**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********Washington, D.C.20549**

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**Form 10-K/A**

**Amendment No. 1****Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

| For the fiscal year ended: **December 31, 2006**   |   | Commission file  number: **000-52048** |
|---------------------------------------------------------|--------|----------------------------------------|
| ** **                                              |   | ** **                             |
| **Cowen Group, Inc.**                              |
| (Exact name of  registrant as specified in its charter) |
|                                                    |   |                                   |
| **Delaware**                                            |   | **84-1702964**                         |
| *(State  or other jurisdiction of*                      |   | *(I.R.S.  Employer*                    |
| *incorporation  or organization)*                       |   | *Identification  No.)*                 |
| * *                                                |   | * *                               |

**1221 Avenue of the AmericasNew York, New York 10020(646) 562-1000**

*(Address, inclu*d*ing zip code, and telephone number, including areacode, of registrant’s principal executive office)*Securities registered pursuant to Section 12(b) of theAct:

| **Title of Each Class**                  |   | **Name of  Exchange on Which Registered** |
|------------------------------------------|--------|-------------------------------------------|
| Common Stock,  par value $0.01 per share |   | The Nasdaq  Global Market                 |

 

Securities registered pursuant toSection 12(g) of the Act: None

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes  o      No  x

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act. Yes  o      No  x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    Yes x      Noo

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation  S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to the Annual Report on Form 10-K.     x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

Largeaccelerated filer o          Acceleratedfiler  o          Non-acceleratedfiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).    Yes  o     No  x

Theaggregate market value of the common stock of the registrant held bynon-affiliates of the registrant on December 29, 2006, the lastbusiness day of the registrant’s fiscal year was: $272,835,000.

Asof March 23, 2007 there were 15,980,077 shares of the registrant’s commonstock outstanding.

Documentsincorporated by reference:

Part III of this Annual Report onForm 10-K incorporates by reference information (to the extent specificsections are referred to herein) from the Registrant’s Proxy Statement for its2007 Annual Meeting of Stockholders.

 

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**EXPLANATORYNOTE**

Cowen Group, Inc. isfiling this Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006 (the “Original Form 10-K”), tocorrect a typographical error in the content of Note 2 to the ConsolidatedFinancial Statements contained in Item 8. Financial Statements andSupplementary Data.  The followinglanguage intended to be included immediately following the paragraph captioned “LegalReserves” on page F-11 of the Original Form 10-K in Note 2—Summary ofSignificant Accounting Policies was inadvertently omitted:

**Revenue recognition**

***Investment Banking***

Investment bankingrevenues include underwriting fees, private placement fees, strategic advisoryfees and financial advisory fees. Underwriting revenues are earned insecurities offerings in which the Company acts as an underwriter and includemanagement fees, sales concessions and underwriting fees. Management fees arerecorded on the offering date, sales concessions on settlement date and underwritingfees are recognized net of related syndicate expenses, at the time theunderwriting is complete and the income is reasonably determinable. Asco-manager for registered equity underwriting transactions, management mustestimate the Company’s share of transaction related expenses incurred by thelead manager in order to recognize revenue. Transaction related expenses arededucted from the underwriting fee and therefore reduces the revenue theCompany recognizes as co-manager. Such amounts are adjusted to reflect actualexpenses in the period in which the Company receives the final settlement,typically 90 days following the closing of the transaction.

Private placement fees,including warrants received in certain private placement transactions, arerecorded on the closing date of the placement. Strategic advisory and financialadvisory fees are recorded when the services to be performed and/or thetransactions are substantially completed, and fees are determinable andcollection is reasonably assured. Expenses associated with these transactionsare recognized, net of client reimbursements, when the related revenue isrecognized or the engagement is otherwise concluded.

No other changes arebeing made to the Financial Statements or other information in Item 8.  In addition, no changes are being madepursuant to this amendment to any other item of our Form 10-K other than theupdating of the Exhibits to include updated Certifications of the ChiefExecutive and Chief Financial Officers. In accordance with the SEC’s rules applicable to the filing ofamendments to Form 10-K, we are including in this amendment the complete textof Item 8.

i

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
| Consolidated Financial Statements                                                                                                    | ** ** | **Page**   |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                                     | ** ** | ** ** |
| Report of  Ernst & Young LLP, Independent Registered Public Accounting Firm                                                           |       | F-2        |
|                                                                                                                                           |       |       |
| Consolidated  Statements of Financial Condition                                                                                                |       | F-3        |
|                                                                                                                                           |       |       |
| Consolidated  Statements of Operations                                                                                                         |       | F-4        |
|                                                                                                                                           |       |       |
| Consolidated  Statements of Changes in Stockholders’ / Group’s Equity                                                                |       | F-5        |
|                                                                                                                                           |       |       |
| Consolidated  Statements of Cash Flows                                                                                                         |       | F-6        |
|                                                                                                                                           |       |       |
| Notes to  Consolidated Financial Statements                                                                                                    |       | F-7        |
|                                                                                                                                           |       |       |
| Note 1—Organization  and Basis of Presentation                                                                                       |       | F-7        |
|                                                                                                                                           |       |       |
| Note 2—Summary  of Significant Accounting Policies                                                                                   |       | F-8        |
|                                                                                                                                           |       |       |
| Note 3—Accounting  Developments                                                                                                      |       | F-14       |
|                                                                                                                                           |       |       |
| Note 4—Restricted Cash Pursuant to Escrow  Agreement and Related Indemnification Agreement with Société Générale |       | F-15       |
|                                                                                                                                           |       |       |
| Note 5—Securities  Owned and Securities Sold, Not Yet Purchased Restricted                                                           |       | F-16       |
|                                                                                                                                           |       |       |
| Note 6—Receivable  from and Payable to Brokers, Dealers and Clearing Brokers                                                         |       | F-17       |
|                                                                                                                                           |       |       |
| Note 7—Exchange  Memberships                                                                                                         |       | F-17       |
|                                                                                                                                           |       |       |
| Note 8—Furniture,  Fixtures, Equipment, and Leasehold Improvements                                                                   |       | F-18       |
|                                                                                                                                           |       |       |
| Note 9—Goodwill                                                                                                                      |       | F-18       |
|                                                                                                                                           |       |       |
| Note 10—Commitments,  Contingencies and Guarantees                                                                                   |       | F-19       |
|                                                                                                                                           |       |       |
| Note 11—Separation  from Société Générale and Other Related Matters                                              |       | F-26       |
|                                                                                                                                           |       |       |
| Note 12—Related  Party Transactions                                                                                                  |       | F-28       |
|                                                                                                                                           |       |       |
| Note 13—Employee  Benefits                                                                                                           |       | F-30       |
|                                                                                                                                           |       |       |
| Note 14—Stock-Based  Compensation                                                                                                    |       | F-32       |
|                                                                                                                                           |       |       |
| Note 15—Income Taxes                                                                                                                 |       | F-34       |
|                                                                                                                                           |       |       |
| Note 16—Financial  Instruments with Off-Balance Sheet Risk, Credit Risk, or Market Risk                                              |       | F-37       |
|                                                                                                                                           |       |       |
| Note 17—Stockholders’  Equity                                                                                                   |       | F-38       |
|                                                                                                                                           |       |       |
| Note 18—Earnings Per  Share                                                                                                          |       | F-39       |
|                                                                                                                                           |       |       |
| Note 19—Regulatory  Requirements                                                                                                     |       | F-40       |
|                                                                                                                                           |       |       |
| Note 20—Subsequent  Events                                                                                                           |       | F-40       |

 

ii

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and Stockholders of Cowen Group, Inc.

We have audited the accompanying consolidatedstatements of financial condition of Cowen Group, Inc. and subsidiaries (the “Company”)as of December 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ /group equity, and cash flows for each of the threeyears in the period ended December 31, 2006. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing auditprocedures  that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting.  Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the consolidated financial position of Cowen Group, Inc. and subsidiaries atDecember 31, 2006 and 2005, and the consolidated results of their operationsand their cash flows for each of the three years in the period ended December31, 2006, in conformity with U.S. generally accepted accounting principles.
| /s/ Ernst & Young LLP |   |
|---------------------------|--------|
|                      |
| New York, New York        |
| March 28, 2007            |

 

F-2

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**CowenGroup, Inc.**

**ConsolidatedStatements of Financial Condition**

**As of December 31, 2006 and 2005**
| ** **                                                                                                                                                                             | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                                                                                                             | ** ** | **(in thousands)** | ** ** |
| **Assets**                                                                                                                                                                             | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                                                                                                                                             |       | $                       | 185,042    |       | $          | 2,150 |   |
| Restricted cash  pursuant to escrow agreement                                                                                                                                          |       | 52,099                  |       | —     |       |
| Cash segregated under  Federal or other regulations                                                                                                                                    |       | —                  |       | 1,107      |       |
| Securities owned, at  fair value                                                                                                                                                       |       | 259,921                 |       | 220,086    |       |
| Securities purchased  under agreements to resell with related party                                                                                                                    |       | —                  |       | 410,981    |       |
| Receivable from brokers  , dealers and clearing brokers (see Note 12, Related Party Disclosures)                                                                                  |       | 83,564                  |       | 25,849     |       |
| Corporate finance and  syndicate receivables                                                                                                                                           |       | 27,022                  |       | 16,120     |       |
| Insurance claims  receivable                                                                                                                                                           |       | —                  |       | 5,316      |       |
| Due from affiliates                                                                                                                                                                    |       | 1,367                   |       | 568        |       |
| Exchange memberships ,  cost (fair value of $2,561 and $27,019 at December 31, 2006 and 2005,  respectively)                                                                      |       | 812                     |       | 8,167      |       |
| Furniture, fixtures ,  equipment and leasehold improvements (net of accumulated depreciation and  amortization of $6,001 and $3,632 at December 31, 2006 and 2005,  respectively) |       | 12,629                  |       | 3,223      |       |
| Goodwill                                                                                                                                                                               |       | 50,000                  |       | 50,000     |       |
| Other assets                                                                                                                                                                           |       | 11,982                  |       | 41,772     |       |
| Total assets                                                                                                                                                                           |       | $                       | 684,438    |       | $          | 785,339 |   |
| **Liabilities and Stockholders’ /  Group Equity**                                                                                                                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| Liabilities                                                                                                                                                                            |       |                    |       |       |       |
| Bank overdrafts                                                                                                                                                                        |       | $                       | 1,858      |       | $          | 1,581 |   |
| Securities sold  , not yet purchased, at fair value                                                                                                                                    |       | 251,580                 |       | 143,223    |       |
| Payable to  brokers , dealers and clearing brokers (see Note 12, Related Party  Transactions)                                                                                     |       | 29,918                  |       | 15,376     |       |
| Employee  compensation and benefits payable                                                                                                                                            |       | 116,021                 |       | 156,924    |       |
| Legal reserves  and legal expenses payable (see Note 10, Commitments , Contingencies and  Guarantees)                                                                                  |       | 53,167                  |       | 78,732     |       |
| Accounts  payable, accrued expenses and other liabilities (see Note 12, Related  Party Transactions)                                                                              |       | 13,766                  |       | 15,552     |       |
| Total  liabilities                                                                                                                                                                     |       | 466,310                 |       | 411,388    |       |
| Stockholders’ / Group  equity                                                                                                                                                     |       |                    |       |       |       |
| Preferred stock,  par value $0.01 per share; 10,000,000 shares authorized, no shares issued and  outstanding                                                                           |       | —                  |       | —     |       |
| Common stock,  par value $0.01 per share; 100,000,000 shares authorized, 15,000,000 shares  issued and 14,988,472 shares outstanding (including 2,088,472 restricted shares)           |       | 129                     |       | —     |       |
| Additional  paid-in capital                                                                                                                                                            |       | 215,240                 |       | —     |       |
| Retained  earnings                                                                                                                                                                     |       | 2,759                   |       | —     |       |
| Less common  stock held in treasury, at cost: 11,528 shares at December 31, 2006 and -0-  shares at December 31, 2005                                                        |       | —                  |       | —     |       |
| Group equity                                                                                                                                                                           |       | —                  |       | 373,951    |       |
| Total stockholders’  equity (2006)/group equity (2005)                                                                                                                            |       | 218,128                 |       | 373,951    |       |
| Total liabilities and  stockholders’/group equity                                                                                                                                 |       | $                       | 684,438    |       | $          | 785,339 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-3

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**CowenGroup, Inc.**

**ConsolidatedStatements of Operations**

**For theYears Ended December 31, 2006, 2005 and 2004**
| ** **                                                                     | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                     | ** ** | **(in thousands)** | ** ** |
| **Revenues**                                                                   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  banking                                                            |       | $                       | 164,342    |       | $          | 126,253    |       | $ | 113,795 |   |
| Commissions                                                                    |       | 93,346                  |       | 93,450     |       | 99,669     |       |
| Principal  transactions                                                        |       | 64,376                  |       | 52,250     |       | 64,519     |       |
| Interest and  dividend income (see Note 12, Related Party Transaction)         |       | 17,766                  |       | 16,990     |       | 9,504      |       |
| Other                                                                          |       | 5,137                   |       | 5,348      |       | 5,574      |       |
| Total revenues                                                                 |       | 344,967                 |       | 294,291    |       | 293,061    |       |
| **Expenses**                                                                   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee  compensation and benefits                                            |       | 215,707                 |       | 172,128    |       | 170,546    |       |
| Floor brokerage  and trade execution (see Note 12, Related Party Transactions) |       | 11,838                  |       | 10,025     |       | 16,136     |       |
| Service fees,  net (see Note 12, Related Party Transactions)                   |       | 16,961                  |       | 18,446     |       | 24,389     |       |
| Communications                                                                 |       | 24,289                  |       | 22,985     |       | 19,812     |       |
| Occupancy and  equipment (see Note 12, Related Party Transactions)             |       | 17,772                  |       | 15,071     |       | 14,633     |       |
| Marketing and  business development                                            |       | 12,581                  |       | 12,382     |       | 12,087     |       |
| Litigation and  related expense, net of recoveries                             |       | 4,411                   |       | 6,930      |       | (44,835    | )          |
| Depreciation and  amortization                                                 |       | 2,369                   |       | 2,140      |       | 2,409      |       |
| Interest                                                                       |       | 980                     |       | 1,178      |       | 825        |       |
| Other                                                                          |       | 21,443                  |       | 20,691     |       | 18,077     |       |
| Total expenses                                                                 |       | 328,351                 |       | 281,976    |       | 234,079    |       |
| Operating income                                                               |       | 16,616                  |       | 12,315     |       | 58,982     |       |
| Gain (loss) on  exchange memberships                                           |       | 25,843                  |       | 918        |       | (1,993     | )          |
| Income before  income taxes                                                    |       | 42,459                  |       | 13,233     |       | 56,989     |       |
| Provision for  income taxes                                                    |       | 4,548                   |       | 1,152      |       | 1,877      |       |
| Net income                                                                     |       | $                       | 37,911     |       | $          | 12,081     |       | $ | 55,112 |   |
| Weighted average  common shares outstanding:                                   |       |                    |       |       |       |       |       |
| Basic                                                                          |       | 12,903                  |       | 12,900     |       | 12,900     |       |
| Diluted                                                                        |       | 12,966                  |       | 12,900     |       | 12,900     |       |
| Earnings per  share:                                                           |       |                    |       |       |       |       |       |
| Basic                                                                          |       | $                       | 2.94       |       | $          | 0.94       |       | $ | 4.27 |   |
| Diluted                                                                        |       | $                       | 2.92       |       | $          | 0.94       |       | $ | 4.27 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-4

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**CowenGroup, Inc.**

**ConsolidatedStatements of Changes in Stockholders’ / Group Equity**

**Forthe Years Ended December 31, 2006, 2005 and 2004**
| ** **                                                                                                    | ** ** | **Common**                                                                | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** | **Stockholders’** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **Shares**                                                                | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Group**  | ** ** | **/ Group**       | ** ** |
| ** **                                                                                                    | ** ** | **Outstanding**                                                           | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Equity** | ** ** | **Equity**             | ** ** |
| ** **                                                                                                    | ** ** | **(amounts in thousands, except share amounts)** | ** ** | ** ** | ** ** |
| **Balance,  December 31, 2003**                                                                          |       | —                                                                    |       | $          | —     |           | $          | —       |       | $          | —     |                   | $          | 262,943 |   | $ | 262,943 |   |
| Net income                                                                                                    |       | —                                                                    |       | —     |       | —         |       | —       |       | 55,112     |       | 55,112                 |       |
| Change in  liability related to the retail brokerage business not conducted by the  Company (see Note 1)      |       | —                                                                    |       | —     |       | —         |       | —       |       | (46,829    | )          | (46,829                | )          |
| Capital  contribution                                                                                         |       | —                                                                    |       | —     |       | —         |       | —       |       | 82,252     |       | 82,252                 |       |
| **Balance,  December 31, 2004**                                                                          |       | —                                                                    |       | —     |       | —         |       | —       |       | 353,478    |       | 353,478                |       |
| Net income                                                                                                    |       | —                                                                    |       | —     |       | —         |       | —       |       | 12,081     |       | 12,081                 |       |
| Change in  liability related to the retail brokerage business not conducted by the  Company (see Note 1)      |       | —                                                                    |       | —     |       | —         |       | —       |       | 5,696      |       | 5,696                  |       |
| Capital  contribution                                                                                         |       | —                                                                    |       | —     |       | —         |       | —       |       | 2,696      |       | 2,696                  |       |
| **Balance,  December 31, 2005**                                                                          |       | —                                                                    |       | —     |       | —         |       | —       |       | 373,951    |       | 373,951                |       |
| Net income, pre  IPO                                                                                          |       | —                                                                    |       | —     |       | —         |       | —       |       | 35,152     |       | 35,152                 |       |
| Change in  liability related to the retail brokerage business not conducted by the  Company (see Note 1) |       | —                                                                    |       | —     |       | —         |       | —       |       | (1,817     | )          | (1,817                 | )          |
| Capital  contributions                                                                                        |       | —                                                                    |       | —     |       | —         |       | —       |       | 6,843      |       | 6,843                  |       |
| Capital  distributions (see Note 1)                                                                           |       | —                                                                    |       | —     |       | —         |       | —       |       | (207,129   | )          | (207,129               | )          |
| Underwriting  discount received in connection with the IPO (see Note 1)                                  |       | —                                                                    |       | —     |       | 3,020          |       | —       |       | —     |       | 3,020                  |       |
| Net income, post  IPO                                                                                         |       | —                                                                    |       | —     |       | —         |       | 2,759        |       | —     |       | 2,759                  |       |
| Stock issuance  (see Note 1, includes 2,100,000 of restricted shares)                                         |       | 15,000,000                                                                |       | 129        |       | 206,871        |       | —       |       | (207,000   | )          | —                 |       |
| Amortization of  share based compensation                                                                     |       | —                                                                    |       | —     |       | 5,349          |       | —       |       | —     |       | 5,349                  |       |
| Forfeitures of  restricted stock awards                                                                       |       | (11,528                                                                   | )          | —     |       | —         |       | —       |       | —     |       | —                 |       |
|                                                                                                          |       |                                                                      |       |       |       |           |       |         |       |       |       |                   |       |
| **Balance, December 31, 2006**                                                                           |       | 14,988,472                                                                |       | $          | 129        |           | $          | 215,240      |       | $          | 2,759      |                   | $          | — |   | $ | 218,128 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-5

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**CowenGroup, Inc.**

**ConsolidatedStatements of Cash Flows**

**For theYears Ended December 31, 2006, 2005 and 2004**
| ** **                                                                                   | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **(in thousands)** | ** ** |
| **Cash  flows from operating activities**                                                    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                       | 37,911     |       | $          | 12,081     |       | $ | 55,112 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                    |       |       |       |       |       |
| Exchange membership impairment                                                               |       | —                  |       | —     |       | 1,980      |       |
| Gain on sale of exchange membership                                                          |       | (24,827                 | )          | 108        |       | —     |       |
| Share-based compensation                                                                     |       | 5,440                   |       | 105        |       | 383        |       |
| Depreciation and amortization                                                                |       | 2,369                   |       | 2,140      |       | 2,409      |       |
| Income taxes                                                                                 |       | (832                    | )          | 1,152      |       | 1,877      |       |
| (Increase) decrease in operating assets :                                                    |       |                    |       |       |       |       |       |
| Restricted cash pursuant to escrow agreement                                                 |       | (52,099                 | )          | —     |       | —     |       |
| Cash segregated under federal and other regulations                                          |       | 1,107                   |       | (502       | )          | (605       | )          |
| Securities owned, at fair value                                                              |       | (39,835                 | )          | (29,768    | )          | 16,967     |       |
| Securities purchased under agreement to resell                                               |       | 410,981                 |       | 34,353     |       | (158,604   | )          |
| Receivable from brokers, dealers and clearing  brokers                                       |       | (57,715                 | )          | 4,977      |       | 80,438     |       |
| Corporate finance and syndicate receivables                                                  |       | (10,902                 | )          | (4,556     | )          | 1,347      |       |
| Exchange memberships                                                                         |       | —                  |       | (114       | )          | —     |       |
| Insurance claims receivable                                                                  |       | 5,316                   |       | 23,184     |       | (28,500    | )          |
| Due from affiliates                                                                          |       | (799                    | )          | 10,562     |       | (11,008    | )          |
| Other assets                                                                                 |       | 30,811                  |       | (4,668     | )          | (83        | )          |
| Increase (decrease) in operating liabilities :                                               |       |                    |       |       |       |       |       |
| Bank overdrafts                                                                              |       | 277                     |       | (1,474     | )          | 3,055      |       |
| Securities sold, not yet purchased, at fair value                                            |       | 108,357                 |       | 16,084     |       | 2,421      |       |
| Payable to brokers , dealers and clearing brokers                                            |       | 14,542                  |       | 612        |       | (6,701     | )          |
| Employee compensation and benefits payable                                                   |       | (40,903                 | )          | 3,491      |       | 1,080      |       |
| Legal reserves and legal expenses payable                                                    |       | 2,206                   |       | (25,342    | )          | (21,171    | )          |
| Accounts payable, accrued expenses and other  liabilities                                    |       | (2,844                  | )          | 2,511      |       | 8,385      |       |
| Net cash provided by (used in) operating activities                                          |       | 388,561                 |       | 44,936     |       | (51,218    | )          |
| **Cash flows from investing  activities**                                                    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  sale of exchange memberships                                                  |       | —                  |       | 148        |       | —     |       |
| Proceeds from  the sale of fixed assets                                                      |       | —                  |       | 22         |       | 891        |       |
| Purchase of  fixed assets from Société Générale                          |       | (228                    | )          | —     |       | —     |       |
| Purchase of  fixed assets                                                                    |       | (11,547                 | )          | (705       | )          | (5,923     | )          |
| Net cash used in investing activities                                                        |       | (11,775                 | )          | (535       | )          | (5,032     | )          |
| **Cash flows from financing  activities**                                                    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payments related  to the Retail brokerage business not conducted by the Company (see Note 1) |       | (27,771                 | )          | (45,670    | )          | (22,064    | )          |
| Capital  distributions                                                                       |       | (180,332                | )          | —     |       | —     |       |
| Capital  contributions, net                                                                  |       | 14,209                  |       | 1,439      |       | 79,991     |       |
| Net cash (used in) provided by financing activities                                          |       | (193,894                | )          | (44,231    | )          | 57,927     |       |
| Net increase in cash                                                                         |       | 182,892                 |       | 170        |       | 1,677      |       |
| **Cash  and Cash Equivalents**                                                               | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of  year                                                                           |       | 2,150                   |       | 1,980      |       | 303        |       |
| End of year                                                                                  |       | $                       | 185,042    |       | $          | 2,150      |       | $ | 1,980 |   |
| **Supplemental  disclosure of cash flow information**                                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for:                                                              |       |                    |       |       |       |       |       |
| Interest                                                                                     |       | $                       | 801        |       | $          | 1,157      |       | $ | 829 |   |
| Income taxes                                                                                 |       | 3,351                   |       | —     |       | —     |       |
| **Supplemental  disclosure of non-cash flow information**                                    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exchange membership demutualization                                                          |       | $                       | —     |       | $          | 774        |       | $ | — |   |
| Transfer to SGASH of consideration of NYSE merger  with Archipelago                          |       | 32,182                  |       | —     |       | —     |       |
| Accrued capital  withdrawal payable to Société Générale                  |       | 1,965                   |       | —     |       | —     |       |

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-6

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements**

**1. Organization and Basis of Presentation**

Cowen Group, Inc. (together with itssubsidiaries, the “Company”) was incorporated in Delaware on February 15,2006 with the issuance of 100 shares of common stock with a par value of $0.01per share. The Company completed an initial public offering (“IPO”) of itscommon stock on July 12, 2006. Prior to July 12, 2006, the Companywas a wholly-owned subsidiary of SG Americas Securities Holdings, Inc. (“SGASH”).SGASH is a wholly-owned subsidiary of SG Americas, Inc. (“SGAI”), which inturn is a wholly-owned subsidiary of Société Générale. The Company is operatedand managed on an integrated basis as a single operating segment and primarilyprovides research, institutional sales and trading and investment bankingservices to its clients.

Cowen and Company, LLC (“Cowen”), a Delaware singlemember limited liability company, is the United States (“U.S.”) broker-dealersubsidiary of Cowen Group, Inc. Cowen is a full-service investment bankingand securities brokerage firm focused on the emerging growth sectors ofhealthcare, technology, media and telecommunications, and consumer, operatingprimarily in the United States. Cowen’s predecessor was SG Cowen SecuritiesCorporation (“SGCSC”). On April 23, 2004, Société Générale reorganizedSGCSC into two separate affiliated single member limited liabilitybroker-dealers: SG Cowen & Co., LLC (which subsequently was renamed asCowen and Company, LLC) and SG Americas Securities, LLC (“SGAS”). Cowen clearsits securities transactions on a fully disclosed basis through its clearingbroker, SGAS, and does not carry customer funds or securities.

Cowen International Limited (“CIL”), a corporationformed under the laws of England and Wales, is the United Kingdom (“U.K.”)broker-dealer subsidiary of the Company. CIL is an investment banking andbrokerage firm also focused on the emerging growth sectors of healthcare,technology, media and telecommunications, and consumer, primarily in Europe.CIL’s predecessors were SG London Securities Limited and SG London Branch.

Cowen Capital Partners, LLC (“Cowen Capital”), aDelaware single member limited liability company, is the wholly-owned directinvestment private equity subsidiary of the Company. Cowen Capital focuses onpartnering with management teams to acquire significant equity positions ingrowing businesses engaged in business services, healthcare services andspecialty manufacturing.

Concurrent with the Company’s IPO, the Board of Directorsof the Company approved a return of capital distribution to SGASH which leftthe Company with initial stockholders’ equity of $207.0 million atJuly 12, 2006. In connection with the IPO, the Company distributed cash of$180.3 million to SGASH pursuant to this authorization. Under the terms of theSeparation Agreement (See Note 11 for further discussion of the SeparationAgreement), the amount of this distribution is subject to adjustment based on afinal review of the Company’s separation from Société Générale. The Company hasaccrued approximately $2.0 million as a capital distribution to SociétéGénérale related to this final review. SGASH received all the proceeds from theissuance of 11,517,392 shares. In addition, 2,100,000 restricted shares weregranted to employees of the Company. SGASH retained 1,382,608 shares of theCompany out of the total 12,900,000 shares available for sale.

**Basis of Presentation**

Management believes that these consolidated financialstatements include normally recurring adjustments and accruals necessary for afair presentation of the Consolidated Statements of Financial Condition,Operations, Cash Flows, and Changes in Stockholders’ / Group Equity for theperiods presented.

F-7

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**1. Organization and Basis of Presentation (continued)**

The consolidated financial statements for all periodsprior to July 13, 2006 include the carve-out accounts of Cowen and thecarve-out accounts of SG London Branch, the predecessor of CIL, in each caseusing the historical basis of accounting for the results of operations, assetsand liabilities of the businesses that currently constitute Cowen and CIL. Theconsolidated financial information included herein may not necessarily beindicative of the Company’s results of operations, financial condition and cashflows in the future or what its results of operations, financial condition andcash flows would have been had the Company been a stand-alone company duringthe entire periods presented.

The Consolidated Statements of Operations do notinclude litigation expenses incurred by Cowen in connection with theGruttadauria litigation and other legal matters related to the retail brokeragebusiness of SGCSC, which was sold in October 2000, and is not part of thebusinesses currently conducted by the Company. The legal reserves related tothis matter are included in legal reserves and legal expenses payable in theConsolidated Statements of Financial Condition. Before becoming a publiccompany, payments related to the Gruttadauria litigation were included in theConsolidated Statements of Cash Flows as financing activities because theCompany was a wholly-owned subsidiary of Société Générale. After becoming apublic company, these payments are included as operating activities. The effectof this indemnification on the Company’s consolidated results of operations isthat when a future increase to a loss contingency reserve that is related tolitigation covered by the Indemnification Agreement is recorded, the litigationcost and the indemnification recovery will be reflected as an increase inlitigation and related expense and the indemnification recovery will berecorded as a reduction to the Company’s litigation and related expense.

The consolidated financial statements include theaccounts of the Company and its subsidiaries. All significant intercompanytransactions have been eliminated upon consolidation.

**2. Summary of Significant Accounting Policies**

**Use of Estimates**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

**Cash and Cash Equivalents**

The Company considers all highly liquid investmentswith original maturities of three months or less at the date of purchase to becash equivalents.

**Valuation of Financial Instruments**

Substantially all of the Company’s financialinstruments are recorded at fair value or contract amounts that approximatefair value. The fair value of a financial instrument is the amount at which theinstrument could be exchanged in a current transaction between willing parties,other than in a forced or liquidation sale. Securities owned and securitiessold, not yet purchased and derivative financial instruments including futures,options and warrant positions are stated at fair value, with related changes inunrealized appreciation or depreciation reflected in principal transactions inthe Consolidated Statements of Operations. Financial instruments carried atcontract amounts include receivable from brokers, dealers and clearing brokers,payable to brokers, dealers and clearing brokers, securities purchased underagreements to resell and corporate finance and syndicate receivables.

F-8

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**2.Summary of Significant Accounting Policies (continued)**

Fair value is generally based on independent sourcessuch as quoted market prices or dealer price quotations. To the extent certainfinancial instruments trade infrequently or are non-marketable securities and,therefore, do not have readily determinable fair values, the Company estimatesthe fair value of these instruments using various pricing models and availableinformation that management deems most relevant. Among the factors consideredby the Company in determining the fair value of financial instruments arediscounted anticipated cash flows, the cost, terms and liquidity of theinstrument, the financial condition, operating results and credit ratings ofthe issuer or underlying company, the quoted market price of publicly tradedsecurities with similar quality and yield, and other factors generallypertinent to the valuation of financial instruments.

**Securities Purchased Under Agreements to Resell**

Securities purchased under agreements to resellgenerally are collateralized by U.S. government and agency obligations, aretreated as collateralized financing transactions and are carried at amounts atwhich the securities will be resold plus accrued interest. It is the Company’spolicy to take possession or control of securities purchased under agreementsto resell. The Company requires the fair value of the collateral to be equal toor in excess of the principal amount loaned under the resale agreements. TheCompany minimizes credit risk associated with these activities by monitoringcredit exposure and collateral values on a daily basis and requiring additionalcollateral or principle to be deposited or returned when deemed appropriate.

**Receivable from and Payable to Brokers, Dealers andClearing Brokers**

Amounts receivable from and payable to brokers,dealers and clearing brokers primarily include proceeds from securities soldshort including commissions and fees related to securities transactions, netreceivables and payables for unsettled transactions, and deposits with theclearing brokers. Proceeds related to securities sold, not yet purchased, maybe restricted until the securities are purchased.

**Corporate Finance and Syndicate Receivables**

Corporate finance and syndicate receivables includereceivables relating to the Company’s investment banking and advisoryengagements. The Company records an allowance for doubtful accounts on thesereceivables on a specific identification basis. No valuation allowance has beenrecorded as of December 31, 2006 and 2005.

**Furniture, Fixtures, Equipment, and Leasehold Improvements**

Furniture, fixtures, equipment, and computer software,and leasehold improvements are stated at cost, less accumulated depreciationand amortization. Depreciation of furniture, fixtures, equipment and computersoftware is provided on the straight-line method over the estimated usefullives of the assets, which range from three to five years. Leaseholdimprovements are amortized over the lesser of the useful life of theimprovement or the term of the lease which range from one to nine years.

**Goodwill**

Goodwill represents the excess of the purchase priceof a business acquisition over the fair value of the net assets acquired. Inaccordance with SFAS No. 142, *Goodwill and OtherIntangible Assets* (“FAS 142”), goodwill is not amortized. TheCompany monitors goodwill annually or more frequently if events orcircumstances indicate a possible impairment.

F-9

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**2.Summary of Significant Accounting Policies (continued)**

A two-step test is used to determine whether goodwillis impaired. The first step is to compare the carrying value of the Companywith the fair value of the Company. If the carrying value of the Companyexceeds the fair value of the Company, the second step is applied. The second stepis to compare the carrying amount of the goodwill with the implied fair valueof the goodwill as determined in accordance with FAS 142. Goodwill impairmentis recognized if its carrying value exceeds its implied fair value. Thedetermination of fair value includes considerations of projected cash flows,revenue multiples of comparable exchange listed corporations, and the tradingprice of the Company’s common shares.

Goodwill impairment tests are subject to significantjudgment in determining the estimation of future cash flows, discount rates andother assumptions. Changes in these estimates and assumptions could have asignificant impact on the fair value and any resulting impairment of goodwill.

**Exchange Memberships**

Exchange memberships representing both ownershipinterest and the right to conduct business on the exchange are accounted for atcost. The Company evaluates exchange memberships for other-than-temporaryimpairment annually or more frequently if events or circumstances indicate apossible impairment.

**Stock-Based Compensation**

***Stock-based awards issued by Société Générale***

On January 1, 2006, the Company adopted SFASNo. 123(R), *Share-Based Payment* (“FAS 123R”).Prior to January 1, 2006, the Company accounted for stock-based awardsissued by Société Générale under the intrinsic value method, which followed therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”), andrelated Interpretations, which requires that compensation be measured by thequoted market price of stock at the measurement date less the amount that theemployee is required to pay. The Company had recognized compensation expensefor these awards of $0.1 and $0.4 million for the years ended December 31,2005 and 2004, respectively.

The following table illustrates the effect on netincome if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-BasedCompensation*, to its stock incentive plans for the years endedDecember 31, 2005 and 2004. The compensation expense for stock optionsdisclosed under the fair value method is not shown net of any tax effects asthe Company has not taken any tax deductions for awards exercised by itsemployees.
|                                                                                                             | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                  | ** ** | **(in thousands)** | ** ** |
| Net income, as  reported                                                                                    |       | $                       | 12,081     |     | $          | 55,112 |   |
| Add: Stock-based  employee compensation expense included in reported net income                             |       | 105                     |       | 383      |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards |       | (342                    | )          | (817     | )          |
| Pro forma net  income                                                                                       |       | $                       | 11,844     |     | $          | 54,678 |   |

 

When the Company adopted FAS 123R on January 1,2006, the modified prospective transition method was used. This method requiresmeasurement of compensation cost for all stock-based awards at fair value onthe date of grant and recognition of compensation over the service period forawards expected to vest. The fair value of stock-based compensation isconsistent with the valuation techniques previously utilized for options infootnote disclosures required under SFAS No. 123, *Accountingfor Stock-*

F-10

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**2.Summary of Significant Accounting Policies (continued)**

*BasedCompensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation—Transition and Disclosure*.Such value is recognized as an expense over the service period, net ofestimated forfeitures, using the straight-line method. All unvested stock-basedawards vested on April 22, 2006, and accordingly, estimated forfeitureswith respect to these awards were deemed to be zero. Therefore, no adjustmentto reflect the net cumulative impact of estimating forfeitures in thedetermination of period expense was deemed necessary in the preparation ofthese Consolidated Financial Statements, nor will any such future expense bedeemed necessary. The Company recognized $0.1 million in compensation expensefor these awards for the year ended December 31, 2006.

***Stock-based awards issued by Cowen Group, Inc.***

Upon becoming a public company, the Companyestablished a stock-based compensation plan. Awards related to this plan areaccounted for under the recognition and measurement provisions of FAS 123R. SeeNote 14 for a description of these awards.

**Legal Reserves**

The Companyestimates potential losses that may arise out of legal and regulatoryproceedings and recognizes liabilities for such contingencies to the extentsuch losses are probable and the amount of loss can be reasonably estimated.These amounts are reported in litigation and related costs, net of recoveries,on the Consolidated Statements of Operations. The Consolidated Statements ofOperations do not include litigation expenses incurred by the Company inconnection with the Gruttadauria litigation matter (see Notes 10 and 11) as itrelates to a business conducted by SGCSC that was sold in October 2000. Asthe successor of the named party in the litigation the Company recognizes thelegal reserve related to this matter in the Consolidated Statements of FinancialCondition.

**Revenue recognition**

***Investment Banking***

Investment bankingrevenues include underwriting fees, private placement fees, strategic advisoryfees and financial advisory fees. Underwriting revenues are earned insecurities offerings in which the Company acts as an underwriter and includemanagement fees, sales concessions and underwriting fees. Management fees arerecorded on the offering date, sales concessions on settlement date andunderwriting fees are recognized net of related syndicate expenses, at the timethe underwriting is complete and the income is reasonably determinable. Asco-manager for registered equity underwriting transactions, management mustestimate the Company’s share of transaction related expenses incurred by thelead manager in order to recognize revenue. Transaction related expenses arededucted from the underwriting fee and therefore reduces the revenue theCompany recognizes as co-manager. Such amounts are adjusted to reflect actualexpenses in the period in which the Company receives the final settlement,typically 90 days following the closing of the transaction.

Private placementfees, including warrants received in certain private placement transactions,are recorded on the closing date of the placement. Strategic advisory andfinancial advisory fees are recorded when the services to be performed and/orthe transactions are substantially completed, and fees are determinable andcollection is reasonably assured. Expenses associated with these transactionsare recognized, net of client reimbursements, when the related revenue isrecognized or the engagement is otherwise concluded.

***Commissions***

Commission revenue includes fees from executing clienttransactions in listed securities. These fees are recognized on a trade datebasis. The Company permits institutional customers to allocate a portion oftheir gross commissions to pay for research products and other servicesprovided by third parties. The 

F-11

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**2. Summaryof Significant Accounting Policies (continued)**

amounts allocated forthose purposes are commonly referred to as soft dollar arrangements.Commissions on soft dollar brokerage are recorded net of the relatedexpenditures on an accrual basis.

***Principal transactions***

Principal transactions revenue includes net tradinggains and losses from the Company’s market-making activities inover-the-counter common equity securities, convertible securities and options,from commitment of capital to facilitate customer trades for listed stocks andfrom proprietary trading activities. In certain cases, the Company providesliquidity to clients buying or selling blocks of shares without previouslyidentifying the other side of the trade at execution, which subjects the Companyto market risk. These positions are typically held for a very short duration.

The Company’s securities and derivative financialinstruments are recorded at fair value. Changes in net unrealized gains orlosses are reflected in principal transactions in the Consolidated Statementsof Operations.

F-12

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**2.Summary of Significant Accounting Policies (continued)**

**Derivative Financial Instruments**

The Company usesU.S. Treasury futures and options to economically hedge proprietary tradingpositions. In addition, the Company uses options for proprietary tradingactivities. Futures contracts are executed on an exchange, and cash settlementis made on a daily basis for market movements. Options are stated at fair valuewhich is based on current market prices. Realized and unrealized gains andlosses associated with futures transactions and options are included inprincipal transactions on the Consolidated Statements of Operations. The fairvalue of futures contracts and required margin deposits are included inreceivable from brokers, dealers and clearing brokers on the ConsolidatedStatements of Financial Condition and were de minimis at December 31, 2006and 2005. The Company also holds warrants, which are reported at fair value.

**Earnings Per Share**

Basic earnings per common share is computed bydividing net income by the weighted average number of common shares outstandingfor the year. Diluted earnings per common share is calculated by adjusting theweighted average outstanding shares to assume conversion of all potentiallydilutive nonvested restricted stock and stock options.

**Leases**

Leases are accounted for under Statement of FinancialAccounting Standards (“SFAS”) No. 13, *Accounting for Leases*.All of our leases are classified as operating leases.

**Foreign Currency Translation**

The Company’s assets and liabilities denominated inforeign currencies are translated based on the rate of exchange prevailing ateach statement of financial condition date. Revenues and expenses aretranslated at the average exchange rates prevailing during the periods. Gainsof $0.3 million on foreign currency transactions are included in other revenuein the Consolidated Statements of Operations.

**Income Taxes**

The taxable results of the Company’s U.S. operationswere historically included in the consolidated income tax returns of SGAIthrough the IPO date. The tax results of the Company’s U.K. operations werehistorically included in the tax returns of SG London Branch throughApril 30, 2006. For the period May 1, 2006 through December 31,2006, the U.K. operations are included in CIL’s U.K. tax filing. The U.S.impact of CIL’s operations is included in the SGAI consolidated tax returns forthe period May 1, 2006 through the IPO date and in the Company’s taxfilings post-IPO.

The income tax provision reflected in the ConsolidatedStatements of Operations is presented as if the Company operated on astand-alone basis for all periods presented, consistent with the liability methodprescribed by SFAS No. 109, *Accounting for IncomeTaxes*. Under the liability method, deferred income taxes reflect thenet tax effects of temporary differences between the carrying amount of assetsand liabilities for financial statement and income tax purposes, as determinedunder applicable tax laws and rates. A valuation allowance is provided fordeferred tax assets when it is more likely than not that the benefits of netdeductible temporary differences and net operating loss carryforwards will notbe realized.

F-13

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**3. Accounting Developments**

In February 2007, the FASB issued Statement ofFinancial Accounting Standard No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“FAS 159”). FAS 159permits entities to choose to measure many financial instruments and certainother items at fair value that are not currently required to be measured atfair value and establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. Unrealized gains andlosses on items for which the fair value option has been elected are reportedin earnings. FAS 159 is effective for fiscal years beginning after November 15,2007. The Company is currently evaluating the impact, if any, of implementingFAS 159.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“FAS 157”).  FAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurement.  This statement shall beeffective for financial statements issued for fiscal years beginning after November15, 2007, and interim periods within those fiscal years. Earlier application isencouraged, provided that the reporting entity has not yet issued financialstatements for that fiscal year, including any financial statements for aninterim period within that fiscal year. The provisions of this statement shouldbe applied prospectively as of the beginning of the fiscal year in which thisstatement is initially applied, except in some circumstances where thestatement shall be applied retrospectively. The Company is currently evaluatingthe impact, if any, that the adoption of FAS 157 will have on the Company’sConsolidated Financial Statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108, *Considering the Effects ofPrior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements* (“SAB 108”), which provides guidance onquantifying and evaluating the materiality of unrecorded prior yearmisstatements. The SEC staff indicates that an entity should quantify theimpact of correcting all misstatements, including both the carryover andreversing effects of prior year misstatements, on the current year financialstatements. Companies may choose to restate their financial statements for anymaterial misstatements arising from the application of SAB 108 or recognize acumulative effect adjustment within the current year opening balance inretained earnings, with disclosure of such items. SAB 108 is effective forfiscal years ending after November 15, 2006. The Company has determined thatthe adoption of SAB 108 did not have a material impact on the ConsolidatedFinancial Statements.

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”), *Accounting for Uncertainty in Income Taxes— anInterpretation of FASB Statement No. 109*. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return and provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition. FIN 48is effective for fiscal years beginning after December 15, 2006. The Company iscurrently evaluating the impact, if any, that the adoption of FIN 48 will haveon the Company’s Consolidated Financial Statements.

Emerging Issues Task Force Issue No. 04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights* (“EITF 04-05”), has two effectivedates.  For general partners of all newlimited partnerships formed and for existing limited partnerships for which thepartnership agreements are modified, EITF 04-05 is effective after June 29,2005.  For general partners in all otherlimited partnerships, it is effective no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005.  Two transition methods are available.  EITF 04-05 provides guidance for assessingwhen a general partner controls, and therefore should consolidate, a limitedpartnership or similar entity when the limited partners 

F-14

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**3. Accounting Developments (continued)**

have certain rights.  The Company has evaluated the impact of EITF04-05 and determined that the adoption of EITF 04-05 did not result in theCompany having to consolidate any limited partnerships that would otherwise notbe consolidated absent EITF 04-05.

FASB Staff Position FAS 115-1/FAS 124-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments* (“FSP 115-1/124-1”) wasfinalized November 3, 2005 and is applicable to reporting periods beginningafter December 15, 2005.  FSP 115-1/124-1nullifies certain requirements of EITF Issue 03-1, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments,* and supersedes *EITF*Topic No. D-44, *Recognition ofOther-Than-Temporary Impairment upon the Planned Sale of a Security Whose CostExceeds Fair Value*.  FSP115-1/124-1 provides guidance on determining whether an investment is impaired,whether impairment is temporary or other than temporary, measurement of theimpairment loss, accounting subsequent to an impairment write-down, anddisclosures about unrecognized losses. The Company has determined that the adoption of FSP 115-1/124-1 didnot have any impact on the Company’s Consolidated Financial Statements.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections, a replacement of APB OpinionNo. 20 and FASB Statement No. 3* (“FAS 154”). FAS 154 providesguidance on the accounting for and reporting of accounting changes and errorcorrections. APB Opinion 20 previously required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principle.FAS 154 requires retrospective application to prior period financial statementsof a voluntary change in accounting principle unless it is impracticable. FAS154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. FAS 154 did not have a materialimpact on the Company’s Consolidated Financial Statements.

In December 2004, the FASB issued SFAS No. 123(R). FAS 123R amends FAS 123, *Accountingfor Stock-Based Compensation*, and requires all share-based paymentsto employees to be recognized in the financial statements. FAS 123R waseffective in fiscal years beginning after December 15, 2005. The Companyadopted FAS 123R on January 1, 2006, and used the modified prospectivetransition method. This method requires measurement of compensation cost forall stock-based awards at fair value on the date of grant and recognition ofcompensation over the service period for awards expected to vest. The adoptionof FAS 123R did not have a material effect on the Company’s financial position,results of operations or cash flows, however, the level of future equity basedcompensation grants, if any, could have a material effect on amounts recordedin the Consolidated Statements of Operations.

**4. Restricted Cash Pursuant to Escrow Agreement andRelated Indemnification Agreement with Société Générale**

In connection with the IPO, the Company has anIndemnification Agreement with Société Générale under which (1) SociétéGénérale will indemnify, and will defend and hold harmless the Company and eachof the Company’s subsidiaries from and against certain liabilities assumed orretained by Société Générale, and (2) Société Générale will indemnify theCompany for known, pending and threatened litigation (including the costs ofsuch litigation) and certain known regulatory matters, in each case, thatexisted prior to the date of the IPO to the extent the cost of such litigationresults in payments in excess of the amount placed in escrow to fund suchmatters (see Note 11, Separation from Société Générale and Other RelatedMatters, for further discussion of the Indemnification Agreement).

On July 12, 2006, the Company entered into anEscrow Agreement with Société Générale and SGASH and a third-party escrowagent. Also on July 12, 2006, the Company deposited with the escrow agent$72.3 million for the payment of liabilities arising out of the matters forwhich Société Générale has 

F-15

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**4. Restricted Cash Pursuant to Escrow Agreement andRelated Indemnification Agreement with Société Générale (continued)**

agreed to indemnifyCowen. Subsequent to making this deposit, certain matters covered by the escrowarrangement have been settled and excess reserves related to these settledmatters were returned to SGASH. The escrow agent will, when and as directed bySGASH, distribute funds from the escrow account to satisfy specified contingentliabilities for which Société Générale has assumed responsibility should suchliabilities become due. Any amounts remaining in the escrow account after finalconclusion of the related litigation will be paid to SGASH. SGASH is alsoentitled to any interest earned on such deposits held in escrow. The balance inthe escrow account was $52.1 million as of December 31, 2006.

The effect of this indemnification on the Company’sconsolidated results of operations is that when a future increase to a losscontingency reserve that is related to litigation covered by theIndemnification Agreement is recorded, the litigation cost and theindemnification recovery will be reflected as an increase in litigation andrelated expense and the indemnification recovery will be recorded as areduction to the Company’s litigation and related expense.

**5. Securities Owned and Securities Sold, Not YetPurchased**

Securities ownedand securities sold, not yet purchased, both at fair value, consist of thefollowing at December 31, 2006 and 2005:

|                            | ** ** | **2006**  | ** ** | **2005**                          | ** ** |
|----------------------------|------------|-----------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **Owned** | ** ** | **Sold  Not Yet  Purchased** | ** ** | **Owned** | ** ** | **Sold,  Not Yet  Purchased** | ** ** |
| Corporate debt  securities |       | $         | 171,124    |                              | $          | 91,904 |   | $ | 155,465 |   | $ | 56,427 |   |
| Equity securities          |       | 54,802    |       | 156,449                           |       | 31,168 |   | 86,796 |   |
| Mutual funds               |       | 3,266     |       | —                            |       | 12,160 |   | — |   |
| Money market  funds        |       | —    |       | —                            |       | 19,660 |   | — |   |
| Options                    |       | 25,874    |       | 3,106                             |       | — |   | — |   |
| Warrants                   |       | 4,088     |       | —                            |       | 1,633 |   | — |   |
| Govenments                 |       | 767       |       | —                            |       | — |   | — |   |
| Other                      |       | —    |       | 121                               |       | — |   | — |   |
| Total                      |       | $         | 259,921    |                              | $          | 251,580 |   | $ | 220,086 |   | $ | 143,223 |   |

 

Included in corporate debt securities owned arenon-marketable securities totaling $0.9 million and $23.9 million atDecember 31, 2006 and 2005, respectively, which consist of securities thathave not been registered under the Securities Act of 1933, and are beingoffered only to qualified institutional buyers under Rule 144A.

Securities sold, not yet purchased, representobligations of the Company to deliver a specified security at a contractedprice and, thereby, create a liability to purchase that security in the marketat prevailing prices. The Company’s liability for securities to be delivered ismeasured at their fair value as of the date of the financial statements.However, these transactions result in off-balance sheet risk, as the Company’sultimate cost to satisfy the delivery of securities sold, not yet purchased,may exceed the amount reflected in the Consolidated Statements of FinancialCondition. Substantially all securities owned are pledged to the clearingbroker under terms which permit the clearing broker to sell or re-pledge thesecurities to others subject to certain limitations.

F-16

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**6. Receivable from and Payable to Brokers, Dealers andClearing Brokers**

Amounts receivablefrom and payable to brokers, dealers and clearing brokers at December 31,2006 and 2005 consist of the following:
|                       | ** ** | **2006**                | ** ** | **2005**    | ** ** |
|-----------------------|------------|-------------------------|------------|-------------|------------|
| ** **            | ** ** | **Receivable**          | ** ** | **Payable** | ** ** | **Receivable** | ** ** | **Payable** | ** ** |
| ** **            | ** ** | **(in thousands)** | ** ** |
| Clearing brokers      |       | $                       | 70,032     |        | $          | 22,215 |   | $ | 25,635 |   | $ | 8,860 |   |
| Fees and  commissions |       | 13,532                  |       | 7,703       |       | 214 |   | 6,516 |   |
| Total                 |       | $                       | 83,564     |        | $          | 29,918 |   | $ | 25,849 |   | $ | 15,376 |   |

 

**7. Exchange Memberships**

Exchange memberships provide the Company with theright to do business on the exchanges of which it is a member. An impairment invalue of the Company’s exchange memberships occurred in 2004, at which time theCompany recorded an impairment loss of approximately $2.0 million. Noimpairment occurred in 2006 or 2005. The fair value of the exchange membershipswas approximately $2.6 million and $27.0 million at December 31, 2006 and2005, respectively.

On November 16, 2006, as a result of thedemutualization of the New York Mercantile Exchange (“NYMEX”), the Companyexchanged its seats at the Commodity Exchange (“COMEX”) for 16,800 shares ofrestricted NYMEX common stock and two trading rights in the restructured COMEX.The NYMEX shares and the trading rights were recognized at fair value on thedate of exchange, and the Company recognized a gain of approximately $1.0million representing the difference between the previous carrying value of theseats and the fair value of the shares that were received from the exchange atthe time of demutualization. The initial gain was recorded in gain on exchangememberships on the Consolidated Statements of Operations. The shares and thetrading rights are included in securities owned and exchange memberships,respectively, in the Consolidated Statements of Financial Condition.

As of January 1, 2006, the Company owned sevenNew York Stock Exchange (“NYSE”) memberships with a carrying value on that dateof $7.3 million. On March 7, 2006 the NYSE merger with ArchipelagoHoldings, Inc. (the “Merger”) was consummated and each member receivedcash and shares of NYSE Group, Inc. common stock. The Company recorded again of $24.8 million as a result of the merger, which is included in gain onexchange memberships in the Consolidated Statements of Operations. Inconnection with these events, the Company directed its interests from theMerger to SGASH. After the Merger, the right to trade on the Exchange ceased tobe tied to membership. Trading privileges are now exercised through tradinglicenses obtained by Dutch auction. The Company purchased seven licenses.

On October 18, 2005, with the demutualization ofthe Chicago Board of Trade (“CBOT”) the Company exchanged its seats at the CBOTfor Class A common shares and Class B membership interests of therestructured CBOT. The shares of the restructured CBOT were recognized at fairvalue at the date of exchange and the Company recognized a gain ofapproximately $1.0 million representing the difference between the previouscarrying value of the seats and the fair value of the shares and membershipinterests received from the exchange. The Class A shares and Class Bmembership interests of the restructured CBOT are included in securities owned,at fair value and exchange memberships, respectively, on the ConsolidatedStatements of Financial Condition.

F-17

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**8. Furniture, Fixtures, Equipment, and LeaseholdImprovements**

Furniture,fixtures, equipment, and leasehold improvements consisted of the following atDecember 31, 2006 and 2005:
|                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Leasehold  improvements                         |       | $                       | 8,824      |     | $          | 1,285 |   |
| Equipment                                       |       | 2,034                   |       | 510      |       |
| Furniture and  fixtures                         |       | 2,506                   |       | 885      |       |
| Computer  software                              |       | 5,266                   |       | 4,175    |       |
| Total                                           |       | 18,630                  |       | 6,855    |       |
| Less accumulated  depreciation and amortization |       | 6,001                   |       | 3,632    |       |
| Total                                           |       | $                       | 12,629     |     | $          | 3,223 |   |

 

Depreciation and amortization expense related tofurniture, equipment and leasehold improvements totaled approximately $1.4million, $0.7 million and $0.6 million for the years ended December 31,2006, 2005 and 2004, respectively. Amortization expense related to computersoftware costs totaled approximately $1.0 million, $1.4 million and $1.8 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. Duringthe year ended December 31, 2005, the Company wrote-off furniture,fixtures and equipment with a net book value of approximately $0.7 million.This write-off was included in depreciation and amortization expense on theConsolidated Statements of Operations.

Unamortized capitalized computer software costs as ofDecember 31, 2006 and 2005, were $0.7 million and $1.7 million,respectively.

**9. Goodwill**

The Company has $50.0 million of goodwill recorded onthe Consolidated Statements of Financial Condition that relates to SociétéGénérale’s acquisition of the Company in 1998. Goodwill is reviewed forpossible impairment at least annually, consistent with valuation methodologiespursuant to FAS 142.

A two-step test is used to determine whether goodwillis impaired. The first step is to compare the carrying value of the Companywith the fair value of the Company. If the carrying value of the Companyexceeds the fair value of the Company, the second step is applied. The secondstep is to compare the carrying amount of the goodwill with the implied fairvalue of the goodwill as determined in accordance with FAS 142.  Goodwill impairment is recognized if itscarrying value exceeds its implied fair value. The determination of fair valueincludes considerations of projected cash flows, revenue multiples ofcomparable exchange listed corporations, and the trading price of the Company’scommon shares. Based upon analysis performed during the years ended December31, 2006, 2005, and 2004 no impairment charges were recognized.

The followingtable reflects the changes in the carrying value of goodwill for the yearsended December 31, 2006 and 2005:
|                   | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------|------------|-------------------------|------------|----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Beginning balance |       | $                       | 50,000     |     | $          | 50,000 |   |
| Goodwill acquired |       | —                  |       | —   |       |
| Impairment losses |       | —                  |       | —   |       |
| Ending balance    |       | $                       | 50,000     |     | $          | 50,000 |   |

 

F-18

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees**

***Litigation***

The Company is subject to numerous litigation andregulatory matters, including securities class action lawsuits.

Although there can be no assurances as to the ultimateoutcome, the Company has established reserves for litigation and regulatory mattersthat it believes are adequate as of December 31, 2006. The Companybelieves that the eventual outcome of the actions against it, including thematters described below, will not in the aggregate, have a material adverseeffect on its financial position or cash flows, but may be material to itsoperating results for any particular period, depending on the level of theCompany’s operating results for such period.

Following are summaries of the Company’s mostsignificant pending legal and regulatory matters at December 31, 2006.

In January 2002, the Company learned that FrankGruttadauria (‘‘Gruttadauria’’), a former employee of SG Cowen SecuritiesCorporation’s (“SGCSC’s”) retail brokerage business that was sold inOctober 2000, had defrauded numerous customers and misappropriated theirassets at various firms that had employed him, including the Company. Followingthe discovery of Gruttadauria’s fraud, numerous former customers commenced orthreatened to commence lawsuits and arbitrations against the Company arisingout of Gruttadauria’s actions. In addition, government and regulatoryauthorities initiated investigations of the matter. The Company cooperatedfully with all of the governmental and regulatory investigations and all knownregulatory matters arising out of Gruttadauria’s conduct were resolved in 2003.The Company has also reached settlements with the vast majority of formercustomers, and has arbitrated several other customers’ claims. The Company isattempting to resolve the remaining disputes. Separately, the securitiesbrokerage firm that purchased SGCSC’s former retail brokerage business inOctober 2000 had threatened to file an arbitration against the Company inconnection with the liabilities, costs and expenses that it has incurred as aresult of Gruttadauria’s actions. The parties have resolved this separatematter which was also subject to the Indemnification Agreement between SociétéGénérale and the Company. To the extent that the Company incurs additionallegal fees or pays any fine or monetary sanction in connection withGruttadauria’s actions, the Company will be indemnified by Société Générale.

The Company is oneof several defendants named in lawsuits involving Lernout & HauspieSpeech Products, N.V. (‘‘L&H’’):

·       In *Nisselson v.Lernout, et al.,* No. 05-1774, filed in the United StatesDistrict Court for the District of Massachusetts on May 5, 2003, theTrustee of the Dictaphone Litigation Trust alleged that the Company madematerial misrepresentations to Dictaphone while the Company was a financialadvisor to L&H on its acquisition of Dictaphone, and further alleged thatthe Company published materially misleading research on L&H, in violationof various federal and state laws. On August 9, 2004, the District Courtgranted the Company’s motion to dismiss the amended complaint. The Trusteeappealed the District Court’s ruling to the United States Court of Appeal forthe First Circuit and, on November 8, 2006, the First Circuit affirmed thedismissal of all claims against the Company. On February 23, 2007, theplaintiff filed a petition for writ of certiorari to the Supreme Court of theUnited States. To the extent that the Company incurs additional legal fees orpays any fine or monetary sanction, the Company will be indemnified by SociétéGénérale.

F-19

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

·       In *RockerManagement, L.L.C., et al. v. Lernout & Hauspie Speech Products, N.V.,et al.*, Civil Action No. 00-CV-5965 (D.N.J.) filedin the United States District Court for the District of New Jersey, onDecember 8, 2000, short-sellers of L&H stock allege that the Companyviolated federal securities laws and state common law by participating in ascheme to artificially inflate L&H’s stock price through the Company’s roleas underwriter and adviser for L&H on several acquisitions and through theCompany’s published research on L&H. On April 3, 2001, the Companyfiled a motion to dismiss which was denied by the court and the Companysubsequently filed an answer denying liability. On November 10, 2006, theCompany filed a motion for summary judgment seeking dismissal of all claims.That same day the plaintiffs filed a motion for spoliation sanctions againstthe Company in which they sought, alternatively, the striking of the Company’sanswer or an adverse jury instruction. Although both motions have been fullybriefed, no date has been set for oral argument. Discovery has not been stayedpending resolution of the motions. To the extent that the Company incursadditional legal fees or pays any fine or monetary sanction, the Company willbe indemnified by Société Générale.

The Company is one of many financial institutionsnamed as defendants in a number of putative securities class actions entitled *In re: Initial Public Offering Securities Litigation*, filedin the United States District Court for the Southern District of New Yorkrelating to numerous initial and other public offerings of common stock fromapproximately 1998 through 2000. The various complaints allege that theunderwriters of certain initial public offerings, including the Company, madematerial misrepresentations and omissions to purchasers of the stock sold inthe initial public offerings, thereby inflating the value of the stock.Specifically, the plaintiffs allege that the defendants failed to disclose,among other things, the purported existence of improper tie-in and compensationarrangements they had with certain purchasers of the stock and alleged conflictsof interest relating to research published by the underwriters, all inviolation of federal securities laws. The district court granted plaintiffs’motion to certify six “focus” cases as class actions. The Company is a nameddefendant in four of these “focus” cases. The Company appealed the classcertification decision to the Second Circuit Court of Appeals and onDecember 4, 2006, the Second Circuit reversed the district court’sdecision and remanded the matter for reconsideration in light of the SecondCircuit’s opinion. Plaintiffs petitioned for rehearing and rehearing en banc bythe Second Circuit. On December 14, 2006, the district court stayeddiscovery in the consolidated banc. On January 24, 2007, the SecondCircuit instructed defendants to submit a response to plaintiffs’ petition. Tothe extent that the Company incurs additional legal fees or pays any fine ormonetary sanction, the Company will be indemnified by Société Générale.

The Company and other underwriters are defendants intwo separate, but related, antitrust actions alleging that the underwriterdefendants conspired to fix initial public offering underwriting fees at 7%. OnFebruary 11, 1999, the United States District Court in the SouthernDistrict of New York (the “Court”) consolidated three actions broughtby purchasers of securities in initial public offerings under thecaption *In re Public Offering Fee AntitrustLitigation*, 98 Civ. 7890 (LMM). In that action, plaintiffs’ damagesclaims were dismissed by the district court, but their claims for injunctiverelief remain pending. In a related case, on April 10, 2001, the Courtconsolidated  several actions filed by certain issuers ofinitial public offerings under the caption *In re Issuer PlaintiffInitial Public Offering Antitrust Litigation*, No. 00 Civ. 7804(LMM). In this action, the damages are unspecified and the district courthad denied the defendants’ motion to dismiss. On April 18, 2006, the courtdenied the issuer plaintiffs’ motion for class certification and orderedfurther briefing on the investor plaintiffs’ motion for class certification.The plaintiffs have also filed a joint motion for summary judgment on liabilityand the issuers have filed a motion for leave to amend their ConsolidatedClass Action Complaint. The district court proceedings in both actions are

F-20

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

stayed pending resolutionof the issuers’ motion for class certification, which is on appeal. The SecondCircuit heard oral argument on the appeal on March 19, 2007. To the extentthat the Company incurs additional legal fees or pays any fine or monetarysanction, the Company will be indemnified by Société Générale.

The Company is a named defendant in severallitigations relating to Adelphia Communications, a cable company that filed forbankruptcy in June 2002. The complaints generally allege that the Rigasfamily who controlled Adelphia took advantage of Adelphia’s assets, including throughthe use of certain loans, or ‘‘co-borrowing facilities,’’ that allowed thefamily to take more than $3 billion for their private use. The Company has beennamed as a defendant in four actions arising out of certain offerings ofAdelphia securities in which the Company participated as a member of theunderwriting syndicate. All four actions are pending before the United StatesDistrict Court for the Southern District of New York. The complaints in each ofthese actions raise a variety of claims arising out of the sale of Adelphiasecurities, including claims under the federal securities laws.

These actions are generally referred to as the “AdelphiaSecurities Class Action”, “W.R. Huff Asset Management”, “Appaloosa”, and “Stocke”.The district court granted the Company’s motion to dismiss all federalsecurities claims brought against the Company in the AdelphiaClass Action. Thereafter, the financial institution defendants reached asettlement with the plaintiffs. On June 15, 2006, the district court preliminarilyapproved the settlement. A fairness hearing before Judge McKenna was held onNovember 10, 2006, and he entered an order approving the settlement onNovember 20, 2006. The Company’s share of the settlement is approximately$1.7 million plus interest at 4.37% beginning December 1, 2006 (all ofwhich is covered by the indemnification agreement between Société Générale andthe Company). This amount has been placed in an escrow account bearing therequired rate of interest. On December 8, 2006, a group of class membersappealed the order approving the settlement agreement with the class plaintiffsto the United States Court of Appeals for the Second Circuit. If Judge McKenna’sapproval of the settlement is upheld on appeal or otherwise becomes final, claimsmade by all class members who did not opt out (including plaintiffs in Stocke)will be dismissed and released. The court also has granted in part and deniedin part certain motions to dismiss filed by various defendants, including theCompany, in Huff, Appaloosa and Stocke, but has not ruled on other potentialbases for dismissal set forth in the Company’s motions in these cases. Inaddition, in August 2005 the district court denied the Company’s motion todismiss based on Huff’s lack of standing, and subsequently granted leave tofile an interlocutory appeal to the Second Circuit Court of Appeals of thatruling. The Second Circuit granted the Company’s petition to appeal under 28U.S.C. § 1292, and that appeal is pending. In addition to the cases in whichthe Company has been named as a defendant, the Company may also face potentialliability pursuant to the applicable master agreements among underwriters forany judgments or settlements in other cases involving the Adelphia securitiesofferings in which the Company participated. To the extent that the Companyincurs additional legal fees or pays any fine or monetary sanction, the Companywill be indemnified by Société Générale.

F-21

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

The Company is also one of many defendants in tworelated adversary proceedings filed in the Adelphia Bankruptcy Proceeding,which is pending in the United States Bankruptcy Court for the Southern Districtof New York. These adversary proceedings were filed by the Official Committeeof Unsecured Creditors and the Official Committee of Equity Security Holders(the “Committees”). Both of these cases raise a variety of common law andfederal claims, which are generally similar to the claims asserted in theAdelphia Securities Class Action and other cases described above. Withrespect to the Company and other investment banks, the complaints takentogether set forth claims for violation of the Bank Holding Company Act,equitable disallowance or equitable subordination, breach of fiduciary duty,aiding and abetting breach of fiduciary duty, aiding and abetting fraud, grossnegligence and breach of contract, among others. On August 30, 2005, thebankruptcy court ruled that the two Committees have standing to prosecute theadversary proceedings, but has not ruled on the various motions to dismiss thatare pending, including motions filed by the Company. On February 9, 2006,the district court withdrew the reference from the bankruptcy court so thatafter the bankruptcy court rules on the pending motions, the cases willproceed before the district court. To the extent that the Company incursadditional legal fees or pays any fine or monetary sanction, the Company willbe indemnified by Société Générale.

The Company has been named as a defendant in apurported class action filed in the United States District Court for theNorthern District of Alabama on January 8, 2004 as a result of the Company’spredecessor’s involvement as one of the initial purchasers in a March 1998private placement of debt securities issued by HealthSouth Corporation, whichwere subsequently exchanged for materially identical registered securities. Thecomplaint alleges that the offering materials for the private placement and theregistration statement in the associated offering violated federal securitieslaws by failing to disclose HealthSouth’s subsequently revealed accountingirregularities. On June 8, 2006, the district court, among other things,dismissed the claims arising out of the March 1998 private placement (theonly claims against the Company). On August 21, 2006, following plaintiffs’subsequent submission of amendments to the complaint, the district courtso-ordered a stipulation and order dismissing all amended counts against theCompany. The dismissal is not yet a “final” judgment from which an appeal maybe taken by plaintiffs. To the extent that the Company incurs additional legalfees or pays any fine or monetary sanction, the Company will be indemnified bySociété Générale.

The Company was one of several named defendants in aputative securities class action filed in the United States District Court forthe District of New Jersey on September 2, 2005. The plaintiffs in this matter sought to recoverlosses allegedly caused by misrepresentations and omissions in connection withthe December 2004 initial public offering of Arbinet-thexchange, anelectronic marketplace for trading, routing and settling telecommunicationscapacity. The complaint alleged that these misrepresentations and omissionsartificially inflated the price of Arbinet’s securities and that subsequentdisclosures of the true state of Arbinet’s market and its business inMay and June 2005 caused Arbinet’s securities to decline in value.The defendants, including the Company, filed a motion to dismiss the complaintand, on December 22, 2006, the court granted defendants’ motion,dismissing the complaint in its entirety, but granting leave to re-plead. Bystipulation and order dated January 22, 2007, plaintiffs agreed that thecase should be dismissed with prejudice, each side to bear its own costs.Accordingly, the case now has been fully resolved in the Company’s favor.

The Company is one of three underwriter defendants ina lawsuit filed in the District Court of Travis County, Texas, on May 24,2006 by Crossroads Systems, Inc., a company that designs, develops, andmanufactures computer storage devices. The lawsuit alleges that theunderwriters of Crossroads’ 1999 IPO, which were led by the Company, purposelyunderpriced the IPO for their own improper purposes. 

F-22

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

Specifically, Crossroadsalleges that the underwriter defendants allocated stock to favored clients whoshared their profits with the underwriters either directly or indirectlythrough excessive trading commissions in connection with the IPO stock and/orunrelated securities trading. Crossroads sets forth causes of action for breachof fiduciary duty, fraud, and unjust enrichment. The damages are unspecified.In July 2006, the Company filed an answer denying the allegations of thecomplaint, and the case is now in the discovery phase. To the extent that theCompany incurs additional legal fees or pays any fine or monetary sanction, theCompany will be indemnified by Société Générale.

On June 28, 2006, a group of approximately 60medical doctors filed a lawsuit against the Company in San Francisco SuperiorCourt. Plaintiffs allege that the Company negligently rendered a fairnessopinion in 1998 in connection with the acquisition of Orange Coast Managed CareServices and St. Joseph Medical Corporation by FPA Medical Management, Inc.According to the complaint, plaintiffs received restricted FPA stock asconsideration in the sale and, shortly after the acquisition, FPA wentbankrupt, rendering the stock worthless. On August 14, 2006, the Companyremoved the case to United States District Court for the Northern District ofCalifornia. On August 17, 2006 the Company filed a motion to dismiss thecomplaint. Plaintiffs are seeking a remand to state court. On March 8,2006, the court granted the Company’s motion to dismiss, with leave to replead,and denied Plaintiffs’ move to remand. To the extent that the Company incursadditional legal fees or pays any fine or monetary sanction, the Company willbe indemnified by Société Générale.

On June 6, 2005, SGC Partners I LLC, SGC PartnersII LLC, SG Merchant Banking Fund, SG Capital Partners LLC and former employeesof SGCSC were served with a First Amended Complaint in a case entitled *Janice E. Stanton v. SGC Partners I, LLC*, Case No. 02-40208,Adv. No. 05-40145 (“Stanton I”). The action was brought inconnection with the bankruptcy proceeding filed by House of Lloyd (“HOL”)pending in that court. The Trustee seeks damages based on claims of breach offiduciary duty, corporate waste, fraudulent transfers, insider preferences andillegal distributions. On December 29, 2006, the Trustee filed a separatecomplaint against the Company, Cowen Capital Partners, LLC, and SG AmericasSecurities, LLC in a case entitled *Janice E. Stanton v. Cowenand Company, LLC* et al., Case No. 02-40208, Adv.No. 06-04283 (“Stanton II”) based on virtually identical factsalleged in Stanton I arising out of the HOL bankruptcy. The complaint furtheralleges that the Company owned and controlled the Defendants in Stanton Iand/or that the Company is the successor of the defendants in Stanton I. Thetwo cases have been consolidated. Discovery is proceeding with a trial datescheduled for January 22, 2008. To the extent that the Company incursadditional legal fees or pays any fine or monetary sanction, the Company willbe indemnified by Société Générale.

The SEC has conducted an investigation arising out ofthe proprietary trading activities of Guillaume Pollet, a former ManagingDirector and proprietary trader in the former equity derivatives division ofSGCSC (which is now part of SGAS), who was terminated by the Company in 2001for violating firm policy and misleading the firm’s management about certain ofhis trading activity. The trading activity at issue involved private placementsin public equity, or so-called ‘‘PIPE’s.’’ The Company received a Wells Noticein July 2004, and submitted a response in August 2004. To the extentthat the Company incurs additional legal fees or pays any fine or monetarysanction, the Company will be indemnified by Société Générale.

Based on information voluntarily disclosed toregulators by the Company, the SEC and NYSE are conducting informal inquiriesthat appear to be focused principally on certain conduct of a researchsalesperson who was terminated by the Company in late 2004. The employee wasdischarged after the Company discovered that the employee had sought andobtained access to sensitive information about a company, shared suchinformation with certain of his clients and others, and made investmentrecommendations to clients in part on the basis of that information. TheCompany has fully cooperated 

F-23

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

with this continuinginvestigation. To the extent that the Company incurs additional legal fees orpays any fine or monetary sanction related to this matter, the Company will notbe indemnified by Société Générale.

The Company has provided various data and informationto the NASD in response to its request for information as part of anindustry-wide “sweep” relating to the Company’s gifts, gratuities andentertainment policies, practices, and procedures. In addition, the Company hasalso received a subpoena for documents and information from the SEC, andadditional requests for information from the NASD, seeking informationconcerning, among other things, gifts, gratuities and entertainment and the useof one of the Company’s error accounts primarily involving an unaffiliatedmutual fund company. The Company is cooperating fully with these continuinginvestigations. To the extent that the Company incurs additional legal fees orpays any fine or monetary sanction related to this matter, the Company will notbe indemnified by Société Générale.

The Company received requests for documents andinformation from the SEC’s Office of Compliance Inspections and Examinationsseeking documents and certain financial and other information concerning, amongother things, the Company’s various trading desks, institutional sales team andinternal accounts, including error accounts, and related compliance procedures.The Company is cooperating fully with this inquiry. To the extent that theCompany incurs additional legal fees or pays any fine or monetary sanctionrelated to this matter, the Company will not be indemnified by SociétéGénérale.

In October 2004, the Company received a requestfrom the NYSE, as part of an industry-wide ‘‘sweep,’’ for data and informationrelating to its compliance with provisions of the federal securities laws, andrelated rules and regulations, concerning delivery of prospectuses and/orproduct descriptions in connection with customer purchases of, inter alia, newissue securities, mutual funds and exchange-traded funds. The Company hasprovided periodic reports to the NYSE concerning its progress in responding totheir request and will continue to cooperate fully with this continuinginquiry. The Company will be indemnified by Société Générale in part againstany liabilities, including legal fees that arise out of any future litigationor the pending regulatory investigation relating to this matter.

***Lease commitments***

The Company’s headquarters is located in New York andother offices are located in Boston, San Francisco, Cleveland, Denver, Londonand Geneva. Certain office space is leased under operating leases that extendup to 2015. In addition, certain lease agreements are subject to escalationclauses. Under the terms of the Boston office lease, which expires onNovember 30, 2014, there is a five-year extension option which would allowthe Company to extend the lease through November 30, 2019.

F-24

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

As ofDecember 31, 2006, the Company had the following lease commitments relatedto these agreements:
|            | ** ** | **Minimum Lease**  | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **Payments**            | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2007       |       | $                       | 8,866      |   |
| 2008       |       | 8,981                   |       |
| 2009       |       | 9,284                   |       |
| 2010       |       | 9,395                   |       |
| 2011       |       | 9,351                   |       |
| Thereafter |       | 20,429                  |       |
|       |       | $                       | 66,306     |   |

 

Rent expense for the years ended December 31,2006, 2005 and 2004 was approximately $10.7 million, $9.4 million and $8.8million, respectively.

***Guarantees***

The Company has outsourced certain information technology services toHewlett-Packard Company and Savvis Communications Corporation. The agreementsare in place until 2010. As of December 31, 2006, the Company’sannual minimum guaranteed payments under these agreements are as follows:
|            | ** ** | **Minimum**             | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **Guaranteed**          | ** ** |
| ** ** | ** ** | **Payments**            | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2007       |       | $                       | 11,118     |   |
| 2008       |       | 11,578                  |       |
| 2009       |       | 9,904                   |       |
| 2010       |       | 4,189                   |       |
|       |       | $                       | 36,789     |   |

 

The Company applies the provisions of the FASB’sInterpretation No. 45, *Guarantor’sAccounting and Disclosure Required for Guarantees, Including IndirectIndebtedness of Others* (“FIN 45”) which provides accounting anddisclosure requirements for certain guarantees. In this regard, the Company hasagreed to indemnify its clearing broker for losses that it may sustain from thecustomer accounts introduced by the Company. Pursuant to the clearingagreement, the Company is required to reimburse the clearing broker withoutlimit for any losses incurred due to the counterparty’s failure to satisfy itscontractual obligations. However, these transactions are collateralized by theunderlying security, thereby reducing the associated risk to changes in themarket value of the security through the settlement date.

The Company is a member of various securitiesexchanges. Under the standard membership agreement, members are required toguarantee the performance of other members and, accordingly, if another memberbecomes unable to satisfy its obligations to the exchange, all other memberswould be required to meet the shortfall. The Company’s liability under thesearrangements is not quantifiable and could exceed the cash and securities ithas posted as collateral. However, management believes that the potential forthe Company to be required to make payments under these arrangements is remote.

F-25

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**10. Commitments, Contingencies and Guarantees(continued)**

Accordingly, nocontingent liability is recorded in the Consolidated Statements of FinancialCondition for these arrangements.

In connection with the IPO, theCompany has an Indemnification Agreement with Société Générale under which the Company will indemnify, and willdefend and hold harmless Société Générale and its subsidiaries from and against certain liabilities specificallyretained or assumed by the Company after becoming a public company (See Note11, Separation from Société Générale and Other Related Matters, for furtherdiscussion of the Indemnification Agreement). There were no contingentliabilities related to these matters recognized by the Company through the periodended December 31, 2006.

**11. Separation fromSociété Générale and Other Related Matters**

In connection with the IPO, the Company entered into aSeparation Agreement, an Indemnification Agreement and a number of otheragreements with Société Générale for the purpose of accomplishing theseparation from Société Générale, the transfer of the Cowen and CIL businessesto the Company, the return of capital to SGASH, and various other mattersregarding the separation and the IPO. The Separation Agreement and IndemnificationAgreement were executed on July 11, 2006. The other agreements describedbelow were executed on July 12, 2006. These agreements provide, amongother things, for the allocation of employee benefits, tax and otherliabilities and obligations attributable or related to periods or events priorto, in connection with and after the IPO.

The Separation Agreement provides that, as ofJuly 18, 2006, both the Company and Société Générale will assume and/orretain certain actual or contingent liabilities. Specifically, the Company willretain or assume, among others, certain liabilities reflected on the Company’sConsolidated Statements of Financial Condition, all liabilities associated withthe Company’s stock ownership and incentive compensation plans, liabilitiesassociated with certain contracts and accounts that the Company shares withSociété Générale, liabilities associated with the breach of or failure toperform any of the Company’s obligations under certain agreements, certainspecified liabilities and all other liabilities expressly allocated to theCompany in connection with the separation, and all other known and unknownliabilities (to the extent not specifically assumed by Société Générale)relating to, arising out of or resulting from the Company’s business, assets,liabilities or any business or operations conducted by the Company at any timeprior to, on or after the date of separation. Liabilities retained orassumed  by Société Générale include,among others, liabilities associated with the sale and transfer of  its interests in the SG Merchant Banking FundL.P. to a third party, its portion of liabilities associated with certaincontracts and accounts that it shares with the Company, liabilities associatedwith the breach of or failure to perform any of its obligations under certainagreements, liabilities arising from the operation of its business, liabilitiesassociated with certain businesses previously conducted by the Company, certainliabilities associated with any known or unknown employee-related claims madeby any current or former employees of Société Générale or any of itssubsidiaries (other than the Company), certain specific contingent liabilitiesto the extent that such liabilities exceed the aggregate dollar amount held inescrow pursuant to the Escrow Agreement, certain  specified liabilities and all otherliabilities expressly allocated to it under the Separation Agreement and the other agreements entered into inconnection with the separation, and all other known and unknown liabilitiesrelating to, arising out of or resulting from its business, assets, liabilitiesor any business or operations conducted by Société Générale.

The Company entered into an Indemnification Agreementwith Société Générale on July 11, 2006. Under the IndemnificationAgreement, the Company will indemnify, and will defend and hold harmlessSociété Générale and its subsidiaries from and against all liabilitiesspecifically retained or assumed by us

F-26

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**11. Separation from Société Générale and OtherRelated Matters (continued)**

after becoming a publiccompany. Société Générale will indemnify, and will defend and hold harmless theCompany and each of the Company’s subsidiaries from and against certainliabilities assumed or retained by them, and Société Générale will indemnifythe Company for known, pending and threatened litigation (including the costsof such litigation) and certain known regulatory matters, in each case, thatexisted prior to the date of the IPO to the extent the cost of such litigationresults in payments in excess of the amount placed in escrow to fund suchmatters.

The Company entered into an Employee Matters Agreementwith Société Générale in connection with the IPO. The Employee MattersAgreement provides, among other things, for the allocation, between the Companyand Société Générale, of responsibilities and liabilities for employees,employee compensation and benefit plans, programs, policies and arrangementsfollowing the transactions contemplated by the Separation Agreement. Suchallocation includes the transfer to Société Générale of certain assets andliabilities associated with identified deferred compensation plans sponsored bySociété Générale.

The Company entered into a Stockholders Agreement withSGASH in connection with the IPO. The Stockholders Agreement, among otheragreements, governs SGASH’s right to appoint members of the Board of Directorsof the Company, SGASH’s registration rights relating to shares of the Company’scommon stock, if any, held by SGASH after the IPO and restrictions on SGASH’sability to sell, transfer or otherwise convey shares of the common stock, ifany, held by SGASH after the IPO. As of July 21, 2006 SGASH holds lessthan 10% of the Company’s common stock. As such, SGASH can no longer appointmembers of the Board of Directors of the Company pursuant to the StockholdersAgreement.

The Company entered into a Transition Services Agreementwith Société Générale in connection with the IPO pursuant to which thecompanies agreed to provide each other certain administrative and supportservices and other assistance consistent with a limited number of the servicesprovided before the separation. Services that the Company agreed to provide toSociété Générale included merchant banking oversight services. Services thatSociété Générale agreed to provide to the Company included facilitiesmanagement, business continuity management, certain legal services andlitigation management services and access to Société Générale data rooms ande-mail archives.

The Company entered into a Tax Matters Agreement withSociété Générale in connection with the IPO. The Tax Matters Agreement includesa description of the Company’s continuing tax sharing arrangements with SociétéGénérale relating to periods prior to the separation, and also allocatesresponsibility and benefits associated with the elections made in connectionwith the separation from Société Générale. The Tax Matters Agreement alsoallocates rights, obligations and responsibilities in connection with certainadministrative matters relating to taxes. In connection with the Company’sseparation from Société Générale, SGAI retained the tax benefits of the Company’snet operating loss carryforwards.

On July 11, 2006 the Board of Directors of theCompany approved the “Equity and Incentive Plan” pursuant to which the Companycan offer employees, independent contractors and non-employee Directors’ equity-basedawards. 4,725,000 shares of common stock have been allocated for issuance underthis plan. In connection with the IPO, the Company made equity awards of2,100,000 shares of restricted stock and granted options to purchase 1,125,000shares of common stock to certain of its senior employees.

F-27

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**12. Related Party Transactions**

Effective July 21, 2006 (the date on whichSociété Générale’s ownership level was reduced to below 10%), the Company’saffiliation with Société Générale was ended. As such, the ConsolidatedStatements of Operations include related party items through July 21,2006. Accordingly, any balances due to or from Société Générale as ofDecember 31, 2006 are no longer separately reported as related partyamounts in the Consolidated Statements of Financial Condition.

Balances withaffiliated companies at December 31, 2006 and 2005 are included in theConsolidated Statements of Financial Condition under the following captions:
|                                                           | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| ** **                                                | ** ** | ** **              | ** ** |
| **Assets**                                                | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                |       | $                       | —     |       | $          | 303 |   |
| Securities  purchased under agreements to resell          |       | —                  |       | 410,981    |       |
| Receivable from  brokers, dealers and clearing brokers    |       | —                  |       | 25,635     |       |
| Due from  affiliates                                      |       | 1,367                   |       | 568        |       |
| Other assets                                              |       | —                  |       | 1,629      |       |
| Total assets                                              |       | 1,367                   |       | 439,116    |       |
|                                                      |       |                    |       |       |       |
| **Liabilities**                                           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Payable to  brokers, dealers and clearing brokers         |       | —                  |       | 9,010      |       |
| Accounts  payable, accrued expenses and other liabilities |       | —                  |       | 5,615      |       |
| Total liabilities                                         |       | —                  |       | 14,625     |       |
| Total net assets                                          |       | $                       | 1,367      |       | $          | 424,491 |   |

 

Until the date of the IPO, the Company’s excess cashwas invested in securities purchased under agreements to resell (“reverse repos”)with the New York branch of Société Générale (“SGNY”). These reverse repos werecollateralized by U.S. government and agency obligations, were monitored dailyfor credit exposure and were payable on demand.

Revenues earnedfrom and expenses incurred with affiliated companies for the years endedDecember 31, 2006 (through July 21, 2006, the date on which SociétéGénérale’s ownership level was reduced to below 10%), 2005 and 2004 aresummarized as follows:
|                                      | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **(in thousands)** | ** ** |
| ** **                           | ** ** | ** **              | ** ** |
| **Revenues**                         | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  banking                  |       | $                       | —     |       | $          | 552        |       | $ | — |   |
| Interest and  dividend income        |       | 9,662                   |       | 12,419     |       | 6,059      |       |
| Other                                |       | 1,141                   |       | 5,425      |       | 5,565      |       |
| Total revenues                       |       | 10,803                  |       | 18,396     |       | 11,624     |       |
|                                 |       |                    |       |       |       |       |       |
| **Expenses**                         | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Floor brokerage  and trade execution |       | 5,006                   |       | 7,982      |       | 13,400     |       |
| Service fees,  net                   |       | 3,675                   |       | 13,392     |       | 22,285     |       |
| Occupancy and  equipment             |       | 7,297                   |       | 12,502     |       | 12,493     |       |
| Interest expense                     |       | 159                     |       | 142        |       | 140        |       |
| Other                                |       | (69                     | )          | 447        |       | 896        |       |
| Total expenses                       |       | 16,068                  |       | 34,465     |       | 49,214     |       |
| Total, net                           |       | $                       | (5,265     | )          | $          | (16,069    | )          | $ | (37,590 | ) |

 

F-28

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**12. Related Party Transactions (continued)**

Other than interest earned on reverse repos with SGNY,revenues earned from and expenses incurred with affiliated companies primarilyresulted from securities transactions and administrative services.

Investment banking revenues included fees earned bythe Company for acting as Société Générale’s agent broker in the U.S. marketfor the sale of certain assets.

Interest income for periods before the reorganizationof SGCSC on April 23, 2004 (see Note 1) was based on the amount of reverserepos allocated to the Company’s business. Interest income on the allocatedreverse repos was based on current market rates for similar transactions.

Pursuant to service agreements with certainaffiliates, the Company received fees related to portfolio, investment andadministration services that were provided in connection with the management ofcertain assets. These fees are included in other revenue on the ConsolidatedStatements of Operations.

The Company clears its securities and futurestransactions on a fully disclosed basis through clearing brokers that areaffiliates of Société Générale. Clearing expenses are reported in floorbrokerage and trade execution on the Consolidated Statements of Operations. TheCompany had entered into a commercial clearing agreement with SGAS as a resultof the Company’s separation from Société Générale, which had replaced theCompany’s pre-existing clearing agreement with SGAS. The initial terms of thatclearing agreement terminated on December 31, 2006 and were extended untilJanuary 25, 2007, at which time the Company entered into a long termrelationship with a new clearing firm.

Pursuant to a service agreement with SGAI and otheraffiliates through the date of the IPO, the Company incurred expenses for costsand services that included facilities administration and security, riskmanagement, financial management and reporting, information systems managementand support, insurance, legal and compliance. Total expenses pursuant to theservice plan were approximately $3.2 million, $13.0 million and $22.3 millionduring the years ended December 31, 2006, 2005 and 2004, respectively. Inaddition, the Company incurred expenses of approximately $0.7 million, $1.5million and $1.2 million with an affiliated company for certain presentationcenter services during the years ended December 31, 2006, 2005 and 2004,respectively. These expenses are included in service fees on the ConsolidatedStatements of Operations, net of approximately $0.2 million, $1.1 million and$1.2 million of fees earned related to presentation center and library servicesprovided by the Company to SGAI during the years ended December 31, 2006,2005 and 2004, respectively. The Company entered into a Transition ServicesAgreement with Société Générale in connection with the IPO pursuant to whichthe companies agreed to provide each other certain administrative and supportservices and other assistance consistent with a limited number of the servicesprovided before the separation. Pursuant to the Transition Services Agreement,the Company has also agreed to provide Société Générale various services thathave previously been provided by the Company to Société Générale, includingmerchant banking oversight services. Société Générale will provide services tothe Company, including, facilities management, business continuity management,certain legal services and litigation management services and access to SociétéGénérale data rooms and e-mail archives.

Certain costs and services,which include real estate, project management and premises and securitiesmaintenance through the date of the IPO were allocated to the Company by SociétéGénérale. The total amount allocated was approximately $7.3 million, $12.5million and $12.5 million during the years ended December 31, 2006, 2005and 2004, respectively, and are reported inoccupancy and equipment on the Consolidated Statements of Operations. Inconnection with the IPO, the Company entered into asub-lease agreement with Société Générale, related to the Company’s New York office, which is in place untilSeptember 30, 2013.

F-29

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**12. Related Party Transactions (continued)**

As a member of the NYSE, theCompany incurs a monthly membership fee based on transaction volume. NYSEmembership fees were $1.1 million, $1.7 million and $1.1 million duringthe years ended December 31, 2006, 2005 and 2004, respectively. Pursuant to the Company’s clearing agreementwith SGAS, portions of these fees were recoverable. The recoverable portion ofthese fees totaled approximately $0.4 million, $0.8 million and $0.2million during the years ended December 31, 2006, 2005 and 2004,respectively. The Company reports theseexchange membership fees in other expenses on the Consolidated Statements ofOperations, net of recoveries.

Prior to the IPO, Société Générale provided letters ofcredit and performance guarantees on the Company’s behalf and the Companyprovided performance guarantees to Société Générale for certain clients of theCompany’s underwriting business which were also clients of Société Générale’scorporate banking business. Expenses under these performance guaranteesamounted to approximately $0.3 million, $0.1 million, and $0.1 millionduring the years ended December 31, 2006, 2005 and 2004, respectively, andare included in other expense in the Consolidated Statements of Operations.

**13.** Employee Benefits

**Defined Contribution Plans**

***The Company sponsors a 401(k) SavingsPlan (the “401(k) Plan”), which is a defined contribution plan.  Employees are entitled to participate, basedupon certain eligibility requirements as defined by the 401(k) Plan.  The Company provides matching contributionsfor certain employees that are equal to a specified percentage of the eligibleparticipant’s contribution as defined by the 401(k) Plan.  The expenses relating to this plan totaledapproximately $0.6 million, $0.7 million, and $0.9 million for the years endedDecember 31, 2006, 2005, and 2004, respectively, and are included in employeecompensation and benefits on the Consolidated Statements of Operations.***

***The Company also sponsors a definedcontribution plan for its Geneva and London employees. Contributions made forthese plans were approximately $0.4 million, $0.5 million, and $0.5 million forthe years ended December 31, 2006, 2005, and 2004, respectively, and areincluded in employee compensation and benefits on the Consolidated Statementsof Operations.***

**Deferred and Other Compensation Plans**

***Prior to the IPO, the Company requiredselected employees to defer a portion of their performance related compensationin the form of a Fidelity Bonus (the ‘‘Fidelity Bonus’’). The Fidelity Bonuswas announced at the time all other bonuses were announced and vested ratablyover a three-year period. Participants were entitled to a rate of return ontheir Fidelity Bonus amount based on a hypothetical investment in variousalternative investment vehicles.  As aresult of the IPO, all of the Company’s employees under the plan became fullyvested and certain employees were paid out in full. Participants who deferredthe distribution of their vested amounts will be paid out in accordance withthe plan’s original distribution schedule. Expenses related to this plan are comprised of both the vesting of thedeferred amounts and any change in value based on the performance of theinvestment alternatives selected by the participants. The Company recognizedcompensation expense of approximately $10.3 million, $8.2 million, and $6.6million for the years ended December 31, 2006, 2005, and 2004, respectively.All of these charges are included in employee compensation and benefits on theConsolidated Statements of Operations. The Company has recorded liabilities ofapproximately $3.2 million and $13.2 million as of December 31, 2006 and 2005,respectively, which are included in employee compensation and benefits payableon the Consolidated Statements of Financial Condition.***

F-30

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**13.** Employee Benefits (continued)

***Prior to the IPO, Société Générale hadsponsored a voluntary deferred compensation plan for certain of the Company’skey executives (the ‘‘Deferred Compensation Plan’’). The Company’s employeesceased contributing to the Deferred Compensation Plan in 2003, and no furthercontributions were made thereafter. Participants were allowed to makehypothetical investments in various alternative investment funds and thecorresponding liability fluctuated based on the performance of thosehypothetical investments. The Company recognized compensation expense ofapproximately $1.5 million, $3.2 million and $4.0 million for the years endedDecember 31 2006, 2005 and 2004, respectively. This expense is included in employeecompensation and benefits on the Consolidated Statements of Operations. TheCompany recorded a liability of approximately $44.8 million at December 31,2005, which is included in employee compensation and benefits payable on theConsolidated Statement of Financial Condition. This liability was joint andseveral with Société Générale. As a result of the IPO and pursuant to theSeparation Agreement, Société Générale assumed the remaining obligations underthe plan and retains all liability for future payments thereunder. The Companyinvested in corporate owned life insurance to economically hedge certainaspects of the Deferred Compensation Plan. At December 31, 2005, the cashsurrender value of the corporate owned life insurance was approximately $35.2million and is included in other assets on the Consolidated Statement ofFinancial Condition. Changes in the cash surrender value of corporate ownedlife insurance are included in employee compensation and benefits on theConsolidated Statements of Operations. For the years ended December 31, 2006,2005 and 2004, the Company recognized increases in the cash surrender value ofapproximately $1.2 million, $2.3 million, and $2.0 million, respectively. As aresult of the IPO and pursuant to the Separation Agreement, the Companytransferred the cash surrender value of corporate owned life insurance toSociété Générale.***

***Prior to the IPO, Société Généralesponsored a plan enabling eligible employees of the Company to defer a portionof their annual performance related compensation to make a hypotheticalinvestment in an alternative investment vehicle indexed to the performance ofinvestments made in the SG Merchant Banking Fund L.P.  The Company had not made an equity investmentin the SG Merchant Banking Fund L.P., but its liability to its employees wasbased upon the performance of their hypothetical investments. Changes in theCompany’s liabilities to employees were approximately ($0.9) million, ($1.0)million, and $0.3 million for the years ended December 31 2006, 2005 and 2004,respectively, and are included in employee compensation and benefits on theConsolidated Statements of Operations. The Company recorded a liability ofapproximately $3.9 million for the year ended December 31, 2005, which isincluded in employee compensation and benefits payable on the ConsolidatedStatement of Financial Condition. Prior to the IPO, this liability was jointand several with Société Générale. As a result of the IPO and pursuant to theSeparation Agreement, Société Générale assumed the remaining obligations underthe plan and retains all liability for future payments thereunder.***

***Prior to the IPO, the Company sponsored aplan enabling eligible employees to invest a portion of their performancerelated compensation in SG Cowen Ventures I, L.P. Most plan participants metthe U.S. Securities and Exchange Commission’s definition of an accreditedinvestor and qualified to become limited partners of the fund. Upon payment ofthe performance related compensation for the year in which the plan wasoffered, the Company had no further obligation to these accreditedparticipants. Certain plan participants did not meet the requirements to betreated as an accredited investor, and accordingly were permitted to make ahypothetical investment with pre-tax dollars in the fund. The Company had notmade an equity investment in SG Cowen Ventures I, L.P., but its liability tothese non-accredited employees was based upon the performance of theirhypothetical investment. Changes in the Company’s liabilities to employees wereapproximately $0.04 million, $0.1 million, and ($0.8) million for the yearsended December 31, 2006, 2005 and 2004 respectively, and are included inemployee compensation and benefits***

F-31

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**13.** Employee Benefits (continued)

***on the Consolidated Statements of Operations. The Companyrecorded a liability of approximately $0.4 million for the year ended December31, 2005, which is included in employee compensation and benefits payable onthe Consolidated Statement of Financial Condition. As a result of the IPO andpursuant to the Separation Agreement, Société Générale assumed the remainingobligations under the plan and retains all liability for future payments thereunder.***

***Prior to the IPO, certain of the Company’semployees participated in and received awards from the SG Corporate andInvestment Banking Partnership. The participants in the partnership wereselected every year and entitled to receive an amount determined based on thenet income of Société Générale’s Corporate and Investment Banking division.Participants were eligible to receive the award only if certain return onequity goals were met in the partnership year. To the extent awards wereearned, they were subject to a four year cliff vest. The Company’s allocationof these compensation charges totaled approximately $1.0 million, $0.4 millionand $1.1 million for the years ended December 31, 2006, 2005 and 2004,respectively. All of these charges are included in employee compensation andbenefits on the Consolidated Statements of Operations. As a result of the IPO,the Company’s employee participants under the partnership became fully vestedand were paid out in full.***

**14. Stock-Based Compensation**

***Stock-based awards issued by Cowen Group, Inc.***

Upon becoming a public company, the Companyestablished the 2006 Equity and Incentive Plan (The “Plan”). The Plan permitsthe grant of options, shares, restricted stock units and other equity basedawards to its employees, consultants and directors for up to 4,725,000 sharesof common stock. On July 12, 2006, the Company granted options to purchase1,125,000 shares of the Company’s stock and 2,100,000 restricted shares. Theoptions were granted to employees of the Company with an exercise price equalto the IPO price of $16.00. The options generally become exercisable upon thecompletion of a five-year vesting period and expire seven years from the dateof grant. The restricted shares generally vest over five years.

The Company measures compensation cost for theseawards according to the fair value method prescribed by FAS 123R. In accordancewith the expense recognition provisions of FAS 123R, unearned compensationassociated with share-based awards with graded vesting periods is amortized onan accelerated basis over the vesting period of the option or award.

The compensation cost that has been expensed for theseawards was approximately $5.3 million for the year ended December 31,2006. An income tax benefit of $2.3 million was recognized during the yearended December 31, 2006.

The fair value of each option award is estimated onthe date of grant using a Black-Scholes option valuation model that uses thefollowing assumptions:

Expected volatility—Based on the lack of historicaldata for the Company’s own shares, the Company based its expected volatility ona representative peer group that took into account the criteria outlined in SECStaff Accounting Bulletin No. 107 (“SAB 107”): industry, marketcapitalization, stage of life cycle and capital structure.

Expected term—Expected term represents the period oftime that options granted are expected to be outstanding. The Company electedto use the “simplified” calculation method according to the provisions of SAB107 as applicable to companies that lack extensive historical data. Themid-point between the vesting date and the contractual expiration date is usedas the expected term under this method.

F-32

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**14. Stock-Based Compensation (continued)**

Risk free rate—The risk-free rate for periods withinthe expected term of the option is based on the interest rate of a tradedzero-coupon U.S. Treasury bond with a term equal to the options’ expected termon the date of grant.

Dividend yield—The Company has not paid and does notexpect to pay dividends in the future. Accordingly, the assumed dividend yieldis zero.

Valuationassumptions :
|                          | ** ** | **Grant Date** | ** ** |
|--------------------------|------------|---------------------|------------|
| Expected option  term    |       | 5.25 years          |       |
| Expected volatility      |       | 31.8                | %          |
| Expected  dividend yield |       | —              |       |
| Risk-free interest rate  |       | 4.97                | %          |

 

The fair value of restricted stock is determined basedon the number of shares granted and the quoted price of the Company’s commonstock on the date of grant.

The followingtable summarizes the Company’s stock option activity for the year endedDecember 31, 2006:
|                                                    | ** ** | **Shares**          | ** ** | **Average**        | ** ** | **Average**   | ** ** | **Aggregate** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------|------------|---------------|------------|
| ** **                                         | ** ** | **Subject to** | ** ** | **Exercise**       | ** ** | **Remaining** | ** ** | **Intrinsic** | ** ** |
| ** **                                         | ** ** | **Option**          | ** ** | **Price/Share(1)** | ** ** | **Term**      | ** ** | **Value(2)**  | ** ** |
| **Balance  outstanding at January 1, 2006**   |       | —              |       | $                  | —     |          | —     |          | $          | — |   |
| Options granted                                    |       | 1,125,000           |       | 16.00              |       | —        |       | —        |       |
| Options  exercised                                 |       | —              |       | —             |       | —        |       | —        |       |
| Options  forfeited                                 |       | (11,573             | )          | —             |       | —        |       | —        |       |
| Options expired                                    |       | —              |       | —             |       | —        |       | —        |       |
| **Balance  outstanding at December 31, 2006** |       | 1,113,427           |       | $                  | 16.00      |          | 6.53       |          | $          | — |   |
| ** **                                         |       |                |       |               |       |          |       |          |       |
| **Options exercisable at  December 31, 2006** |       | —              |       | —             |       | —        |       | —        |       |

----

(1)             Noshares were exercised from July 12, 2006, the date of grant, throughDecember 31, 2006.

(2)             Nooptions were vested or exercisable through December 31, 2006. Theweighted-average grant-date fair value of options granted on July 12, 2006was $6.11.

As of December 31, 2006, there was$5.5 million of unrecognized compensation cost related to the Company’sgrant of stock options.

The followingtable summarizes the Company’s nonvested restricted shares activity for theyear ended December 31, 2006:
|                                                    | ** ** | **Nonvested**  | ** ** | **Weighted-Average** | ** ** |
|----------------------------------------------------|------------|----------------|------------|----------------------|------------|
| ** **                                         | ** ** | **Restricted** | ** ** | **Grant Date**  | ** ** |
| ** **                                         | ** ** | **Shares**     | ** ** | **Fair Value**  | ** ** |
| **Balance  outstanding at January 1, 2006**   |       | —         |       | $                    | —     |   |
| Granted                                            |       | 2,100,000      |       | 16.00                |       |
| Vested                                             |       | —         |       | —               |       |
| Forfeited                                          |       | (11,528        | )          | —               |       |
| **Balance outstanding at  December 31, 2006** |       | 2,088,472      |       | $                    | 16.00      |   |

 

F-33

----

**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**14. Stock-Based Compensation (continued)**

As of December 31, 2006, there was $28.1 millionof unrecognized compensation cost related to the Company’s grants of nonvestedrestricted shares. Unrecognized compensation cost related to nonvestedrestricted shares is expected to be recognized over a weighted-average periodof 2.35 years. None of the nonvested restricted shares vested during the periodended December 31, 2006.

There have been no modifications to any awards grantedunder the Plan during the year ended December 31, 2006.

During the year ended December 31, 2006 theCompany issued 9,792 restricted stock units to non-employee directors whichwere immediately vested. The fair value at the date of grant of a restrictedstock unit was $15.32.

***Stock-based awards issued bySociété Générale***

Prior to the IPO, certain of the Company’s employeeswere granted awards under Société Générale’s various stock incentive plans.Société Générale sponsors an Employee Stock Purchase Plan (“ESPP”), referred toas the SG International Group Savings Plan. This plan allowed employees topurchase Société Générale stock at a discount. The Company provided matchingcontributions to the ESPP, which were equal to a specified percentage of theemployees’ contribution, as defined by the ESPP. Beginning in 2005, the Companyceased providing matching contributions. Employee shares were non-forfeitablewhen issued and accordingly are not subject to any vesting provisions.

Also prior to the IPO, Société Générale grantedcertain employees of the Company options to purchase shares of Société Généralestock. Such options were granted to employees of the Company with exerciseprices equal to the average of the opening trading price of Société Généraleshares on the Euronext Paris SA exchange during the 20 trading days prior tothe date of grant. Generally, the options become exercisable upon thecompletion of a three year vesting period and expire seven years from the dateof grant.

All of the optionsunder this plan became fully vested prior to the IPO. The Company recognizedcompensation expense for these awards of $0.1 million, $0.1 millionand $0.4 million for the years ended December 31, 2006, 2005 and2004, respectively which are included in employee compensation and benefits onthe Consolidated Statements of Operations.

**15. Income Taxes**

The taxable results of the Company’s U.S. operationswere historically included in the consolidated income tax returns of SGAIthrough the IPO date. The tax results of the Company’s U.K. operations werehistorically included in the tax returns of SG London Branch throughApril 30, 2006. For the period May 1, 2006 through December 31,2006, the U.K. operations are included in CIL’s U.K. tax filing. The U.S.impact of CIL’s operations is included in the SGAI consolidated tax returns forthe period May 1, 2006 through the IPO date and in the Company’s tax filingspost-IPO.

F-34

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**15. Income Taxes(continued)**

The components ofthe Company’s income tax expense (benefit) for the years endedDecember 31, 2006, 2005 and 2004 are as follows:
|                                  | ** ** | **Federal**             | ** ** | **State and local** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------|------------|-----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Current                          |       | $                       | 3,469      |                          | $          | 2,351       |       | $         | 656        |   | $ | 6,476 |   |
| Deferred                         |       | (1,374                  | )          | (671                          | )          | 117         |       | (1,928    | )          |
| Total at  December 31, 2006 |       | $                       | 2,095      |                          | $          | 1,680       |       | $         | 773        |   | $ | 4,548 |   |
|                             |       |                    |       |                          |       |        |       |      |       |
| Current                          |       | —                  |       | $                             | 1,104      |        | $          | 48        |       | $ | 1,152 |   |
| Deferred                         |       | —                  |       | —                        |       | —      |       | —    |       |
| Total at  December 31, 2005 |       | $                       | —     |                          | $          | 1,104       |       | $         | 48         |   | $ | 1,152 |   |
|                             |       |                    |       |                          |       |        |       |      |       |
| Current                          |       | $                       | 1,423      |                          | $          | 1,003       |       | $         | (549       | ) | $ | 1,877 |   |
| Deferred                         |       | —                  |       | —                        |       | —      |       | —    |       |
| Total at  December 31, 2004 |       | $                       | 1,423      |                          | $          | 1,003       |       | $         | (549       | ) | $ | 1,877 |   |

 

As of December 31, 2006, the Company has incometaxes payable of approximately $1.8 million which is included in accountspayable, accrued expenses and other liabilities on the Consolidated Statementof Financial Condition.

The reconciliationof the Company’s federal statutory tax rate to the effective income tax ratefor the years ended December 31, 2006, 2005 and 2004 is as follows:
|                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory U.S.  federal income tax rate |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State and local  taxes                  |       | 3.0      |       | 8.3      |       | 1.8      |       |
| Change in  valuation allowance          |       | (30.2    | )          | (41.9    | )          | (34.7    | )          |
| Other, net                              |       | 2.9      |       | 7.3      |       | 1.2      |       |
| Effective rate                          |       | 10.7     | %          | 8.7      | %          | 3.3      | %          |

 

Deferred income tax assets and liabilities reflect thetax effect of temporary differences between the carrying amount of assets andliabilities for financial reporting purposes and the amounts used for the sameitems for income tax reporting purposes.

F-35

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**15. Income Taxes(continued)**

The components ofthe Company’s deferred tax assets and liabilities as of December 31, 2006and 2005 are as follows:
| ** **                                       | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| **Deferred  Tax Assets:**                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net operating  loss carryforwards                |       | $                       | —     |       | $          | 44,553 |   |
| Deferred  compensation and employee benefits     |       | 3,012                   |       | 31,359     |       |
| Legal reserves  and other deferred deductions    |       | —                  |       | 11,940     |       |
| Goodwill                                         |       | —                  |       | 36,225     |       |
| Other                                            |       | 55                      |       | 1,210      |       |
| Gross deferred  tax assets                       |       | 3,067                   |       | 125,287    |       |
| Valuation  allowance                             |       | (80                     | )          | (125,287   | )          |
| Deferred tax  assets, net of valuation allowance |       | $                       | 2,987      |       | $          | — |   |
|                                             |       |                    |       |       |       |
| **Deferred  Tax Liabilities:**                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Deferred  compensation and employee benefits     |       | $                       | (49        | )          | $          | — |   |
| Goodwill                                         |       | (572                    | )          | —     |       |
| Depreciation                                     |       | (140                    | )          | —     |       |
| Foreign income                                   |       | (298                    | )          | —     |       |
| Deferred tax  liabilities                        |       | (1,059                  | )          | —     |       |
| Net deferred tax assets                          |       | $                       | 1,928      |       | $          | — |   |

 

Deferred tax assets and deferred tax liabilities areincluded in other assets and accounts payable, accrued expenses and otherliabilities, respectively, on the Consolidated Statements of FinancialCondition.

As discussed in Note 1, on April 23, 2004,Société Générale reorganized SGCSC into two separate single member limitedliability broker-dealers: SG Cowen & Co., LLC and SGAS. As a result ofthe reorganization, the tax attributes, including net operating losscarryforwards (“NOL”) of Cowen & Co., LLC were transferred to SGAI.There is no financial statement impact for the Company as a result of thetransfer since a full valuation allowance was reflected for the NOL attribute.The gross amount of the NOL transferred to SGAI as part of the reorganizationtotaled approximately $192.0 million.

For the period January 1, 2004 throughApril 23, 2004 (the “Period”), the Company was taxable as a corporation.During the Period, the Company recognized alternative minimum federal taxexpense of $1.4 million and state and local tax expense of $0.4 million basedon federal taxable income of $69.6 million. The state and local tax expense forthe period April 24, 2004 through December 31, 2004 was $0.6 million.

The NOL as of December 31, 2004 in the amount of$94.2 million consists of the NOL generated for the tax period fromApril 24, 2004 through December 31, 2004. The NOL as ofDecember 31, 2005 was $98.5 million prior to the IPO; a full valuationallowance was established to offset the deferred tax assets primarily due toaccumulated tax losses through the IPO date.

In connection with the Company’s separation fromSociété Générale, SGAI has retained such tax benefits associated with the IPO,including the Company’s net operating losses.

In 2006, a tax provision of $4.5 million was recorded.The low effective tax rate is due to a net reversal in the valuation allowanceprimarily due to payments of deferred compensation arrangements related to theIPO and pre-IPO amortization of goodwill. The valuation allowance isattributable to the portion of organizational costs and director relatedrestricted stock units that will be tax deductible after December 31,2008.

F-36

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**16. Financial Instruments with Off-Balance Sheet Risk,Credit Risk, or Market Risk**

The Company has anirrevocable Letter of Credit for $5.0 million issued by the Bank of NewYork (“BONY”) at the prime commercial lending rate, expiring onJuly 12, 2008, supporting Cowen’s Boston office lease. The Companyhas another irrevocable Letter of Credit for $100 thousand issued by BONYat the prime commercial lending rate, expiring on July 26, 2008,supporting Cowen’s worker compensation insurance with Safety National Casualty Corporation.As of December 31, 2006, there were no amounts due related to theseletters of credit.

The Company is engaged invarious securities underwriting, trading and brokerage activities servicing adiverse group of domestic and foreign corporations, and institutional investorclients. A substantial portion of the Company’s transactions are collateralizedand are executed with and on behalf of institutional investors including otherbrokers or dealers, commercial banks, and other financial institutions. TheCompany’s exposure to credit risk associated with the nonperformance of theseclients in fulfilling their contractual obligations pursuant to securitiestransactions can be directly impacted by volatile trading markets which mayimpair the client’s ability to satisfy its obligations to the Company.  The Company’s principal activities are alsosubject to the risk of counterparty nonperformance.

Prior to the IPO, the Companyobtained securities under resale agreements on terms which permit it torepledge or resell the securities to others. At December 31, 2005,the Company’s securities purchased under agreements to resell totaling$411.0 million were collateralized by securities pledged with a fair valueof approximately $411.0 million.

Securities sold, not yetpurchased are recorded as liabilities in the Consolidated Statements ofFinancial Condition and have market risk to the extent that the Company, insatisfying its obligations, may have to purchase securities at a higher valuethan what is recorded in securities sold, not yet purchased as ofDecember 31, 2006.

Derivative contracts arefinancial instruments such as forwards, futures, swaps, warrants, or optioncontracts that derive their value from underlying assets, reference rates,indices, or a combination thereof. A derivative instrument generally representsfuture commitments to purchase or sell financial instruments at specified termson a specified date, or to exchange currency or interest payment flows based oncontractual or notional amounts. Derivatives often are referred to asoff-balance-sheet instruments because neither their notional amounts nor theunderlying instruments are reported in the Consolidated Statements of FinancialCondition. Instead, fair values related to the derivative transactions arereported in the Consolidated Statements of Financial Condition. Changes in thefair value of derivatives are reported in principal transactions on the ConsolidatedStatements of Operations.

Derivatives are subjectto various risks similar to other financial instruments, including market,credit and operational risk. In addition, the Company may be exposed tolegal risks related to derivative activities, including the possibility atransaction may be unenforceable under applicable law. The risks of derivativesshould not be viewed in isolation, but rather should be considered on anaggregate basis along with the Company’s other trading-related activities. TheCompany manages the risks associated with derivatives on an aggregate basisalong with the risks associated with market-making activities in cashinstruments, as part of the Company’s firm-wide risk management policies.

The Company uses U.S.Treasury futures and listed options to economically hedge proprietary tradingpositions. In addition, the Company uses listed options for proprietary tradingactivities.  Futures contracts areexecuted on an exchange, and cash settlement is made on a daily basis formarket movements. As a 

F-37

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**16. Financial Instruments with Off-Balance Sheet Risk,Credit Risk, or Market Risk (continued)**

writer of options, theCompany receives a premium in exchange for giving the counterparty the right tobuy or sell the security at a future date at a contracted price. Warrantsprovide an option to the holder to purchase securities from the issuer. Creditdefault swaps represent agreements in which one party pays a fixed fee inreturn for a payment by the other party contingent upon a specified defaultevent relating to an underlying reference asset or pool of assets.

Realized and unrealized gains and losses associatedwith derivative transactions are included in principal transactions on theConsolidated Statements of Operations. The fair value of futures contracts andrequired margin deposits are included in receivable from brokers, dealers andclearing brokers on the Consolidated Statements of Financial Condition, and werede minimis at December 31, 2006 and 2005. The fair value of thelisted options, warrants, and the credit default swap is included in securitiesowned and securities sold, not yet purchased on the Consolidated Statements ofFinancial Condition.

As of December 31,2006 and 2005, the fair value of the Company’s derivative financial instrumentswas as follows:
| ** **           | ** ** | **2006**   | ** ** | **2005**                | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|
| ** **           | ** ** | **Assets** | ** ** | **Liabilities**         | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **           | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Options              |       | $          | 25,874     |                    | $          | 3,106 |   | $ | — |   | $ | — |   |
| Warrants             |       | 4,088      |       | —                  |       | 1,633 |   | — |   |
| Credit default  swap |       | —     |       | 121                     |       | — |   | — |   |
| Total                |       | $          | 29,962     |                    | $          | 3,227 |   | $ | 1,633 |   | $ | — |   |

 

**17. Stockholders’ Equity**

The certificate of incorporation of the Companyprovides for the issuance of up to 100,000,000 shares of common stock with apar value of $0.01 per share and up to 10,000,000 shares of preferred stockwith a par value of $0.01 per share.

*Commonstock*

The holders of the Company’s common stock are entitledto one vote per share on all matters to be voted upon by the stockholders anddo not have cumulative voting rights. Subject to preferences that may beapplicable to any outstanding preferred stock of the Company, the holders ofits common stock are entitled to receive ratably such dividends, if any, as maybe declared from time to time by the Company’s board of directors out of fundslegally available for that purpose. In the event that the Company is liquidatedor dissolved, the holders of its common stock are entitled to share ratably inall assets remaining after payment of liabilities, subject to any priordistribution rights of the Company’s preferred stock, if any, then outstanding.The holders of the common stock have no preemptive rights, conversion rights orother subscription rights. There are no redemption or sinking fund provisionsapplicable to the Company’s common stock. All outstanding shares of commonstock are fully paid and non-assessable.

During the year ended December 31, 2006, theCompany received 11,528 shares into treasury as a result of forfeituresrelated to the 2006 Equity and Incentive Plan.

***Preferred stock***

The Company’s board of directors has the authority,without action by its stockholders, to designate and issue preferred stock inone or more series and to designate the rights, preferences, and privileges of 

F-38

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**17. Stockholders’ Equity(continued)**

each series, which may begreater than the rights associated with the common stock. It is not possible tostate the actual effect of the issuance of any shares of preferred stock uponthe rights of holders of common stock until the Company’s board of directorsdetermines the specific rights of the holders of preferred stock. However, theeffects may include the following: restricting dividends on its common stock,diluting the voting power of its common stock, impairing the liquidation rightsof its common stock and delaying or preventing a change in control of theCompany without further action by its stockholders.

**18.** Earnings Per Share

The Company calculatesits basic and diluted earnings per share in accordance with SFAS No. 128, *Earnings Per Share*. Basic earnings per common share iscalculated by dividing net income by the weighted average number of commonshares outstanding for the period. As of December 31, 2006 there were14,988,472 shares outstanding, of which 2,088,472 are restricted. The Companyhas included the weighted average of 9,792 fully vested restricted stock unitsin its calculation of basic earnings per share.

Diluted earnings percommon share is calculated by adjusting the weighted average outstanding sharesto assume conversion of all potentially dilutive nonvested restricted stock andstock options. The Company uses the treasury stock method to reflect thepotential dilutive effect of the unvested restricted shares and unexercisedstock options. In calculating the number of dilutive shares outstanding, theshares of common stock underlying unvested restricted shares are assumed tohave been delivered, and options are assumed to have been exercised, on thegrant date. The assumed proceeds from the assumed vesting, delivery andexercising were calculated as the sum of (a) the amount of compensationcost attributed to future services and not yet recognized as ofDecember 31, 2006 and (b) the amount of tax benefit that wascredited to additional paid-in capital assuming vesting and delivery of therestricted shares. The tax benefit is the amount resulting from a tax deductionfor compensation in excess of compensation expense recognized for financial statementreporting purposes. In applying the treasury stock method to assume conversionof potentially dilutive stock options, there was no incremental dilutive effectof options through December 31, 2006.

F-39

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**Cowen Group, Inc.Notes to Consolidated Financial Statements (continued)**

**18.** Earnings Per Share (continued)

The computation ofearnings per share is as follows:
| ** **                                 | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Net income                                 |       | $                       | 37,911     |     | $          | 12,081   |       | $ | 55,112 |   |
| Shares for basic  and diluted calculations |       |                    |       |     |       |     |       |
| Average shares used in basic computation   |       | 12,903                  |       | 12,900   |       | 12,900   |       |
| Stock options                              |       | —                  |       | —   |       | —   |       |
| Restricted shares                          |       | 63                      |       | —   |       | —   |       |
| Average shares used in diluted computation |       | 12,966                  |       | 12,900   |       | 12,900   |       |
| Earnings per  share                        |       |                    |       |     |       |     |       |
| Basic                                      |       | $                       | 2.94       |     | $          | 0.94     |       | $ | 4.27 |   |
| Diluted                                    |       | $                       | 2.92       |     | $          | 0.94     |       | $ | 4.27 |   |

** **

**19.** Regulatory Requirements

As a registeredbroker-dealer, Cowen is subject to the Uniform Net Capital Rule 15c3-1of the Securities Exchange Act of 1934. Under the alternative method permittedby this Rule, Cowen’s net capital, as defined, is $1.0 million. Cowen is notpermitted to withdraw equity if certain minimum net capital requirements arenot met. As of December 31, 2006, Cowen had net capital ofapproximately $54.4 million, which was approximately $53.4 million in excess ofits net capital requirement of $1.0 million.

Pursuant to an exemptionunder Rule 15c3-3(k)(2)(ii), Cowen is not required to calculate areserve requirement and segregate funds for the benefit of customers since itclears its securities transactions on a fully disclosed basis and promptlytransmits all customer funds and securities to the clearing broker-dealer whichcarries the accounts, maintains and preserves such books and records pertainingto them pursuant to Rules 17a-3 and 17a-4.

The Company rebates aportion of its commissions back to its customers. Under Rule 15c3-1(a)(2)(iv),it is required to maintain a segregated bank account where it issues paymentsto reimburse its customers. At December 31, 2005, approximately$1.1 million has been segregated in a special account for the exclusivebenefit of customers. There was no amount required to be segregated in aspecial account for the exclusive benefit of customers atDecember 31, 2006.

Proprietary balances ofintroducing brokers (“PAIB”) held at the clearing broker are consideredallowable assets for net capital purposes, pursuant to agreements between Cowenand the clearing broker, which require, among other things, that the clearingbroker performs computations for PAIB and segregates certain balances on behalfof Cowen, if applicable.

CIL is subject to thecapital requirements of the Financial Services Authority (“FSA”) of the UnitedKingdom. Financial resources, as defined, must exceed the total financialresources requirement of the FSA. At December 31, 2006, CIL’sfinancial resources of approximately $4.4 million exceeded the minimumrequirement of $3.3 million by approximately $1.1 million.

**20.** Subsequent Events

On January 26, 2007the Company entered into a new clearing agreement with National Financial Services,LLC. The services provided under the new clearing agreement are substantiallythe same as the previous clearing agreement.

F-40

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**Supplemental Financial Information**

The following tablepresents unaudited quarterly results of operations for 2006 and 2005. Thesequarterly results reflect all normal recurring adjustments that are, in theopinion of management, necessary for a fair presentation of the results.Revenues and net income can vary significantly from quarter to quarter due tothe nature of our business activities.

**CowenGroup, Inc.Quarterly Financial Information (Unaudited)**
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,  2006**         | ** ** | **June 30,  2006** | ** ** | **Sept. 30,  2006** | ** ** | **Dec. 31,  2006** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Total revenues                              |       | $                                | 103,793    |   | $ | 83,617 |   | $ | 60,200 |   | $ | 97,357 |   |
| Expenses:                                   |       |                             |       |   |   |   |   |   |   |
| Compensation and  benefits                  |       | 62,738                           |       | 48,838 |   | 44,999 |   | 59,132 |   |
| Other expenses                              |       | 27,571                           |       | 28,859 |   | 27,270 |   | 28,944 |   |
| Total expenses                              |       | 90,309                           |       | 77,697 |   | 72,269 |   | 88,076 |   |
| Operating income  (loss)                    |       | 13,484                           |       | 5,920 |   | (12,069 | ) | 9,281 |   |
| Gain on exchange  memberships               |       | 24,832                           |       | — |   | — |   | 1,011 |   |
| Income (loss)  before income taxes          |       | 38,316                           |       | 5,920 |   | (12,069 | ) | 10,292 |   |
| Provision  (benefit) for taxes              |       | 1,776                            |       | 345 |   | (655 | ) | 3,082 |   |
| Net income  (loss)                          |       | $                                | 36,540     |   | $ | 5,575 |   | $ | (11,414 | ) | $ | 7,210 |   |
| Earnings per  share:                        |       |                             |       |   |   |   |   |   |   |
| Basic                                       |       | 2.83                             |       | 0.43 |   | (0.88 | ) | 0.56 |   |
| Diluted                                     |       | 2.83                             |       | 0.43 |   | (0.88 | ) | 0.55 |   |
| Weighted average  number of common shares : |       |                             |       |   |   |   |   |   |   |
| Basic                                       |       | 12,900                           |       | 12,900 |   | 12,902 |   | 12,910 |   |
| Diluted                                     |       | 12,900                           |       | 12,900 |   | 12,902 |   | 13,162 |   |

 
| ** **                                  | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|
| Total revenues                              |       | $                        | 82,272     |                    | $          | 53,480                   |       | $                       | 77,915     |   | $ | 80,624 |   |
| Expenses:                                   |       |                     |       |                    |       |                     |       |                    |       |
| Compensation and  benefits                  |       | 45,509                   |       | 29,673                  |       | 42,434                   |       | 54,512                  |       |
| Other expenses                              |       | 26,420                   |       | 25,845                  |       | 29,876                   |       | 27,707                  |       |
| Total expenses                              |       | 71,929                   |       | 55,518                  |       | 72,310                   |       | 82,219                  |       |
| Operating income  (loss)                    |       | 10,343                   |       | (2,038                  | )          | 5,605                    |       | (1,595                  | )          |
| Gain on exchange  memberships               |       | —                   |       | —                  |       | —                   |       | 918                     |       |
| Income (loss)  before income taxes          |       | 10,343                   |       | (2,038                  | )          | 5,605                    |       | (677                    | )          |
| Provision  (benefit) for taxes              |       | 782                      |       | (59                     | )          | 488                      |       | (59                     | )          |
| Net income  (loss)                          |       | $                        | 9,561      |                    | $          | (1,979                   | )          | $                       | 5,117      |   | $ | (618 | ) |
| Earnings per  share:                        |       |                     |       |                    |       |                     |       |                    |       |
| Basic                                       |       | 0.74                     |       | (0.15                   | )          | 0.40                     |       | (0.05                   | )          |
| Diluted                                     |       | 0.74                     |       | (0.15                   | )          | 0.40                     |       | (0.05                   | )          |
| Weighted average  number of common shares : |       |                     |       |                    |       |                     |       |                    |       |
| Basic                                       |       | 12,900                   |       | 12,900                  |       | 12,900                   |       | 12,900                  |       |
| Diluted                                     |       | 12,900                   |       | 12,900                  |       | 12,900                   |       | 12,900                  |       |

 

F-41

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Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|        | COWEN GROUP, INC.                                                                                                                                   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                |
|   |                                                                                                                                                |
|   | By: /s/ Kim S. Fennebresque                                                                                                                         |
|   | Name: Kim S. Fennebresque                                                                                                                      |
|   | Title:   Chairman, Chief Executive  Officer               and  President |

 

Dated:  July 17, 2007

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                     |
|-----------------|------------|-------------------------------------------------------------------------------------|
|            |       |                                                                                |
| 23.1            |       | Consent of Ernst & Young LLP                                                    |
|            |       |                                                                                |
| 31.1            |       | Certification of CEO Pursuant to Section 302 of  Sarbanes-Oxley Act of 2002         |
|            |       |                                                                                |
| 31.2            |       | Certification of CFO Pursuant to Section 302 of  Sarbanes-Oxley Act of 2002         |
|            |       |                                                                                |
| 32              |       | Certification of CEO and CFO Pursuant to Section 906  of Sarbanes-Oxley Act of 2002 |

 

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