService
    
    
    Service
    
    
    Service
    
    
    ServiceRequired
    
    
    Required
    
    
    Required
    
    
    RequiredRestricted stock units:Balance, beginning of year
    
    
    109,693
    
    
    
    1,439,855
    
    
    $
    10.32
    
    
    $
    6.76Vested
    
    
    (105,995
    )
    
    
    105,995
    
    
    
    10.33
    
    
    
    10.33Converted and redeemed
    
    
    
    
    
    
    (113,219
    )
    
    
    
    
    
    
    9.52Balance, end of year *
    
    
    3,698
    
    
    
    1,432,631
    
    
    $
    9.98
    
    
    $
    6.80
 
 *
    
    The balance of RSUs with respect to future service required at December 31, 2007 will vest in
2008. Year Ended December 31,2007
    
    
    2006
    
    
    2005Restricted stock units:Balance, beginning of year
    
    
    1,549,548
    
    
    
    1,751,003
    
    
    
    1,751,003Grants
    
    
    
    
    
    
    3,698
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Converted and redeemed
    
    
    (113,219
    )
    
    
    (205,153
    )
    
    
    Balance, end of year
    
    
    1,436,329
    
    
    
    1,549,548
    
    
    
    1,751,003
     (13) Employee Profit-Sharing and Retirement Plan
  71




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
  (14) Earnings Per Share
  Years Ended December 31,2007
    
    
    2006
    
    
    2005Numerator for basic and diluted EPS
 net income (Note 9)
    
    $
    27,292
    
    
    $
    53,284
    
    
    $
    17,407Denominator for EPS  weighted average number of
common shares outstanding:Basic
    
    
    30,654,058
    
    
    
    27,512,023
    
    
    
    27,194,404Effect of dilutive securities  restricted stock
    
    
    907,693
    
    
    
    53,430
    
    
    
    20,597Diluted
    
    
    31,561,751
    
    
    
    27,565,453
    
    
    
    27,215,001Earnings per common share:Basic
    
    $
    0.89
    
    
    $
    1.94
    
    
    $
    0.64Diluted
    
    $
    0.86
    
    
    $
    1.93
    
    
    $
    0.64
 72




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 (15) Income Taxes
  Current
    
    
    Deferred
    
    
    TotalYear ended December 31, 2007U.S. Federal
    
    $
    22,359
    
    
    $
    (6,909
    )
    
    $
    15,450State and Local
    
    
    8,475
    
    
    
    (2,505
    )
    
    
    5,970Non-U.S.
    
    
    1,404
    
    
    
    (711
    )
    
    
    693$
    32,238
    
    
    $
    (10,125
    )
    
    $
    22,113Year ended December 31, 2006U.S. Federal
    
    $
    26,400
    
    
    $
    590
    
    
    $
    26,990State and Local
    
    
    10,560
    
    
    
    260
    
    
    
    10,820Non-U.S.
    
    
    1,075
    
    
    
    (520
    )
    
    
    555$
    38,035
    
    
    $
    330
    
    
    $
    38,365Year ended December 31, 2005U.S. Federal
    
    $
    10,633
    
    
    $
    (1,646
    )
    
    $
    8,987State and Local
    
    
    5,019
    
    
    
    (731
    )
    
    
    4,288Non-U.S.
    
    
    928
    
    
    
    (468
    )
    
    
    460$
    16,580
    
    
    $
    (2,845
    )
    
    $
    13,735
  2007
    
    
    2006
    
    
    2005Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof Pretax
    
    
    
    
    
    
    of Pretax
    
    
    
    
    
    
    of PretaxAmount
    
    
    Earnings
    
    
    Amount
    
    
    Earnings
    
    
    Amount
    
    
    EarningsComputed expected tax provision
    
    $
    17,292
    
    
    
    35.0
    %
    
    $
    32,077
    
    
    
    35.0
    %
    
    $
    10,900
    
    
    
    35.0
    %Non-U.S. tax rate differential
    
    
    (70
    )
    
    
    (0.1
    )
    
    
    (80
    )
    
    
    (0.1
    )
    
    
    (66
    )
    
    
    (0.2
    )State and local taxes, net of related
Federal income tax benefit
    
    
    3,881
    
    
    
    7.9
    
    
    
    7,033
    
    
    
    7.7
    
    
    
    2,796
    
    
    
    9.0Permanent differences
    
    
    1,010
    
    
    
    2.0
    
    
    
    (665
    )
    
    
    (0.7
    )
    
    
    105
    
    
    
    0.3$
    22,113
    
    
    
    44.8
    %
    
    $
    38,365
    
    
    
    41.9
    %
    
    $
    13,735
    
    
    
    44.1
    %
   73




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
   2007
    
    
    2006Deferred tax assets:Employee compensation and benefits
    
    $
    13,257
    
    
    $
    5,768Legal contingencies
    
    
    298
    
    
    
    484Other
    
    
    158
    
    
    
    Total deferred tax assets
    
    
    13,713
    
    
    
    6,252Deferred tax liabilities:Accumulated depreciation and amortization of
furniture, equipment and leasehold improvements
    
    
    (849
    )
    
    
    (1,561
    )Financial instruments owned, at fair value
    
    
    (1,818
    )
    
    
    (3,785
    )Total deferred tax liabilities
    
    
    (2,667
    )
    
    
    (5,346
    )Net deferred tax assets
    
    $
    11,046
    
    
    $
    906
     74




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 AmountBalance as of January 1, 2007
    
    $
    5,801Additions based upon current
year tax positions
    
    
    644Additions for prior years
tax positions
    
    
    334Reductions for prior years
tax positions
    
    
    (65
    )Settlements
    
    
    (222
    )Balance as of December 31, 2007
    
    $
    6,492
    (16) Industry Segment Data
 Disclosures about Segments of an
Enterprise and Related Information
 (17) Recent Accounting Developments
 The Fair Value Option for Financial Assets and
Financial Liabilities
 75




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 (18) Net Capital Requirement
  December 31, 2007Net Capital
    
    $
    100,302Excess net capital
    
    $
    90,920
  (19) Selected Quarterly Financial Information (Unaudited)
  2007
 First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    101,279
    
    
    $
    119,752
    
    
    $
    101,135
    
    
    $
    105,362Net Income
    
    $
    7,720
    
    
    $
    10,395
    
    
    $
    5,535
    
    
    $
    3,642Earnings per share (*):Basic
    
    $
    0.25
    
    
    $
    0.34
    
    
    $
    0.18
    
    
    $
    0.12Diluted
    
    $
    0.24
    
    
    $
    0.33
    
    
    $
    0.18
    
    
    $
    0.11Average shares outstanding:Basic
    
    
    30,640,736
    
    
    
    30,603,734
    
    
    
    30,665,945
    
    
    
    30,704,979Diluted
    
    
    31,525,629
    
    
    
    31,543,189
    
    
    
    31,546,276
    
    
    
    31,734,882
 2006
 First
    
    
    Second
    
    
    Third
    
    
    FourthRevenues
    
    $
    101,438
    
    
    $
    91,708
    
    
    $
    93,212
    
    
    $
    120,229Net Income
    
    $
    10,156
    
    
    $
    8,394
    
    
    $
    9,310
    
    
    $
    25,424Earnings per share (*):Basic
    
    $
    0.37
    
    
    $
    0.31
    
    
    $
    0.35
    
    
    $
    0.88Diluted
    
    $
    0.37
    
    
    $
    0.31
    
    
    $
    0.35
    
    
    $
    0.87Average shares outstanding:Basic
    
    
    27,386,872
    
    
    
    26,917,398
    
    
    
    26,749,483
    
    
    
    28,991,535Diluted
    
    
    27,412,199
    
    
    
    26,917,398
    
    
    
    26,749,483
    
    
    
    29,363,999
 76




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##### Table of Contents



KBW, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share information)
 
 *
    
    Summation of the quarters earnings per share may not equal the annual amounts due to the
averaging effect of the number of shares outstanding throughout each respective year. 77




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  
 Item 9A.
    
    Controls and Procedures.
     
 Item 9B.
    
    Other Information.
  
 PART III
 
 Item 10.
    
    Directors, Executive Officers and Corporate Governance.
  
 Item 11.
    
    Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
  78




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##### Table of Contents



Item 13.
    
    Certain Relationships and Related Transactions and Director Independence.
  
 Item 14.
    
    Principal Accountant Fees and Services.
  
 PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Managements Report on Internal Control over Financial Reporting
    
    51Report of Independent Registered Public Accounting Firm
    
    52Consolidated Statements of Financial Condition as of December 31, 2007 and 2006
    
    55Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
    
    56Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
for the years ended December 31, 2007, 2006 and 2005
    
    57Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    58Notes to Consolidated Financial Statements
    
    59
     79




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##### Table of Contents



SIGNATURES
   KBW, INC.By:
    /s/ John G. DuffyName:
    John G. DuffyTitle:
    Chairman and Chief Executive Officer   Signature
    
    Title/s/ John G. Duffy

John G. Duffy
    
    Director, Chairman and Chief Executive Officer
(principal executive officer)/s/ Robert Giambrone

Robert Giambrone
    
    Chief Financial Officer
(principal financial and accounting officer)/s/ Andrew M. Senchak

Andrew M. Senchak
    
    Director/s/ Thomas B. Michaud

Thomas B. Michaud
    
    Director/s/ Daniel M. Healy

Daniel M. Healy
    
    Director/s/ Christopher M. Condron

Christopher M. Condron
    
    Director/s/ James K.Schmidt

James K. Schmidt
    
    Director/s/ Michael J. Zimmerman

Michael J. Zimmerman
    
    Director
 80




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##### Table of Contents



EXHIBIT INDEX
 3 .1
    
    Second Amended and Restated Certificate of Incorporation of KBW, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrants quarterly
report on Form 10-Q with respect to the quarter ended September 30, 2007
filed on November 13, 2007).3.2
    
    Amended and Restated Bylaws of KBW, Inc. (incorporated by reference to
Exhibit 3.2 to the Registrants quarterly report on Form 10-Q with respect to
the quarter ended September 30, 2006 filed on December 15, 2006).4.1
    
    Specimen Common Stock Certificate of KBW, Inc. (incorporated by reference to
Exhibit 4.1 to the Registrants registration statement on Form S-1/A (No.
333-136509) filed on September 28, 2006).4.2
    
    Second Amended and Restated Stockholders Agreement (incorporated by
reference to Exhibit 4.1 to the Registrants quarterly report on Form 10-Q
with respect to the quarter ended September 30, 2006 filed on December 15,
2006).10.1
    
    KBW, Inc. 2006 Equity Incentive Plan (incorporated by reference to Exhibit
10.4 to the Registrants quarterly report on Form 10-Q with respect to the
quarter ended September 30, 2006 filed on December 15, 2006).10.2
    
    Fully Disclosed Clearing Agreement, dated as of October 22, 1992, between
Pershing LLC and Keefe, Bruyette & Woods, Inc., as amended (incorporated by
reference to Exhibit 10.3 to the Registrants registration statement on Form
S-1/A (No. 333-136509) filed on September 28, 2006).10.3
    
    Fully Disclosed Clearing Agreement, dated as of February 28, 2005, between
Fortis Securities LLC and Keefe, Bruyette & Woods, Inc. (incorporated by
reference to Exhibit 10.4 to the Registrants registration statement on Form
S-1/A (No. 333-136509) filed on September 28, 2006).10.4
    
    Agreement of Lease, dated November 12, 2002, between the Equitable Life
Assurance Society of the United States, ELAS Securities Acquisition Corp. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit 10.5 to
the Registrants registration statement on Form S-1/A (No. 333-136509) filed
on September 28, 2006).10.5
    
    First Amendment to Lease, dated September 6, 2003, between the Equitable Life
Assurance Society of the United States, ELAS Securities Acquisition Corp. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit 10.6 to
the Registrants registration statement on Form S-1/A (No. 333-136509) filed
on September 28, 2006).10.6
    
    Second Amendment to Lease, dated September 6, 2004, between the Equitable
Life Assurance Society of the United States, ELAS Securities Acquisition
Corp. and Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit
10.7 to the Registrants registration statement on Form S-1/A (No.
333-136509) filed on September 28, 2006).10.7
    
    KBW, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.5 to
the Registrants quarterly report on Form 10-Q with respect to the quarter
ended September 30, 2006 filed on December 15, 2006).10.8
    
    Form of Restricted Stock Award Agreement for Awards under the 2006 Equity
Incentive Plan in connection with the IPO (incorporated by reference to
Exhibit 10.8 to the Registrants annual report on Form 10-K with respect to
the year ended December 31, 2006, filed on March 30, 2007).10.9
    
    Form of Restricted Stock Award Agreement for February 2007 awards under the
2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Registrants annual report on Form 10-K with respect to the year ended
December 31, 2006, filed on March 30, 2007).10.10*
    
    Form of Restricted Stock Award Agreement for February 2008 awards under the 2006 Equity Incentive Plan.
 E-1




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##### Table of Contents



10.11
    
    Employment Agreement with John G. Duffy (incorporated by reference to Exhibit
10.1 to the Registrants quarterly report with respect to the quarter ended
September 30, 2006 on Form 10-Q filed on December 15, 2006).10.12
    
    Employment Agreement with Thomas B. Michaud (incorporated by reference to
Exhibit 10.2 to the Registrants quarterly report with respect to the quarter
ended September 30, 2006 on Form 10-Q filed on December 15, 2006).10.13
    
    Employment Agreement with Andrew M. Senchak (incorporated by reference to
Exhibit 10.3 to the Registrants quarterly report with respect to the quarter
ended September 30, 2006 on Form 10-Q filed on December 15, 2006).10.14
    
    Sublease between Keefe, Bruyette & Woods, Inc. and National Financial
Partners Corp., dated as of August 31, 2007 (incorporated by reference to
Exhibit 10.1 to the Registrants current report on Form 8-K, filed on
September 7, 2007).10.15*
    
    Change in Control Agreement with Robert Giambrone, dated February 1, 2008.10.16*
    
    Change in Control Agreement with Mitchell B. Kleinman, dated February 1, 2008.11
    
    Statement regarding computation of per share earnings. (The calculation of
per share earnings is in Part II, Item 8, Note 14 to the Consolidated
Financial Statements (Earnings Per Share) and is omitted here in accordance
with Section(b)(11) of Item 601 of Regulation S-K).21.1
    
    List of Subsidiaries of KBW, Inc. (incorporated by reference to Exhibit 21.1
to the Registrants registration statement on Form S-1/A (No. 333-136509)
filed on August 11, 2006).23.1*
    
    Consent of KPMG LLP.31.1*
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of the Chief Financial Officer 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.
 
 
    
    Indicates a management contract or compensatory arrangement*
    
    Filed herewith E-2