**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**

**Annual Report Pursuant to Section 13or 15(d)**

**of theSecurities Exchange Act of 1934**

| For the fiscal year ended: **December 31, 2006** |   | Commission file number:  **000-52048** |
|-------------------------------------------------------|--------|----------------------------------------|

**Cowen Group, Inc.**

(Exact name of registrantas 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 Americas**

**New 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 registeredpursuant to Section 12(b) of the Act:

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

 

Securities registeredpursuant to Section 12(g) of the Act: None

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act.     Yes o     No  x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation  S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof the Annual Report on Form  10-K or any amendment to the AnnualReport on Form  10-K.      x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o            Accelerated  filer  o           Non-accelerated  filer  x |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).    Yes o      No  x

The aggregate market value of the common stock of theregistrant held by non-affiliates of the registrant on December 29, 2006,the last business day of the registrant’s fiscal year was: $272,835,000.

As of March 23, 2007 there were 15,980,077 sharesof the registrant’s common stock outstanding.

Documents incorporated by reference:

Part IIIof this Annual Report on Form 10-K incorporates by referenceinformation (to the extent specific sections are referred to herein) from theRegistrant’s Proxy Statement for its 2007 Annual Meeting of Stockholders.

 

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**TABLEOF CONTENTS**
| Item No.                                                                        | ** ** | ** **                                                                                                                     | ** ** | **Page No.** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| **PART I**                                                                      |       |                                                                                                                           |       |              |
| 1.                                                                              |       | Business                                                                                                                       |       | 1                 |
| 1A.                                                                             |       | Risk Factors                                                                                                                   |       | 8                 |
| 1B.                                                                             |       | Unresolved Staff Comments                                                                                                      |       | 18                |
| 2.                                                                              |       | Properties                                                                                                                     |       | 18                |
| 3.                                                                              |       | Legal Proceedings                                                                                                              |       | 18                |
| 4.                                                                              |       | Submission of Matters to a Vote of Security Holders                                                                            |       | 24                |
| **PART II**                                                                     |       |                                                                                                                           |       |              |
| 5.                                                                              |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities             |       | 25                |
| 6.                                                                              |       | Selected  Financial Data                                                                                                       |       | 25                |
| 7.                                                                              |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operation       |       | 27                |
| 7A.                                                                             |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                    |       | 47                |
| 8.                                                                              |       | Financial Statements and Supplementary Data                                                                                    |       | 48                |
| 9.                                                                              |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                 |       | 48                |
| 9A.                                                                             |       | Controls and Procedures                                                                                                        |       | 48                |
| 9B.                                                                             |       | Other  Information                                                                                                             |       | 48                |
| **PART III**                                                                    |       |                                                                                                                           |       |              |
| 10.                                                                             |       | Directors and Executive Officers of the Registrant                                                                             |       | 49                |
| 11.                                                                             |       | Executive Compensation                                                                                                         |       | 49                |
| 12.                                                                             |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                                |       | 49                |
| 13.                                                                             |       | Certain Relationships and Related Transactions                                                                                 |       | 49                |
| 14.                                                                             |       | Principal Accountant Fees and Services                                                                                         |       | 49                |
| **PART IV**                                                                     |       |                                                                                                                           |       |              |
| 15.                                                                             |       | Exhibits and Financial Statement Schedules                                                                                     |       | 50                |
| **CONSOLIDATED FINANCIAL STATEMENTS**                                           |       | F-1                                                                                                                            |
| 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 Equity        |       | F-5                                                                                                                            |
| Consolidated Statements of Cash Flows                                           |       | F-6                                                                                                                            |
| Notes to Consolidated Financial Statements                                      |       | F-7                                                                                                                            |
| Supplemental Financial Information                                              |       | F-40                                                                                                                           |
| **SIGNATURES**                                                                  |       |                                                                                                                           |
| **EXHIBIT INDEX**                                                               |       |                                                                                                                           |

 

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**Special Note RegardingForward-Looking Statements**

We have made statements in this Annual Report on Form 10-K(the “Annual Report”) in, among other sections, Item 1—“Business,” Item 1A—“RiskFactors,” Item 3—“Legal Proceedings,” and Item 7—“Management’sDiscussion and Analysis of Financial Condition and Results of Operations” thatare forward-looking statements. In some cases, you can identify these statementsby forward-looking terms such as “may”, “might”, “will”, “should”, “expect”, “plan”,“anticipate”, “believe”, “estimate”, “predict”, “potential”, “intend” or “continue,”the negative of these terms and other comparable terminology. Theseforward-looking statements, which are subject to risks, uncertainties andassumptions about us, may include projections of our future financialperformance, which in some cases may be based on our growth strategies andanticipated trends in our business. These statements are only predictions basedon our current expectations and projections about future events. There areimportant factors that could cause our actual results, level of activity,performance or achievements to differ materially from those expressed or impliedby the forward-looking statements. In particular, you should consider thenumerous risks outlined under Item 1A—“Risk Factors” in this Annual Reporton Form 10-K.

Although we believe the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,level of activity, performance or achievements. Moreover, neither we nor anyother person assumes responsibility for the accuracy or completeness of any ofthese forward-looking statements. You should not rely upon forward-lookingstatements as predictions of future events. We are under no duty to update anyof these forward-looking statements after the date of this filing to conformour prior statements to actual results or revised expectations.

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**PART I**

*When weuse the terms “we”, “us”, “our” and the “Company” we mean Cowen Group, Inc.,a Delaware corporation, and its consolidated subsidiaries, taken as a whole, aswell as any predecessor entities, unless the context otherwise indicates.*

**Item 1.**                        Business

**Overview**

We are an investment bank dedicated to providingsuperior research, sales and trading and investment banking services tocompanies and institutional investor clients primarily in the healthcare,technology, media and telecommunications, alternative energy and consumersectors. We use a team-based approach to deliver customized solutions to ourclients, and we provide our clients with frequent and consistent interactionwith our senior professionals. We believe the experience and talent of ourprofessionals enable us to deliver the specialized advice and differentiatedservices our clients demand.

Our firm has a rich history beginning with thefounding of Cowen in 1918 in New York City as a bond brokerage firm andcontinuing to our current position as an investment bank focused on key sectorsof the economy. In 1998, our firm was acquired by Société Générale, one of thelargest financial services firms in Europe. On July 12, 2006, followingthe transfer by SG Americas Securities Holdings of all of its interest inCowen and Company, LLC and Cowen International Limited to our holdingcompany, Cowen Group, Inc., in exchange for 12,899,900 shares of ourstock, we again became an independent company as a result of our initial publicoffering (“IPO”). All of the shares sold in our IPO were previously held bySG Americas Securities Holdings. Cowen Group, Inc. was incorporatedin Delaware in February 2006 in anticipation of the IPO.

We operate our business as one reportable segment.Total revenues were $345.0 million, $294.3 million and $293.1 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. Net incomewas $37.9 million, $12.1 million and $55.1 million for the yearsended December 31, 2006, 2005 and 2004, respectively. Total assets were$684.4 million, $785.3 million and $820.4 million at December 31,2006, 2005 and 2004, respectively. Total investment banking revenues were$164.3 million, $126.2 million and $113.8 million for the yearsended December 31, 2006, 2005 and 2004, respectively. Total sales andtrading revenues were $157.7 million, $145.7 million and $164.2 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. Foradditional financial information, please see Item 8—“Financial Statementsand Supplementary Data.”

Our principal executiveoffices are located at 1221 Avenue of the Americas, New York, New York 10020. Ourtelephone number is (646) 562-1000. We also have offices in Boston,Chicago, Cleveland, Denver, San Francisco, London and Geneva. We maintain awebsite at www.cowen.com. The information contained on and connected to ourwebsite is not incorporated by reference into this report. We make availablefree of charge on or through our website our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,amendments to those reports filed or furnished pursuant to Section 13(a)or 15(d) of the Securities Act of 1934, and all other reports we file withthe Securities Exchange Commission (the “SEC”), as soon as reasonablypracticable after we electronically file these reports with the SEC. The Cowenand Company, LLC logo and the other trademarks, tradenames and servicemarks of Cowen and Company, LLC mentioned in this report, including Cowenand Company, LLC, are the property of Cowen Group, Inc.

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**Principal BusinessLines**

***Research***

The goal of our research professionals is to producetimely and actionable investment ideas and proprietary information that willimprove our clients’ investment performance. We define the best investmentideas as correct, non-consensus conclusions. In our industry, we believe thatthere has been growing confusion between financial reporting, otherwise knownas maintenance research, and financial analysis. To allow our analysts to focuson developing ideas that create significant value for our clients, and toenhance analyst productivity, we have eliminated the requirement for manyelements of maintenance research.

We have a research team of 28 professionals providingresearch coverage on 426 companies. Within our coverage universe,approximately 44% are technology, media and telecommunications companies, 35%are healthcare companies, 19% are consumer companies and 2% are alternativeenergy companies. In addition, we have a research strategist providing coverageon the technology, media and telecommunications industry. Our research analystsare located in New York City, Boston and San Francisco, in close proximity tomany of the leading investors in the United States.

Our research culture is team oriented and discouragesthe ‘‘star’’ system perpetuated by annual investor polls, which we do notconsider in our evaluation of analyst performance. We believe our cultureenhances productivity as we direct our analysts to ignore pursuits that woulddetract from time spent developing valuable investment ideas. This moreproductive approach has enabled our analysts to raise their research coveragefrom 10 companies per analyst to 15 in the past four and a halfyears, a 50% increase. We are continually assessing the opportunity to addcoverage of both small- and large-capitalization stocks within our sectors. Wealso may seek to add sub-sectors of coverage when we believe an opportunityexists to provide a differentiated opinion and help our investor clients achievehigher returns.

We highlight our investment research and providesignificant investor access to corporate management teams through a number ofannual conferences focused on our sectors and sub-sectors. We believe ourconferences are differentiated by the quality of our research presented, thequality of our survey results presented and the quality of our expert panelistparticipants. Expert panelists who appear at our conferences are drawn from ourextensive network of industry experts that have been developed over the past30 years. Our investor clients recognize that our networks, particularlyin healthcare, are comprised of many of the leading professionals in theirrespective fields.

Our research franchise hasconsistently been characterized by teamwork and a desire to develop talent fromwithin the organization. When we hire analysts from outside the organization,we prefer to hire technical professionals from the industry they will cover andto train them internally in our research approach. This approach ensures weattain the differentiated research our clients expect while we maintain the keyaspects of our culture.

***Sales and Trading***

Our team of sales and trading professionals arefocused on institutional investor clients in the U.S. and internationally. Wetrade common and convertible securities, as well as listed options, on behalfof our clients. In 2006, we had relationships with over 1,000 institutionalinvestor clients. Our sales and trading team is comprised of experiencedprofessionals dedicated to our target sectors, which allows us to develop alevel of knowledge and focus that differentiates our sales and tradingcapabilities from those of our competitors. We believe our sales and tradingclients are becoming specialized in their evaluation of investmentopportunities. As a result, the value they place on our focused, insightful,proprietary research and dedicated sales and trading professionals is growing.Additionally, we tailor our account coverage to the unique needs of ourclients. For example, as hedge funds have contributed an increasing percentageof 

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our revenues in recentyears, we have established a dedicated team of professionals to providecustomized, value-added service to emerging firms in this important clientsegment. We have also established a dedicated team of professionals to focus ondeveloping relationships with middle market investor clients. The value ourclients place on our sales force expertise is evident in the client surveysconducted by third parties. The Institutional Investor Research Group rankedour sales force number one for the healthcare sector in eight out of the lasttwelve years.

Our sales professionals also provide our institutionalinvestor clients with access to the management of our investment bankingclients outside the context of financing transactions. These meetings, commonlyreferred to as non-deal road shows, are highly valued by both our investmentbanking and institutional investor clients. Non-deal road shows allow ourinvestment banking clients to increase their visibility with the institutionalinvestor community while providing our institutional investor clients with theopportunity to further educate themselves on companies and industries throughmeetings with management. We arranged 283 days of non-deal road showmeetings for 156 companies in 2006. We believe our deep relationships withcompany management teams and our sector-focused approach provides us withstrong access to management.

We believe that by specializing in the healthcare, technology,media and telecommunications, alternative energy and consumer sectors ourtraders are able to provide superior execution because of their extensiveknowledge of the interests of our institutional investor clients in specificcompanies in our target sectors. Within our sales and trading division, we alsohave a team dedicated to the distribution of convertible debt offerings wemanage for our investment banking clients and the provision of liquidity forour institutional investor clients through the trading of convertible debtsecurities. We also have a group of sales and trading professionals focused onproviding listed option strategies and execution for our institutional investorclients.

Our sales and tradingprofessionals are primarily located in New York City, Boston, San Francisco andLondon. We also have sales and trading offices in Chicago, Cleveland, Denverand Geneva.

***Investment Banking***

Our investment bankingprofessionals are focused on providing strategic advisory and capital raisingservices to public and private companies in the healthcare, technology, mediaand telecommunications, alternative energy and consumer sectors. By focusing onour target sectors over a long period of time, we have developed a significantunderstanding of the unique challenges and demands with respect to public andprivate capital raising and strategic advice in these sectors. Our advisory andcapital raising capabilities begin at the early stages of a private company’saccelerated growth phase and continue through its evolution as a publiccompany. A significant majority of our investment banking revenue is earnedfrom high-growth public companies with a market capitalization below $2 billion.We believe the high level of expertise and client trust we have developed allowus to generate significant repeat business. In 2006, over 36% of our businesswas executed with repeat clients. In addition, we believe lead-managed businessreflects our expertise and the strength of our client relationships. We were leadmanager on approximately 39% of our underwritten capital raising transactionsexecuted in 2006. The percentage of lead-managed business is up from less than20% in 2001 and reflects a concerted effort by management to focus onlead-managed transactions.

***Asset Management***

Cowen’s current assetmanagement activities include managing a portfolio of merchant bankinginvestments on behalf of Société Générale and other third party investors aswell as managing a portfolio of venture capital investments on behalf of aninactive employee fund. We expect to expand our asset management activitiesover time. In that regard, we recently formed Cowen Healthcare Royalty Partnersand hired two individuals with extensive experience financing thecommercialization of drugs through 

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royaltystructures. In 2006, we also hired an individual to assist us in developing atraditional asset management business. At this time, we are reviewing variousoptions that may be available to us to enter this business area.

**Financial InformationAbout Geographic Areas**

We are principally engagedin providing investment banking and sales and trading services to corporationsand institutional investor clients in the United States. We also provideinvestment banking and sales and trading services to companies andinstitutional  investor clients ininternational jurisdictions, primarily in England and Europe. We conduct ourinternational business primarily through Cowen International Limited, ourinvestment banking and brokerage subsidiary located in London, England. Netrevenues for Cowen International Limited were $15.8 million,$11.4 million and $12.8 million for the years ended December 31,2006, 2005 and 2004, respectively. Long-lived assets attributable to foreignoperations were $9.5 million, $0.9 million and $1.2 million at December 31,2006, 2005 and 2004 respectively.

**Competition**

As an investment bank, allaspects of our business are intensely competitive. Our competitors are otherinvestment banks, brokerage firms, merchant banks and financial advisory firms.We compete with some of our competitors nationally and with others on aregional, product or business line basis. Many of our competitors havesubstantially greater capital and resources than we do and offer a broaderrange of financial products. We believe that the principal factors affectingcompetition in our business include client relationships, reputation, qualityand price of our products and services, market focus and the ability of ourprofessionals. Competition is intense for the recruitment and retention ofqualified professionals. Our ability to continue to compete effectively in ourbusiness will depend upon our continued ability to retain and motivate ourexisting professionals and attract new professionals. In recent years, therehas been substantial consolidation and convergence among companies in thefinancial services industry, including among many of our former competitors. Inparticular, a number of large commercial banks have established or acquiredbroker-dealers or have merged with other financial institutions. Many of thesefirms have the ability to offer a wider range of products than we offer,including loans, deposit taking, and insurance. Many of these firms also havemore extensive investment banking services, which may enhance their competitiveposition. They also have the ability to support investment banking andsecurities products with commercial banking and other financial servicesrevenue in an effort to gain market share, which could result in pricingpressure in our business. This trend toward consolidation and convergence hassignificantly increased the capital base and geographic reach of ourcompetitors.

**Seasonality**

Our sales and trading andinvestment banking businesses typically experience slowdowns during certainperiods of the year, such as certain summer months and around various holidayssuch as Thanksgiving. However, seasonality has not typically been a significantfactor affecting our results.

**Regulation**

Our business, as well as the financial servicesindustry generally, is subject to extensive regulation in the United States andelsewhere. As a matter of public policy, regulatory bodies in the United Statesand the rest of the world are charged with safeguarding the integrity of thesecurities and other financial markets and with protecting the interests ofcustomers participating in those markets.

In the United States, the SEC is the federal agencyresponsible for the administration of the federal securities laws. Cowen andCompany, LLC, our wholly-owned subsidiary, is registered as abroker-dealer with the SEC, the NYSE and the NASD and in all 50 states,the District of Columbia and Puerto Rico. Accordingly, Cowen and Company, LLCis subject to regulation and oversight by the SEC, the NYSE and 

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the NASD. The NYSE and theNASD are self-regulatory organizations which are themselves subject tooversight by the SEC and which adopt and enforce rules governing theconduct, and examine the activities, of its member firms, including Cowen andCompany, LLC. In fall 2006, the NYSE and NASD announced a plan toconsolidate their member regulation operations into a new self-regulatoryorganization that will become the principal private sector regulator for Cowenand Company, LLC after consolidation. We cannot fully predict thepractical effect that such regulatory consolidation will have on our businessat this time. State securities regulators also have regulatory or oversightauthority over Cowen and Company, LLC. Cowen and Company, LLC is alsoa member of, and subject to regulation by, the NYSE, the Chicago Board  Options Exchange, the Philadelphia StockExchange, the American Stock Exchange, the Chicago Stock Exchange, theInternational Stock Exchange, the NASDAQ Global Market, the Nasdaq StockExchange, the Pacific Stock Exchange, the Chicago Board of Trade and the NewYork Mercantile Exchange. Cowen International Limited, our newly formed U.K.broker-dealer subsidiary, is subject to regulation by the Financial ServicesAuthority in the U.K. Our business may also be subject to regulation bynon-U.S. governmental and regulatory bodies and self-regulatory authorities inother countries where we operate.

Broker-dealers are subject to regulations that coverall aspects of the securities business, including sales methods, tradepractices among broker-dealers, use and safekeeping of customers’ funds andsecurities, capital structure, record-keeping, the financing of customers’ purchasesand the conduct and qualifications of directors, officers and employees. Inparticular, as a registered broker-dealer and member of various self-regulatoryorganizations, Cowen and Company, LLC is subject to the SEC’s uniform netcapital rule, Rule 15c3-1. Rule 15c3-1 specifies theminimum level of net capital a broker-dealer must maintain and also requiresthat a significant part of a broker-dealer’s assets be kept in relativelyliquid form. The SEC and various self-regulatory organizations impose rules thatrequire notification when net capital falls below certain predefined criteria,limit the ratio of subordinated debt to equity in the regulatory capitalcomposition of a broker-dealer and constrain the ability of a broker-dealer toexpand its business under certain circumstances. Additionally, the SEC’suniform net capital rule requires us to give prior notice to the SEC forcertain withdrawals of capital. As a result, our ability to withdraw capitalfrom our broker-dealer subsidiary may be limited.

The effort to combat money laundering and terroristfinancing is a priority in governmental policy with respect to financialinstitutions. The Bank Secrecy Act, as amended by Title III of the USA PATRIOTAct of 2001 and its implementing regulations requires broker-dealers and otherfinancial services companies to maintain an anti-money laundering complianceprogram that includes written policies and procedures, designated complianceofficer(s), appropriate training, independent review of the program, standardsfor verifying client identity at account opening, and obligations to reportsuspicious activities and certain other financial transactions. Through theseand other provisions, the Bank Secrecy Act seeks to promote the identificationof parties that may be involved in financing terrorism or money laundering. Wemust also comply with sanctions programs administered by the U.S. Department ofTreasury’s Office of Foreign Asset Control, which may include prohibitions ontransactions with designated individuals and entities and with individuals andentities from certain countries.

Anti-money laundering laws outside the United Statescontain some similar provisions. The obligation of financial institutions,including us, to identify their customers, watch for and report suspicioustransactions, respond to requests for information by regulatory authorities andlaw enforcement agencies, and share information with other financialinstitutions, has required the implementation and maintenance of internalpractices, procedures and controls which have increased, and may continue toincrease, our costs, and any failure with respect to our programs in this areacould subject us to serious regulatory consequences, including substantialfines, and potentially other liabilities.

Certain of our businessesare subject to compliance with laws and regulations of United States federaland state governments, non-United States governments, their respective agenciesand/or various self-

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regulatoryorganizations or exchanges relating to the privacy of client information, andany failure to comply with these regulations could expose us to liabilityand/or reputational damage. Additional legislation, changes in rules promulgatedby the SEC and self-regulatory organizations or changes in the interpretationor enforcement of existing laws and rules, either in the United States orelsewhere, may directly affect the mode of our operation and profitability. TheUnited States and non-United States government agencies and self-regulatoryorganizations, as well as state securities commissions in the United States,are empowered to conduct administrative proceedings that can result in censure,fine, the issuance of cease-and-desist orders or the suspension or expulsion ofa broker-dealer or its directors, officers or employees. Occasionally, we havebeen subject to investigations and proceedings, and sanctions have been imposedfor infractions of various regulations relating to our activities.

**Employees**

As of March 23, 2007,we employed 537 people.

**Executive Officers**

Set forth below isinformation concerning our executive officers.
| Name                  | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                       | ** ** | **Positions** |
|-----------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
| Kim S. Fennebresque   |       | 57         |       | Chairman, Chief  Executive Officer and President of Cowen and Company, LLC and Chairman,  Chief Executive Officer and President of Cowen Group, Inc.                |
| Thomas K. Conner      |       | 46         |       | Chief Financial  Officer and Member of the Office of the Chief Executive of Cowen and  Company, LLC and Chief Financial Officer and Treasurer of Cowen  Group, Inc. |
| William H. Dibble     |       | 53         |       | Head of Human  Resources and Member of the Office of the Chief Executive of Cowen and  Company, LLC                                                                           |
| Mark A. Egert         |       | 44         |       | Chief Compliance  Officer and Member of the Office of the Chief Executive of Cowen and  Company, LLC                                                                     |
| J. Kevin McCarthy     |       | 42         |       | General Counsel  and Member of the Office of the Chief Executive of Cowen and Company, LLC and  General Counsel of Cowen Group, Inc.                                          |
| Jean Orlowski         |       | 41         |       | Chief Information  Officer and Member of the Office of the Chief Executive of Cowen and  Company, LLC                                                                    |
| Christopher A . White |       | 42         |       | Chief of Staff, Chief  Administrative Officer, and Member of the Office of the Chief Executive of  Cowen and Company, LLC and Vice President of Cowen Group, Inc.   |

 

***Kim S. Fennebresque***hasserved as Chief Executive Officer and President of Cowen and Company, LLCsince November 1999 and as Chairman of Cowen and Company, LLC since August 2005.Mr. Fennebresque has been the Chairman and President of Cowen Group, Inc.since its formation in February 2006 and Chief Executive Officer since June 2006.Prior to becoming Chief Executive Officer, Mr. Fennebresque served as Headof Mergers & Acquisitions from 1998 to 1999 and became Head ofInvestment Banking in 1999. Mr. Fennebresque joined Cowen andCompany, LLC in March 1998 from UBS Securities where he had served asHead of the Corporate Finance and Mergers & Acquisitions Departments.From 1991 to 1994, he was a General Partner and Co-Head of Investment Bankingat Lazard Frères & Co. From 1977 to 1991, he was with The First BostonCorporation where he held the positions of Head of Leveraged Acquisitions, Headof Transaction Development and Co-Head of General 

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InvestmentBanking. Mr. Fennebresque holds an A.B. from Trinity College and a lawdegree from Vanderbilt Law School.

***Thomas K. Conner***has served as Chief FinancialOfficer of Cowen and Company, LLC since July 2003 and has been theTreasurer of Cowen Group, Inc. since its formation in February 2006and Chief Financial Officer since June 2006. Mr. Conner isresponsible for all of our financial management and control matters, includingregulatory reporting. He joined Cowen and Company, LLC in 1992 as DivisionFinancial Officer for the firm’s investment banking activities. Prior tojoining Cowen and Company, LLC, Mr. Conner worked for TLP LeasingPrograms in Boston, where he managed the accounting operations of 15 publicand 15 private limited partnerships. From 1987 to 1989, Mr. Connerworked for Atlantic Capital Corporation. He began his career at DeloitteHaskins & Sells in 1983. Mr. Conner holds a B.B.A. from theUniversity of Massachusetts in Amherst.

***William H. Dibble***has served as Head of HumanResources of Cowen and Company, LLC since August 2004. Prior to joiningour Human Resources Department, Mr. Dibble had more than 20 years ofhuman resources experience within the financial services industry. Mostrecently, Mr. Dibble was Head of Human Resources for Nomura Securities.Prior to Nomura, Mr. Dibble held a variety of human resources roles at TheFirst Boston Corporation, Marsh & McLennan and Merrill Lynch focusingon benefits, compensation, performance management, employee relations, trainingand development, succession planning and recruiting. Mr. Dibble earned abachelor’s degree in business administration from Seton Hall University.

***Mark A. Egert***has served as Chief ComplianceOfficer of Cowen and Company, LLC since January 2005. Prior tojoining the Legal and Compliance Department, Mr. Egert was Legal &Compliance Director for RBC Capital Markets Corporation, a subsidiary of theRoyal Bank of Canada from 2003 to January 2005. From 2001 to 2003, he wasChief Legal Officer of ABN AMRO Inc., the U.S. broker-dealer affiliate of Dutchbank, ABN AMRO and served in other positions at the firm from 1997 to 2001. Mr. Egertalso was associated with the law firms of Shearman & Sterling from1987 to 1992 and Kavanagh Peters Powell & Osnato from 1992 to 1994 andwas Vice President and Associate General Counsel at the Securities IndustryAssociation from 1994 to 1997. He received his law degree from GeorgeWashington University School of Law and his undergraduate degree from theUniversity of Delaware.

***J. Kevin McCarthy***has served as General Counsel ofCowen and Company, LLC since December 2006. As General Counsel,Mr. McCarthy heads Cowen’s Legal and Compliance Department based in NewYork, and is a member of the Office of the Chief Executive. In that capacity,Mr. McCarthy has overall responsibility for all legal, compliance andregulatory issues involving the firm. Prior to joining Cowen inDecember 2006, Mr. McCarthy was a partner at Wilmer Hale LLP inNew York. From 1996 to 2004, Mr. McCarthy was with Credit Suisse FirstBoston, where he served in a variety of capacities, most recently as ManagingDirector and Global Head of Litigation. He began his legal career at WillkieFarr & Gallagher in 1990. Mr. McCarthy received his law degreefrom Albany Law School of Union University in 1990 and his undergraduate degreefrom Siena College in 1987.

***Jean Orlowski*********hasserved as Chief Information Officer of Cowen and Company, LLC sinceJanuary 2003. Mr. Orlowski served as an Information Technologymanager from 2002 to January 2003. Prior to joining the InformationTechnology department of Cowen and Company, LLC, Mr. Orlowski worked atFimat, a global brokerage organization and wholly-owned subsidiary of SociétéGénérale, from 1993 to2000. Mr. Orlowski joined Fimat in Singapore as an Asian Pacific regionalInformation Technology manager before moving to Chicago to be the ChiefInformation Officer of Fimat in 1995. In 2000, Mr. Orlowski moved to Indiato become the Chief Executive Officer of SG Software Asia where he started SGSoftware Asia/Pacific as the offshore development center to the SociétéGénérale Group. He receivedhis Information Technology Engineering diploma from the Ecole Sup ́erieured’Informatique in Paris.

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***Christopher A. White*********hasserved as Chief of Staff of Cowen and Company, LLC since December 2005 andas Chief Administrative Officer of Cowen and Company, LLC since June 2006.Mr. White has been the Vice President of Cowen Group, Inc. since itsformation in February 2006. Mr. White served as a member of SGCapital Partners, the Merchant Banking Division of Cowen and Company, LLC, from2003 to December 2005. Prior to joining the Merchant Banking Division, Mr. Whitewas in the Equity Capital Markets Group of Cowen and Company, LLC where hecovered the technology and consumer sectors. Prior to this, Mr. Whiteworked at Salomon Smith Barney in the Equity Capital Markets Group. Mr. Whiteserves as a Director of Achillion Pharmaceuticals, Inc. and DayInternational, Inc. In addition, Mr. White has seven years experienceas a practicing securities and mergers and acquisitions lawyer at Brown RudnickFreed & Gesmer and Lord Day & Lord, Barrett Smith. Mr. Whiteearned his law degree from the University of Michigan Law School and hisundergraduate degree from Amherst College.

**Item 1A.**                RiskFactors

**Risks Related toOur Business**

***We focus principally on specific sectors of theeconomy, and deterioration in the business environment in these sectors or adecline in the market for securities of companies within these sectors couldmaterially adversely affect our business.***

We focus principally on the healthcare, technology,media and telecommunications, alternative energy and consumer sectors of theeconomy. Therefore, volatility in the business environment in these sectors orin the market for securities of companies within these sectors couldsubstantially affect our financial results and the market value of our commonstock. The business environment for companies in these sectors has been subjectto substantial volatility, and our financial results have consequently beensubject to significant variations from year to year. The market for securitiesin each of our target sectors may also be subject to industry-specific risks. Forexample, changes in policies of the United States Food and Drug Administration,along with changes in Medicare and government reimbursement policies, mayaffect the market for securities of healthcare companies.

As an investment bank focused principally on specificgrowth sectors of the economy, we also depend significantly on private companytransactions for sources of revenues and potential business opportunities. Mostof these private company clients are initially funded and controlled by privateequity firms. To the extent the pace of these private company transactionsslows or the average size declines due to a decrease in private equityfinancings, difficult market conditions in our target sectors or other factors,our business and results of operations may be adversely affected.

Underwriting and othercapital raising transactions, strategic advisory engagements and relatedtrading activities in our target sectors represent a significant portion of ourbusiness. This concentration of activity exposes us to the risk of substantialdeclines in revenues in the event of downturns in these sectors. For example,from 2004 to 2005, the sectors in which we operate experienced a significantdrop in the total amount of public equity capital raised. Total public equitycapital raised in our sectors fell from $78.0 billion in 2004 to $60.3 billionin 2005, a decrease of 23%. The total number of transactions also fellsignificantly, from 466 transactions in 2004 to 331 transactions in 2005, adecrease of 29%. Any future downturns in our target sectors could materiallyadversely affect our business and results of operations.

***Our financial results may fluctuate substantially fromperiod to period, which may impair our stock price.***

We have experienced, and expect to experience in thefuture, significant periodic variations in our revenues and results ofoperations. These variations may be attributed in part to the fact that ourinvestment banking revenues are typically earned upon the successful completionof a transaction, the timing of which is uncertain and beyond our control. Inmost cases, we receive little or no payment for investment banking engagementsthat do not result in the successful completion of a transaction. As a 

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result, our business ishighly dependent on market conditions as well as the decisions and actions ofour clients and interested third parties. For example, a client’s acquisitiontransaction may be delayed or terminated because of a failure to agree uponfinal terms with the counterparty, failure to obtain necessary regulatoryconsents or board or stockholder approvals, failure to secure necessaryfinancing, adverse market conditions or unexpected financial or other problemsin the client’s or counterparty’s business. If the parties fail to complete atransaction on which we are advising or an offering in which we areparticipating, we will earn little or no revenue from the transaction. Thisrisk may be intensified by our focus on growth companies in the healthcare,technology, media and telecommunications, alternative energy and consumersectors as the market for securities of these companies has experiencedsignificant variations in the number and size of equity offerings. Recently,more companies initiating the process of an initial public offering aresimultaneously exploring merger and acquisition exit opportunities. Ourinvestment banking revenues would be adversely affected in the event that aninitial public offering for which we are acting as an underwriter is preemptedby the company’s sale if we are not also engaged as a strategic advisor in suchsale.

As a result, we areunlikely to achieve steady and predictable earnings on a quarterly basis, whichcould in turn adversely affect our stock price. For more information, see Item7—“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Overview.”

***Our ability to retain our senior professionals iscritical to the success of our business, and our failure to do so maymaterially adversely affect our reputation, business and results of operations.***

Our people are our mostvaluable resource. Our ability to obtain and successfully execute the businessmandates that generate a significant portion of our revenues depends upon thereputation, judgment, business generation capabilities and project executionskills of our senior professionals. Our employees’ reputations andrelationships with our clients are a critical element in obtaining andexecuting client engagements. We encounter intense competition for qualifiedemployees from other companies in the investment banking industry as well asfrom businesses outside the investment banking industry, such as hedge fundsand private equity funds. From time to time, we have experienced departures ofinvestment banking, sales and trading, research and other professionals. Lossesof key personnel may occur in the future. In addition, if any of our bankers orexecutive officers were to join an existing competitor or form a competingcompany, some of our clients could choose to use the services of thatcompetitor instead of our services**.**

***Pricing and other competitive pressures may impair therevenues of our sales and trading business.***

We derive a significantportion of our revenues from our sales and trading business, which accountedfor approximately 46% of our revenues in 2006. Along with other firms, we haveexperienced intense price competition in this business in recent years. Inparticular, the ability to execute trades electronically and throughalternative trading systems has increased the pressure on trading commissionsand spreads. We expect pricing pressures in the business to continue.Decimalization in securities trading, introduced in 2000, has also reducedrevenues and lowered margins within the equity sales and trading divisions ofmany firms, including ours. We believe we may experience competitive pressuresin these and other areas in the future as some of our competitors seek toobtain market share by competing on the basis of price or use their own capitalto facilitate client trading activities. In addition, we face pressure from ourlarger competitors, which may be better able to offer a broader range ofcomplementary products and services to clients in order to win their tradingbusiness. As we are committed to maintaining and improving our comprehensiveresearch coverage in our target sectors to support our sales and tradingbusiness, we may be required to make substantial investments in our researchcapabilities. If we are unable to compete effectively in these areas, therevenues of our sales and trading business may decline, and our business andresults of operations may be adversely affected.

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***Our sales and trading and research businesses may beadversely affected by changes in laws and regulations and industry practices.***

Changes in laws and regulations governing sales andtrading and research activities could adversely affect our results ofoperations. The SEC staff has indicated that it is considering rulemaking inthis area, and we cannot predict the effect that such rulemaking may have onour sales and trading business.

Changes in industry practices may also adverselyaffect our results of operations. Historically, our clients have paid us forresearch through commissions on trades. Over the past year, the large fundmanager Fidelity Investments entered into arrangements with certain financialinstitutions of which it is a client, pursuant to which Fidelity Investmentsagreed to pay separately for trading and research services, a process known as “unbundling.”Previously, Fidelity Investments had, like other fund managers, paid forresearch from those financial institutions through the commissions that it hadpaid to those financial institutions for trading services. As a result ofunbundling, the financial institutions will charge lower commissions per tradebut will receive separate compensation for research that they provide toFidelity Investments.

We are a party to unbundling arrangements with fiveinstitutional investors. We may enter into additional unbundling arrangementsin the future. It is uncertain whether unbundling arrangements will become anindustry trend, and if so, to what extent. Furthermore, we cannot predict theconsequences on our business of these arrangements, nor can we predict theimpact on our business if unbundling develops as an industry trend.

If unbundling becomesprevalent, some or all of our sales and trading clients may pay us separatelyfor our research. If they do, there can be no assurance that our revenues fromthese clients will not decrease from current levels. If our clients wish topurchase sales and trading and research services separately, there can be noassurance that we will be able to market our services on that basis aseffectively as some of our competitors, in which case our business could beadversely affected.

***We face strong competition from larger firms.***

The research, sales and trading and investment bankingindustries are intensely competitive, and we expect them to remain so. Wecompete on the basis of a number of factors, including client relationships,reputation, the abilities of our professionals, market focus and the relativequality and price of our services and products. We have experienced intenseprice competition in some of our businesses, including trading commissions andspreads in our sales and trading business. In addition, pricing and othercompetitive pressures in investment banking, including the trends towardmultiple bookrunners, co-managers and financial advisors, could adverselyaffect our revenues.

We are a relatively small investment bank. Many of ourcompetitors in the research, sales and trading and investment bankingindustries have a broader range of products and services, greater financialresources, larger customer bases, greater name recognition and marketingresources, a larger number of senior professionals to serve their clients’needs, greater global reach and more established relationships with clientsthan we have. These larger and better capitalized competitors may be betterable to respond to changes in the research, sales and trading and investmentbanking industries, to compete for skilled professionals, to financeacquisitions, to fund internal growth and to compete for market sharegenerally.

The scale of ourcompetitors has increased in recent years as a result of substantialconsolidation among companies in the research, sales and trading and investmentbanking industries. In addition, a number of large commercial banks and otherbroad-based financial services firms have established or acquired underwritingor financial advisory practices and broker-dealers or have merged with otherfinancial institutions. These firms have the ability to offer a wider range ofproducts than we do which may enhance their competitive position. They alsohave the ability to support their investment banking groups 

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withcommercial banking and other financial services in an effort to gain marketshare, which has resulted, and could further result, in pricing pressure in ourbusinesses. In particular, the ability to provide debt financing has become animportant advantage for some of our larger competitors. We do not provide debtfinancing and are just beginning to develop debt arrangement capabilities, andtherefore we may be unable to compete as effectively for clients in asignificant part of the investment banking market. If we are unable to competeeffectively with our competitors, our business and results of operations willbe adversely affected.

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

We have incurred losses in several recent periods andalso recorded net losses in certain quarters within other fiscal years. We mayincur losses in any of our future periods. From 1998 until our IPO in July 2006,most of our funding requirements were met through contributions from SociétéGénérale. Société Générale no longer has any reason to contribute funds to us.If we are unable to raise funds to finance future losses, those losses may havea significant effect on our liquidity as well as our ability to operate.

In addition, we may incur significant expenses inconnection with any expansion, strategic acquisition or investment.Accordingly, we will need to increase our revenues at a rate greater than ourexpenses to achieve and maintain profitability. If our revenues do not increasesufficiently, or even if our revenues increase but we are unable to manage ourexpenses, we will not achieve and maintain profitability in future periods.

As a result of ourseparation from Société Générale and our becoming a public company, certain ofour expenses increased. For example, in 2006, we entered a new clearingagreement with Société Générale which has subsequently been terminated and anamended lease with Société Générale for our New York headquarters, both at anincreased cost. In addition, our effective tax rate in 2006 increased becauseour U.S. business had operating income without the benefit of net operatingloss carryforwards to offset federal and most state and local income taxes. Weexpect our effective tax rate to increase again in 2007, our first full year asan independent public company. See Item 7—“Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

***Our capital markets and strategic advisory engagementsare singular in nature and do not generally provide for subsequent engagements.***

Our investment bankingclients generally retain us on a short-term, engagement-by-engagement basis inconnection with specific capital markets or mergers and acquisitionstransactions, rather than on a recurring basis under long-term contracts. Asthese transactions are typically singular in nature and our engagements withthese clients may not recur, we must seek out new engagements when our current engagementsare successfully completed or are terminated. As a result, high activity levelsin any period are not necessarily indicative of continued high levels ofactivity in any subsequent period. If we are unable to generate a substantialnumber of new engagements that generate fees from new or existing clients, ourbusiness and results of operations would likely be adversely affected.

***Larger and more frequent capital commitments in ourtrading and underwriting businesses increase the potential for significantlosses.***

There is a trend toward larger and more frequentcommitments of capital by financial services firms in many of their activities.For example, in order to win business, investment banks are increasinglycommitting to purchase large blocks of stock from publicly traded issuers orsignificant stockholders, instead of the more traditional marketed underwritingprocess in which marketing is typically completed before an investment bankcommits to purchase securities for resale. We anticipate participating in this 

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trend and, as a result, wewill be subject to increased risk as we commit capital to facilitate business.Furthermore, we may suffer losses as a result of the positions taken in thesetransactions even when economic and market conditions are generally favorablefor others in the industry.

We may enter into large transactions in which wecommit our own capital as part of our trading business to facilitate clienttrading activities. The number and size of these large transactions may materiallyaffect our results of operations in a given period. Market fluctuations mayalso cause us to incur significant losses from our trading activities. To theextent that we own assets,*i.e.*,have long positions, a downturn in the value of those assets or in the marketsin which those assets are traded could result in losses. Conversely, to theextent that we have sold assets we do not own,*i.e**.*, have short positions, in anyof those markets, an upturn in those markets could expose us to potentiallylarge losses as we attempt to cover our short positions by acquiring assets ina rising market.

In the event we requireadditional capital for our business or to fund losses, we will need to seeksuch capital through the sale of additional common stock, the issuance of debtsecurities, or through other debt financings.

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

Liquidity, or ready access to funds, is essential tofinancial services firms. Failures of financial institutions have often beenattributable in large part to insufficient liquidity. Liquidity is ofparticular importance to our trading business and perceived liquidity issuesmay affect our clients’ and counterparties’ willingness to engage in brokeragetransactions with us. Our liquidity could be impaired due to circumstances thatwe may be unable to control, such as a general market disruption or anoperational problem that affects our trading clients, third parties or us.Further, our ability to sell assets may be impaired if other marketparticipants are seeking to sell similar assets at the same time.

Cowen and Company, LLC,our broker-dealer subsidiary, is subject to the net capital requirements of theSEC and various self-regulatory organizations of which it is a member. Theserequirements typically specify the minimum level of net capital a broker-dealermust maintain and also mandate that a significant part of its assets be kept inrelatively liquid form. Cowen International Limited, our registered U.K.broker-dealer subsidiary, is subject to the capital requirements of the U.K.Financial Services Authority. Any failure to comply with these capitalrequirements could impair our ability to conduct our business.

***Our operations and infrastructure may malfunction orfail.***

Our businesses are highly dependent on our ability toprocess, on a daily basis, a large number of transactions across diversemarkets, and the transactions we process have become increasingly complex. Theinability of our systems to accommodate an increasing volume of transactionscould also constrain our ability to expand our businesses. If any of thesesystems do not operate properly or are disabled, or if there are othershortcomings or failures in our internal processes, people or systems, we couldsuffer impairments, financial loss, a disruption of our businesses, liabilityto clients, regulatory intervention or reputational damage.

We have outsourced certain aspects of our technologyinfrastructure including data centers, disaster recovery systems, and wide areanetworks, as well as some trading applications. We are dependent on ourtechnology providers to manage and monitor those functions. A disruption of anyof the outsourced services would be out of our control and could negativelyimpact our business. We have experienced disruptions on occasion, none of whichhas been material to our operations and results. However, there can be noguarantee that future material disruptions with these providers will not occur.

We also face the risk of operational failure of ortermination of relations with any of the clearing agents, exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities 

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transactions. Any suchfailure or termination could adversely affect our ability to effecttransactions and to manage our exposure to risk.

In addition, our ability to conduct business may beadversely impacted by a disruption in the infrastructure that supports ourbusinesses and the communities in which we are located. This may affect, amongother things, our financial, accounting or other data processing systems. Thismay include a disruption involving electrical, communications, transportationor other services used by us or third parties with which we conduct business,whether due to fire, other natural disaster, power or communications failure,act of terrorism or war or otherwise. Nearly all of our employees in ourprimary locations in New York City, Boston, San Francisco and London work inclose proximity to each other. Although we have a formal disaster recovery planin place, if a disruption occurs in one location and our employees in thatlocation are unable to communicate with or travel to other locations, ourability to service and interact with our clients may suffer, and we may not beable to implement successfully contingency plans that depend on communicationor travel.

Our operations also relyon the secure processing, storage and transmission of confidential and otherinformation in our computer systems and networks. Although we take protectivemeasures and endeavor to modify them as circumstances warrant, our computersystems, software and networks may be vulnerable to unauthorized access,computer viruses or other malicious code and other events that could have asecurity impact. If one or more of such events occur, this could jeopardize ouror our clients’ or counterparties’ confidential and other information processedand stored in, and transmitted through, our computer systems and networks, orotherwise cause interruptions or malfunctions in our, our clients’, ourcounterparties’ or third parties’ operations. We may be required to expendsignificant additional resources to modify our protective measures, toinvestigate and remediate vulnerabilities or other exposures or to makerequired notifications, and we may be subject to litigation and financiallosses that are either not insured against or not fully covered through anyinsurance maintained by us.

***Strategic investments or acquisitions and jointventures, or our entry into new business areas, may result in additional risksand uncertainties in our business.***

We have grown andintend to continue to grow our core businesses both through internal expansionand through strategic investments, acquisitions or joint ventures. When we makestrategic investments or acquisitions or enter into joint ventures, we expectto face numerous risks and uncertainties in combining or integrating therelevant businesses and systems, including the need to combine accounting anddata processing systems and management controls and to integrate relationshipswith customers and business partners. In January 2006, we entered into aventure with two of our employees to hold a minority interest in CowenQuantitative Strategies LLC, a market neutral statistical arbitrage proprietarytrading program. Our participation in this venture, and any other ventures thatwe may enter into, may subject us to additional risks and uncertainties becausewe may be dependent upon, and subject to liability, losses or reputationaldamage relating to, systems, controls and personnel that are not under ourcontrol. Conflicts or disagreements between us and the other members of aventure may negatively impact our businesses. In addition, future acquisitionsor joint ventures may involve the issuance of additional shares of our commonstock, which may dilute our stockholders’ ownership of our firm. Furthermore,any future acquisitions of businesses or facilities could entail a number ofrisks, including:

·       problems with the effectiveintegration of operations;

·       inability to maintain keypre-acquisition business relationships;

·       increased operating costs;

·       exposure to unanticipatedliabilities; and

·       difficulties in realizingprojected efficiencies, synergies and cost savings.

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At the end of 2006 weannounced our entry into asset management services and in the beginning of 2007we expanded our sector coverage into alternative energy. Our expansion intothese areas, as well as our further expansion into merchant banking willrequire significant resources and/or may result in significant unanticipatedlosses, costs or liabilities. In addition, expansions, acquisitions or jointventures may require significant managerial attention, which may be divertedfrom our other operations. These capital, equity and managerial commitments mayimpair the operation of our businesses.

***Failure to achieve and maintain effective internalcontrols in accordance with Section 404 of the Sarbanes-Oxley Act couldhave a material adverse effect on our ability to report our financial resultstimely and accurately and on our stock price.***

We are in the process of documenting and testing ourinternal control procedures in order to satisfy the requirements of Section 404of the Sarbanes-Oxley Act, which requires annual management assessments of theeffectiveness of our internal controls over financial reporting and a report byour independent auditors addressing these assessments. We are required tocomplete our initial assessment by the filing of our Form 10-K forthe year ended December 31, 2007. During the course of our testing, we mayidentify deficiencies which we may not be able to remediate in time to meetthis deadline. In addition, if we fail to maintain the adequacy of our internalcontrols, as such standards are modified, supplemented or amended from time totime, we may not be able to ensure that we can conclude on an ongoing basisthat we have effective internal controls over financial reporting in accordancewith Section 404. Failure to achieve and maintain an effective internalcontrol system could cause us to suffer material misstatements in our financialstatements and fail to meet our reporting obligations, which would likely causeinvestors to lose confidence in our reported financial information. This couldharm our operating results and lead to a decline in our stock price.

After we had included ourcombined financial statements for the years ended December 31, 2005, 2004and 2003 in the initial filing with the SEC of our registration statement inconnection with our IPO, we determined that our combined financial statementscontained certain misstatements. The restatement of our combined financialstatements increased cumulative net income for the five-year period ended December 31,2005 by $18.0 million, decreased group equity at December 31, 2005 by$1.0 million, and increased both cumulative cash provided by operatingactivities and cumulative cash used in financing activities for the three-yearperiod ended December 31, 2005 by $283.3 million. While managementdoes not believe the restatement was a result of a material weakness in ourinternal controls, there can be no assurance as to the effect of therestatement on an assessment of our internal controls and there can be noassurance that other misstatements will not occur in our annual or interimfinancial statements in the future.

**Risks Related toOur Separation from Société Générale**

***Certain of our oversight and control functions havebeen performed in the past by Société Générale and we may be unsuccessful inperforming such functions, which may leave us exposed to unidentified orunanticipated risks.***

Prior to our IPO in July 2006,certain of our oversight and control functions were provided by SociétéGénérale. In connection with our IPO we created our own oversight and controlfunctions. If we were unsuccessful in the implementation of these oversight andcontrol functions we may be exposed to unidentified or unanticipated risks. Forexample, prior to our IPO, significant aspects of our risk management policiesand procedures were performed by Société Générale. As a result of our IPO, wereevaluated and developed our own risk management policies and procedures andhave hired employees to develop and administer these policies. However, ourrisk management strategies and techniques may not be fully effective inmitigating our risk exposure in all market environments or against all types ofrisk. For example, we are exposed to the risk that third parties who owe usmoney, securities or other assets will not perform their obligations. Theseparties may default on their obligations to us due to bankruptcy, lack of 

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liquidity,operational failure, breach of contract or other reasons. We are also subjectto the risk that our rights against third parties may not be enforceable in allcircumstances. Although we periodically review our credit exposures, defaultrisk may arise from events or circumstances that are difficult to detect orforesee. There can be no assurance that our stand-alone risk managementpolicies and procedures will be successful in detecting or addressing theserisks.

***Our historical financial results as a part of SociétéGénérale may not reflect what our results would have been as a separate,stand-alone entity.***

The historicalfinancial information we have included in this Annual Report may not reflectwhat our results of operations, financial condition and cash flows would havebeen had we been an independent company during the periods presented. This isprimarily a result of the following factors:

·       Since we did not operate,and Société Générale did not account for us, as a separate, stand-alone entityfor the historical periods prior to our IPO, we made adjustments andallocations in preparing our financial statements, including in respect of thecosts and expenses of various general and administrative services provided bySociété Générale to our business, and the assumptions underlying thoseadjustments and allocations may not prove to be accurate.

·       As part of SociétéGénérale, we received the benefit of lower costs due to economies of scale,shared services and increased purchasing power with vendors due to the size ofthe overall organization.

·       Oureffective tax rates for the years ended December 31, 2006, 2005, and 2004and were 10.7%, 8.7%, and 3.3%, respectively. Our effective tax rate for 2006was relatively low due to a net reversal in the valuation allowance primarilydue to payments of deferred compensation arrangements related to our IPO andpre-IPO amortization of goodwill. Our low effective tax rates in 2005 and 2004were primarily attributable to continued net operating losses for tax purposes,which were retained by Société Générale following our separation. As aresult, we expect our effective tax rate to be approximately 45% beginning in2007.

Accordingly, to the extent that our historicalfinancial information is not reflective of what our results of operations,financial condition and cash flows would have been had we been an independentcompany during the periods presented, that historical financial informationwill not be a reliable indicator of what our results of operations, financialcondition and cash flows will be in the future.

**Risks Related to Our Industry**

***Difficult marketconditions could adversely affect our business in many ways.***

Difficult market andeconomic conditions and geopolitical uncertainties have in the past adverselyaffected and may in the future adversely affect our business and profitabilityin many ways. Weakness in equity markets and diminished trading volume ofsecurities could adversely impact our sales and trading business, from which wehave historically generated a significant portion of our revenues.Industry-wide declines in the size and number of underwritings and mergers andacquisitions also would likely have an adverse effect on our revenues. Inaddition, reductions in the trading prices for equity securities also tend toreduce the dollar value of investment banking transactions, such as underwritingand mergers and acquisitions transactions, which in turn may reduce the fees weearn from these transactions. As we may be unable to reduce expensescorrespondingly, our profits and profit margins may decline.

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***Increases inregulation of the capital markets may have an adverse impact on our business.***

Highly publicizedfinancial scandals in recent years have led to investor concerns over theintegrity of the U.S. financial markets, and have prompted Congress, the SEC,the NYSE and Nasdaq to significantly expand corporate governance and publicdisclosure requirements. To the extent that private companies, in order toavoid becoming subject to these new requirements, decide to forgo initialpublic offerings, our equity underwriting business may be adversely affected.In addition, provisions of the Sarbanes-Oxley Act and the corporate governance rules imposedby self-regulatory organizations may divert companies’ attention away fromcapital markets transactions. In particular, companies that are or are planningto become publicly traded are incurring significant expenses and are allocatingsignificant resources in order to comply with the SEC standards relating tointernal controls over financial reporting, and companies that disclosematerial weaknesses in such controls under the new standards may have greaterdifficulty accessing the capital markets. These factors, in addition torecently adopted or proposed accounting and disclosure changes, may have anadverse effect on our business.

***Financial services firms have been subject toincreased scrutiny over the last several years, increasing the risk offinancial liability and reputational harm resulting from adverse regulatoryactions.***

Firms in the financialservices industry have been subject to an increasingly regulated environment.The industry has experienced increased scrutiny from a variety of regulators,including the SEC, the NYSE, the NASD and state attorneys general. Penaltiesand fines sought by regulatory authorities have increased substantially overthe last several years. This regulatory and enforcement environment has createduncertainty with respect to a number of transactions that historically had beenentered into by financial services firms and that were generally believed to bepermissible and appropriate. We may be adversely affected by changes in theinterpretation or enforcement of existing laws and rules by thesegovernmental authorities and self-regulatory organizations. We also may beadversely affected as a result of new or revised legislation or regulationsimposed by the SEC, other United States or foreign governmental regulatoryauthorities or self-regulatory organizations that supervise the financialmarkets. Among other things, we could be fined, prohibited from engaging insome of our business activities or subjected to limitations or conditions onour business activities. In addition, we could incur significant expenseassociated with compliance with any such legislation or regulations or the regulatoryand enforcement environment generally. Substantial legal liability orsignificant regulatory action against us could have material adverse financialeffects or cause significant reputational harm to us, which could seriouslyaffect our business prospects.

In addition, financialservices firms are subject to numerous conflicts of interests or perceivedconflicts, which have drawn scrutiny from the SEC and other federal and stateregulators. For example, the research areas of investment banks have been andremain the subject of heightened regulatory scrutiny, which has led toincreased restrictions on the interaction between equity research analysts andinvestment banking personnel at securities firms. While we have adopted variouspolicies, controls and procedures to address or limit actual or perceivedconflicts and regularly seek to review and update our policies, controls andprocedures, appropriately dealing with conflicts of interest is complex anddifficult, and our reputation could be damaged if we fail, or appear to fail,to deal appropriately with conflicts of interest. Our policies and proceduresto address or limit actual or perceived conflicts may also result in increasedcosts, additional operational personnel and increased regulatory risk. Failureto adhere to these policies and procedures may result in regulatory sanctionsor client litigation.

***Our exposure to legal liability is significant, anddamages that we may be required to pay and the reputational harm that couldresult from legal action against us could materially adversely affect ourbusinesses.***

As an investment bankingfirm, we depend to a large extent on our reputation for integrity andhigh-caliber professional services to attract and retain clients. As a result,if a client is not satisfied with our 

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services,it may be more damaging in our business than in other businesses. Moreover, ourrole as advisor to our clients on important underwriting or mergers andacquisitions transactions involves complex analysis and the exercise ofprofessional judgment, including rendering “fairness opinions” in connectionwith mergers and other transactions. Therefore, our activities may subject usto the risk of significant legal liabilities to our clients and aggrieved thirdparties, including stockholders of our clients who could bring securities classactions against us. Although our investment banking engagements typicallyinclude broad indemnities from our clients and provisions to limit our exposureto legal claims relating to our services, these provisions may not protect usor may not be enforceable in all cases. As a result, we may incur significantlegal and other expenses in defending against litigation and may be required topay substantial damages for settlements and/or adverse judgments. Substantiallegal liability or significant regulatory action against us could have amaterial adverse effect on our results of operations or cause significantreputational harm to us, which could seriously harm our business and prospects.

In connection with ourseparation from Société Générale, we entered into an Indemnification Agreementwith Société Générale, wherein, among other things, Société Générale agreed toindemnify us for all liability arising out of all known, pending or threatenedlitigation (including the cost of such litigation) and arbitrations and certainknown regulatory matters, in each case, that existed prior to the date of ourIPO. Société Générale, however, will not indemnify us, and we will insteadindemnify Société Générale, for most litigation, arbitration and regulatorymatters that may occur in the future but were unknown at the time of our IPOand certain known regulatory matters. See Item 3—“Legal Proceedings” for adiscussion of the matters covered by these indemnification provisions.

***Employee misconductcould harm us and is difficult to detect and deter.***

It is not always possibleto deter employee misconduct. The precautions we take to detect and preventthis activity may not be effective in all cases, and we may suffer significantreputational harm for any misconduct by our employees. For example, themisconduct of Frank Gruttadauria and Guillaume Pollet, as described in Item 3—“LegalProceedings,” resulted in substantial financial costs for internalinvestigations and in defending against (and, in the Gruttadauria matter, inresolving) private damages claims and regulatory investigations. Both matterswere the subject of numerous articles in the financial press and in otherpublications that mentioned us by name. The harm to our reputation and to ourbusiness caused by such matters is impossible to quantify. For information onour treatment of litigation expenses, see Item 7—“Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Basis of Presentation.”

**Risks Related to Our Shares**

***Provisions of ourorganizational documents may discourage an acquisition of us.***

Our organizationaldocuments contain provisions that impede the removal of directors and maydiscourage a third party from making a proposal to acquire us. Our board isclassified, and directors may only be able to be removed for cause and by theaffirmative vote of at least 80% of our then-outstanding capital stock entitledto vote. Our board has the ability to take defensive measures that could impedeor thwart a takeover such as, under certain circumstances, adopting a poisonpill, or causing us to issue preferred stock that has greater voting rightsthan the common stock. If a change of control or change in management thatstockholders might otherwise consider to be favorable is prevented or delayed,the market price of our common stock could decline.

***Our directors, executive officers and other employeeshave significant influence over matters requiring stockholder approval, whichcould delay or prevent a change of control.***

Our directors, executiveofficers and other employees beneficially own approximately 19% (25% on a fullydiluted basis) of our common stock. In addition, we will continue to use equityas a component of our 

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compensationprogram, which will result in our employees owning a greater percentage of ouroutstanding common stock. Consequently, our directors, executive officers andother employees, to the extent their interests are aligned, collectively may beable to significantly influence matters submitted for stockholder action,including the election of our board of directors and approval of significantcorporate transactions, including business combinations, consolidations andmergers and the determination of our day-to-day corporate and managementpolicies. This concentration of ownership of our common stock could delay orprevent proxy contests, mergers, tender offers, open-market purchase programsor other purchases of our common stock that might otherwise give you the opportunityto realize a premium over the then-prevailing market price of our common stock.In addition, these stockholders could exercise their influence in a manner thatis not in the best interest of our other stockholders.

***Future sales of ourcommon stock could cause our stock price to decline.***

Sales of substantialamounts of common stock by our employees and other stockholders, or thepossibility of such sales, may adversely affect the price of our common stockand impede our ability to raise capital through the issuance of equitysecurities. As of December 31, 2006, Société Générale was our largeststockholder, owning 9.22% of our common stock. Pursuant to an agreement weentered into with Société Générale in connection with our separation, we haveprovided Société Générale registration rights for all of its shares. SociétéGénérale may currently exercise its registration rights at any time. If SociétéGénérale exercises its registration rights for a significant amount of itsshares or otherwise disposes of a significant amount of its shares, the marketprice of our common stock may decline.

***We do not expect topay any cash dividends in the foreseeable future.***

We intend to retain anyfuture earnings to fund the development and growth of our business. We, therefore,do not anticipate paying cash dividends in the foreseeable future. Accordingly,you must rely on sales of your shares of common stock after price appreciation,which may never occur, as the only way to realize any future gains on yourinvestment.

**Item 1B.**   UnresolvedStaff Comments

None.

**Item 2.**   Properties

Our main offices, all ofwhich are leased, are located in New York City, Boston, San Francisco andLondon. Our headquarters are located at 1221 Avenue of the Americas, New York,New York, and comprise approximately 109,619 square feet of leased space,pursuant to a sublease agreement expiring in 2013. We also lease approximately38,217 square feet of space at Two International Place in Boston pursuant to alease agreement expiring in 2014. In San Francisco, we lease approximately29,072 square feet of space at 555 California Street, pursuant to a leaseagreement expiring in 2015. Our London office is located at Broadgate WestPhase II, 1 Snowden Street, 11th Floor, London, EC2A 2DQ and is subject to alease agreement expiring in 2017. We believe that all of our properties andfacilities are well maintained. We do not anticipate a need for additionaloffice space in the near term.

**Item 3.   LegalProceedings**

We face significant legalrisks in our businesses and, in recent years, the volume of claims and amountof damages sought in litigation and regulatory proceedings against financialinstitutions have been increasing. These risks include potential liabilityunder federal securities and other laws in connection with securities offeringsand other transactions, as well as advice and opinions we provide concerningstrategic transactions. In addition, like most financial institutions, we areoften the subject of claims made by current and former employees arising out oftheir employment or termination of employment with us. We are 

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involvedin a number of judicial, regulatory and arbitration matters arising inconnection with our business including those described below.

Pursuant to SFAS No. 5,‘‘Accounting for Contingencies,’’ we review the need for any loss contingencyreserves, and we have established reserves for certain of these matters that webelieve are adequate where, in the opinion of management, the likelihood ofliability is probable and the extent of such liability is reasonably estimable.In addition, in connection with our initial public offering (“IPO”), we enteredinto an Indemnification Agreement with Société Générale, wherein SociétéGénérale has agreed to indemnify us for all liability arising out of all known,pending or threatened litigation and arbitrations and certain specifiedregulatory matters that exist at the time of our IPO. The IndemnificationAgreement will also provide that Société Générale will indemnify us for all knownor unknown liabilities, including litigation and related matters, arising fromany business conducted by Société Générale or previously conducted by us to theextent that such business is not part of the businesses currently conducted byus. The liabilities for which Société Générale will indemnify us include thecosts of legal fees and related expenses incurred in connection with theindemnified matters as well as any settlements or awards. Under the sameagreement, we have agreed to indemnify Société Générale for all claims madeafter our IPO to the extent they relate to the businesses currently conductedby us and were not known or threatened at the time of our IPO. All of ourmaterial pending legal proceedings are described below. These material proceedings,along with certain other immaterial known, pending or threatened litigationsand arbitrations, are subject to indemnification by Société Générale under theIndemnification Agreement.

***GruttadauriaMatters***

In January 2002, welearned that Frank Gruttadauria (‘‘Gruttadauria’’), a former employee of SGCowen Securities Corporation’s (“SGCSC’s”) retail brokerage business that wassold in October 2000, had defrauded numerous customers and misappropriatedtheir assets at various firms that had employed him, including us. Followingthe discovery of Gruttadauria’s fraud, numerous former customers commenced orthreatened to commence lawsuits and arbitrations against us arising out ofGruttadauria’s actions. In addition, government and regulatory authorities initiatedinvestigations of the matter. We cooperated fully with all of the governmentaland regulatory investigations and all known regulatory matters arising out ofGruttadauria’s conduct were resolved in 2003. We have also reached settlementswith the vast majority of former customers, and have arbitrated several othercustomers’ claims. We are attempting to resolve the remaining disputes.Separately, the securities brokerage firm that purchased SGCSC’s former retailbrokerage business in October 2000 had threatened to file an arbitrationagainst us in connection with the liabilities, costs and expenses that it hasincurred as a result of Gruttadauria’s actions. The parties have resolved thisseparate matter which was also subject to the Indemnification Agreement betweenSociété Générale and us. To the extent that we incur additional legal fees orpay any fine or monetary sanction in connection with Gruttadauria’s actions, wewill be indemnified by Société Générale.

***Lernout &Hauspie Litigation***

We areone of several defendants named in lawsuits involving Lernout &Hauspie Speech Products, N.V. (‘‘L&H’’):

·       In*Nisselson v. Lernout, et al.,* No. 05-1774,filed in the United States District Court for the District of Massachusetts on May 5,2003, the Trustee of the Dictaphone Litigation Trust alleged that we madematerial misrepresentations to Dictaphone while we were a financial advisor toL&H on its acquisition of Dictaphone, and further alleged that we publishedmaterially misleading research on L&H, in violation of various federal andstate laws. On August 9, 2004, the District Court granted our motion todismiss the amended complaint. The Trustee appealed the District Court’s rulingto the United States Court of Appeal for the First Circuit and, on November 8,2006, the First Circuit affirmed the dismissal of all claims against us. On February 23,2007, the plaintiff filed a petition for 

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writ of certiorarito the Supreme Court of the United States. To the extent that we incuradditional legal fees or pay any fine or monetary sanction, we will beindemnified by Société Générale.

·       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, on December 8,2000, short-sellers of L&H stock allege that we violated federal securitieslaws and state common law by participating in a scheme to artificially inflateL&H’s stock price through our role as underwriter and adviser for L&H onseveral acquisitions and through our published research on L&H. On April 3,2001, we filed a motion to dismiss which was denied by the court and wesubsequently filed an answer denying liability. On November 10, 2006, wefiled a motion for summary judgment seeking dismissal of all claims. That sameday the plaintiffs filed a motion for spoliation sanctions against us in whichthey sought, alternatively, the striking of our answer or an adverse juryinstruction. Although both motions have been fully briefed, no date has beenset for oral argument. Discovery has not been stayed pending resolution of themotions. To the extent that we incur additional legal fees or pay any fine ormonetary sanction, we will be indemnified by Société Générale.

***In re: Initial PublicOffering Securities Litigation***

We are one of manyfinancial institutions named as defendants in a number of putative securitiesclass actions entitled *In re: Initial PublicOffering Securities Litigation*, filed in the United States DistrictCourt for the Southern District of New York relating to numerous initial andother public offerings of common stock from approximately 1998 through 2000.The various complaints allege that the underwriters of certain initial publicofferings, including us, made material misrepresentations and omissions topurchasers of the stock sold in the initial public offerings, thereby inflatingthe value of the stock. Specifically, the plaintiffs allege that the defendantsfailed to disclose, among other things, the purported existence of impropertie-in and compensation arrangements they had with certain purchasers of thestock and alleged conflicts of interest relating to research published by theunderwriters, all in violation of federal securities laws. The district court grantedplaintiffs’ motion to certify six “focus” cases as class actions. We are anamed defendant in four of these “focus” cases. We appealed the classcertification decision to the Second Circuit Court of Appeals and on December 4,2006, the Second Circuit reversed the district court’s decision and remandedthe matter for reconsideration in light of the Second Circuit’s opinion.Plaintiffs petitioned for rehearing and rehearing en banc by the SecondCircuit. On December 14, 2006, the district court stayed discovery in theconsolidated banc. On January 24, 2007, the Second Circuit instructeddefendants to submit a response to plaintiffs’ petition. To the extent that weincur additional legal fees or pay any fine or monetary sanction, we will beindemnified by Société Générale.

***IPO AntitrustActions***

We and other underwritersare defendants in two separate, but related, antitrust actions alleging thatthe underwriter defendants conspired to fix initial public offeringunderwriting fees at 7%. On February 11, 1999, the United StatesDistrict Court in the Southern District of New York (the “Court”) consolidatedthree actions brought by purchasers of securities in initial publicofferings under the caption *In re Public Offering FeeAntitrust Litigation*, 98 Civ. 7890 (LMM). In that action, plaintiffs’damages claims were dismissed by the district court, but their claims forinjunctive relief remain pending. In a related case, on April 10, 2001,the Court consolidated  several actions filed by certain issuersof initial public offerings under the caption *In re IssuerPlaintiff Initial Public Offering Antitrust Litigation*, No. 00Civ. 7804 (LMM). In this action, the damages are unspecified and thedistrict court had denied the defendants’ motion to dismiss. On April 18,2006, the court denied the issuer plaintiffs’ motion for class certificationand ordered further briefing on the investor plaintiffs’ motion for classcertification. The plaintiffs have also filed a joint motion for summaryjudgment on liability and the issuers have filed a motion for leave to amendtheir Consolidated Class Action Complaint. The district court proceedingsin both actions are 

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stayedpending resolution of the issuers’ motion for class certification, which is onappeal. The Second Circuit heard oral argument on the appeal on March 19,2007. To the extent that we incur additional legal fees or pay any fine ormonetary sanction, we will be indemnified by Société Générale.

***AdelphiaCommunications Corp. Litigation***

We are a named defendantin several litigations relating to Adelphia Communications, a cable companythat filed for bankruptcy in June 2002. The complaints generally allegethat the Rigas family who controlled Adelphia took advantage of Adelphia’sassets, including through the use of certain loans, or ‘‘co-borrowingfacilities,’’ that allowed the family to take more than $3 billion for theirprivate use. We have been named as a defendant in four actions arising out ofcertain offerings of Adelphia securities in which we participated as a memberof the underwriting syndicate. All four actions are pending before the UnitedStates District Court for the Southern District of New York. The complaints ineach of these actions raise a variety of claims arising out of the sale ofAdelphia securities, including claims under the federal securities laws.

These actions aregenerally referred to as the “Adelphia Securities Class Action”, “W.R.Huff Asset Management”, “Appaloosa”, and “Stocke”. The district court grantedour motion to dismiss all federal securities claims brought against us in theAdelphia Class Action. Thereafter, the financial institution defendantsreached a settlement with the plaintiffs. On June 15, 2006, the districtcourt preliminarily approved the settlement. A fairness hearing before JudgeMcKenna was held on November 10, 2006, and he entered an order approvingthe settlement on November 20, 2006. Our share of the settlement isapproximately $1.7 million plus interest at 4.37% beginning December 1,2006 (all of which is covered by the indemnification agreement between SociétéGénérale and us). 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,claims made 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 us,in Huff, Appaloosa and Stocke, but has not ruled on other potential bases fordismissal set forth in our motions in these cases. In addition, in August 2005the district court denied our motion to dismiss based on Huff’s lack ofstanding, and subsequently granted leave to file an interlocutory appeal to theSecond Circuit Court of Appeals of that ruling. The Second Circuit granted ourpetition to appeal under 28 U.S.C. § 1292, and that appeal is pending. Inaddition to the cases in which we have been named as a defendant, we may alsoface potential liability pursuant to the applicable master agreements amongunderwriters for any judgments or settlements in other cases involving theAdelphia securities offerings in which we participated. To the extent that weincur additional legal fees or pay any fine or monetary sanction, we will beindemnified by Société Générale.

We are also one of manydefendants in two related adversary proceedings filed in the AdelphiaBankruptcy Proceeding, which is pending in the United States Bankruptcy Courtfor the Southern District of New York. These adversary proceedings were filedby the Official Committee of Unsecured Creditors and the Official Committee ofEquity Security Holders (the “Committees”). Both of these cases raise a varietyof common law and federal claims, which are generally similar to the claimsasserted in the Adelphia Securities Class Action and other cases describedabove. With respect to us 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 us. On February 9, 2006, thedistrict court withdrew the reference from the bankruptcy 

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court sothat after the bankruptcy court rules on the pending motions, the caseswill proceed before the district court. To the extent that we incur additionallegal fees or pay any fine or monetary sanction, we will be indemnified bySociété Générale.

***In re: HealthSouthCorporation Bondholder Litigation***

We have been named as adefendant in a purported class action filed in the United States District Courtfor the Northern District of Alabama on January 8, 2004 as a result of ourpredecessor’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 us). 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 us.The dismissal is not yet a “final” judgment from which an appeal may be takenby plaintiffs. To the extent that we incur additional legal fees or pay anyfine or monetary sanction, we will be indemnified by Société Générale.

***Arbinet IPOLitigation***

We were one of severalnamed defendants in a putative securities class action filed in the UnitedStates District Court for the District of New Jersey on  September 2, 2005. The plaintiffs inthis matter sought to recover losses allegedly caused by misrepresentations andomissions in connection with the December 2004 initial public offering ofArbinet-thexchange, an electronic marketplace for trading, routing and settlingtelecommunications capacity. The complaint alleged that thesemisrepresentations and omissions artificially inflated the price of Arbinet’ssecurities and that subsequent disclosures of the true state of Arbinet’smarket and its business in May and June 2005 caused Arbinet’ssecurities to decline in value. The defendants, including us, filed a motion todismiss the complaint and, on December 22, 2006, the court granteddefendants’ motion, dismissing the complaint in its entirety, but grantingleave to re-plead. By stipulation and order dated January 22, 2007,plaintiffs agreed that the case should be dismissed with prejudice, each sideto bear its own costs. Accordingly, the case now has been fully resolved in ourfavor.

***Crossroads Systems, Inc.Litigation***

We are one of threeunderwriter defendants in a lawsuit filed in the District Court of Travis County,Texas, on May 24, 2006 by Crossroads Systems, Inc., a company thatdesigns, develops, and manufactures computer storage devices. The lawsuitalleges that the underwriters of Crossroads’ 1999 IPO, which were led by us,purposely underpriced the IPO for their own improper purposes. Specifically,Crossroads alleges that the underwriter defendants allocated stock to favoredclients who shared their profits with the underwriters either directly orindirectly through excessive trading commissions in connection with the IPOstock and/or unrelated securities trading. Crossroads sets forth causes ofaction for breach of fiduciary duty, fraud, and unjust enrichment. The damagesare unspecified. In July 2006, we filed an answer denying the allegationsof the complaint, and the case is now in the discovery phase. To the extentthat we incur additional legal fees or pay any fine or monetary sanction, wewill be indemnified by Société Générale.

***Madden Litigation***

On June 28, 2006, agroup of approximately 60 medical doctors filed a lawsuit against us in SanFrancisco Superior Court. Plaintiffs allege that we negligently rendered afairness opinion in 1998 in connection with the acquisition of Orange CoastManaged Care Services and St. Joseph Medical Corporation by FPA MedicalManagement, Inc. According to the complaint, plaintiffs receivedrestricted 

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FPAstock as consideration in the sale and, shortly after the acquisition, FPA wentbankrupt, rendering the stock worthless. On August 14, 2006, we removedthe case to United States District Court for the Northern District ofCalifornia. On August 17, 2006 we filed a motion to dismiss the complaint.Plaintiffs are seeking a remand to state court. On March 8, 2007, thecourt granted our motion to dismiss, with leave to replead, and deniedPlaintiffs’ move to remand. To the extent that we incur additional legal feesor pay any fine or monetary sanction, we will be indemnified by SociétéGénérale.

***Stanton Litigation***

On June 6, 2005, SGCPartners I LLC, SGC Partners II LLC, SG Merchant Banking Fund, SG CapitalPartners LLC and former employees of SGCSC were served with a First AmendedComplaint in a case entitled *Janice E. Stanton v. SGCPartners I, LLC*, Case No. 02-40208, Adv. No. 05-40145(“Stanton I”). The action was brought in connection with the bankruptcyproceeding filed by House of Lloyd (“HOL”) pending in that court. The Trusteeseeks damages based on claims of breach of fiduciary duty, corporate waste,fraudulent transfers, insider preferences and illegal distributions. On December 29,2006, the Trustee filed a separate complaint against us, Cowen CapitalPartners, LLC, and SG Americas Securities, LLC (“SGAS”) in a case entitled *Janice E. Stanton v. Cowen and 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 we owned and controlled the Defendants in Stanton I and/or that weare the successor of the defendants in Stanton I. The two cases have beenconsolidated. Discovery is proceeding with a trial date scheduled for January 22,2008. To the extent that we incur additional legal fees or pay any fine ormonetary sanction, we will be indemnified by Société Générale.

***Regulatory Inquiriesand Investigations***

Inaddition to the litigation matters described above, we are also involved in anumber of regulatory inquiries and investigations, which, except as notedbelow, are not covered by the above-referenced Indemnification Agreement betweenus and Société Générale. The most significant regulatory matters are asfollows:

·       TheSEC commenced an investigation arising out of the proprietary tradingactivities of Guillaume Pollet, a former Managing Director and proprietarytrader in the former equity derivatives division of SGCSC (which is now part ofSGAS, which was formerly an affiliate of ours), who was terminated by us in2001 for violating firm policy and misleading the firm’s management aboutcertain of his trading activity. The trading activity at issue involved privateplacements in public equity, or so-called ‘‘PIPE’s.’’ We received a WellsNotice in July 2004, and submitted a response in August 2004. To theextent that we incur additional legal fees or pay any fine or monetary sanction,we will be indemnified by Société Générale.

·       Basedon information voluntarily disclosed by us to regulators, the SEC and NYSE areconducting informal inquiries that appear to be focused principally on certainconduct of a research salesperson who we terminated in late 2004. The employeewas discharged after we discovered that the employee had sought and obtainedaccess to sensitive information about a company, shared such information withcertain of his clients and others, and made investment recommendations toclients based in part on that information. We have cooperated fully with thiscontinuing investigation. To the extent that we incur additional legal fees orpay any fine or monetary sanction related to this matter, we will not beindemnified by Société Générale.

·       Wehave provided various data and information to the NASD in response to itsrequest for information as part of an industry-wide “sweep” relating to ourgifts, gratuities and entertainment policies, practices, and procedures. Inaddition, we have also received a subpoena for documents and information fromthe SEC, and additional requests for information from the NASD, seeking 

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informationconcerning, among other things, gifts, gratuities and entertainment and the useof one of our error accounts primarily involving an unaffiliated mutual fundcompany. We are cooperating fully with these continuing investigations. To theextent that we incur additional legal fees or pay any fine or monetary sanctionrelated to this matter, we will not be indemnified by Société Générale.

·       Wereceived requests for documents and information from the SEC’s Office ofCompliance Inspections and Examinations seeking documents and certain financialand other information concerning, among other things, our various tradingdesks, institutional sales team and internal accounts, including erroraccounts, and related compliance procedures. We are cooperating fully with thisinquiry. To the extent that we incur additional legal fees or pay any fine ormonetary sanction related to this matter, we will not be indemnified by SociétéGénérale.

In October 2004, wereceived a request from the NYSE, as part of an industry-wide ‘‘sweep,’’ fordata and information relating to our compliance with provisions of the federalsecurities laws, and related rules and regulations, concerning delivery ofprospectuses and/or product descriptions in connection with customer purchasesof, among other things, new issue securities, mutual funds and exchange-tradedfunds. We have provided periodic reports to the NYSE concerning our progress inresponding to their request and will continue to cooperate fully with thiscontinuing inquiry. We 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.

**Item 4.**   Submissionof Matters to a Vote of Security Holders

None.

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**PART II**

**Item 5.**              Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

**Stock PriceInformation and Stockholders**

The principal market onwhich the company’s common stock is traded is the Nasdaq Global Market underthe symbol “COWN.” The following table sets forth the high and low sales priceof our common stock for the third quarter of 2006 from the date of our IPO andfor the fourth quarter of 2006, the only full quarter for which a public marketfor the Company’s common stock has existed. As of March 19, 2007 therewere 18 registered holders of our common stock. This number does not includestockholders for whom shares were held in “nominee” or “street’’ name.
|                                                | ** ** | **Sales Price** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **High**             | ** ** | **Low** | ** ** |
| July 13, 2006 to  September 30, 2006 |       | $                    | 16.73      |   | $ | 13.40 |   |
| Fourth Quarter 2006                            |       | $                    | 21.40      |   | $ | 14.45 |   |

 

**Dividends**

The Company has notdeclared or paid any cash dividends on our common stock. Our board of directorsdoes not anticipate authorizing the payment of cash dividends in theforeseeable future and intends to retain all available funds and any futureearnings to fund the development and growth of our business. Any determinationto pay dividends to holders of our common stock in the future will be at thediscretion of our board of directors and will depend on many factors, includingour financial condition, results of operations, general business conditions andany other factors our board of directors deems relevant.

**Recent Sales ofUnregistered Securities**

None.

**Issuer Purchases ofEquity Securities**

**None.**

**Item 6.**   SelectedFinancial Data

The following table sets forth our selectedconsolidated financial and other data for the years ended December 31,2006, 2005, 2004, 2003 and 2002. The selected Consolidated Statements ofFinancial Condition data and statement of operations data as of and for theyears ended December 31, 2006, 2005, and 2004 have been derived from ouraudited consolidated financial statements. The selected Consolidated Statementof Financial Condition data as of and for the year ended December 31, 2003was derived from our audited consolidated financial statements, whereas theselected statement of operations data for that same period was derived from ourunaudited financial statements. The selected Consolidated Statement ofFinancial Condition data and statement of operations data as of, and for the yearended, December 31, 2002 was derived from our unaudited consolidatedfinancial statements. Our selected consolidated financial data is only asummary and should be read in conjunction with the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andwith our audited consolidated financial statements and related notes includedelsewhere in this Annual Statement on Form 10-K.

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| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                    | ** ** |
| **Consolidated Statements of  Operations Data:** |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| *Revenues*                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Investment banking                               |       | $                                          | 164,342    |   | $ | 126,253 |   | $ | 113,795 |   | $ | 104,863 |   |   | $ | 77,479 |   |   |
| Commissions                                      |       | 93,346                                     |       | 93,450 |   | 99,669 |   | 120,056 |   |   | 147,724 |   |   |
| Principal  transactions                          |       | 64,376                                     |       | 52,250 |   | 64,519 |   | 54,326 |   |   | 66,139 |   |   |
| Interest and  dividend income                    |       | 17,766                                     |       | 16,990 |   | 9,504 |   | 12,302 |   |   | 19,060 |   |   |
| Other                                            |       | 5,137                                      |       | 5,348 |   | 5,574 |   | 1,412 |   |   | 804 |   |   |
| Total revenues                                   |       | 344,967                                    |       | 294,291 |   | 293,061 |   | 292,959 |   |   | 311,206 |   |   |
| *Expenses*                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Employee  compensation and benefits              |       | 215,707                                    |       | 172,128 |   | 170,546 |   | 156,202 |   |   | 194,095 |   |   |
| Non-compensation  expense(1)                     |       | 112,644                                    |       | 109,848 |   | 63,533 | (2) | 210,976 | (3) |   | 346,230 | (4) |   |
| Total expenses                                   |       | 328,351                                    |       | 281,976 |   | 234,079 |   | 367,178 |   |   | 540,325 |   |   |
| Operating income (loss)                          |       | 16,616                                     |       | 12,315 |   | 58,982 |   | (74,219 | ) |   | (229,119 | ) |   |
| Gain (loss) on  exchange memberships             |       | 25,843                                     |       | 918 |   | (1,993 | ) | (1,195 | ) |   | — |   |   |
| Income (loss) before income taxes                |       | 42,459                                     |       | 13,233 |   | 56,989 |   | (75,414 | ) |   | (229,119 | ) |   |
| Provision for  (benefit from) income taxes       |       | 4,548                                      |       | 1,152 |   | 1,877 |   | (1,040 | ) |   | 27 |   |   |
| Net income (loss)                                |       | $                                          | 37,911     |   | $ | 12,081 |   | $ | 55,112 |   | $ | (74,374 | ) |   | $ | (229,146 | ) |   |
| **Earnings per share:**                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average common  shares outstanding:     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | 12,903                                     |       | 12,900 |   | 12,900 |   | 12,900 |   |   | 12,900 |   |   |
| Diluted                                          |       | 12,966                                     |       | 12,900 |   | 12,900 |   | 12,900 |   |   | 12,900 |   |   |
| Earnings per share:                              |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | $                                          | 2.94       |   | $ | 0.94 |   | $ | 4.27 |   | $ | (5.77 | ) |   | $ | (17.76 | ) |   |
| Diluted                                          |       | $                                          | 2.92       |   | $ | 0.94 |   | $ | 4.27 |   | $ | (5.77 | ) |   | $ | (17.76 | ) |   |

 

| ** **                                                           | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                           | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**               | ** ** |
| **Consolidated  Statements of Financial Condition Data:**            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                         |       | $                                     | 684,438    |   | $ | 785,339 |   | $ | 820,350 |   |   | $ | 717,980 |   |   |   | $ | 750,054 |   |   |
| Total liabilities                                                    |       | 466,310                               |       | 411,388 |   | 466,872 |   |   | 455,037 |   |   |   | 357,005 |   |   |
| Total stockholders’  equity (2006) and group equity (2005-2002) |       | $                                     | 218,128    |   | $ | 373,951 |   | $ | 353,478 |   |   | $ | 262,943 |   |   |   | $ | 393,049 |   |   |

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(1)          Includes floor brokerage and tradeexecution, net service fees, communications, occupancy and equipment, marketingand business development, litigation and related costs, depreciation andamortization, interest and other expenses.

(2)          Includes a net benefit of $46.9 millionrelated to accruals for insurance recoveries and the net reversal of previouslyaccrued reserves in 2004. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

(3)          Includes a charge of $71.7 millionrelated to loss contingency reserves established in 2003.

(4)          Includes a charge of $187.6 millionfor the impairment of goodwill associated with Société Générale’s acquisitionof our predecessor company.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation

*The following discussion should be read in conjunctionwith our audited consolidated financial statements and the related notes thatappear elsewhere in this Annual Report. In addition to historical information,this discussion includes forward-looking information that involves risks andassumptions, which could cause actual results to differ materially frommanagement’s expectations. See “Special Note Regarding Forward-LookingStatements” included elsewhere in this Annual Report.*

**Overview**

We are an investment bank dedicated to providingsuperior research, sales and trading and investment banking services tocompanies and institutional investor clients primarily in the healthcare,technology, media and telecommunications, alternative energy and consumersectors. As of December 31, 2006 our research and sales and tradingservices were provided to over 1,000 domestic and international clients seekingto trade equity, convertible and other equity-linked securities, principally inour target sectors. We focus our investment banking efforts, principally equityand equity-linked capital raising and strategic advisory services, on small andmid-capitalization public companies as well as private companies. We operatethrough a single reportable segment.

Many external factors affect our revenues andprofitability, including economic and market conditions, the level andvolatility of interest rates, inflation, political events, investor sentiment,legislative and regulatory developments and competition. A favorable businessenvironment is characterized by many factors, including a stable geopoliticalclimate, transparent financial markets, low inflation, low interest rates, lowunemployment, strong business profitability and high business and investorconfidence. These factors influence levels of equity security issuance andmerger and acquisition activity generally and in our target sectors, whichaffect our investment banking business. The same factors also affect tradingvolumes and valuations in secondary financial markets, which affect our salesand trading business. Commission rates, market volatility and other factorsalso affect our sales and trading revenues and may cause our sales and tradingrevenues to vary from period to period. Because these business environmentissues are unpredictable and beyond our control, our earnings may fluctuatesignificantly from year to year. We are also subject to various legal andregulatory actions that impact our business and financial results.

During the period from2004 to 2006, the equity markets were generally characterized by increasingstock prices, increased capital markets issuance and an increased volume ofmergers and acquisition transactions. During that same period, we experiencedan increase in our volume of capital raising activities, leading to improvedinvestment banking revenues. Our sales and trading business continued toexperience the effects of increased competition in the brokerage industry. Overthe past several years, the entrance of new competitors such as electroniccommunications networks into the brokerage sector has resulted in a reductionof broker assisted trading volume and commission rates. Although recent clientand product initiatives resulted in an 8% increase in our sales and tradingrevenues in 2006, competitive pressures in the secondary equities business havecaused our sales and trading revenues to decline from previous levels. Weremain confident in the long-term market opportunity for our business primarilydue to positive long-term growth and investment trends in our target sectorsand expected continued demand for our specialized services; however, because weare primarily focused on the healthcare, technology, media andtelecommunications, alternative energy and consumer sectors, ourperiod-over-period operating results may be different than performance levelsindicated by broader market trends.

*Public Equity*

We experienced favorablemarket conditions for much of the first six months of 2006. Public capitalraising activity began a broad decline across all sectors toward the end of thesecond quarter and in the third quarter but became more favorable again in thefourth quarter ended December 31, 2006. For the 

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twelvemonths ended December 31, 2006, new issue activity, including IPOs,secondary offerings and convertible debt offerings increased modestly comparedto 2005. When measured by number of offerings, new issue activity increased by2% year-over-year. When measured by total proceeds, new issue activityincreased by 17% year-over-year. Cowen’s growth sectors experienced a moresignificant increase than the overall market in 2006, with the number oftransactions up 15% and total proceeds up 52% from 2005.

*Private Equity*

Private market capitalraising activity also increased for the year ended December 31, 2006relative to 2005. Year-over-year, the number of private investments in publicequities (“PIPEs”) and registered direct placements (“RDs”) increased byapproximately 3%. When measured by total proceeds, the increase was moredramatic, with the total proceeds up 18%.

*Strategic Advisory*

Merger and acquisitionactivity on a year-over-year basis increased in 2006 when measured by bothaggregate transaction value and number of transactions. Transaction value in2006 increased 33% across all sectors and increased 34% within Cowen’s growthsectors compared to 2005. When measured by the total number of transactions,year-over-year volume increased 10% across all sectors and was up 6% withinCowen’s growth sectors.

*Sales and Trading*

The equity tradingenvironment remained challenging, despite increased activity on both the NewYork Stock Exchange and NASDAQ where year-over-year volumes increased 5% and13%, respectively.

*Separation fromSociété Générale*

On July 12, 2006, we completed our IPO and becamean independent public company. Prior to our IPO, we had for approximately eightyears, been a wholly owned subsidiary of Société Générale.

Our separation from Société Générale presented certainchallenges, risks and uncertainties. In particular, we were required to assumecertain support functions and replicate certain facilities, systems, andinfrastructure previously performed for us, or provided to us by SociétéGénérale or one of its affiliates. In this regard, we believe that we havesuccessfully replicated the required support functions by hiring a number ofindividuals to perform such functions as internal audit, compliance and riskmanagement. We also believe that we have in all material respects successfullyreplicated the necessary facilities, systems and infrastructure utilized in ourbusiness.

We are also focusedon the impact our separation from Société Générale will have on our coststructure. In the past when we created a number of our own support functions,we were able to reduce costs relative to those charged to us by Société Généraleby eliminating services that were not required to run our business. We havebeen able to reduce certain costs upon our separation from Société Générale;however, we recognize that other costs have increased as a result of theseparation. At this time, the majority of cost increases are a result of hiringadditional support staff to take over certain functions, such as internalaudit, compliance and risk management, which were previously provided in whole,or in part, by Société Générale. Most of the expense of these additional hiresis compensation related and was subsumed in our target compensation to revenueratio of 58% to 60%. We do not believe that this increase in compensation had amaterial impact on the amount available to compensate our front officepersonnel. In addition, we have purchased certain equipment and licensedcertain products, such as a risk management system, as part of taking overthese support functions. We also recognize that certain costs will increase asa result of decreased purchasing power and size compared with that previouslyprovided by our association with Société Générale. Finally, we have incurredcertain additional costs related to the corporate 

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governanceand reporting obligations associated with being a public company. The netresult was an increase to our costs, but it is not expected to have a materialeffect on our operating results. Examples of cost increases incurred in 2006include the following:

·       Ourcompensation expense increased by $15.8 million in 2006 due to the expenseassociated with the initial grant of equity to our senior employees inconnection with our IPO and the expense associated with the deferredcompensation plans that were terminated as a result of our separation fromSociété Générale. The increase in compensation expense related to the deferredcompensation plans will have no impact on our results in 2007 and future years.The annual expense associated with the initial grant of equity to our senioremployees will be $10.4 million, $10.0 million, $6.9 million,$5.5 million and $0.8 million in the years 2007, 2008, 2009, 2010 and2011, respectively.

·       Ouroccupancy costs increased as a result of our entering into new leases,including a sublease with Société Générale for our New York City location. Theincrease associated with these occupancy related costs was $1.2 million in2006. The increase in occupancy cost will be recurring.

·       Theexpense associated with our clearing arrangement with Société Généraleincreased by $1.9 million in 2006 primarily as a result of a new clearingagreement executed in connection with our IPO. We have subsequently enteredinto a new clearing arrangement with National Financial Services and anticipatethat our future clearance costs will be materially lower than those incurred in2006.

In connection with our separation from SociétéGénérale and our becoming a public company, we made a payment representing areturn of capital to SGASH in the amount of $180.3 million. As a result ofthis payment, our stockholders’ equity was reduced from approximately$374.0 million at the end of 2005 to $207.0 million immediatelyfollowing our IPO. Under the terms of the Separation Agreement (see Note 11),the amount of this distribution is subject to adjustment based on a finalreview of the Company’s separation from Société Générale. We have accruedapproximately $2.0 million as a capital distribution payable to SociétéGénérale related to this final review.

We do not believe that this reduction in our stockholders’equity had a material impact on our existing operations as the level of initialequity was determined based on our estimate of the appropriate amount needed tooperate our existing businesses and to expand certain businesses, such as ourlisted options business. We will, however, need to carefully review ourallocation of capital to new business opportunities in the future and will needto take a selective approach to entering new businesses. In addition, we willno longer have the ability to seek capital contributions from Société Généralein the event we incur significant unexpected liabilities or losses in thefuture. In the event we require additional capital for new businesses or tofund losses, we will need to seek such capital through the sale of additionalcommon stock, or through other debt financings. The reduction in ourstockholders’ equity has resulted in a reduction in our interest earningassets, which in turn has resulted in a reduction in our interest income.

Prior to our IPO we had alow effective tax rate primarily as a result of continued net operating lossesfor tax purposes and, in 2006, as a result of a net reversal of valuationallowance due to payments of deferred compensation arrangements related to theIPO and pre-IPO amortization of goodwill. We expect our effective tax rate toincrease significantly as we will no longer have the benefits of these items,nor will we have the benefit of net operating loss carryforwards to offsetfederal and most state and local income taxes. Such benefits were retained bySociété Générale. As a result, we expect our effective tax rate to beapproximately 45% in 2007 and subsequent years.

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**Basis of Presentation**

Our consolidated financial statements have beenprepared as if we had been a stand-alone entity for the periods presented priorto our IPO in July 2006. Our consolidated financial statements for thoseperiods prior to the IPO have also been prepared assuming that SG AmericasSecurities Holdings, Inc. (“SGASH”) transferred all of its interest inCowen and Cowen International Limited (“CIL”) to the Company.

Our consolidated financial statements primarilyinclude the carve-out accounts of Cowen, and the carve-out accounts of SG LondonBranch, the predecessor of CIL, in each case using the historical basis ofaccounting for the results of operations, assets and liabilities of thebusinesses that currently constitute Cowen and CIL.

In April 2004, Société Générale reorganized SGCowen Securities Corporation (“SGCSC”) into two separate single member limitedliability broker-dealers: SG Cowen & Co., LLC and SG Americas Securities, LLC(“SGAS”). The financial statements of SGAS have not been included in ourfinancial statements. In February 2006, SG Cowen & Co., LLCchanged its name to Cowen & Co., LLC and SG Cowen EuropeLimited changed its name to CIL. In May 2006, Cowen & Co., LLCchanged its name to Cowen and Company, LLC. Cowen and Company, LLCclears its securities transactions on a fully disclosed basis through itsclearing broker and does not carry customer funds or securities.

The consolidated financial statements for the yearended December 31, 2006 included elsewhere in this Annual Report have beenprepared in conformity with U.S. GAAP. The consolidated financial informationincluded herein may not necessarily be indicative of our results of operations,financial position and cash flows in the future or what our results ofoperations, financial position and cash flows would have been had we been astand-alone company during the periods presented prior to the date of our IPO.

The consolidated results include the revenues generatedand expenses incurred based on customer relationships and related businessactivities. Certain of our expenses are based on shared services that wereprovided by Société Générale or one of its affiliates prior to the IPO. Theseexpenses primarily related to providing employee-related services and benefits,technology and data processing services and corporate functions including tax,legal, compliance, finance and operations. Costs included in the consolidatedfinancial statements for shared services were determined based on costs to theaffiliated entity and allocated based on our usage of those services.

The consolidated statements of operations do notinclude litigation expenses incurred by us in connection with the Gruttadaurialitigation and other legal matters related to the retail brokerage business ofSGCSC, which was sold in October 2000, and is not part of the businessescurrently conducted by us. As the successor of the named party in thelitigation, we recognize the legal reserves and accruals related to this matterin our consolidated statements of financial condition and cash flows related tothis matter as financing activities in the audited consolidated statements ofcash flows. We will be indemnified by Société Générale for any payments we maybe required to make or expenses we may incur related to the Gruttadaurialitigation and other legal matters related to the retail brokerage business ofSGCSC.

All intercompany accountsand transactions have been eliminated in consolidation.

**Revenues**

We operate our business asa single segment; however, we derive revenues from two primary sources,investment banking and sales and trading.

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***Investment Banking***

We earn investmentbanking revenue primarily from fees associated with underwriting and privatelyplacing securities and from providing strategic advisory services in mergersand acquisitions and similar transactions. Our investment banking revenues arederived primarily from small and mid-capitalization companies within our targetsectors of healthcare, technology, media and telecommunications and consumer.During 2006 we derived a portion of our investment banking revenue from thealternative energy sector which we covered out of our technology group. Inearly 2007, we created a separate and distinct alternative energy group.

·       **Underwriting revenues**.   We earnunderwriting revenues in securities offerings in which we act as anunderwriter, such as initial public offerings, follow-on equity offerings andconvertible security offerings. Underwriting revenues include management fees,underwriting fees and selling concessions. Management fees are recorded on theoffering date, sales concessions on settlement date and underwriting fees arerecognized net of related syndicate expenses, at the time the underwriting iscomplete and the income is reasonably determinable. As co-manager forregistered equity underwriting transactions, management must estimate theCompany’s share of transaction-related expenses incurred by the lead manager inorder to recognize revenue. Transaction-related expenses are deducted from theunderwriting fee and therefore reduce the revenue the Company recognizes asco-manager. Such amounts are adjusted to reflect actual expenses in the periodin which the Company receives the final settlement, typically within 90 daysfollowing the closing of the transaction. We receive a higher proportion oftotal fees in underwritten transactions in which we act as a lead manager.

·       **Private placement revenues**.   Weearn agency placement fees in non-underwritten transactions such as privateplacements, PIPEs and RDs. We record private placement revenues on the closingdate of the transaction. Expenses associated with generating agency placementfees are recognized primarily as marketing and business development expense,net of client reimbursements, when related revenue is recognized or theengagement is otherwise concluded.

·       **Strategic advisory revenues**.   Ourstrategic advisory revenues include success fees earned in connection with advisingcompanies, both buyers and sellers, principally in mergers and acquisitions. Wealso earn fees for related advisory work such as providing fairness opinions.We record strategic advisory revenues when the transactions or the services(or, if applicable, separate components thereof) to be performed aresubstantially complete, the fees are determinable and collection is reasonablyassured. Expenses associated with generating strategic advisory fees arerecognized primarily as marketing and business development expense, net ofclient reimbursements, when the related revenue is recognized or the engagementis otherwise concluded.

Since our investmentbanking revenues are generally recognized at the time of completion of eachtransaction or the services to be performed, these revenues typically varybetween periods and may be considerably affected by the timing of the closingof significant transactions.

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***Sales and Trading***

Our sales andtrading revenues consist of commissions and principal transactions revenues.Our management reviews sales and trading revenue on a combined basis as themajority of the revenue in both line items is derived from the same group ofclients. In addition, the majority of our trading gains and losses are a resultof activities that support the facilitation of client orders in both listed andover-the-counter securities, although all trading gains and losses are recordedin principal transactions. We derive our sales and trading revenue primarilyfrom trading equity and equity-linked securities on behalf of institutionalinvestors. In 2006, we added a group of professionals dedicated to sales andtrading activities related to listed options. We also added a professionaldedicated to developing soft dollar relationships.

·       **Commissions**.   Our sales andtrading business generates commission revenue from securities tradingcommissions paid by institutional investor clients. Commissions are recognizedon a trade date basis. The Company permits institutional customers to allocate aportion of their gross commissions to pay for research products and otherservices provided by third parties. The amounts allocated for those purposesare commonly referred to as soft dollar arrangements. Commissions on softdollar brokerage are recorded net of the related expenditures on an accrualbasis.

·       **Principal transactions**.   Oursales and trading revenues also include net trading gains and losses fromprincipal transactions, which primarily include our acting as a market-maker inover-the-counter equity securities, our listed options trading, and our tradingof convertible securities. In certain cases, we commit our own capital toprovide liquidity to clients buying or selling blocks of shares of listedstocks without previously identifying the other side of the trade at execution,which subjects us to market risk. These positions are typically held for a veryshort duration.

***Interest and Dividend Income***

Interest and dividend income primarily consists ofinterest earned on our interest bearing assets and net interest and dividendson securities maintained in trading accounts related to our sales and tradingbusiness. In conjunction with our separation from Société Générale and ourbecoming a public company we have made a payment representing a return of capitalto SGASH. The level of our interest bearing assets was significantly reduced asa result of this capital distribution which will result in a meaningfulreduction in our interest income in 2007. In addition, we have transferred$72.3 million into an escrow account for the future payment of certainlitigation that existed prior to the date of the IPO for which Société Généralehas agreed to indemnify us. Subsequent to making this transfer, certain matterscovered by the escrow arrangement have been settled and the escrow balance hasbeen reduced accordingly. Excess reserves related to these settled matters willbe returned to SGASH. SGASH is also entitled to any interest earned on suchdeposits held in escrow.

***Other***

Other revenue includesfees for managing a portfolio of merchant banking investments on behalf ofSociété Générale and other third party investors, miscellaneous income such asfees for managing venture capital investments on behalf of an inactive employeefund and fees for the delivery of equity research related to unbundlingagreements with certain of our institutional investor clients. Fees formanaging the portfolio of merchant banking assets and venture capitalinvestments are earned on a monthly basis pursuant to the terms of agreementswith Société Générale and other third party investors.

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**Expenses**

A significant portion ofour expense base is variable, including employee compensation and benefits,brokerage and clearance, communications, and marketing and business developmentexpenses. Certain of our expenses are largely fixed in nature, the mostsignificant of which include expenses associated with rent and occupancy,outsourced services such as information technology infrastructure, presentationcenter, copy center and library services.

***Compensation Expense***

Our ongoing compensation expense includes salaries,employee benefits, amortization of equity compensation awards and cash bonuses.The annual base salary for each individual employee is based on theirexperience and position, but generally does not exceed $250 thousand. Amortizationexpense of equity awards relates to both the compensation expense associatedwith the initial grant of equity to our senior employees (as described below)in connection with our IPO, and, commencing in 2007, expenses associated withour ongoing Cowen equity plan, which is a component of annual employeecompensation. According to our equity plan, employees who earn totalcompensation above a designated level will have a specified percentage of theircompensation paid with restricted equity awards in lieu of cash. The amount ofrestricted equity awards paid to an employee is determined using a pre-determinedformula such that higher levels of compensation will be more heavily weightedtoward equity awards. As is typical in our industry, variable bonuses representthe most significant component of compensation expense.

We intend to incur employee compensation and benefitsexpense equal to between 58% and 60% of total revenues, plus, through 2011, thecompensation expense associated with the initial grant of equity to our senioremployees in connection with our IPO. We may change our target percentages atany time. This target percentage includes all cash and non-cash compensationand benefit expense, with the exception of the initial grant of equity which iscomprised of nonqualified stock options and nonvested restricted shares, and, in2006, the vesting and payments related to deferred compensation plans(including the SG Corporate and Investment Banking Partnership) that wereterminated as a result of our separation from Société Générale and our becominga public company.

The annual expense associated with the initial grantof equity to our senior employees in connection with our IPO was $5.2 millionin 2006 and will be $10.4 million, $10.0 million, $6.9 million, $5.5 million,and $0.8 million in the years 2007, 2008, 2009, 2010, and 2011, respectively. Wehave accounted for our equity awards in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), *Share-BasedPayments*. Compensation and benefit expense in 2006, and prior years,included expense associated with deferred compensation plans that wereterminated as a result of our separation from Société Générale. In 2006, $10.6million of compensation expense related to terminated deferred compensationplans (including the SG Corporate and Investment Banking Partnership).

In 2005 and 2004, ourcompensation arrangement with Société Générale was based generally on acompensation-to-revenue ratio and a profit sharing arrangement. The profitsharing arrangement allowed us to increase employee compensation as a result ofincreased profitability due to lower non-compensation expenses. We no longerutilize a profit sharing arrangement. In each of these years, our total compensationand benefits expense was approximately 58% of total revenues.

***Non-compensation Expense***

**Floorbrokerage and trade execution.****  **These expenses include floorbrokerage and trade execution costs that fluctuate depending on the volume oftrades we complete. We entered into a new commercial clearing agreement withSGAS as a result of our separation from Société Générale and our becoming apublic company, which replaced our pre-existing clearing agreement with SGAS. Theinitial terms of the 

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clearing agreement terminatedon December 31, 2006 and were extended until January 25, 2007, atwhich time we commenced operations with a new clearing firm.

**Servicefees, net.****  **Theseexpenses include fees for outsourcing services, including certain supportfunctions such as information technology infrastructure, management andsupport, net 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.

**Communications.****  **These expenses include costs fortelecommunication and data communication, primarily consisting of expenses forobtaining third-party market data. We also incur communications expensesrelated to electronic trading network connections and in connection with otherenhancements to our trading platform.

**Occupancyand equipment.****  **Theseexpenses include rent and utilities associated with our various offices,occupancy and premises taxes, support for software applications, disasterrecovery services and other fixed asset service fees.

**Marketingand business development.****  **These expenses include costs such as business traveland entertainment, expenses related to holding conferences and advertisingcosts.

**Litigationand related costs.****  **Weestablish loss contingency reserves for certain legal proceedings where, in theopinion of management, the likelihood of liability is probable and the extentof such liability is reasonably estimable. Establishment of reserves is aninherently uncertain process involving estimates of future losses. Any futureincreases to our loss contingency reserves or releases from these reserves mayaffect our results of operations.

We have an Indemnification Agreement with SociétéGénérale under which (1) we will indemnify, and will defend and holdharmless Société Générale and its subsidiaries from and against certainliabilities specifically retained or assumed by us after becoming a publiccompany, (2) Société Générale will indemnify, and will defend and holdharmless the Company and each of our subsidiaries from and against certainliabilities assumed or retained by Société Générale, and (3) SociétéGénérale will indemnify us for known, pending and threatened litigation(including the costs of such litigation) and certain known regulatory matters,in each case, that existed prior to the date of the IPO to the extent the costof such litigation results in payments in excess of the amount placed in escrowto fund such matters. The effect of this indemnification on our consolidatedresults of operations is that when a future increase to a loss contingencyreserve that is related to litigation covered by the indemnification agreementis recorded, our litigation cost and indemnification recovery will be reflectedas an increase in our litigation and related expense and indemnificationrecovery will be recorded as a reduction to our litigation and related expense.

**Depreciationand amortization.****  **Weincur depreciation and amortization expense related to capital assets, such asinvestments in technology and leasehold improvements.

**Other.****  **Other expenses include consultingfees, professional fees, and implementation costs related to outsourcing and otherprojects, insurance premiums, exchange membership fees (net), research deliverycosts and other related expenses.

**Gain (Loss) on ExchangeMemberships.****  **Theserealized gains or losses are recognized upon the sale, exchange or otherdisposition of the membership interests or the other-than-temporary impairmentof the membership interests.

**Provision forIncome 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 through April 30,2006. For the period May 1, 

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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 this AnnualReport is presented as if we operated on a stand-alone basis, consistent withthe liability method prescribed by SFAS No. 109,*Accounting for Income Taxes*. Under the liability method,deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amount of assets and liabilities for financial statementand income tax purposes, as determined under applicable tax laws and rates. Avaluation allowance is provided for deferred tax assets when it is more likelythan not that the benefits of net deductible temporary differences and netoperating loss carryforwards will not be realized.

Our effective tax rates for the years ended December 31,2006, 2005 and 2004 were 10.7%, 8.7% and 3.3%, respectively.

The low effective tax ratein 2006 is primarily the result of a net reversal of valuation allowance due topayments of deferred compensation arrangements related to the IPO and pre-IPOamortization of goodwill. The low effective tax rates in 2005 and 2004 areprimarily attributable to continued net operating losses for tax purposes. Weexpect our effective tax rate to increase significantly as we will no longerhave the benefits of these items, nor will we have the benefit of net operatingloss carryforwards to offset federal and most state and local income taxes. Suchbenefits were retained by Société Générale. As a result, we expect oureffective tax rate to be approximately 45% in 2007 and subsequent years.

**Results ofOperations**

***Year Ended December 31, 2006 Compared with theYear Ended December 31, 2005***

**Overview**

Total revenues increased $50.7 million, or 17.2%, to$345.0 million for the twelve months ended December 31, 2006 compared with$294.3 million in 2005. This increase was primarily due to an increase ininvestment banking revenues of $38.1 million and an increase in sales andtrading related revenues of $12.0 million.

Total expenses increased $46.4 million, or 16.4%, to$328.4 million for the twelve months ended December 31, 2006 compared with$282.0 million in 2005, primarily due to an increase in compensation expense. Compensationexpense increased for a number of reasons including; the increase in totalrevenues, 58% of which were used for compensation, expense associated with theaccelerated vesting of deferred compensation plans that were terminated as aresult of our separation from Société Générale and expense associated with theinitial grant of equity to our employees in connection with our IPO. Totalnon-compensation expenses increased $2.8 million, or 2.5%, during the twelvemonths ended December 31, 2006 compared with 2005, primarily due to anincrease in occupancy related expenses as a result of our new sublease in NewYork, our new office in London, an increase in floor brokerage and tradeexecution related expenses due to increased volumes and increased pricing underour clearing agreement with SGAS. These increases were partially offset by adecrease in certain allocated costs which terminated after our separation fromSociété Générale and litigation and related costs. We recorded net income of$37.9 million for the twelve months ended December 31, 2006 compared with$12.1 million in 2005. Net income for the twelve months ended December 31,2006 included one-time gains on exchange memberships, including $24.8 millionrealized upon the consummation of the merger of the New York Stock Exchange andArchipelago Holdings, Inc. which occurred on March 7, 2006. TheCompany directed its interests from the merger to SGASH.

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The following tableprovides a comparison of our revenues and expenses for the periods presented:
|                                | ** ** | **2006**                | ** ** | **2005** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|-------------------|------------|-------------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| **Revenues**                   |       |                    |       |     |       |              |       |              |       |   |   |
| Investment  banking            |       | $                       | 164,342    |     | $          | 126,253           |       | $                 | 38,089     |   |   | 30.2 | % |   |
| Commissions                    |       | 93,346                  |       | 93,450   |       | (104              | )          |              | NM         |   |   |
| Principal  transactions        |       | 64,376                  |       | 52,250   |       | 12,126            |       |              | 23.2       |   |   |
| Interest and  dividend income  |       | 17,766                  |       | 16,990   |       | 776               |       |              | 4.6        |   |   |
| Other                          |       | 5,137                   |       | 5,348    |       | (211              | )          |              | (3.9       | ) |   |
| Total revenues                 |       | 344,967                 |       | 294,291  |       | 50,676            |       |              | 17.2       |   |   |
| **Expenses**                   |       |                    |       |     |       |              |       |              |       |   |   |
| Employee  compensation and     |       | 215,707                 |       | 172,128  |       | 43,579            |       |              | 25.3       |   |   |
| Floor brokerage  and trade     |       | 11,838                  |       | 10,025   |       | 1,813             |       |              | 18.1       |   |   |
| Service fees ,  net            |       | 16,961                  |       | 18,446   |       | (1,485            | )          |              | (8.1       | ) |   |
| Communications                 |       | 24,289                  |       | 22,985   |       | 1,304             |       |              | 5.7        |   |   |
| Occupancy and  equipment       |       | 17,772                  |       | 15,071   |       | 2,701             |       |              | 17.9       |   |   |
| Marketing and  business        |       | 12,581                  |       | 12,382   |       | 199               |       |              | 1.6        |   |   |
| Litigation and  related costs  |       | 4,411                   |       | 6,930    |       | (2,519            | )          |              | (36.3      | ) |   |
| Depreciation and  amortization |       | 2,369                   |       | 2,140    |       | 229               |       |              | 10.7       |   |   |
| Interest                       |       | 980                     |       | 1,178    |       | (198              | )          |              | (16.8      | ) |   |
| Other                          |       | 21,443                  |       | 20,691   |       | 752               |       |              | 3.6        |   |   |
| Total expenses                 |       | 328,351                 |       | 281,976  |       | 46,375            |       |              | 16.4       |   |   |
| Operating income               |       | 16,616                  |       | 12,315   |       | 4,301             |       |              | 34.9       |   |   |
| Gain on exchange  memberships  |       | 25,843                  |       | 918      |       | 24,925            |       |              | 2,715      |   |   |
| Income before  income taxes    |       | 42,459                  |       | 13,233   |       | 29,226            |       |              | 220.9      |   |   |
| Provision for  income taxes    |       | 4,548                   |       | 1,152    |       | 3,396             |       |              | 294.8      |   |   |
| Net income                     |       | $                       | 37,911     |     | $          | 12,081            |       | $                 | 25,830     |   |   | 213.8 | % |   |

----

*NM**—*indicates notmeaningful.

**Revenues**

***Investment Banking***

Investment banking revenuesincreased $38.1 million, or 30.2%, to $164.3 million for the year ended December 31,2006 compared with $126.2 million in 2005. The increase reflects improvedresults in our capital raising activities. Our underwriting revenues increased$25.1 million, or 45.5%, to $80.2 million for the year ended December 31,2006 compared with $55.1 million during the same period in the prior year. Theincrease in underwriting revenues was the result of increased transactionvolume, which increased by 32% and an increase in our average revenues pertransaction. We lead managed 39% of our underwritten transactions in 2006. Ourprivate placement revenues increased $36.3 million, or 122.6%, to $65.9 millionfor the year ended December 31, 2006 compared with $29.6 million in 2005.The increase in private placement revenues was primarily attributable to anincrease in both the number and median size of the transactions completed in2006. The increase in capital raising revenues were partially offset by adecrease of $23.3 million, or 56.2%, in strategic advisory fees to $18.2million for the twelve months ended December 31, 2006 compared with $41.5million in 2005. The decrease in strategic advisory fees was primarily theresult of a decrease in the size of the transactions completed in 2006 and, toa lesser extent, the number of transactions closed.

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***Sales and Trading***

**·****      Commissions**

Commissionsdecreased slightly to $93.3 million for the year ended December 31, 2006compared with $93.4 million in 2005. These results were primarily attributableto a reduction in commission rates partially offset by an increase in tradingvolume.

**·****      PrincipalTransactions**

Principaltransactions increased $12.1 million, or 23.2%, to $64.4 million for the yearended December 31, 2006 compared with $52.3 in 2005. This increase wasprimarily due to higher over-the-counter equity volumes as well as improvedrevenues related to our convertible bond business.

***Interest andDividend Income***

Interest and dividendincome increased $0.8 million, or 4.6%, to $17.8 million for the year ended December 31,2006 compared with $17.0 million in 2005, resulting primarily from higheraverage interest rates during 2006, partially offset by lower average interestbearing assets in 2006 compared with 2005. In conjunction with our IPO, we madea payment of $180.3 million, representing a return of capital, to SGASH.The level of our interest bearing assets was significantly reduced as a resultof this capital distribution which will result in a meaningful reduction in ourinterest income in the future.

***Other***

Other revenues decreased$0.2 million, or 3.9%, to $5.1 million for the year ended December 31,2006 compared with $5.3 million in 2005. This decrease was primarilyattributable to the decrease in fees for managing the portfolio of merchantbanking assets and venture capital investments, partially offset by addition ofequity research fee income associated with unbundling arrangements with certainof our institutional investor clients.

**Expenses**

***EmployeeCompensation and Benefits***

Employee compensation andbenefits expense increased $43.6 million, or 25.3%, to $215.7 million for theyear ended December 31, 2006 compared with $172.1 million in 2005. Thisincrease was primarily attributable to the application of our targetcompensation and benefits expense to revenue ratio to the increased revenuesduring 2006 as compared to 2005. In addition, there was an accelerated vestingexpense of $10.6 million related to deferred compensation plans that wereterminated as a result of our separation from Société Génerale and $5.2 millionof expense associated with the initial grant of equity to our employees inconnection with the IPO. Excluding the compensation expense associated with theinitial grant of equity and the terminated deferred compensation plans,employee compensation and benefits expense as a percentage of total revenueswas 58.0% for the year ended December 31, 2006. Employee compensation andbenefits expense as a percentage of total revenues was 58.5% for 2005.

***Floor Brokerage andTrade Execution***

Floor brokerage and tradeexecution fees increased $1.8 million, or 18.1%, to $11.8 million for the yearended December 31, 2006 compared with $10.0 million in 2005. This increasewas primarily attributable to an increase in volumes and increased pricing underour clearing agreement with SGAS. We recently entered into a long termrelationship with a new clearing firm.

***Service Fees, net***

Net service fees decreased$1.5 million, or 8.1%, to $17.0 million for the year ended December 31,2006 compared with $18.5 million in 2005. This decrease was primarilyattributable to the termination of various service level agreements withSociété Générale for certain support functions as a result of the IPO,partially offset by the full year effect of the outsourcing of our informationtechnology infrastructure.

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***Communications***

Communications expenseincreased $1.3 million, or 5.7%, to $24.3 million for the year ended December 31,2006 compared with $23.0 million in 2005. This increase was primarilyattributable to increased costs associated with third-party trade related andother market data services fees.

***Occupancy andEquipment***

Occupancy and equipmentexpense increased $2.7 million, or 17.9%, to $17.8 million for the year ended December 31,2006 compared with $15.1 million in 2005. This increase was primarily attributableto an increase in rent expense under our new sublease for our New York officespace, new London office space and an increase in certain software licensefees.

***Marketing andBusiness Development***

Marketing and businessdevelopment expense increased $0.2 million, or 1.6%, to $12.6 million for theyear ended December 31, 2006 compared with $12.4 million in 2005. Thisincrease was primarily due to an increase in conference related costs,partially offset by a decrease in travel and entertainment related expenses.

***Litigation andRelated Costs***

Litigation and relatedcosts decreased $2.5 million, or 36.3%, to $4.4 million for the year ended December 31,2006 compared with $6.9 million in 2005. This decrease in litigation andrelated costs was primarily attributable to elimination of certain expenseswhich are now covered under the Indemnification Agreement with SociétéGénérale.

***Depreciation andAmortization***

Depreciation andamortization expense increased $0.2 million, or 10.7%, to $2.4 million for theyear ended December 31, 2006 compared with $2.2 million in 2005. Thisincrease was primarily attributable to the amortization of additional networkhardware and additional leasehold improvements placed into service during 2006.

***Gain on ExchangeMemberships***

Gain on exchangememberships increased $24.9 million to $25.8 million for the twelve monthsended December 31, 2006 compared to $0.9 million in the prior year. Thisincrease was primarily attributable to a $24.8 million one-time gain realizedupon the consummation of the merger of the New York Stock Exchange andArchipelago Holdings, Inc. which occurred on March 7, 2006. NYSEmembers were entitled to receive cash and shares of NYSE Group common stock foreach NYSE membership seat. We held seven NYSE membership seats at the date ofthe merger. The Company directed its interests from the merger to SGASH. Theremaining gain occurred 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 at 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.

**Provision for Income Taxes**

We reported a taxprovision of $4.5 million for the year ended December 31, 2006, whichreflects an effective tax rate of 10.7% compared to a tax provision of $1.2million in 2005, which reflects an effective tax rate of 8.7%. The 2006 loweffective rate is primarily the result of a net reversal of valuation allowance

38

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due topayments of deferred compensation arrangements related to the IPO and pre-IPOamortization of goodwill. We expect our effective tax rate to increasesignificantly as we no longer retain tax benefits related to these items. Wealso no longer have the benefit of net operating loss carryforwards to offsetfederal and most state and local income taxes. SGAI has retained these taxbenefits in connection with our separation from Société Générale. As a result,we expect our effective tax rate to be approximately 45% in 2007 and subsequentyears.

***Year Ended December 31,2005 Compared with the Year Ended December 31, 2004***

**Overview**

Total revenues increased$1.2 million, or 0.4%, to $294.3 million for the year ended December 31,2005 compared with $293.1 million for the year ended December 31,2004. This increase was primarily due to increases in investment bankingrevenues of $12.5 million and interest and dividend income of$7.5 million, offset partially by a decrease in sales and trading revenuesof $18.5 million.

Fluctuations in litigationand related costs caused by $46.9 million of accruals for insurancerecoveries and the net reversal of previously accrued reserves in 2004significantly affected year-over-year operating results comparisons. Totalexpenses increased $47.9 million, or 20.5%, to $282.0 million for theyear ended December 31, 2005 compared with $234.1 million in theprior year primarily due to the impact of accruals for insurance recoveries andthe net reversal of previously accrued reserves noted above on our totalexpenses in 2004. Total expenses and total non-compensation expenses, in eachcase excluding litigation and related costs, decreased $3.9 million and$5.5 million, respectively, in 2005 compared with the prior year. Werecorded net income of $12.1 million in 2005 compared with$55.1 million in 2004.

The following tableprovides a comparison of our revenues and expenses for the periods presented:

| ** **                          | ** ** | **Year Ended December 31,** | ** ** | **Period-to-Period** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2004**             | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                    | ** ** |
| **Revenues**                        | ** ** | ** **                                 | ** ** | ** **           | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Investment banking                  |       | $ 126,253                             |       | $ 113,795       |       | $ 12,458 |   |   | 10.9 | % |   |
| Commissions                         |       | 93,450                                     |       | 99,669               |       | (6,219 | ) |   | (6.2 | **)** |   |
| Principal transactions              |       | 52,250                                     |       | 64,519               |       | (12,269 | ) |   | (19.0 | **)** |   |
| Interest and dividend income        |       | 16,990                                     |       | 9,504                |       | 7,486 |   |   | 78.8 | ** ** |   |
| Other                               |       | 5,348                                      |       | 5,574                |       | (226 | ) |   | (4.1 | **)** |   |
| Total revenues                      |       | 294,291                                    |       | 293,061              |       | 1,230 |   |   | 0.4 | ** ** |   |
| **Expenses**                        | ** ** | ** **                                 | ** ** | ** **           | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Employee compensation and           |       | 172,128                                    |       | 170,546              |       | 1,582 |   |   | 0.9 |   |   |
| Floor brokerage and trade           |       | 10,025                                     |       | 16,136               |       | (6,111 | ) |   | (37.9 | ) |   |
| Service fees , net                  |       | 18,446                                     |       | 24,389               |       | (5,943 | ) |   | (24.4 | ) |   |
| Communications                      |       | 22,985                                     |       | 19,812               |       | 3,173 |   |   | 16.0 |   |   |
| Occupancy and equipment             |       | 15,071                                     |       | 14,633               |       | 438 |   |   | 3.0 |   |   |
| Marketing and business              |       | 12,382                                     |       | 12,087               |       | 295 |   |   | 2.4 |   |   |
| Litigation and related costs        |       | 6,930                                      |       | (44,835              | )          | 51,765 |   |   | NM |   |   |
| Depreciation and amortization       |       | 2,140                                      |       | 2,409                |       | (269 | ) |   | (11.2 | ) |   |
| Interest                            |       | 1,178                                      |       | 825                  |       | 353 |   |   | 42.8 |   |   |
| Other                               |       | 20,691                                     |       | 18,077               |       | 2,614 |   |   | 14.5 |   |   |
| Total expenses                      |       | 281,976                                    |       | 234,079              |       | 47,897 |   |   | 20.5 |   |   |
| Operating income                    |       | 12,315                                     |       | 58,982               |       | (46,667 | ) |   | (79.1 | ) |   |
| Gain (loss) on exchange memberships |       | 918                                        |       | (1,993               | )          | 2,911 |   |   | NM |   |   |
| Income before income taxes          |       | 13,233                                     |       | 56,989               |       | (43,756 | ) |   | (76.8 | ) |   |
| Provision for income taxes          |       | 1,152                                      |       | 1,877                |       | (725 | ) |   | (38.6 | ) |   |
| Net income                          |       | $ 12,081                              |       | $ 55,112        |       | $ (43,031 | ) |   | (78.1 | )% |   |

 

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NM indicates not meaningful

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**Revenues**

***Investment Banking***

Investment bankingrevenues increased $12.5 million, or 10.9%, to $126.3 million for theyear ended December 31, 2005 compared with $113.8 million in theprior year, reflecting significant improvements in the dollar volume of mergersand acquisitions advisory assignments. Strategic advisory fees increased$22.6 million, or 119.6%, to $41.5 million for the year ended December 31,2005 compared with $18.9 million in the prior year and included severalsignificant assignments in terms of total fees paid per transaction. Ourunderwriting revenues decreased $15.6 million, or 22.1%, to$55.1 million for the year ended December 31, 2005 compared with$70.7 million in the prior year. The decrease in underwriting revenues wasconsistent with the trend in the overall market as the number of underwrittenpublic equity transactions in our target sectors fell by 29% in 2005. Ourdecrease in underwriting revenues was partially offset by an increase in boththe number and median deal size of Private Investments in Public Equities (“PIPEs”)and Registered Directs (“RDs”)we completed during 2005. Our underwriting and other capital raising businessincreased in the fourth quarter of 2005, resulting in over 35% of 2005 revenuefrom these businesses being booked in that quarter. We lead managed 40% of ourunderwritten transactions in 2005.

***Sales and Trading***

·                    **Commissions**

Commissions decreased $6.2 million, or 6.2%, to$93.5 million for the year ended December 31, 2005 compared with$99.7 million in 2004 due primarily to lower trading volumes and, to alesser extent, commission rates.

·                    **Principal Transactions**

Principal transactions revenues decreased $12.3 million,or 19.0%, to $52.3 million for the year ended December 31, 2005compared with $64.5 million in 2004 due primarily to lower trading gainsresulting from lower trading volumes and, to a lesser extent, sale credits,partially offset by lower trading losses associated with the facilitation ofclient orders. Compared with the more robust corporate equity issuanceenvironment in 2004, growth equity issuance in our target sectors for 2005 wasdown, which also impacted our trading volumes. Our convertible trading businessalso experienced a difficult market environment in early 2005, resulting in aloss of $1.0 million, net of commissions, for the year, which furtheraffected results.

***Interest andDividend Income***

Interest and dividendincome increased $7.5 million, or 78.8%, to $17.0 million for theyear ended December 31, 2005 compared with $9.5 million in 2004 dueprimarily to higher average interest bearing assets and higher interest ratesin 2005 relative to 2004.

**Expenses**

***EmployeeCompensation and Benefits***

Employee compensation andbenefits expense increased $1.6 million, or 0.9%, to $172.1 millionfor the year ended December 31, 2005 compared with $170.5 million inthe prior year. This increase was primarily attributable to increased variablecompensation under the compensation system with Société Générale that includeda profit sharing arrangement, partially offset by a $0.3 million increasein the cash surrender value of corporate owned life insurance we use toeconomically hedge certain aspects of a voluntary deferred compensation planfor key executives. The profit sharing arrangement allowed us to increaseemployee compensation as a result of the reduction in our non-compensationexpense excluding litigation and certain other corporate expenses. We have nothad a profit sharing arrangement in place 

40

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subsequentto the IPO. Employee compensation and benefits expense as a percentage of totalrevenues was 58.5% for the year ended December 31, 2005 and 58.2% for theyear ended December 31, 2004.

***Floor Brokerage andTrade Execution***

Floor brokerage and tradeexecution fees decreased $6.1 million, or 37.9%, to $10.0 million forthe year ended December 31, 2005 compared with $16.1 million in 2004.This reduction in fees was primarily related to a full year of savings relatedto our clearing agreement with an affiliate of Société Générale, which wasrenegotiated in January 2005.

***Service Fees, net***

Service fees decreased$5.9 million, or 24.4%, to $18.4 million for the year ended December 31,2005 compared with $24.4 million in 2004. This decrease was primarilyattributable to the outsourcing of a portion of our information technologyinfrastructure, including help desk, data warehousing and informationtechnology hardware in July 2005 and the negotiation of more favorableterms under certain service level agreements with Société Générale.

***Communications***

Communications expenseincreased $3.2 million, or 16.0%, to $23.0 million for the year endedDecember 31, 2005 compared with $19.8 million in 2004. This increase wasprimarily attributable to increased costs associated with third-party traderelated and other market data services.

***Occupancy andEquipment***

Occupancy and equipmentexpense increased $0.4 million, or 3.0%, to $15.1 million for theyear ended December 31, 2005 compared with $14.6 million in 2004.This increase was primarily attributable to additional office space leased atone of our locations and increased application software support fees partiallyoffset by reduced fixed asset service fees.

***Marketing andBusiness Development***

Marketing and businessdevelopment expense increased $0.3 million, or 2.4%, to $12.4 millionfor the year ended December 31, 2005 compared with $12.1 million in2004. This increase was primarily due to increased travel, entertainment andlodging related costs.

***Litigation and Related Costs***

Litigation and relatedcosts increased $51.8 million to $6.9 million for the year ended December 31,2005 compared with $(44.8) million in 2004. The variance in litigation andrelated costs was attributable to the accrual for insurance recoveries and thenet reversal of previously accrued reserves associated with the settlement ofcertain litigation matters in 2004.

***Depreciation andAmortization***

Depreciation andamortization expense decreased $0.3 million, or 11.2%, to$2.1 million for the year ended December 31, 2005 compared with$2.4 million in 2004. This decrease was primarily attributable to reducedamortization of capitalized information technology investments, partiallyoffset by increased software amortization costs.

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***Other***

Other expense increased$2.6 million, or 14.5%, to $20.7 million for the year ended December 31,2005 compared with $18.1 million in 2004. This increase was primarily aresult of implementation costs related to our information technologyoutsourcing project as well as increased insurance premiums.

**Gain (Loss) on Exchange Memberships**

Gain (loss) on exchangememberships was a gain of $0.9 million for the year ended December 31,2005 compared with a loss of $2.0 million in 2004. The $0.9 milliongain in 2005 was primarily related to the receipt of shares in the ChicagoBoard of Trade as a result of its demutualization. The $2.0 million lossin 2004 related to an impairment charge on our exchange memberships.

**Provision for Income Taxes**

The provision for taxes was $1.2 million in 2005,which reflects an effective tax rate of 8.7%, compared to $1.9 million in2004, which reflects an effective tax rate of 3.3%. Our low effective tax ratesin 2005 and 2004 were primarily attributable to continued net operating lossesfor tax purposes, which were retained by Société Générale following ourseparation.

**Liquidity and Capital Resources**

Most of our assets consistof cash, cash equivalents and assets readily convertible into cash such as oursecurities held in inventory. Securities inventories are stated at fair valueand are generally readily marketable. As of December 31, 2006, we had cashand cash equivalents of $185.0million.

As part of our separationfrom Société Générale and our becoming a public company, we made a payment toSGASH of $180.3 million in 2006. This distribution was the amount necessary tocause our stockholders’ equity to be $207.0 million immediately after the IPOas agreed upon with Société Générale. Under the terms of the SeparationAgreement (see Note 11 for further discussion of the Separation Agreement), theamount of this distribution is subject to adjustment based on a final review ofthe Company’s separation from Société Générale. The Company has accruedapproximately $2.0 million as a capital distribution payable to SociétéGénérale related to this final review.

As a registeredbroker-dealer and member firm of the NYSE, our broker-dealer subsidiary issubject to the uniform net capital rule of the SEC. We have elected to usethe alternative method permitted by the uniform net capital rule, whichgenerally requires that we maintain minimum net capital of $1.0 million. TheNYSE may prohibit a member firm from expanding its business or paying dividendsif resulting net capital would be below the regulatory limit. We expect theselimits will not impact our ability to meet current and future obligations.

At December 31, 2006,our net capital under the SEC’s Uniform Net Capital Rule was $54.4 million, or $53.4 million in excess of the minimumrequired net capital.

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’s financialresources of approximately $4.4 million exceeded the minimum requirement of$3.3 million by approximately $1.1 million.

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***Cash Flows***

**Yearended December 31, 2006.**   Cash increased by$182.9 million for the twelve months ended December 31, 2006 from theprior year, primarily as a result of cash provided by operating activities,partially offset by cash used in financing activities. In conjunction with ourseparation from Société Générale and our becoming a public company, we made apayment representing a return of capital to SGASH in the amount of $180.3million. This distribution was the amount necessary to cause our stockholders’equity to be $207.0 million immediately after the IPO as agreed upon withSociété Générale. The increase in cash for the twelve months ended December 31,2006 and the cash used to distribute this $180.3 million payment to SGASH wasprimarily funded by the decrease in securities purchased under agreements toresell with related parties of $411.0 million.

Our operating activities provided $388.6 million ofcash due to net income of $37.9 million and cash provided by changes inoperating assets of $286.9 million, including an increase in cash from changesin operating liabilities of $81.6 million and a decrease in non-cash revenueand expense items of $17.9 million. The change in operating liabilities of$81.6 million was primarily due to an increase in securities sold, not yetpurchased, at fair value, of $108.4 million partially offset by a decrease inemployee compensation and benefits payable of $40.9 million. The change inoperating assets of $286.9 million primarily resulted from a decrease in securitiespurchased under agreements to resell with related parties of $411.0 million,which caused cash to increase by that amount, offset by an increase inrestricted cash pursuant to an escrow agreement of $52.1 million and an increaseof $57.7 million in receivable from brokers, dealers and clearing brokers. Netnon-cash revenue and expense items consisted primarily of a million $24.8million gain on exchange memberships.

Our investing activities consumed $11.8 million due topurchases of fixed assets. Net cash used in financing activities of $193.9million was primarily attributable to a net capital distribution of $180.3 millionto Société Générale.

**Yearended December 31, 2005.****  **Cash increased $0.2 million inthe year ended December 31, 2005 from the prior year, primarily due topositive operating cash flow, substantially offset by cash used in financingactivities.

Our operating activities provided $44.9 millionof cash due to net income of $12.1 million, including non-cash revenue andexpense items of $3.5 million, and cash provided from the change inoperating assets of $33.5 million, offset by a reduction in cash from thechange in operating liabilities of $4.1 million. The non-cash itemsconsist primarily of depreciation and amortization expense of $2.1 millionand income tax expense of $1.2 million. Cash provided from the change inoperating assets consisted primarily of $34.4 million from the reductionof securities purchased under agreements to resell, $23.2 million from thecollection of insurance claims receivable and $10.6 million from thereduction of amounts due from affiliates, partially offset by an increase of$29.8 million in securities owned. Cash consumed by the decrease inoperating liabilities was primarily attributable to $25.3 million relatedto the change in legal reserves and related payables, partially offset by anincrease of $16.1 million in securities sold, not yet purchased.

We used $0.5 million in our investing activities,primarily in the purchase of fixed assets. Financing activities consisted of$1.4 million of net capital contributions from Société Générale and$45.7 million in payments related to the retail brokerage business notconducted by us.

**Yearended December 31, 2004.****  **Cash increased $1.7 millionduring the year ended December 31, 2004 from the prior year, primarily dueto positive cash flows from financing activities, substantially offset by cashused in operating activities and investing activities.

Our operating activities consumed $51.2 millionof cash due to a reduction in cash from the change in operating assets of$100.0 million and a reduction in cash from the change in operatingliabilities of 

43

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$12.9 million,partially offset by net income of $55.1 million, including non-cashrevenue and expense items of $6.6 million. The change in operating assetsrelated primarily to a $158.6 million increase in securities purchasedunder agreements to resell, partially offset by a reduction in receivables frombrokers, dealers, and clearing brokers of $80.4 million. The reduction incash from decreased operating liabilities was primarily attributable to$21.2 million related to the change in legal reserves and related payablesand $6.7 million related to the change in payable to brokers, dealers andclearing brokers, partially offset by an increase in accounts payable, accruedexpenses and other liabilities. The non-cash items consist primarily ofdepreciation and amortization expense of $2.4 million, an impairment ofexchange memberships of $2.0 million and income tax expense of$1.9 million.

Our investing activitiesconsisted of net purchases of fixed assets in the amount of $5.0 million.Financing activities consisted of $80.0 million of net capitalcontributions from Société Générale and $22.1 million in payments relatedto the retail brokerage business not conducted by us.

***Credit Facilities***

We have an irrevocableLetter of Credit for $5.0 million issued by the Bank of New York (“BONY”) atthe prime commercial lending rate, expiring on July 12, 2008, supportingour Boston office lease. We have another irrevocable Letter of Credit for $100thousand issued by BONY at the prime commercial lending rate, expiring on July 26,2008, supporting our worker compensation insurance with Safety NationalCasualty Corporation.

**ContractualObligations**

Thefollowing table provides a summary of our contractual obligations as of December 31,2006:

| ** **                     | ** ** | **Payments due by Period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009-2010** | ** ** | **2011 and  Thereafter** | ** ** |
| ** **                     | ** ** | **(in thousands)**                   | ** ** |
| Operating lease  obligations   |       | $                                         | 66,306     |   | $ | 8,866 |   | $ | 8,981 |   |   | $ | 18,679 |   |   |   | $ | 29,780 |   |   |
| Other contractual  obligations |       | 36,789                                    |       | 11,118 |   | 11,578 |   |   | 14,093 |   |   |   | — |   |   |
| Total                          |       | $                                         | 103,095    |   | $ | 19,984 |   | $ | 20,559 |   |   | $ | 32,772 |   |   |   | $ | 29,780 |   |   |

 

**Off-Balance Sheet Arrangements**

We had no materialoff-balance sheet arrangements as of December 31, 2006; however, throughindemnification provisions in our clearing agreement, customer activities mayexpose us to off-balance-sheet credit risk. Pursuant to the clearing agreement,we are required to reimburse our clearing broker, without limit, for any lossesincurred due to a counterparty’s failure to satisfy its contractualobligations. However, these transactions are collateralized by the underlyingsecurity, thereby reducing the associated risk to changes in the market valueof the security through the settlement date. See Item 7A - “Qualitative andQuantitative Disclosures About Market Risk—Credit Risk.”

We are a member of varioussecurities exchanges. Under the standard membership agreement, members arerequired to guarantee the performance of other members and, accordingly, ifanother member becomes unable to satisfy its obligations to the exchange, allother members would be required to meet the shortfall. Our liability underthese arrangements is not quantifiable and could exceed the cash and securitieswe have posted as collateral. However, management believes that the potentialfor us to be required to make payments under these arrangements is remote.Accordingly, no contingent liability is carried in the accompanyingconsolidated statements of financial condition for these arrangements.

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**Critical Accounting Policies and Estimates**

The preparation of ourconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and of revenues andexpenses during the reporting periods. We base our estimates and assumptions onhistorical experience and on various other factors that we believe arereasonable under the circumstances. The use of different estimates andassumptions could produce materially different results. For example, if factorssuch as those described in “Risk Factors” cause actual events to differ fromthe assumptions we used in applying the accounting policies, our results ofoperations, financial condition and liquidity could be materially adverselyaffected.

Our significantaccounting policies are summarized in Note 2 to our audited consolidatedfinancial statements included elsewhere in this Annual Report on Form 10-K.On an ongoing basis, we evaluate our estimates and assumptions, particularly asthey relate to accounting policies that we believe are most important to thepresentation of our financial condition and results of operations. We regard anaccounting estimate or assumption to be most important to the presentation ofour financial condition and results of operations where:

·       thenature of the estimate or assumption is material due to the level ofsubjectivity and judgment necessary to account for highly uncertain matters orthe susceptibility of such matters to change; and

·       theimpact of the estimate or assumption on our financial condition or operatingperformance is material.

Usingthese criteria, we believe the following to be our critical accountingpolicies:

***Revenue Recognition***

Investment bankingrevenues include underwriting fees, private placement fees, strategic advisoryfees and financial advisory fees. Underwriting revenues are earned insecurities offerings in which we act as an underwriter and include managementfees, sales concessions and underwriting fees. Management fees are recorded onthe offering date, sales concessions on settlement date and underwriting feesare recognized net of related syndicate expenses, at the time the underwritingis complete and the income is reasonably determinable. 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.

***Valuation ofFinancial Instruments***

Substantially all of ourfinancial instruments are recorded at fair value or contract amounts thatapproximate fair value. The fair value of a financial instrument is the amountat which the instrument could be exchanged in a current transaction between willingparties, other than in a forced or liquidation sale. “Securities owned” and “securitiessold, not yet purchased” and derivative financial instruments includingfutures, options and warrant positions are stated at fair value, with relatedchanges in unrealized appreciation or depreciation reflected in the line item “principaltransactions” in our consolidated statements of operations. Financialinstruments carried at contract amounts include “receivable from brokers,dealers and clearing brokers”, “payable to brokers, dealers and clearingbrokers”, “securities purchased under agreements to resell with related party”and “corporate finance and syndicate receivables.”

Fair value is generallybased on independent sources such as quoted market prices or dealer pricequotations. To the extent certain financial instruments trade infrequently orare non-marketable securities 

45

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and,therefore, do not have readily determinable fair values, we estimate the fairvalue of these instruments using various pricing models and the informationavailable to us that we deem most relevant. Among the factors considered by usin determining the fair value of financial instruments are discountedanticipated cash flows, the cost, terms and liquidity of the instrument, thefinancial condition, operating results and credit ratings of the issuer orunderlying company, the quoted market price of publicly traded securities withsimilar quality and yield and other factors generally pertinent to thevaluation of financial instruments.

***Goodwill***

Goodwill represents theexcess of the purchase price of a business acquisition over the fair value ofthe net assets acquired. In accordance with SFAS No. 142, Goodwill andOther Intangible Assets (“FAS 142”), goodwill is not amortized; instead theseassets are evaluated at least annually for impairment.

The Company monitorsgoodwill annually or more frequently if events or circumstances indicate apossible impairment. A two-step test is used to determine whether goodwill isimpaired. The first step is to compare the carrying value of the Company withthe fair value of the Company. If the carrying value of the Company exceeds thefair value of the Company, the second step is applied. The second step is tocompare the carrying amount of the goodwill with the implied fair value of thegoodwill. If the carrying amount of the goodwill exceeds the implied fair valueof the goodwill, goodwill impairment is recognized. Fair value is based onfactors such as projected cash flows, revenue multiples of comparable exchangelisted companies, and/or the price of our stock.

***Legal andRegulatory Reserves***

In the normal course ofbusiness, we have been named a defendant in a number of lawsuits and otherlegal and regulatory proceedings. Such proceedings include actions broughtagainst us and others with respect to transactions in which we acted as anunderwriter or financial advisor, actions arising out of our activities as abroker or dealer in securities and actions brought on behalf of various classesof claimants against many securities firms, including us. We estimate potentiallosses that may arise out of legal and regulatory proceedings and recognizeliabilities for such contingencies to the extent such losses are probable andthe amount of loss can be reasonably estimated. We review outstanding claimswith internal and external counsel to assess probability and estimates of loss.We reassess the risk of loss as new information becomes available, and reservesare adjusted, as appropriate. Any future increases to our loss contingencyreserves or releases from these reserves may affect our results of operations.Historically, litigation and related costs have significantly impacted ourfinancial results.

**Recently Issued Accounting Standards, Not Yet Adopted**

InFebruary 2007, the FASB issued Statement of Financial Accounting Standard No.159, *The Fair Value Option for Financial Assets andFinancial Liabilities* ("FAS 159"). FAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue 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.

InSeptember, 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“FAS 157”). FAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurement. This statement shall be effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year, 

46

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including any financial statements for an interimperiod within that fiscal year. The provisions of this statement should beapplied 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. We are currently evaluating theimpact, if any, that the adoption of FAS 157 will have on our consolidatedfinancial statements.

In June 2006, theFASB issued Interpretation No. 48,  *Accounting for Uncertainty in Income Taxes - an Interpretation of FASBStatement No. 109* (“FIN 48”). FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return andprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We arecurrently evaluating, the impact, if any, that the adoption of FIN 48 willhave on our consolidated financial statements.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

***Market Risk***

Market risk represents therisk of loss that may result from the change in value of a financial instrumentdue to fluctuations in its market price. Market risk may be exacerbated intimes of trading illiquidity when market participants refrain from transactingin normal quantities and/or at normal bid-offer spreads. Our exposure to marketrisk is directly related to our role as a financial intermediary in customertrading and to our market making and investment activities. Market risk isinherent in financial instruments. We trade in equity and convertible debt securitiesas an active participant in both listed and over the counter markets. Wetypically maintain securities in inventory to facilitate our market makingactivities and customer order flow. We may use a variety of risk managementtechniques and hedging strategies in the ordinary course of our tradingbusiness to manage our exposures. In connection with our trading business,management also reviews reports appropriate to the risk profile of specifictrading activities. Typically, market conditions are evaluated and transactiondetails and securities positions are reviewed. These activities seek to ensurethat trading strategies are within acceptable risk tolerance parameters,particularly when we commit our own capital to facilitate client trading.Activities include price verification procedures, position reconciliations andreviews of transaction booking. We believe these procedures, which stresstimely communications between traders, trading management and seniormanagement, are important elements of the risk management process.

***Interest Rate Risk***

Interest rate riskrepresents the potential loss from adverse changes in market interest rates. Aswe may hold convertible debt securities and other interest sensitiveliabilities from time to time, we are exposed to interest rate risk arisingfrom changes in the level and volatility of interest rates and in the shape ofthe yield curve. Interest rate risk is primarily managed through the use ofU.S. Treasury futures, options and short positions in corporate debt securities.

***Credit Risk***

We engage in varioussecurities underwriting, trading and brokerage activities servicing a diversegroup of domestic and foreign corporations and institutional investor clients.A substantial portion of our transactions are collateralized and are executedwith and on behalf of institutional investor clients including other brokers ordealers, commercial banks and other financial institutions. Our exposure tocredit risk associated with the nonperformance of these clients in fulfilling theircontractual obligations pursuant to securities transactions can be directlyimpacted by volatile trading markets which may impair the client’s ability tosatisfy its obligations to us. Our principal activities are also subject to therisk of counterparty nonperformance. Pursuant to our clearing agreement, we arerequired to reimburse our clearing broker without limit for any losses incurreddue to a counterparty’s failure to satisfy its contractual 

47

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obligationswith respect to a transaction executed by the affiliate as a clearing agent.However, as noted above, these transactions are collateralized by theunderlying security, thereby reducing the associated risk to changes in themarket value of the security through the settlement date. We also seek to mitigatethe risks associated with sales and trading services through active customerscreening and selection procedures and through requirements that clientsmaintain collateral in appropriate amounts where required or deemed necessary.

***Inflation Risk***

Because our assets are, toa large extent, liquid in nature, they are not significantly affected byinflation. However, the rate of inflation affects such expenses as employeecompensation and communications charges, which may not be readily recoverablein the prices of services we offer. To the extent inflation results in risinginterest rates and has other adverse effects on the securities markets, it mayadversely affect our  financial conditionand results of operations in certain businesses.

***Operational Risk***

Operationalrisk is the risk of loss resulting from inadequate or failed internalprocesses, people and systems or from external events. We are focused onmaintaining our overall operational risk management framework and minimizing ormitigating these risks through continual assessment, reporting and monitoringof potential operational risks.

**Item 8.**                        FinancialStatements and Supplementary Data

Thefinancial statements and supplementary data required by this item are listed inItem 15—“Exhibits and Financial Statement Schedules” of this Annual Report. “SupplementalInformation—Quarterly Information” is included after Note 19, SubsequentEvents.

**Item 9.**                        Changesin and Disagreements With Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant to theSecurities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b).Based upon that evaluation, as of December 31, 2006, our Chief ExecutiveOfficer along with the Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in our periodic SEC filings. There have been no changesin our internal controls over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

Disclosurecontrols and procedures are our controls and other procedures which aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file or submit under the Exchange Act is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

**Item 9B.**               OtherInformation

None.

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**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The informationregarding our executive officers included in Part I of this Form 10-Kunder the caption “Executive Officers” is incorporated herein by reference. Theinformation in the definitive proxy statement for our 2007 annual meeting ofstockholders under the captions “Class I Directors—Terms Ending in 2009,” “Class IIDirectors—Terms Ending in 2008,” and “Class III Directors—Nominees ForTerms Ending in 2010,” “Information Regarding the Board of Directors andCorporate Governance—Committees of the Board—Audit Committee,” “InformationRegarding the Board of Directors and Corporate Governance—Director NominationProcess,” “Information Regarding the Board of Directors and CorporateGovernance—Procedures for Nominating Director Candidates,” “InformationRegarding the Board of Directors and Corporate Governance—Code of BusinessConduct and Ethics” and “Section 16(a) Beneficial Ownership ReportingCompliance” is incorporated herein by reference.

**Item 11.**                 ExecutiveCompensation

The information inthe definitive proxy statement for our 2007 annual meeting of stockholdersunder the captions “Executive Compensation—Compensation and Benefits CommitteeReport,” “Certain Relationships and Related Transactions—Compensation andBenefits Committee Interlocks and Insider Participation” and “InformationRegarding the Board of Directors and Corporate Governance—Compensation Programfor Non-Employee Directors” is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information inthe definitive proxy statement for our 2007 annual meeting of stockholdersunder the captions “Security Ownership—Beneficial Ownership of Directors,Nominees and Executive Officers,” “Security Ownership—Beneficial Owners of Morethan Five Percent of our Common Stock” and “Securities Authorized for IssuanceUnder Equity Compensation Plans” are incorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

The information inthe definitive proxy statement for our 2007 annual meeting of stockholdersunder the captions “Information Regarding the Board of Directors and CorporateGovernance—Director Independence,” “Certain Relationships and RelatedTransactions—Transactions with Related Persons,” and “Certain Relationships andRelated Transactions—Review and Approval of Transactions with Related Persons”is incorporated herein by reference.

**Item 14.**                 PrincipalAccounting Fees and Services

The information inthe definitive proxy statement for our 2007 annual meeting of stockholdersunder the captions “Audit Committee Report and Payment of Fees to OurIndependent Auditor—Auditor Fees” and “Audit Committee Report and Payment ofFees to Our Independent Auditor—Auditor Services Pre-Approval Policy” isincorporated herein by reference.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)          Documentsfiled as part of this Annual Report on Form 10-K:

1.                 ConsolidatedFinancial Statements

The consolidated financialstatements required to be filed in the Annual Report on Form 10-Kare listed on page F-1 hereof. The required financial statementsappear on pages F-1 through F-39 hereof.

2.                 FinancialStatement Schedules

Separate financialstatement schedules have been omitted either because they are not applicable orbecause the required information is included in the consolidated financialstatements.

3.                 Exhibits

See the Exhibit Indexon pages E-1 through E-2for a list of the exhibits being filed or furnished with or incorporated byreference into this Annual Report of Form 10-K.

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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-13       |       |
| Note 4—Restricted Cash Pursuant to Escrow  Agreement and Related Indemnification             Agreement  with Société Générale |       | F-14       |       |
| Note 5—Securities Owned and Securities Sold, Not  Yet Purchased Restricted                                                                                                                               |       | F-15       |       |
| Note 6—Receivable from and Payable to Brokers,  Dealers and Clearing Brokers                                                                                                                             |       | F-16       |       |
| Note 7—Exchange Memberships                                                                                                                                                                              |       | F-16       |       |
| Note 8—Furniture, Fixtures, Equipment, and  Leasehold Improvements                                                                                                                                       |       | F-17       |       |
| Note 9—Goodwill                                                                                                                                                                                          |       | F-17       |       |
| Note 10—Commitments, Contingencies and Guarantees                                                                                                                                                        |       | F-18       |       |
| Note 11—Separation from Société Générale and  Other Related Matters                                                                                                                  |       | F-25       |       |
| Note 12—Related Party Transactions                                                                                                                                                                       |       | F-27       |       |
| Note 13—Employee Benefits                                                                                                                                                                                |       | F-29       |       |
| Note 14—Stock-Based  Compensation                                                                                                                                                                        |       | F-31       |       |
| Note 15—Income Taxes                                                                                                                                                                                     |       | F-33       |       |
| Note 16—Financial Instruments with Off-Balance  Sheet Risk, Credit Risk, or Market Risk                                                                                                                  |       | F-36       |       |
| Note 17—Stockholders’ Equity                                                                                                                                                                        |       | F-37       |       |
| Note 18—Earnings Per Share                                                                                                                                                                               |       | F-38       |       |
| Note 19—Regulatory  Requirements                                                                                                                                                                         |       | F-39       |       |
| Note 20—Subsequent Events                                                                                                                                                                                |       | F-39       |       |

 

F-1

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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 consolidatedstatements of operations, stockholders' /group equity, and cash flows for eachof the three years in the period ended December 31, 2006. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour 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 the purposeof expressing an opinion on the effectiveness of the Company's internal controlover financial reporting.  Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Cowen Group, Inc. andsubsidiaries at December 31, 2006 and 2005, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2006, in conformity with U.S. generally accepted accountingprinciples.

/s/ Ernst & Young LLP

New York, New YorkMarch 28, 2007

F-2

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**Cowen Group, Inc.Consolidated Statements 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 accompanying notes are an integral part of these consolidated financial statements.

F-3

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**Cowen Group, Inc.Consolidated Statements of OperationsFor the Years 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 accompanying notes are an integral part of these consolidated financial statements.

F-4

----

**Cowen Group, Inc.Consolidated Statements of Changes in Stockholders’ / Group EquityFor the 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 accompanying notes are an integral part of these consolidated financial statements.

F-5

----

**Cowen Group, Inc.Consolidated Statements of Cash FlowsFor the Years 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 consolidated financial statements.

F-6

----

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

**1. Organization andBasis 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 banking servicesto 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 theCompany’s IPO, the Board of Directors of the Company approved a return ofcapital distribution to SGASH which left the Company with initial stockholders’equity of $207.0 million at July 12, 2006. In connection with the IPO, theCompany distributed cash of $180.3 million to SGASH pursuant to thisauthorization. Under the terms of the Separation Agreement (See Note 11 forfurther discussion of the Separation Agreement), the amount of thisdistribution is subject to adjustment based on a final review of the Company’sseparation from Société Générale. The Company has accrued approximately $2.0million as a capital distribution to Société Générale related to this finalreview. SGASH received all the proceeds from the issuance of 11,517,392 shares.In addition, 2,100,000 restricted shares were granted to employees of theCompany. SGASH retained 1,382,608 shares of the Company out of the total12,900,000 shares available for sale.

**Basis ofPresentation**

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)**

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 financialstatements include the accounts of the Company and its subsidiaries. Allsignificant intercompany transactions have been eliminated upon consolidation.

**2. Summary ofSignificant Accounting Policies**

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

**Cash and CashEquivalents**

The Company considers allhighly liquid investments with original maturities of three months or less atthe date of purchase to be cash equivalents.

**Valuation ofFinancial 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)**

Fair value is generallybased on independent sources such as quoted market prices or dealer pricequotations. To the extent certain financial instruments trade infrequently orare non-marketable securities and, therefore, do not have readily determinablefair values, the Company estimates the fair value of these instruments usingvarious pricing models and available information that management deems mostrelevant. Among the factors considered by the Company in determining the fair valueof financial instruments are discounted anticipated cash flows, the cost, termsand liquidity of the instrument, the financial condition, operating results andcredit ratings of the issuer or underlying company, the quoted market price ofpublicly traded securities with similar quality and yield, and other factorsgenerally pertinent to the valuation of financial instruments.

**SecuritiesPurchased Under Agreements to Resell**

Securities purchased underagreements to resell generally are collateralized by U.S. government and agencyobligations, are treated as collateralized financing transactions and arecarried at amounts at which the securities will be resold plus accrued interest.It is the Company’s policy to take possession or control of securities purchasedunder agreements to resell. The Company requires the fair value of thecollateral to be equal to or in excess of the principal amount loaned under theresale agreements. The Company minimizes credit risk associated with theseactivities by monitoring credit exposure and collateral values on a daily basisand requiring additional collateral or principle to be deposited or returnedwhen deemed appropriate.

**Receivable from andPayable to Brokers, Dealers and Clearing Brokers**

Amounts receivable fromand payable to brokers, dealers and clearing brokers primarily include proceedsfrom securities sold short including commissions and fees related to securitiestransactions, net receivables and payables for unsettled transactions, anddeposits with the clearing brokers. Proceeds related to securities sold, notyet purchased, may be restricted until the securities are purchased.

**Corporate Financeand Syndicate Receivables**

Corporate finance andsyndicate receivables include receivables relating to the Company’s investmentbanking and advisory engagements. The Company records an allowance for doubtfulaccounts on these receivables on a specific identification basis. No valuationallowance has been recorded as of December 31, 2006 and 2005.

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

Furniture, fixtures,equipment, and computer software, and leasehold improvements are stated atcost, less accumulated depreciation and amortization. Depreciation offurniture, fixtures, equipment and computer software is provided on thestraight-line method over the estimated useful lives of the assets, which rangefrom three to five years. Leasehold improvements are amortized over the lesserof the useful life of the improvement or the term of the lease which range fromone 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)**

A two-step test is used to determine whether goodwillis impaired. The first step is to compare the carrying value of the Company withthe fair value of the Company. If the carrying value of the Company exceeds thefair value of the Company, the second step is applied. The second step is tocompare the carrying amount of the goodwill with the implied fair value of thegoodwill as determined in accordance with FAS 142. Goodwill impairment isrecognized 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 testsare subject to significant judgment in determining the estimation of futurecash flows, discount rates and other assumptions. Changes in these estimatesand assumptions could have a significant impact on the fair value and anyresulting impairment of goodwill.

**ExchangeMemberships**

Exchange membershipsrepresenting both ownership interest and the right to conduct business on theexchange are accounted for at cost. The Company evaluates exchange membershipsfor other-than-temporary impairment annually or more frequently if events orcircumstances indicate a possible impairment.

**Stock-BasedCompensation**

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

On January 1, 2006, the Company adopted SFAS No. 123(R),*Share-Based Payment* (“FAS 123R”). Priorto January 1, 2006, the Company accounted for stock-based awards issued bySociété 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 ended December 31,2005 and 2004. The compensation expense for stock options disclosed under thefair value method is not shown net of any tax effects as the Company has nottaken any tax deductions for awards exercised by its employees.

| ** **                                                                                                  | ** ** | **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

----

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

*Based Compensation*,as amended by SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*. Such value is recognized asan expense over the service period, net of estimated forfeitures, using thestraight-line method. All unvested stock-based awards vested on April 22,2006, and accordingly, estimated forfeitures with respect to these awards weredeemed to be zero. Therefore, no adjustment to reflect the net cumulativeimpact of estimating forfeitures in the determination of period expense wasdeemed necessary in the preparation of these Consolidated Financial Statements,nor will any such future expense be deemed necessary. The Company recognized $0.1million in compensation expense for 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 ofFinancial Condition.

***Commissions***

Commission revenueincludes fees from executing client transactions in listed securities. Thesefees are recognized on a trade date basis. The Company permits institutionalcustomers to allocate a portion of their gross commissions to pay for researchproducts and other services provided by third parties. The amounts allocatedfor those purposes are commonly referred to as soft dollar arrangements.Commissions on soft dollar brokerage are recorded net of the related expenditureson an accrual basis.

***Principal transactions***

Principal transactionsrevenue includes net trading gains and losses from the Company’s market-makingactivities in over-the-counter common equity securities, convertible securitiesand options, from commitment of capital to facilitate customer trades forlisted stocks and from proprietary trading activities. In certain cases, theCompany provides liquidity to clients buying or selling blocks of shareswithout previously identifying the other side of the trade at execution, whichsubjects the Company to market risk. These positions are typically held for avery short duration.

The Company’s securitiesand derivative financial instruments are recorded at fair value. Changes in netunrealized gains or losses are reflected in principal transactions in theConsolidated Statements of Operations.

F-11

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

**Derivative Financial Instruments**

TheCompany uses U.S. Treasury futures and options to economically hedgeproprietary trading positions. In addition, the Company uses options forproprietary trading activities. Futures contracts are executed on an exchange,and cash settlement is made on a daily basis for market movements. Options arestated at fair value which is based on current market prices. Realized andunrealized gains and losses associated with futures transactions and optionsare included in principal transactions on the Consolidated Statements ofOperations. The fair value of futures contracts and required margin depositsare included in receivable from brokers, dealers and clearing brokers on theConsolidated Statements of Financial Condition and were de minimis atDecember 31, 2006 and 2005. The Company also holds warrants, which are reported at fairvalue.

**Earnings Per Share**

Basic earnings per commonshare is computed by dividing net income by the weighted average number ofcommon shares outstanding for the year. Diluted earnings per common share iscalculated by adjusting the weighted average outstanding shares to assumeconversion of all potentially dilutive nonvested restricted stock and stockoptions.

**Leases**

Leases are accounted forunder Statement of Financial Accounting Standards (“SFAS”) No. 13, *Accounting for Leases*. All of our leases are classified asoperating leases.

**Foreign Currency Translation**

The Company’s assets andliabilities denominated in foreign currencies are translated based on the rateof exchange prevailing at each statement of financial condition date. Revenuesand expenses are translated at the average exchange rates prevailing during theperiods. Gains of $0.3 million on foreign currency transactions are included inother revenue in the Consolidated Statements of Operations.

**Income Taxes**

The taxable results of theCompany’s U.S. operations were historically included in the consolidated incometax returns of SGAI through the IPO date. The tax results of the Company’s U.K.operations were historically included in the tax returns of SG London Branchthrough April 30, 2006. For the period May 1, 2006 throughDecember 31, 2006, the U.K. operations are included in CIL’s U.K. taxfiling. The U.S. impact of CIL’s operations is included in the SGAIconsolidated tax returns for the period May 1, 2006 through the IPO dateand in the Company’s tax filings post-IPO.

The income tax provisionreflected in the Consolidated Statements of Operations is presented as if theCompany operated on a stand-alone basis for all periods presented, consistentwith the liability method prescribed by SFAS No. 109, *Accountingfor Income Taxes*. Under the liability method, deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial statement and income taxpurposes, as determined under applicable tax laws and rates. A valuationallowance is provided for deferred tax assets when it is more likely than notthat the benefits of net deductible temporary differences and net operatingloss carryforwards will not be realized.

F-12

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

**3. Accounting Developments**

In February 2007, the FASBissued Statement of Financial Accounting Standard No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“FAS159”). FAS 159 permits entities to choose to measure many financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value and establishes presentation and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Unrealizedgains and losses on items for which the fair value option has been elected arereported in earnings. FAS 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the impact, if any, ofimplementing FAS 159.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(“FAS 157”).  FAS 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurement.  This statementshall be effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years. Earlierapplication is encouraged, provided that the reporting entity has not yetissued financial statements for that fiscal year, including any financialstatements for an interim period within that fiscal year. The provisions ofthis statement should be applied prospectively as of the beginning of thefiscal year in which this statement is initially applied, except in somecircumstances where the statement shall be applied retrospectively. The Companyis currently evaluating the impact, if any, that the adoption of FAS 157 willhave on the Company’s Consolidated Financial Statements.

In September 2006, the SECstaff issued Staff Accounting Bulletin No. 108, *Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements* (“SAB 108”), which providesguidance on quantifying 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 FASBissued Interpretation No. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes— an Interpretation of FASB Statement No. 109*. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return and provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. The Company is currently evaluating the impact, if any, that the adoptionof FIN 48 will have on the Company’s Consolidated Financial Statements.

Emerging Issues Task ForceIssue No. 04-5, *Determining Whether a General Partner, orthe General Partners as a Group, Controls a Limited Partnership or SimilarEntity When the Limited Partners Have Certain Rights* (“EITF 04-05”),has two effective dates.  For generalpartners of all new limited partnerships formed and for existing limitedpartnerships for which the partnership agreements are modified, EITF 04-05 iseffective after June 29, 2005.  Forgeneral partners in all other limited partnerships, it is effective no laterthan the beginning of the first reporting period in fiscal years beginningafter December 15, 2005.  Two transitionmethods are available.  EITF 04-05provides guidance for assessing when a general partner controls, and thereforeshould consolidate, a limited partnership or similar entity when the limitedpartners 

F-13

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

havecertain rights.  The Company hasevaluated the impact of EITF 04-05 and determined that the adoption of EITF04-05 did not result in the Company having to consolidate any limitedpartnerships that would otherwise not be consolidated absent EITF 04-05.

FASB Staff Position FAS115-1/FAS 124-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*(“FSP 115-1/124-1”) was finalized November 3, 2005 and is applicable toreporting periods beginning after December 15, 2005.  FSP 115-1/124-1 nullifies certainrequirements of EITF Issue 03-1, *The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments,*and supersedes *EITF*Topic No.D-44, *Recognition of Other-Than-TemporaryImpairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value*.  FSP 115-1/124-1 provides guidance ondetermining whether an investment is impaired, whether impairment is temporaryor other than temporary, measurement of the impairment loss, accountingsubsequent to an impairment write-down, and disclosures about unrecognizedlosses.  The Company has determined that theadoption of FSP 115-1/124-1 did not have any impact on the Company’sConsolidated Financial Statements.

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3*(“FAS 154”). FAS 154 provides guidance on the accounting for and reportingof accounting changes and error corrections. APB Opinion 20 previously requiredthat most voluntary changes in accounting principle be recognized by includingin net income of the period of the change the cumulative effect of changing tothe new accounting principle. FAS 154 requires retrospective application toprior period financial statements of a voluntary change in accounting principleunless it is impracticable. FAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.FAS 154 did not have a material impact on the Company’s Consolidated FinancialStatements.

In December 2004, the FASBissued SFAS No. 123(R).  FAS 123R amends FAS 123, *Accounting for Stock-Based Compensation*,and requires all share-based payments to employees to be recognized in thefinancial statements. FAS 123R was effective in fiscal years beginning afterDecember 15, 2005. The Company adopted FAS 123R on January 1, 2006, and usedthe modified prospective transition method. This method requires measurement ofcompensation cost for all stock-based awards at fair value on the date of grantand recognition of compensation over the service period for awards expected tovest. The adoption of FAS 123R did not have a material effect on the Company’sfinancial position, results of operations or cash flows, however, the level offuture equity based compensation grants, if any, could have a material effecton amounts recorded in the Consolidated Statements of Operations.

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

In connection with theIPO, the Company has an Indemnification Agreement with Société Générale underwhich (1) Société Générale will indemnify, and will defend and holdharmless the Company and each of the Company’s subsidiaries from and againstcertain liabilities assumed or retained by Société Générale, and(2) Société Générale will indemnify the Company for known, pending andthreatened litigation (including the costs of such litigation) and certainknown regulatory matters, in each case, that existed prior to the date of theIPO to the extent the cost of such litigation results in payments in excess ofthe amount placed in escrow to fund such matters (see Note 11, Separation fromSociété Générale and Other Related Matters, for further discussion of theIndemnification Agreement).

On July 12, 2006, theCompany entered into an Escrow Agreement with Société Générale and SGASH and athird-party escrow agent. Also on July 12, 2006, the Company depositedwith the escrow agent $72.3 million for the payment of liabilities arising outof the matters for which Société Générale has 

F-14

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

agreedto indemnify Cowen. Subsequent to making this deposit, certain matters coveredby the escrow arrangement have been settled and excess reserves related tothese settled matters were returned to SGASH. The escrow agent will, when andas directed by SGASH, distribute funds from the escrow account to satisfyspecified contingent liabilities for which Société Générale has assumedresponsibility should such liabilities become due. Any amounts remaining in theescrow account after final conclusion of the related litigation will be paid toSGASH. SGASH is also entitled to any interest earned on such deposits held inescrow. The balance in the escrow account was $52.1 million as ofDecember 31, 2006.

The effect of thisindemnification on the Company’s consolidated results of operations is thatwhen 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.

**5. Securities Ownedand Securities Sold, Not Yet Purchased**

Securitiesowned and securities sold, not yet purchased, both at fair value, consist ofthe following 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 debtsecurities owned are non-marketable securities totaling $0.9 million and $23.9million at December 31, 2006 and 2005, respectively, which consist ofsecurities that have not been registered under the Securities Act of 1933, andare being offered only to qualified institutional buyers under Rule 144A.

Securities sold, not yetpurchased, represent obligations of the Company to deliver a specified securityat a contracted price and, thereby, create a liability to purchase thatsecurity in the market at prevailing prices. The Company’s liability forsecurities to be delivered is measured at their fair value as of the date ofthe financial statements. However, these transactions result in off-balancesheet risk, as the Company’s ultimate cost to satisfy the delivery ofsecurities sold, not yet purchased, may exceed the amount reflected in theConsolidated Statements of Financial Condition. Substantially all securitiesowned are pledged to the clearing broker under terms which permit the clearingbroker to sell or re-pledge the securities to others subject to certainlimitations.

F-15

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

**6. Receivable fromand Payable to Brokers, Dealers and Clearing Brokers**

Amountsreceivable from and payable to brokers, dealers and clearing brokers atDecember 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 membershipsprovide the Company with the right to do business on the exchanges of which itis a member. An impairment in value of the Company’s exchange membershipsoccurred in 2004, at which time the Company recorded an impairment loss ofapproximately $2.0 million. No impairment occurred in 2006 or 2005. The fairvalue of the exchange memberships was approximately $2.6 million and $27.0million at December 31, 2006 and 2005, respectively.

On November 16, 2006,as a result of the demutualization of the New York Mercantile Exchange(“NYMEX”), the Company exchanged its seats at the Commodity Exchange (“COMEX”)for 16,800 shares of restricted NYMEX common stock and two trading rights in therestructured COMEX. The NYMEX shares and the trading rights were recognized atfair value on 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 that were receivedfrom the exchange at the time of demutualization. The initial gain was recordedin gain on exchange memberships on the Consolidated Statements of Operations.The shares and the trading rights are included in securities owned and exchangememberships, respectively, in the Consolidated Statements of FinancialCondition.

As of January 1,2006, the Company owned seven New York Stock Exchange (“NYSE”) memberships witha carrying value on that date of $7.3 million. On March 7, 2006 the NYSEmerger with Archipelago Holdings, Inc. (the “Merger”) was consummated andeach member received cash and shares of NYSE Group, Inc. common stock. TheCompany recorded a gain of $24.8 million as a result of the merger, which isincluded in gain on exchange memberships in the Consolidated Statements ofOperations. In connection with these events, the Company directed its interestsfrom the Merger to SGASH. After the Merger, the right to trade on the Exchangeceased to be tied to membership. Trading privileges are now exercised throughtrading licenses obtained by Dutch auction. The Company purchased sevenlicenses.

On October 18, 2005,with the demutualization of the Chicago Board of Trade (“CBOT”) the Companyexchanged its seats at the CBOT for Class A common shares and Class Bmembership interests of the restructured CBOT. The shares of the restructuredCBOT were recognized at fair value at the date of exchange and the Companyrecognized a gain of approximately $1.0 million representing the differencebetween the previous carrying value of the seats and the fair value of theshares and membership interests received from the exchange. The Class Ashares and Class B membership interests of the restructured CBOT areincluded in securities owned, at fair value and exchange memberships,respectively, on the Consolidated Statements of Financial Condition.

F-16

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

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

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 andamortization expense related to furniture, equipment and leasehold improvementstotaled approximately $1.4 million, $0.7 million and $0.6 million for the yearsended December 31, 2006, 2005 and 2004, respectively. Amortization expenserelated to computer software costs totaled approximately $1.0 million, $1.4million and $1.8 million for the years ended December 31, 2006, 2005 and2004, respectively. During the year ended December 31, 2005, the Companywrote-off furniture, fixtures and equipment with a net book value ofapproximately $0.7 million. This write-off was included in depreciation andamortization expense on the Consolidated Statements of Operations.

Unamortized capitalizedcomputer software costs as of December 31, 2006 and 2005, were $0.7 millionand $1.7 million, respectively.

**9. Goodwill**

The Company has $50.0million of goodwill recorded on the Consolidated Statements of FinancialCondition that relates to Société Générale’s acquisition of the Company in1998. Goodwill is reviewed for possible impairment at least annually,consistent with valuation methodologies pursuant 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 following tablereflects the changes in the carrying value of goodwill for the years endedDecember 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-17

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

**10. Commitments, Contingencies and Guarantees**

***Litigation***

The Company is subject tonumerous litigation and regulatory matters, including securities class actionlawsuits.

Although there can be noassurances as to the ultimate outcome, the Company has established reserves forlitigation and regulatory matters that it believes are adequate as ofDecember 31, 2006. The Company believes that the eventual outcome of theactions against it, including the matters described below, will not in theaggregate, have a material adverse effect on its financial position or cashflows, but may be material to its operating results for any particular period,depending on the level of the Company’s operating results for such period.

Following are summaries ofthe Company’s most significant pending legal and regulatory matters atDecember 31, 2006.

In January 2002, theCompany learned that Frank Gruttadauria (‘‘Gruttadauria’’), a former employeeof SG Cowen Securities Corporation’s (“SGCSC’s”) retail brokerage business thatwas sold in October 2000, had defrauded numerous customers andmisappropriated their assets at various firms that had employed him, includingthe Company. Following the discovery of Gruttadauria’s fraud, numerous formercustomers commenced or threatened to commence lawsuits and arbitrations againstthe Company arising out of Gruttadauria’s actions. In addition, government andregulatory authorities initiated investigations of the matter. The Companycooperated fully with all of the governmental and regulatory investigations andall known regulatory matters arising out of Gruttadauria’s conduct wereresolved in 2003. The Company has also reached settlements with the vastmajority of former customers, and has arbitrated several other customers’claims. The Company is attempting to resolve the remaining disputes.Separately, the securities brokerage firm that purchased SGCSC’s former retailbrokerage business in October 2000 had threatened to file an arbitrationagainst the Company in connection with the liabilities, costs and expenses thatit has incurred as a result of Gruttadauria’s actions. The parties haveresolved this separate matter which was also subject to the IndemnificationAgreement between Société Générale and the Company. To the extent that theCompany incurs additional legal fees or pays any fine or monetary sanction inconnection with Gruttadauria’s actions, the Company will be indemnified bySociété Générale.

TheCompany is one of several defendants named in lawsuits involvingLernout & Hauspie Speech Products, N.V. (‘‘L&H’’):

·       In*Nisselson v. Lernout, et al.,*No. 05-1774, filed in the United States District Court for theDistrict of Massachusetts on May 5, 2003, the Trustee of the DictaphoneLitigation Trust alleged that the Company made material misrepresentations toDictaphone while the Company was a financial advisor to L&H on itsacquisition of Dictaphone, and further alleged that the Company publishedmaterially misleading research on L&H, in violation of various federal andstate laws. On August 9, 2004, the District Court granted the Company’smotion to dismiss the amended complaint. The Trustee appealed the DistrictCourt’s ruling to the United States Court of Appeal for the First Circuit and,on November 8, 2006, the First Circuit affirmed the dismissal of allclaims against the Company. On February 23, 2007, the plaintiff filed apetition for writ of certiorari to the Supreme Court of the United States. Tothe extent that the Company incurs additional legal fees or pays any fine ormonetary sanction, the Company will be indemnified by Société Générale.

F-18

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

·       In*Rocker Management, L.L.C., et al. v.Lernout & Hauspie Speech Products, N.V., et al.*, CivilAction No. 00-CV-5965 (D.N.J.) filed in the United StatesDistrict Court for the District of New Jersey, on December 8, 2000,short-sellers of L&H stock allege that the Company violated federalsecurities laws and state common law by participating in a scheme toartificially inflate L&H’s stock price through the Company’s role asunderwriter 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 will beindemnified by Société Générale.

The Company is one of manyfinancial institutions named as defendants in a number of putative securitiesclass actions entitled *In re: Initial PublicOffering Securities Litigation*, filed in the United States DistrictCourt for the Southern District of New York relating to numerous initial andother public offerings of common stock from approximately 1998 through 2000.The various complaints allege that the underwriters of certain initial publicofferings, including the Company, made material misrepresentations andomissions to purchasers of the stock sold in the initial public offerings,thereby inflating the value of the stock. Specifically, the plaintiffs allegethat the defendants failed to disclose, among other things, the purportedexistence of improper tie-in and compensation arrangements they had withcertain purchasers of the stock and alleged conflicts of interest relating toresearch published by the underwriters, all in violation of federal securitieslaws. The district court granted plaintiffs’ motion to certify six “focus”cases as class actions. The Company is a named defendant in four of these“focus” cases. The Company appealed the class certification decision to theSecond Circuit Court of Appeals and on December 4, 2006, the SecondCircuit reversed the district court’s decision and remanded the matter forreconsideration in light of the Second Circuit’s opinion. Plaintiffs petitionedfor rehearing and rehearing en banc by the Second Circuit. On December 14,2006, the district court stayed discovery in the consolidated banc. OnJanuary 24, 2007, the Second Circuit instructed defendants to submit aresponse to plaintiffs’ petition. 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 and otherunderwriters are defendants in two separate, but related, antitrust actionsalleging that the underwriter defendants conspired to fix initial publicoffering underwriting fees at 7%. On February 11, 1999, theUnited States District Court in the Southern District of New York(the “Court”) consolidated three actions brought by purchasers ofsecurities in initial public offerings under the caption *In re Public Offering Fee Antitrust Litigation*, 98 Civ. 7890(LMM). In that action, plaintiffs’ damages claims were dismissed by thedistrict court, but their claims for injunctive relief remain pending. In arelated case, on April 10, 2001, the Court consolidated  severalactions filed by certain issuers of initial public offerings under thecaption *In re Issuer Plaintiff Initial Public OfferingAntitrust Litigation*, No. 00 Civ. 7804 (LMM). In this action,the damages are unspecified and the district court had denied the defendants’motion to dismiss. On April 18, 2006, the court denied the issuerplaintiffs’ motion for class certification and ordered further briefing on theinvestor plaintiffs’ motion for class certification. The plaintiffs have alsofiled a joint motion for summary judgment on liability and the issuers havefiled a motion for leave to amend their Consolidated Class ActionComplaint. The district court proceedings in both actions are 

F-19

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

stayedpending resolution of the issuers’ motion for class certification, which is onappeal. The Second Circuit heard oral argument on the appeal on March 19,2007. To the extent that the Company incurs additional legal fees or pays anyfine or monetary sanction, the Company will be indemnified by Société Générale.

The Company is a nameddefendant in several litigations relating to Adelphia Communications, a cablecompany that filed for bankruptcy in June 2002. The complaints generallyallege that the Rigas family who controlled Adelphia took advantage ofAdelphia’s assets, including through the use of certain loans, or‘‘co-borrowing facilities,’’ that allowed the family to take more than $3billion for their private use. The Company has been named as a defendant infour actions arising out of certain offerings of Adelphia securities in whichthe Company participated as a member of the underwriting syndicate. All fouractions are pending before the United States District Court for the SouthernDistrict of New York. The complaints in each of these actions raise a varietyof claims arising out of the sale of Adelphia securities, including claimsunder the federal securities laws.

These actions aregenerally referred to as the “Adelphia Securities Class Action”, “W.R.Huff Asset Management”, “Appaloosa”, and “Stocke”. The district court grantedthe Company’s motion to dismiss all federal securities claims brought againstthe Company in the Adelphia Class Action. Thereafter, the financialinstitution defendants reached a settlement with the plaintiffs. OnJune 15, 2006, the district court preliminarily approved the settlement. Afairness hearing before Judge McKenna was held on November 10, 2006, andhe entered an order approving the settlement on November 20, 2006. TheCompany’s share of the settlement is approximately $1.7 million plus interestat 4.37% beginning December 1, 2006 (all of which is covered by theindemnification agreement between Société Générale and the Company). Thisamount has been placed in an escrow account bearing the required rate ofinterest. On December 8, 2006, a group of class members appealed the orderapproving the settlement agreement with the class plaintiffs to the UnitedStates Court of Appeals for the Second Circuit. If Judge McKenna’s approval ofthe settlement is upheld on appeal or otherwise becomes final, claims made byall class members who did not opt out (including plaintiffs in Stocke) will bedismissed and released. The court also has granted in part and denied in partcertain motions to dismiss filed by various defendants, including the Company,in Huff, Appaloosa and Stocke, but has not ruled on other potential bases fordismissal set forth in the Company’s motions in these cases. In addition, inAugust 2005 the district court denied the Company’s motion to dismissbased on Huff’s lack of standing, and subsequently granted leave to file aninterlocutory appeal to the Second Circuit Court of Appeals of that ruling. TheSecond Circuit granted the Company’s petition to appeal under 28 U.S.C. § 1292,and that appeal is pending. In addition to the cases in which the Company hasbeen named as a defendant, the Company may also face potential liabilitypursuant to the applicable master agreements among underwriters for anyjudgments 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-20

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**Cowen Group, Inc. Notes to Consolidated Financial Statements (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 SouthernDistrict of New York. These adversary proceedings were filed by the OfficialCommittee of Unsecured Creditors and the Official Committee of Equity SecurityHolders (the “Committees”). Both of these cases raise a variety of common lawand federal claims, which are generally similar to the claims asserted in the AdelphiaSecurities Class Action and other cases described above. With respect tothe Company and other investment banks, the complaints taken together set forthclaims for violation of the Bank Holding Company Act, equitable disallowance orequitable subordination, breach of fiduciary duty, aiding and abetting breachof fiduciary duty, aiding and abetting fraud, gross negligence and breach ofcontract, among others. On August 30, 2005, the bankruptcy court ruledthat the two Committees have standing to prosecute the adversary proceedings,but has not ruled on the various motions to dismiss that are pending, includingmotions filed by the Company. On February 9, 2006, the district courtwithdrew the reference from the bankruptcy court so that after the bankruptcycourt rules on the pending motions, the cases will proceed before thedistrict court. To the extent that the Company incurs additional legal fees orpays any fine or monetary sanction, the Company will be indemnified by SociétéGénérale.

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 recover losses allegedly causedby misrepresentations and omissions in connection with the December 2004initial public offering of Arbinet-thexchange, an electronic marketplace fortrading, routing and settling telecommunications capacity. The complaintalleged that these misrepresentations and omissions artificially inflated theprice of Arbinet’s securities and that subsequent disclosures of the true stateof Arbinet’s market and its business in May and June 2005 causedArbinet’s securities to decline in value. The defendants, including the Company,filed a motion to dismiss the complaint and, on December 22, 2006, thecourt granted defendants’ motion, dismissing the complaint in its entirety, butgranting leave to re-plead. By stipulation and order dated January 22,2007, plaintiffs agreed that the case should be dismissed with prejudice, eachside to bear its own costs. Accordingly, the case now has been fully resolvedin 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-21

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**Cowen Group, Inc. Notes to Consolidated Financial Statements (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 facts alleged in Stanton I arisingout of the HOL bankruptcy. The complaint further alleges that the Company ownedand controlled the Defendants in Stanton I and/or that the Company is thesuccessor of the defendants in Stanton I. The two cases have been consolidated.Discovery is proceeding with a trial date scheduled for January 22, 2008.To the extent that the Company incurs additional legal fees or pays any fine ormonetary sanction, the Company will be 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 research salespersonwho was terminated by the Company in late 2004. The employee was dischargedafter the Company discovered that the employee had sought and obtained accessto sensitive information about a 

F-22

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

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 with this continuing investigation. To the extentthat the Company incurs additional legal fees or pays any fine or monetarysanction related to this matter, the Company will not be indemnified by SociétéGénérale.

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 information concerning,among other things, gifts, gratuities and entertainment and the use of one ofthe Company’s error accounts primarily involving an unaffiliated mutual fundcompany. The Company is cooperating fully with these continuing investigations.To the extent that the Company incurs additional legal fees or pays any fine ormonetary sanction related to this matter, the Company will not be indemnifiedby 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, theCompany received a request from the NYSE, as part of an industry-wide ‘‘sweep,’’for data and information relating to its compliance with provisions of thefederal securities laws, and related rules and regulations, concerningdelivery of prospectuses and/or product descriptions in connection withcustomer purchases of, inter alia, new issue securities, mutual funds andexchange-traded funds. The Company has provided periodic reports to the NYSEconcerning its progress in responding to their request and will continue tocooperate fully with this continuing inquiry. The Company will be indemnifiedby Société Générale in part against any liabilities, including legal fees thatarise out of any future litigation or the pending regulatory investigationrelating 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 on November 30,2014, there is a five-year extension option which would allow the Company toextend the lease through November 30, 2019.

F-23

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

As of December 31,2006, the Company had the following lease commitments related to theseagreements:

| ** ** | ** ** | **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 yearsended December 31, 2006, 2005 and 2004 was approximately $10.7 million,$9.4 million and $8.8 million, respectively.

***Guarantees***

The Company has outsourced certain information technologyservices to Hewlett-Packard Company and Savvis Communications Corporation. Theagreements are in place until 2010. As of December 31, 2006, theCompany’s annual minimum guaranteed payments under these agreements are asfollows:

| ** ** | ** ** | **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-24

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

Accordingly, no contingentliability is recorded in the Consolidated Statements of Financial Condition forthese arrangements.

Inconnection with the IPO, the Company has an Indemnification Agreement with SociétéGénérale under which the Company willindemnify, and will defend and hold harmless Société Générale and its subsidiaries from and against certainliabilities specifically retained or assumed by the Company after becoming apublic company (See Note 11, Separation from Société Générale and Other RelatedMatters, for further discussion of the Indemnification Agreement). There wereno contingent liabilities related to these matters recognized by the Companythrough the period ended 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 andIndemnification Agreement were executed on July 11, 2006. The otheragreements described below were executed on July 12, 2006. Theseagreements provide, among other things, for the allocation of employeebenefits, tax and other liabilities and obligations attributable or related toperiods or events prior to, in connection with and after the IPO.

The Separation Agreement provides that, as of July 18,2006, both the Company and Société Générale will assume and/or retain certainactual or contingent liabilities. Specifically, the Company will retain orassume, 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-25

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

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 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. 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 theBoard of Directors of the Company approved the “Equity and Incentive Plan”pursuant to which the Company can offer employees, independent contractors andnon-employee Directors’ equity-based awards. 4,725,000 shares of common stockhave been allocated for issuance under this plan. In connection with the IPO,the Company made equity awards of 2,100,000 shares of restricted stock andgranted options to purchase 1,125,000 shares of common stock to certain of itssenior employees.

F-26

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**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 with affiliatedcompanies at December 31, 2006 and 2005 are included in the ConsolidatedStatements 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 ended December 31,2006 (through July 21, 2006, the date on which Société Générale’sownership level was reduced to below 10%), 2005 and 2004 are summarized asfollows:

| ** **                           | ** ** | **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-27

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

Other than interest earnedon reverse repos with SGNY, revenues earned from and expenses incurred withaffiliated companies primarily resulted from securities transactions andadministrative services.

Investment banking revenuesincluded fees earned by the Company for acting as Société Générale’s agentbroker in the U.S. market for the sale of certain assets.

Interest income forperiods before the reorganization of SGCSC on April 23, 2004 (see Note 1)was based on the amount of reverse repos allocated to the Company’s business. Interestincome on the allocated reverse repos was based on current market rates forsimilar transactions.

Pursuant to serviceagreements with certain affiliates, the Company received fees related to portfolio,investment and administration services that were provided in connection withthe management of certain assets. These fees are included in other revenue onthe Consolidated Statements of Operations. 

The Company clears itssecurities and futures transactions on a fully disclosed basis through clearingbrokers that are affiliates of Société Générale. Clearing expenses are reportedin floor brokerage and trade execution on the Consolidated Statements ofOperations. The Company had entered into a commercial clearing agreement withSGAS as a result of the Company’s separation from Société Générale, which hadreplaced the Company’s pre-existing clearing agreement with SGAS. The initialterms of that clearing agreement terminated on December 31, 2006 and wereextended until January 25, 2007, at which time the Company entered into along term relationship with a new clearing firm.

Pursuant to a serviceagreement with SGAI and other affiliates through the date of the IPO, theCompany incurred expenses for costs and services that included facilitiesadministration and security, risk management, financial management andreporting, information systems management and support, insurance, legal andcompliance. Total expenses pursuant to the service plan were approximately$3.2 million, $13.0 million and $22.3 million during the years ended December 31,2006, 2005 and 2004, respectively. In addition, the Company incurred expensesof approximately $0.7 million, $1.5 million and $1.2 million with an affiliatedcompany for certain presentation center services during the years ended December 31,2006, 2005 and 2004, respectively. These expenses are included in service feeson the Consolidated Statements of Operations, net of approximately $0.2million, $1.1 million and $1.2 million of fees earned related to presentationcenter and library services provided by the Company to SGAI during the yearsended December 31, 2006, 2005 and 2004, respectively. The Company enteredinto a Transition Services Agreement with Société Générale in connection withthe IPO pursuant to which the companies agreed to provide each other certainadministrative and support services and other assistance consistent with alimited number of the services provided before the separation. Pursuant to theTransition Services Agreement, the Company has also agreed to provide SociétéGénérale various services that have previously been provided by the Company toSociété Générale, including merchant banking oversight services. SociétéGénérale will provide services to the Company, including, facilitiesmanagement, business continuity management, certain legal services andlitigation management services and access to Société Générale data rooms ande-mail archives.

Certaincosts and services, which include real estate, project management and premisesand securities maintenance through the date of the IPO were allocated to theCompany by Société Générale. The total amount allocated wasapproximately $7.3 million, $12.5 million and $12.5 million during the yearsended December 31, 2006, 2005 and 2004, respectively, and are reported in occupancy and equipment onthe Consolidated Statements of Operations. In connection with the IPO, theCompany entered into asub-lease agreement with Société Générale, related to the Company’s New York office, which is in place until September 30,2013.

F-28

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

As amember of the NYSE, the Company incurs a monthly membership fee based ontransaction volume. NYSE membership fees were $1.1 million, $1.7 millionand $1.1 million during the years ended December 31, 2006, 2005 and 2004,respectively. Pursuant to the Company’sclearing agreement with SGAS, portions of these fees were recoverable. Therecoverable portion of these fees totaled approximately $0.4 million,$0.8 million and $0.2 million during the years ended December 31, 2006,2005 and 2004, respectively. The Companyreports these exchange membership fees in other expenses on the ConsolidatedStatements of Operations, net of recoveries.

Prior to the IPO, SociétéGénérale provided letters of credit and performance guarantees on the Company’sbehalf and the Company provided performance guarantees to Société Générale forcertain clients of the Company’s underwriting business which were also clientsof Société Générale’s corporate banking business. Expenses under theseperformance guarantees amounted to approximately $0.3 million,$0.1 million, and $0.1 million during the years ended December 31,2006, 2005 and 2004, respectively, and are included in other expense in theConsolidated Statements of Operations.

**13.**   Employee Benefits

**Defined Contribution Plans**

***The Company sponsors a 401(k) Savings Plan (the “401(k)Plan”), which is a defined contribution plan. Employees are entitled to participate, based upon certain eligibilityrequirements as defined by the 401(k) Plan. The Company provides matching contributions for certain employees thatare equal to a specified percentage of the eligible participant’s contributionas defined by the 401(k) Plan.  Theexpenses relating to this plan totaled approximately $0.6 million, $0.7million, and $0.9 million for the years ended December 31, 2006, 2005, and2004, respectively, and are included in employee compensation and benefits onthe Consolidated Statements of Operations.***

***The Company also sponsors a defined contribution plan forits Geneva and London employees. Contributions made for these plans wereapproximately $0.4 million, $0.5 million, and $0.5 million for the years endedDecember 31, 2006, 2005, and 2004, respectively, and are included in employeecompensation and benefits on the Consolidated Statements of Operations.***

**Deferred and Other Compensation Plans**

***Prior to the IPO, the Company required selected employees todefer a portion of their performance related compensation in the form of aFidelity Bonus (the ‘‘Fidelity Bonus’’). The Fidelity Bonus was announced atthe time all other bonuses were announced and vested ratably over a three-yearperiod. Participants were entitled to a rate of return on their Fidelity Bonusamount based on a hypothetical investment in various alternative investmentvehicles.  As a result of the IPO, all ofthe Company’s employees under the plan became fully vested and certainemployees were paid out in full. Participants who deferred the distribution oftheir vested amounts will be paid out in accordance with the plan’s originaldistribution schedule.  Expenses relatedto this plan are comprised of both the vesting of the deferred amounts and anychange in value based on the performance of the investment alternativesselected by the participants. The Company recognized compensation expense ofapproximately $10.3 million, $8.2 million, and $6.6 million for the years endedDecember 31, 2006, 2005, and 2004, respectively. All of these charges areincluded in employee compensation and benefits on the Consolidated Statementsof Operations. The Company has recorded liabilities of approximately $3.2million and $13.2 million as of December 31, 2006 and 2005, respectively, whichare included in employee compensation and benefits payable on the ConsolidatedStatements of Financial Condition.***

F-29

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

***Prior to the IPO, Société Générale had sponsored a voluntarydeferred compensation plan for certain of the Company’s key executives (the‘‘Deferred Compensation Plan’’). The Company’s employees ceased contributing tothe Deferred Compensation Plan in 2003, and no further contributions were madethereafter. Participants were allowed to make hypothetical investments invarious alternative investment funds and the corresponding liability fluctuatedbased on the performance of those hypothetical investments. The Companyrecognized compensation expense of approximately $1.5 million, $3.2 million and$4.0 million for the years ended December 31 2006, 2005 and 2004, respectively.This expense is included in employee compensation and benefits on theConsolidated Statements of Operations. The Company recorded a liability ofapproximately $44.8 million at December 31, 2005, which is included in employeecompensation and benefits payable on the Consolidated Statement of FinancialCondition. This liability was joint and several with Société Générale. As aresult of the IPO and pursuant to the Separation Agreement, Société Généraleassumed the remaining obligations under the plan and retains all liability forfuture payments thereunder. The Company invested in corporate owned lifeinsurance to economically hedge certain aspects of the Deferred CompensationPlan. At December 31, 2005, the cash surrender value of the corporate ownedlife insurance was approximately $35.2 million and is included in other assetson the Consolidated Statement of Financial Condition. Changes in the cashsurrender value of corporate owned life insurance are included in employeecompensation and benefits on the Consolidated Statements of Operations. For theyears ended December 31, 2006, 2005 and 2004, the Company recognized increasesin the cash surrender value of approximately $1.2 million, $2.3 million, and$2.0 million, respectively. As a result of the IPO and pursuant to theSeparation Agreement, the Company transferred the cash surrender value ofcorporate owned life insurance to Société Générale. ***

***Prior to the IPO, Société Générale sponsored a plan enablingeligible employees of the Company to defer a portion of their annualperformance related compensation to make a hypothetical investment in analternative investment vehicle indexed to the performance of investments madein the SG Merchant Banking Fund L.P.  TheCompany had not made an equity investment in the SG Merchant Banking Fund L.P.,but its liability to its employees was based upon the performance of theirhypothetical investments. Changes in the Company’s liabilities to employeeswere approximately ($0.9) million, ($1.0) million, and $0.3 million for theyears ended December 31 2006, 2005 and 2004, respectively, and are included inemployee compensation and benefits on the Consolidated Statements ofOperations. The Company recorded a liability of approximately $3.9 million forthe year ended December 31, 2005, which is included in employee compensationand benefits payable on the Consolidated Statement of Financial Condition.Prior to the IPO, this liability was joint and several with Société Générale.As a result of the IPO and pursuant to the Separation Agreement, SociétéGénérale assumed the remaining obligations under the plan and retains allliability for future payments thereunder.***

***Prior to the IPO, the Company sponsored a plan enablingeligible employees to invest a portion of their performance relatedcompensation in SG Cowen Ventures I, L.P. Most plan participants met the U.S.Securities and Exchange Commission’s definition of an accredited investor andqualified to become limited partners of the fund. Upon payment of theperformance related compensation for the year in which the plan was offered,the Company had no further obligation to these accredited participants. Certainplan participants did not meet the requirements to be treated as an accreditedinvestor, and accordingly were permitted to make a hypothetical investment withpre-tax dollars in the fund. The Company had not made an equity investment inSG Cowen Ventures I, L.P., but its liability to these non-accredited employeeswas based upon the performance of their hypothetical investment. Changes in theCompany’s liabilities to employees were approximately $0.04 million, $0.1million, and ($0.8) million for the years ended December 31, 2006, 2005 and2004 respectively, and are included in employee compensation and benefits***

F-30

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

***Prior to the IPO, certain of the Company’s employees participated in and receivedawards from the SG Corporate and Investment Banking Partnership.The participants in the partnership were selected every year and entitled toreceive an amount determined based on the net income of Société Générale’sCorporate and Investment Banking division. Participants were eligible toreceive the award only if certain return on equity goals were met in thepartnership year. To the extent awards were earned, they were subject to a fouryear cliff vest. The Company’s allocation of these compensation charges totaledapproximately $1.0 million, $0.4 million and $1.1 million for the years endedDecember 31, 2006, 2005 and 2004, respectively. All of these charges areincluded in employee compensation and benefits on the Consolidated Statementsof Operations. As a result of theIPO, the Company’s employee participants under the partnership became fullyvested and were paid out in full.***

**14.**   Stock-BasedCompensation

***Stock-based awardsissued by Cowen Group, Inc.***

Upon becoming a publiccompany, the Company established the 2006 Equity and Incentive Plan (The “Plan”).The Plan permits the grant of options, shares, restricted stock units and otherequity based awards to its employees, consultants and directors for up to4,725,000 shares of common stock. On July 12, 2006, the Company grantedoptions to purchase 1,125,000 shares of the Company’s stock and 2,100,000restricted shares. The options were granted to employees of the Company with anexercise price equal to the IPO price of $16.00. The options generally becomeexercisable upon the completion of a five-year vesting period and expire sevenyears from the date of grant. The restricted shares generally vest over fiveyears.

The Company measurescompensation cost for these awards according to the fair value methodprescribed by FAS 123R. In accordance with the expense recognition provisionsof FAS 123R, unearned compensation associated with share-based awards withgraded vesting periods is amortized on an accelerated basis over the vestingperiod of the option or award.

The compensation cost thathas been expensed for these awards was approximately $5.3 million for the yearended December 31, 2006. An income tax benefit of $2.3 million wasrecognized during the year ended December 31, 2006.

The fair value of eachoption award is estimated on the date of grant using a Black-Scholes optionvaluation model that uses the following assumptions:

Expected volatility—Basedon the lack of historical data for the Company’s own shares, the Company basedits expected volatility on a representative peer group that took into accountthe criteria outlined in SEC Staff Accounting Bulletin No. 107 (“SAB 107”):industry, market capitalization, stage of life cycle and capital structure.

Expected term—Expectedterm represents the period of time that options granted are expected to beoutstanding. The Company elected to use the “simplified” calculation methodaccording to the provisions of SAB 107 as applicable to companies that lackextensive historical data. The mid-point between the vesting date and thecontractual expiration date is used as the expected term under this method.

F-31

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

Risk free rate—Therisk-free rate for periods within the expected term of the option is based onthe interest rate of a traded zero-coupon U.S. Treasury bond with a term equalto the options’ expected term on the date of grant.

Dividend yield—The Companyhas not paid and does not expect to pay dividends in the future. Accordingly,the assumed dividend yield is 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 ofrestricted stock is determined based on the number of shares granted and thequoted price of the Company’s common stock on the date of grant.

Thefollowing table summarizes the Company’s stock option activity for the yearended December 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, through December 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.

Thefollowing table summarizes the Company’s nonvested restricted shares activityfor the year 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-32

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

As of December 31,2006, there was $28.1 million of unrecognized compensation cost related to theCompany’s grants of nonvested restricted shares. Unrecognized compensation costrelated to nonvested restricted shares is expected to be recognized over aweighted-average period of 2.35 years. None of the nonvested restricted sharesvested during the period ended December 31, 2006.

There have been nomodifications to any awards granted under the Plan during the year ended December 31,2006.

During the year ended December 31,2006 the Company issued 9,792 restricted stock units to non-employee directorswhich were immediately vested. The fair value at the date of grant of arestricted stock unit was $15.32.

***Stock-based awardsissued by Société Générale***

Prior to the IPO, certainof the Company’s employees were granted awards under Société Générale’s variousstock incentive plans. Société Générale sponsors an Employee Stock PurchasePlan (“ESPP”), referred to as the SG International Group Savings Plan. Thisplan allowed employees to purchase Société Générale stock at a discount. TheCompany provided matching contributions to the ESPP, which were equal to aspecified percentage of the employees’ contribution, as defined by the ESPP. Beginningin 2005, the Company ceased providing matching contributions. Employee shareswere non-forfeitable when issued and accordingly are not subject to any vestingprovisions.

Also prior to the IPO,Société Générale granted certain employees of the Company options to purchaseshares of Société Générale stock. Such options were granted to employees of theCompany with exercise prices equal to the average of the opening trading priceof Société Générale shares on the Euronext Paris SA exchange during the 20trading days prior to the date of grant. Generally, the options becomeexercisable upon the completion of a three year vesting period and expire sevenyears from the date of grant.

All ofthe options under this plan became fully vested prior to the IPO. The Companyrecognized compensation expense for these awards of $0.1 million,$0.1 million and $0.4 million for the years ended December 31,2006, 2005 and 2004, respectively which are included in employee compensationand benefits on the Consolidated Statements of Operations.

**15.**   Income Taxes

The taxable results of theCompany’s U.S. operations were historically included in the consolidated incometax returns of SGAI through the IPO date. The tax results of the Company’s U.K.operations were historically included in the tax returns of SG London Branchthrough April 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.

F-33

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

Thecomponents of the Company’s income tax expense (benefit) for the years ended December 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 income taxes payable of approximately $1.8 million whichis included in accounts payable, accrued expenses and other liabilities on the ConsolidatedStatement of Financial Condition.

Thereconciliation of the Company’s federal statutory tax rate to the effective incometax rate for the years ended December 31, 2006, 2005 and 2004 is asfollows:

| ** **                              | ** ** | **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-34

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

Thecomponents of the Company’s deferred tax assets and liabilities as of December 31,2006 and 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 anddeferred tax liabilities are included in other assets and accounts payable,accrued expenses and other liabilities, respectively, on the Consolidated Statementsof Financial Condition.

As discussed in Note 1, onApril 23, 2004, Société Générale reorganized SGCSC into two separatesingle member limited liability broker-dealers: SG Cowen & Co., LLCand SGAS. As a result of the reorganization, the tax attributes, including netoperating loss carryforwards (“NOL”) of Cowen & Co., LLC weretransferred to SGAI. There is no financial statement impact for the Company asa result of the transfer since a full valuation allowance was reflected for theNOL attribute. The gross amount of the NOL transferred to SGAI as part of thereorganization totaled approximately $192.0 million.

For the period January 1,2004 through April 23, 2004 (the “Period”), the Company was taxable as acorporation. During the Period, the Company recognized alternative minimumfederal tax expense of $1.4 million and state and local tax expense of $0.4million based on federal taxable income of $69.6 million. The state and localtax expense for the period April 24, 2004 through December 31, 2004was $0.6 million.

The NOL as of December 31,2004 in the amount of $94.2 million consists of the NOL generated for the taxperiod from April 24, 2004 through December 31, 2004. The NOL as of December 31,2005 was $98.5 million prior to the IPO; a full valuation allowance wasestablished to offset the deferred tax assets primarily due to accumulated taxlosses through the IPO date.

In connection with theCompany’s separation from Société Générale, SGAI has retained such tax benefitsassociated with the IPO, including the Company’s net operating losses.

In 2006, a tax provisionof $4.5 million was recorded. The low effective tax rate is due to a netreversal in the valuation allowance primarily due to payments of deferredcompensation arrangements related to the IPO and pre-IPO amortization ofgoodwill. The valuation allowance is attributable to the portion oforganizational costs and director related restricted stock units that will betax deductible after December 31, 2008.

F-35

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

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

The Company has an irrevocable Letter of Credit for$5.0 million issued by the Bank of New York (“BONY”) at the primecommercial lending rate, expiring on July 12, 2008, supporting Cowen’sBoston office lease. The Company has another irrevocable Letter of Credit for$100 thousand issued by BONY at the prime commercial lending rate,expiring on July 26, 2008, supporting Cowen’s worker compensationinsurance with Safety National Casualty Corporation. As of December 31,2006, there were no amounts due related to these letters of credit.

The Company is engaged in various securitiesunderwriting, trading and brokerage activities servicing a diverse group ofdomestic and foreign corporations, and institutional investor clients. Asubstantial portion of the Company’s transactions are collateralized and areexecuted with and on behalf of institutional investors including other brokersor dealers, commercial banks, and other financial institutions. The Company’sexposure to credit risk associated with the nonperformance of these clients infulfilling their contractual obligations pursuant to securities transactionscan be directly impacted by volatile trading markets which may impair theclient’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 Company obtained securitiesunder resale agreements on terms which permit it to repledge or resell thesecurities to others. At December 31, 2005, the Company’s securities purchasedunder agreements to resell totaling $411.0 million were collateralized by securitiespledged with a fair value of approximately $411.0 million.

Securities sold, not yet purchased are recorded asliabilities in the Consolidated Statements of Financial Condition and havemarket risk to the extent that the Company, in satisfying its obligations, mayhave to purchase securities at a higher value than what is recorded insecurities sold, not yet purchased as of December 31, 2006.

Derivative contracts are financial instruments such asforwards, futures, swaps, warrants, or option contracts that derive their valuefrom underlying assets, reference rates, indices, or a combination thereof. Aderivative instrument generally represents future commitments to purchase orsell financial instruments at specified terms on a specified date, or toexchange currency or interest payment flows based on contractual or notionalamounts. Derivatives often are referred to as off-balance-sheet instrumentsbecause neither their notional amounts nor the underlying instruments arereported in the Consolidated Statements of Financial Condition. Instead, fairvalues related to the derivative transactions are reported in the ConsolidatedStatements of Financial Condition. Changes in the fair value of derivatives arereported in principal transactions on the Consolidated Statements ofOperations.

Derivatives are subject to various risks similar toother financial instruments, including market, credit and operational risk. Inaddition, the Company may be exposed to legal risks related toderivative activities, including the possibility a transaction may beunenforceable under applicable law. The risks of derivatives should not beviewed in isolation, but rather should be considered on an aggregate basisalong with the Company’s other trading-related activities. The Company managesthe risks associated with derivatives on an aggregate basis along with therisks associated with market-making activities in cash instruments, as part of theCompany’s firm-wide risk management policies.

The Company usesU.S. Treasury futures and listed options to economically hedge proprietarytrading positions. In addition, the Company uses listed options for proprietarytrading activities.  Futures contractsare executed on an exchange, and cash settlement is made on a daily basis formarket movements. As a 

F-36

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

writerof options, the Company receives a premium in exchange for giving thecounterparty the right to buy or sell the security at a future date at acontracted price. Warrants provide an option to the holder to purchasesecurities from the issuer. Credit default swaps represent agreements in whichone party pays a fixed fee in return for a payment by the other partycontingent upon a specified default event relating to an underlying referenceasset 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, andwere de 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 ofDecember 31, 2006 and 2005, the fair value of the Company’s derivativefinancial instruments was 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.

*Common stock*

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 prior distributionrights of the Company’s preferred stock, if any, then outstanding. The holdersof the common stock have no preemptive rights, conversion rights or othersubscription 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 endedDecember 31, 2006, the Company received 11,528 shares into treasuryas a result of forfeitures related to the 2006 Equity and Incentive Plan.

***Preferred stock***

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

F-37

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

eachseries, which may be greater than the rights associated with the common stock.It is not possible to state the actual effect of the issuance of any shares ofpreferred stock upon the rights of holders of common stock until the Company’sboard of directors determines the specific rights of the holders of preferredstock. However, the effects may include the following: restricting dividends onits common stock, diluting the voting power of its common stock, impairing theliquidation rights of its common stock and delaying or preventing a change incontrol of the Company without further action by its stockholders.

**18.**   EarningsPer Share

The Company calculates itsbasic 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 was creditedto additional paid-in capital assuming vesting and delivery of the restrictedshares. The tax benefit is the amount resulting from a tax deduction forcompensation in excess of compensation expense recognized for financialstatement reporting purposes. In applying the treasury stock method to assumeconversion of potentially dilutive stock options, there was no incrementaldilutive effect of options through December 31, 2006.

F-38

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

Thecomputation of earnings 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.**   RegulatoryRequirements

As a registered broker-dealer, Cowen is subject to theUniform Net Capital Rule 15c3-1 of the Securities Exchange Act of1934. Under the alternative method permitted by this Rule, Cowen’s net capital,as defined, is $1.0 million. Cowen is not permitted to withdraw equity ifcertain minimum net capital requirements are not met. As of December 31,2006, Cowen had net capital of approximately $54.4 million, which wasapproximately $53.4 million in excess of its net capital requirement of $1.0million.

Pursuant to an exemption under Rule 15c3-3(k)(2)(ii),Cowen is not required to calculate a reserve requirement and segregate fundsfor the benefit of customers since it clears its securities transactions on afully disclosed basis and promptly transmits all customer funds and securitiesto the clearing broker-dealer which carries the accounts, maintains andpreserves such books and records pertaining to them pursuant to Rules 17a-3and 17a-4.

The Company rebates a portion of its commissions backto its customers. Under Rule 15c3-1(a)(2)(iv), it is required tomaintain a segregated bank account where it issues payments to reimburse itscustomers. At December 31, 2005, approximately $1.1 million has beensegregated in a special account for the exclusive benefit of customers. Therewas no amount required to be segregated in a special account for the exclusivebenefit of customers at December 31, 2006.

Proprietary balances of introducing brokers (“PAIB”)held at the clearing broker are considered allowable assets for net capitalpurposes, pursuant to agreements between Cowen and the clearing broker, whichrequire, among other things, that the clearing broker performs computations forPAIB and segregates certain balances on behalf of 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’s financial resourcesof approximately $4.4 million exceeded the minimum requirement of $3.3 millionby approximately $1.1 million.

**20.**   SubsequentEvents

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

F-39

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**SupplementalFinancial 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,**               | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2006** | ** ** | **2006** | ** ** | **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,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2005**           | ** ** | **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-40

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by 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:  March 30, 2007

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and as of the datesindicated.
|                                     | **Name** | ** **                                                                | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|-------------------------------------|----------|---------------------------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|------------|
| /s/  KIM S. FENNEBRESQUE            |     | Chairman, Chief  Executive Officer                                        |       | March 30,  2007 |      |
| Kim S.  Fennebresque                |     | and President (principal executive officer)                               |       |                 |      |
| /s/ THOMAS  K. CONNER               |     | Chief Financial Officer  and                                              |       | March 30,  2007 |      |
| Thomas K. Conner                    |     | Treasurer (principal financial officer and principal  accounting officer) |       |                 |      |
|                                |     |                                                                      |       |                 |      |
| /s/  STEVEN KOTLER                  |     | Director                                                                  |       | March 30,  2007 |      |
| Steven  Kotler                      |     |                                                                      |       |                 |      |
| /s/  JEFFREY KURZWEIL               |     | Director                                                                  |       | March 30,  2007 |      |
| Jeffrey  Kurzweil                   |     |                                                                      |       |                 |      |
| /s/  PHILIP B. POOL, JR.       |     | Director                                                                  |       | March 30,  2007 |      |
| Philip  B. Pool, Jr.           |     |                                                                      |       |                 |      |
| /s/  L. THOMAS RICHARDS             |     | Director                                                                  |       | March 30,  2007 |      |
| L.  Thomas Richards                 |     |                                                                      |       |                 |      |
| /s/  JOHN E. TOFFOLON, JR.     |     | Director                                                                  |       | March 30,  2007 |      |
| John  E. Toffolon, Jr.         |     |                                                                      |       |                 |      |
| /s/  CHARLES W.B. WARDELL, III |     | Director                                                                  |       | March 30,  2007 |      |
| Charles  W.B. Wardell, III     |     |                                                                      |       |                 |      |

 

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**Exhibit Index**

| Exhibit No. | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                | ** ** | ** ** |
|------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|             | 3.1        |       |       | Amended and Restated  Certificate of Incorporation (incorporated by reference from Exhibit 3.1  on Form 10-Q for the quarter ended June 30, 2006)                                                                                                                                               |
|             | 3.2        |       |       | Amended and  Restated Bylaws (incorporated by reference from Exhibit 3.2 on  Form 10-Q for the quarter ended June 30, 2006)                                                                                                                                                                     |
|             | 4.1        |       |       | Specimen Common  Stock Certificate (incorporated by reference from Exhibit 4.1 on  Form S-1/A filed on June 12, 2006)                                                                                                                                                                           |
|             | 4.2        |       |       | Stockholders  Agreement between SG Americas Securities Holdings, Inc. and Cowen  Group, Inc. (incorporated by reference from Exhibit 4.1 on  Form 10-Q for the quarter ended June 30, 2006)                                                                                      |
|             | 10.1       |       |       | Separation  Agreement among Société Générale, SG Americas, Inc., SG Americas  Securities Holdings, Inc., Cowen and Company, LLC and Cowen  Group, Inc. (incorporated by reference from Exhibit 10.1 on  Form 10-Q for the quarter ended June 30, 2006)       |
|             | 10.2       |       |       | Tax Matters  Agreement among SG Americas, Inc., SG Americas Securities  Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.  (incorporated by reference from Exhibit 10.2 on Form 10-Q for  the quarter ended June 30, 2006)                                            |
|             | 10.3       |       |       | Employment  Agreement of Kim S. Fennebresque (incorporated by reference from  Exhibit 10.3 on Form S-1/A filed on June 12, 2006)*                                                                                                                                                               |
|             | 10.4       |       |       | 2006 Equity and  Incentive Plan (incorporated by reference from Exhibit 4.1 on  Form S-1/A filed on June 12, 2006)*                                                                                                                                                                             |
|             | 10.5       |       |       | Sublease, dated  as of December 19, 2005, between Société Générale and SG  Cowen & Co., LLC (incorporated by reference from Exhibit 10.5  on Form S-1 filed on March 21, 2006)                                                                                |
|             | 10.6       |       |       | Lease, dated as  of October 29, 1993, between Rock-McGraw, Inc. and Société Générale  (incorporated by reference from Exhibit 10.5(a) on Form S-1/A  filed on May 17, 2006)                                                                                  |
|             | 10.7       |       |       | Supplemental  Indenture, dated as of May 5, 1998, between Rock-McGraw, Inc. and  Société Générale (incorporated by reference from  Exhibit 10.5(a)(i) on Form S-1/A filed on May 17,  2006)                                                                  |
|             | 10.8       |       |       | Master Services  Agreement, dated as of January 21, 2005, between SG Cowen &  Co., LLC and Savvis Communications Corp. (incorporated by reference from  Exhibit 10.6 on Form S-1/A filed on May 17, 2006)                                                                         |
|             | 10.9       |       |       | Services  Agreement, dated as of December 6, 2004, between SG Cowen &  Co., LLC and Hewlett-Packard Company (incorporated by reference from  Exhibit 10.7 on Form S-1/A filed on May 17, 2006)                                                                                    |
|             | 10.10      |       |       | Indemnification  Agreement among Société Générale, SG Americas Securities Holdings, Cowen  and Company, LLC and Cowen Group, Inc. (incorporated by reference from  Exhibit 10.4 on Form 10-Q for the quarter ended June 30,  2006)                                |
|             | 10.11      |       |       | Employee Matters  Agreement among Société Générale, SG Americas, Inc., SG Americas  Securities Holdings, Inc., Cowen and Company, LLC and Cowen  Group, Inc. (incorporated by reference from Exhibit 10.5 on Form 10-Q  for the quarter ended June 30, 2006) |
|                  |            |            |            |                                                                                                                                                                                                                                                                                                                |            |            |  |  |

E-1

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|        | 10.12 |   |   | Transition  Services Agreement among Société Générale, SG Americas, Inc., SG  Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen  Group, Inc. (incorporated by reference from Exhibit 10.6 on  Form 10-Q for the quarter ended June 30, 2006) |
|--------|-------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.13 |   |   | Escrow Agreement  among SG Americas Securities Holdings, Inc., Cowen and  Company, LLC, Cowen Group, Inc. and the escrow agent (incorporated  by reference from Exhibit 10.7 on Form 10-Q for the quarter  ended June 30, 2006)                                                |
|   | 10.14 |   |   | Form of  Director Award Agreement (incorporated by reference from Exhibit 99.1 on  Form 8-K filed on September 14, 2006)*                                                                                                                                                                     |
|   | 10.15 |   |   | Form of 2006  Equity Award Agreement for Executive Officers (filed herewith)*                                                                                                                                                                                                                                |
|   | 10.16 |   |   | Employment  Agreement of J. Kevin McCarthy (filed herewith)*                                                                                                                                                                                                                                                      |
|   | 10.17 |   |   | Form of 2006  Executive Incentive Award Agreement (filed herewith)*                                                                                                                                                                                                                                               |
|   | 10.18 |   |   | Form of 2006  Incentive Award Agreement with Kim S. Fennebresque (filed herewith)*                                                                                                                                                                                                                                |
|   | 21.1  |   |   | List of Subsidiaries  of Cowen Group, Inc. (filed herewith)                                                                                                                                                                                                                                                  |
|   | 31.1  |   |   | Certification of  CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                |
|   | 31.2  |   |   | Certification of  CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                |
|   | 32    |   |   | Certification of CEO and  CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (furnished  herewith)                                                                                                                                                                                                    |

 

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*                    Signifiesmanagement contract or compensatory plan or arrangement.

E-2

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