k1093007.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2007

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           

Commission file number 1-9109

RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Florida
 
No. 59-1517485
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

880 Carillon Parkway, St. Petersburg, Florida
 
33716
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code
(727) 567-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 Par Value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
 
 
(Title of class)
 

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer xAccelerated filer oNon-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
No x
 
As of March 31, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold was $2,848,369,151.

The number of shares outstanding of the registrant’s common stock as of November 19, 2007 was 120,051,495.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held February 14, 2008 are incorporated by reference into Part III.






 
RAYMOND JAMES FINANCIAL, INC.
 
   
Page
PART I
   
     
Item 1
2
Item 1A
10
Item 1B
12
Item 2
12
Item 3
12
Item 4
12
     
PART II
   
     
Item 5
13
Item 6
14
Item 7
15
Item 7A
37
Item 8
42
Item 9
81
Item 9A
81
Item 9B
84
     
PART III
   
     
Item 10
84
Item 11
84
Item 12
84
Item 13
84
Item 14
84
     
PART IV
   
     
Item 15
85
 
87















Table of Contents
PART I

ITEM 1.     BUSINESS

Raymond James Financial, Inc. (“RJF”), the parent company of a business established in 1962 and a public company since 1983, is a holding company headquartered in Florida whose subsidiaries are engaged in various financial services businesses predominantly in the United States of America (“U.S.”) and Canada. Its principal subsidiaries include Raymond James & Associates, Inc. (“RJA”), Raymond James Financial Services, Inc. (“RJFS”), Raymond James Ltd. ("RJ Ltd."), Eagle Asset Management, Inc. (“Eagle”), Heritage Asset Management, Inc. (“Heritage”) and Raymond James Bank, FSB (“RJBank”). All of these subsidiaries are wholly owned by RJF. RJF and its subsidiaries are hereinafter collectively referred to as the “Company”.

PRINCIPAL SUBSIDIARIES

RJF's principal subsidiary, RJA, is the largest full service brokerage and investment firm headquartered in the state of Florida and one of the larger retail brokerage firms in North America. RJA is a self-clearing broker-dealer engaged in most aspects of securities distribution, trading, investment banking and asset management. RJA also offers financial planning services for individuals and provides clearing services for RJFS, other affiliated entities and several unaffiliated broker-dealers. In addition, RJA has six institutional sales offices in Europe. RJA is a member of the New York Stock Exchange (“NYSE”), American Stock Exchange, and most regional exchanges in the U.S. It is also a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investors Protection Corporation (“SIPC”). FINRA was created in July 2007 through the consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the NYSE.

RJFS is an independent contractor broker-dealer subsidiary, and one of the largest independent contractor brokerage firms in the U.S. Financial Advisors affiliated with RJFS may offer their clients all products and services offered by RJA. RJFS is a member of FINRA and SIPC, but not of any exchange, as it clears all of its business on a fully disclosed basis through RJA.

RJ Ltd. is the Company's Canadian broker-dealer subsidiary which engages in both retail and institutional distribution and investment banking. RJ Ltd. is a member of the Toronto Stock Exchange (“TSX”) and the Investment Dealers Association of Canada ("IDA"). Its U.S. broker-dealer subsidiary is a member of FINRA.

Eagle is a registered investment advisor serving as the discretionary manager for individual and institutional equity and fixed income portfolios.

Heritage acts as the manager of the Company's internally sponsored Heritage Family of Mutual Funds.

RJBank provides traditional banking products and services to the clients of the Company's broker-dealer subsidiaries and to the general public.

BUSINESS SEGMENTS

The Company has eight business segments: Private Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets; Stock Loan/Borrow; Proprietary Capital and certain corporate activities combined in the "Other" segment. In the quarter ended September 30, 2007, management identified a new segment, Proprietary Capital, due to increased business activity. The results of this segment were previously included within Asset Management and Other. Reclassifications have been made in the segment disclosure for previous years to conform to this presentation. Financial information concerning RJF for each of the fiscal years ended September 30, 2007, September 30, 2006 and September 30, 2005 is included in the consolidated financial statements and notes thereto. Such information is hereby incorporated by reference.

PRIVATE CLIENT GROUP

The Company provides securities transaction and financial planning services to approximately 1.6 million client accounts through the branch office systems of RJA, RJFS, RJ Ltd., and Raymond James Investment Services Limited (“RJIS"), an independent contractor subsidiary in the United Kingdom. The Company's Financial Advisors offer a broad range of investments and services, including both third party and proprietary products, and a range of financial planning services. The Company charges sales commissions or asset-based fees for investment services it provides to its Private Client Group clients based on established schedules. Varying discounts may be given, generally based upon the client's level of business, the trade size, service level provided, and other relevant factors. In fiscal year 2007 asset-based fees represented 34% of the Private Client Group's commission and fees.

The majority of the Company’s U.S. Financial Advisors are also licensed to sell insurance and annuity products through its general insurance agency, Planning Corporation of America (“PCA”), a wholly owned subsidiary of RJA. Through the Financial Advisors of the Company's broker-dealer subsidiaries, PCA provides product and marketing support for a broad range of insurance products, principally fixed and variable annuities, life insurance, disability insurance and long-term care coverage.

The Company's Financial Advisors offer a number of professionally managed load mutual funds, as well as a selection of no-load funds. RJA and RJFS maintain dealer sales agreements with most major distributors of mutual fund shares sold through broker-dealers, including funds managed by Heritage. Commissions on such sales generally range up to 6% of the dollar value of the transaction. The majority of mutual fund purchases include a front-end sales charge or occur at net asset value (“NAV”) in fee-based accounts. In addition, there is typically an annual charge in the form of a fund expense.

2


                                                                                Private Client Group Securities Commission and Fees
                                                                                                      For the Fiscal Years Ended:

 
September 30,
% of
September 30,
% of
September 30,
% of
 
2007
Total
2006
Total
2005
Total
 
($ in 000's)
             
Listed Equities
$    188,120
13%
$    188,031
15%
$    178,148
16%
OTC Equities
56,847
4%
55,706
5%
55,946
5%
Fixed Income Products
36,414
3%
37,911
3%
41,596
3%
Mutual Funds
354,647
24%
294,586
23%
257,026
23%
Fee-Based Accounts
487,988
34%
390,691
31%
307,684
27%
Insurance and Annuity Products
233,878
16%
228,888
18%
222,657
20%
New Issue Sales Credits
94,005
6%
66,938
5%
69,234
6%
Total Private Client Group
           
Commissions And Fees
$ 1,451,899
100%
$ 1,262,751
100%
$ 1,132,291
100%

Net interest revenue in the Private Client Group is generated by customer balances, predominantly the earnings on margin loans and assets segregated pursuant to regulations less interest paid on customer cash balances. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this report for financial information regarding the Company’s net interest revenues.

Clients' transactions in securities are effected on either a cash or margin basis. In margin transactions, the client pays a portion of the purchase price, and RJA makes a loan to the client for the balance, collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed to finance margin transactions. The financing of margin purchases is an important source of revenue to RJA, since the interest rate paid by the client on funds loaned by RJA exceeds RJA's cost of short-term funds. The interest charged to a client on a margin loan is based on current interest rates and on the size of the loan balance in the client's account.

Typically, broker-dealers utilize bank borrowings and equity capital as the primary sources of funds to finance clients' margin account borrowings. RJA's primary source of funds to finance clients' margin account balances has been cash balances in brokerage clients' accounts (Client Interest Program), which are funds awaiting investment. In addition, pursuant to written agreements with clients, broker-dealers are permitted by the Securities and Exchange Commission (“SEC”) and FINRA rules to lend client securities in margin accounts to other financial institutions. SEC regulations, however, restrict the use of clients' funds derived from pledging and lending clients' securities, as well as funds awaiting investment, to the financing of margin account balances; to the extent not so used, such funds are required to be deposited in a special segregated account for the benefit of clients. The regulations also require broker-dealers, within designated periods of time, to obtain possession or control of, and to segregate, clients' fully paid and excess margin securities.

No single client accounts for a material percentage of this segment's total business.

Raymond James & Associates

RJA employs 1,087 Financial Advisors in 185 retail branch offices concentrated in the Southeast, Midwest, Southwest and Mid-Atlantic regions of the United States. RJA's Financial Advisors work in a traditional branch setting supported by local management and administrative staffs. The number of Financial Advisors per office ranges from one to 31. RJA Financial Advisors are employees and their compensation includes both commission payments and participation in the firm’s benefit plans (including Profit Sharing and ESOP programs). All investment program products are available to RJA Financial Advisors. Between 75 and 100 new Financial Advisors are trained each year at the Robert A. James National Training Center in St. Petersburg, Florida.

Raymond James Financial Services

RJFS supports 3,068 independent contractor Financial Advisors in providing products and services to their Private Client Group clients in 1,450 offices and 512 satellite offices throughout all 50 states. The number of Financial Advisors in RJFS offices ranges from one to 36. Independent contractors are responsible for all of their direct costs and, accordingly, are paid a larger percentage of commissions and fees. They are permitted to conduct other approved businesses unrelated to their RJFS activities such as offering insurance products, independent registered investment advisory services, and accounting and tax services, among others.

Through its Financial Institutions Division (“FID”), RJFS offers securities to customers of financial institutions such as banks, thrifts and credit unions. FID consists of 511 Financial Advisors in 206 branches and 191 satellite offices. RJFS also provides custodial, trading, and other services (including access to clients' account information and the services of the Asset Management segment) to unaffiliated independent investment advisors through its Investment Advisor Division (“IAD”). IAD’s 77 investment advisory firms are able to conduct daily business online with RJFS.

3



Raymond James Ltd.

RJ Ltd. is a self-clearing broker-dealer in Canada with its own operations and information processing personnel. RJ Ltd. has 18 private client branches with 186 employee Financial Advisors and 139 independent Financial Advisors in 48 branch locations.

Raymond James Investment Services Limited

The Company is a 75% shareholder of RJIS. This entity operates an independent contractor network in the United Kingdom, and currently has 41 branch locations and 81 Financial Advisors.

RJA – Operations and Information Technology

RJA's operations personnel are responsible for the execution of certain orders, processing of securities transactions, custody of client securities, support of client accounts, receipt, identification and delivery of funds and securities, compliance with certain regulatory and legal requirements and general office administration for most of the Company's securities brokerage operations. At September 30, 2007, RJA employed 716 persons in its operations areas who provide services primarily to the Private Client Group, but also support the Company's other segments.

The Company's businesses are supported by, and are dependent upon, an extensive system of electronic data processing. These computer systems are largely developed and maintained by the 795 employees in the Company’s information technology department.

Since the Company’s principal operations are located in St. Petersburg, the Company has continued to enhance certain aspects of its business continuity plan to deal with the possible impact of future hurricanes or other events by expanding its operational and processing capabilities in Southfield, Michigan. As of September 30, 2007, 23% and 6% of the employees in RJA’s operational and information technology areas, respectively, are located in Southfield. The Company’s business continuity plan is designed to permit continued operation of critical business functions in the event of disruptions to the St. Petersburg facility; all mission critical business departments have developed operational plans for such disruptions, and the Company has a staff which devotes their full time to monitoring and facilitating those plans. In that connection, the Company maintains computer capacity to support mission critical functions at its Southfield location, and conducts some of its daily operational activities from that site. Systems have been designed so that the Company can transfer all mission critical processing activities to Southfield, and personnel have been identified who are assigned responsibility for this role, including some personnel who will be required to temporarily relocate to Southfield to carry out these activities if necessary.

CAPITAL MARKETS

Capital Markets activities consist primarily of equity and fixed income products and services. No single client accounts for a material percentage of this segment's total business.

Institutional Sales

Institutional sales commissions account for a significant portion of this segment's revenue, which is fueled by a combination of general market activity and the Capital Markets group’s ability to identify attractive investment opportunities and promote those opportunities. The Company's institutional clients are serviced by the RJA and RJ Ltd. Institutional Equity Departments, the RJA Fixed Income Department, RJA’s European offices, and Raymond James Financial International Ltd, an institutional UK broker-dealer located in London. In providing securities brokerage services to its institutional clients, the Company charges its commissions on equity transactions based on trade size and the amount of business conducted annually with each institution. Fixed income commissions are based on trade size and the characteristics of the specific security involved.

Capital Markets Commissions
For the Fiscal Years Ended:

 
September 30,
% of
September 30,
% of
September 30,
% of
 
2007
Total
2006
Total
2005
Total
 
($ in 000's)
             
Equity
$ 210,343
83%
$ 217,840
84%
$ 193,001
74%
Fixed Income
44,454
17%
41,830
16%
66,431
26%
             
Total Commissions
$ 254,797
100%
$ 259,670
100%
$ 259,432
100%


4



The 121 domestic and overseas professionals in RJA's Institutional Equity Sales and Sales Trading Departments maintain relationships with over 1,270 institutional clients, principally in North America and Europe. In addition to the Company's headquarters in St. Petersburg, FL, RJA has institutional equity sales offices in New York City, Boston, Chicago, Los Angeles, London, Geneva, Brussels, Dusseldorf, Luxembourg and Paris. European offices also provide services to high net worth clients. RJ Ltd. has 30 institutional equity sales and trading professionals servicing predominantly Canadian institutional investors from offices in Montreal, Toronto and Vancouver.

RJA distributes to its institutional clients both taxable and tax-exempt fixed income products, primarily municipal, corporate, government agency and mortgage backed bonds. RJA carries inventory positions of taxable and tax-exempt securities in both the primary and secondary markets to facilitate its institutional sales activities. In addition to St. Petersburg, the Fixed Income Department maintains institutional sales and trading offices in New York City, Chicago and 19 other cities throughout the U.S. To assist institutional clients, the Fixed Income Research Group provides portfolio strategy analysis and municipal bond research.

Equity Research

The 46 domestic senior analysts in RJA's research department support the Company's institutional and retail sales efforts and publish research on approximately 670 companies. This research primarily focuses on U.S. companies in specific industries including Technology, Telecommunications, Consumer, Financial Services, Business Services, Healthcare, Real Estate, Energy and Industrial Growth. Proprietary industry studies and company-specific research reports are made available to both institutional and individual clients. RJ Ltd. has an additional 18 analysts who publish research on approximately 190 companies primarily focused in the Energy, Energy Services, Mining, Forest Products, Biotechnology, Technology, Consumer and Industrial Products, REIT and Income Trust sectors. These analysts, combined with 22 additional analysts located in Europe and Latin America, represent the Company's global research effort.

Equity Trading

Trading equity securities in the over-the-counter ("OTC") and TSX markets involves the purchase and sale of securities from/to clients of the Company or other dealers. Profits and losses are derived from the spreads between bid and asked prices, as well as market trends for the individual securities during the holding period. RJA makes markets in approximately 340 common stocks in the OTC market. Similar to the equity research department, this operation serves to support both the Company's institutional and Private Client Group sales efforts. The RJ Ltd. Institutional and Private Client Group trading desks not only support client activity, but also take proprietary positions. RJ Ltd. also provides specialist services through its Registered Traders in approximately 120 TSX listed common stocks.

Equity Investment Banking

The 62 professionals of RJA's Investment Banking Group, located in St. Petersburg with additional offices in Atlanta, New York City, Nashville, Chicago, Palo Alto, Dallas, and Houston, are involved in a variety of activities including public and private equity financing for corporate clients, and merger and acquisition advisory services. RJ Ltd.'s Investment Banking Group consists of 21 professionals located in Calgary, Toronto and Vancouver providing equity financing and financial advisory services to corporate clients. The Company's investment banking activities provide a comprehensive range of strategic and financial advisory services tailored to our clients’ business evolution life cycle and backed by our strategic industry focus.

Syndicate

The Syndicate department consists of 8 RJA and 3 RJ Ltd. professionals who coordinate the marketing, distribution, pricing and stabilization of lead and co-managed equity underwritings. In addition to managed and co-managed offerings, this department coordinates the firm's syndicate and selling group activities in transactions managed by other investment banking firms.

Fixed Income Trading

RJA trades both taxable and tax-exempt fixed income products. The 29 taxable and 28 tax-exempt RJA fixed income traders purchase and sell corporate, municipal, government, government agency, and mortgage backed bonds, asset backed securities, preferred stock and certificates of deposit from/to clients of the Company or other dealers. RJA enters into future commitments such as forward contracts and “to be announced” securities (e.g. securities having a stated coupon and original term to maturity, although the issuer and/or the specific pool of mortgage loans is not known at the time of the transaction). Proprietary trading positions are also periodically taken by RJA for various purposes. In addition, a subsidiary of RJF, RJ Capital Services Inc., participates in the interest rate swaps market as a principal, both for economically hedging RJA fixed income inventory and in transactions with customers.

5



Fixed Income Investment Banking

Fixed income investment banking includes debt underwriting and public finance activities. The 45 professionals in the RJA Public Finance division operate out of 11 offices (located in St. Petersburg, Birmingham, Boston, New York City, Chicago, Detroit, Atlanta, Nashville, Helena (Montana), Orlando, and San Antonio). The Company acts as a financial advisor or underwriter to various municipal agencies or political subdivisions, housing developers and non-profit health care institutions.

RJA acts as an underwriter or selling group member for corporate bonds, mortgage backed securities, agency bonds, preferred stock and unit investment trusts. When underwriting new issue securities, RJA agrees to purchase the issue through a negotiated sale or submits a competitive bid.

Raymond James Tax Credit Funds, Inc.

Raymond James Tax Credit Funds, Inc. (“RJTCF”) is the general partner or managing member in a number of limited partnerships and limited liability companies which invest in multi-family real estate entities that qualify for tax credits under Section 42 of the Internal Revenue Code. RJTCF has been an active participant in the tax credit program since its inception in 1986, and currently focuses on tax credit funds for institutional investors that invest in a portfolio of tax credit eligible multi-family apartments. The investors’ expected return on investment from these funds are primarily derived from tax credits and tax losses that investors can use to reduce their federal tax liability. During fiscal 2007, RJTCF invested over $374.9 million for large institutional investors in 90 real estate transactions for properties located throughout the U.S. From inception, RJTCF has raised over $1.7 billion in equity and has sponsored 49 tax credit funds, with investments in 1,150 tax credit apartment properties in 42 states.

ASSET MANAGEMENT

The Company's asset management segment includes proprietary asset management operations, internally sponsored mutual funds, several small proprietary hedge funds, non-affiliated private account portfolio management alternatives, and other fee based programs. No single client accounts for a material percentage of this segment's total business.

Eagle Asset Management, Inc.

Eagle is a registered investment advisor with $14.5 billion under management at September 30, 2007, including approximately $2.4 billion for the Heritage Family of Mutual Funds. Eagle offers a variety of equity and fixed income objectives managed by six portfolio management teams. Eagle's clients include individuals, pension and profit sharing plans, foundations, endowments, variable annuities and mutual fund portfolios. These accounts are managed on a discretionary basis in accordance with the investment objective(s) specified by the client. Eagle manages $7.6 billion for institutional clients, including funds managed as a sub-advisor to variable annuity accounts and mutual funds (including Heritage), and $6.9 billion for private client accounts. Eagle also manages non-discretionary assets of $147 million.

Eagle's investment management fee for discretionary accounts generally ranges from .20% to 1.00% of asset balances per year depending upon the size and investment objective(s) of the account.

Heritage Asset Management, Inc.

Heritage serves as investment advisor to the Heritage Family of Mutual Funds and certain short-term fixed income accounts. Heritage also serves as transfer agent for all of the funds and as fund accountant for all Heritage funds except the International Equity Fund. Heritage internally manages the largest of its portfolios, the Heritage Cash Trust Money Market Fund, which has $4.3 billion in assets. Portfolio management services for the Core Equity Fund, Diversified Growth Fund and the Mid-Cap Stock Fund are sub-advised by Eagle. Portfolio management for the Small Cap Stock Fund is sub-advised by both Eagle and the Company's Awad Asset Management subsidiary (“Awad”). Unaffiliated advisors are utilized for the Municipal Money Market Fund, Capital Appreciation Trust, High Yield Bond Fund, Growth and Income Fund, and the International Equity Fund.

Heritage also serves as an advisor to RJBank to make recommendations and monitor the Bank's liquid assets, investments in mortgages and mortgage related securities.

Total assets under management at September 30, 2007 were $10.1 billion, of which approximately $5.5 billion were money market funds.

Heritage Fund Distributors, Inc.

Heritage Fund Distributors, Inc. is a registered broker-dealer engaged in the distribution of the Heritage Family of Mutual Funds. Heritage Fund Distributors, Inc. is a wholly owned subsidiary of Heritage Asset Management.

6



Awad Asset Management, Inc.

Awad is a registered investment advisor that primarily manages small cap equity portfolios. At September 30, 2007, Awad had approximately $623 million under management, including approximately $225 million of the Heritage Small Cap Stock Fund. Awad's clients include individuals, pension and profit sharing plans, retirement funds and mutual fund portfolios. Accounts are managed on a discretionary basis in accordance with the investment objective(s) specified by the client. Management fees generally range from 0.27% to 1.00% of asset balances annually depending upon the size and investment objective(s) of the account.

Asset Management Services

RJA's Asset Management Services (“AMS”) Department manages several investment advisory programs. The primary advisory services offered are the Raymond James Consulting Services program, which offers a variety of both affiliated and non-affiliated advisors, and the Eagle High Net Worth program. Both programs maintain an approved list of investment managers, provide asset allocation model portfolios, establish custodial facilities, monitor performance of client accounts, provide clients with accounting and other administrative services, and assist investment managers with certain trading management activities. AMS earns fees generally ranging from 0.35% to 0.85% of asset balances per annum, a portion of which is paid to the investment managers who direct the investment of the clients' accounts. In addition, AMS also offers the Freedom program, where an investment committee within AMS manages portfolios of mutual funds on a discretionary basis. At September 30, 2007, these three programs had approximately $17.8 billion in assets under management, including approximately $2.7 billion managed by Heritage, Eagle and Awad.

Additional advisory programs offered through AMS are Passport, Ambassador, Opportunity, and the Managed Investment Programs. For these accounts, AMS provides quarterly performance reporting and other accounting and administrative services. Advisory services are provided by PCG Financial Advisors. Fees are based on the individual account size and are also dependent on the type of securities in the accounts. Total client fees generally range from 0.50% to 3.0% of assets, which are predominantly allocated to the Private Client Group. As of September 30, 2007, these programs had approximately $23.8 billion in assets.

In addition to the foregoing programs, AMS also administers fee-based programs for clients who have contracted for portfolio management services from nonaffiliated investment advisors that are not part of the Raymond James Consulting Services program.

RJFS offers an advisory fee based program similar to Passport called IMPAC. As of September 30, 2007, IMPAC had $9.4 billion in assets serviced by RJFS Financial Advisors.

Raymond James Trust Company
Raymond James Trust Company West

Raymond James Trust Company and Raymond James Trust Company West provide personal trust services primarily to existing clients of the broker-dealer subsidiaries. Portfolio management of trust assets is often subcontracted to the asset management operations of the Company. These two subsidiaries had a combined total of approximately $1.7 billion in client assets at September 30, 2007, including $77 million in the donor-advised charity known as the Raymond James Charitable Endowment Fund.

RAYMOND JAMES BANK, FSB

RJBank is a federally chartered savings bank, regulated by the Office of Thrift Supervision, which provides residential, consumer and commercial loans, as well as FDIC-insured deposit accounts, to clients of the Company's broker-dealer subsidiaries and to the general public. RJBank also purchases residential whole loan packages and is active in bank participations and corporate loan syndications. RJBank generates revenue principally through the interest income earned on the transactions noted above, offset by the interest expense it incurs on client deposits and on its borrowings. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this report for financial information regarding RJBank’s net interest revenues.

RJBank operates from a single branch location adjacent to the Company’s headquarters complex in St. Petersburg, Florida. Access to RJBank's products and services is available nationwide through the offices of its affiliated broker-dealers as well as through telephonic and electronic banking services. As of September 30, 2007, RJBank had total assets of $6.1 billion with $4.4 billion in loans. These loans are either originated or purchased by RJBank and include commercial and residential mortgage loans, as well as consumer loans. As of September 30, 2007, RJBank had total liabilities of $5.7 billion with $5.6 billion in deposits. These deposits consist predominately of cash balances swept from the investment accounts of RJA and RJFS clients. These balances are held in the FDIC insured Raymond James Bank Deposit Program administered by RJA. No single client accounts for a material percentage of the segment's total business.

EMERGING MARKETS

Raymond James International Holdings, Inc. (“RJIH”) currently has interests in joint ventures in Latin America and Turkey. These joint ventures operate securities brokerage, investment banking and asset management businesses. No single client accounts for a material percentage of this segment's total business.

7


STOCK LOAN/BORROW

This activity involves the borrowing and lending of securities from and to other broker-dealers, financial institutions and other counterparties, generally as an intermediary. The borrower of the securities puts up a cash deposit, commonly 102% of the market value of the securities, on which interest is earned. Accordingly, the lender receives cash and pays interest. These cash deposits are adjusted daily to reflect changes in current market value. The net revenues of this operation are the interest spreads generated. No single client accounts for a material percentage of this segment's total business.

PROPRIETARY CAPITAL

This segment consists of the Company’s principal capital and private equity activities including: various direct and third party private equity and merchant banking investments, short-term special situations and bridge investments (“Special Situations Investments”), Raymond James Employee Investment Funds I and II (the “EIF Funds”), and two private equity funds sponsored by the Company: Raymond James Capital Partners, L.P., a merchant banking limited partnership, and Ballast Point Ventures, L.P., a venture capital limited partnership (the “Funds”) and their management companies. The Company, through wholly owned subsidiaries, earns management fees for services provided to the Funds and participates in profits or losses through both general and limited partnership interests. Additionally, the Company incurs profits or losses as a result of direct merchant banking investments and Special Situations Investments. The EIF Funds are limited partnerships, for which the Company is the general partner, that invest in the merchant banking and private equity activities of the Company and other unaffiliated venture capital limited partnerships. The EIF Funds were established as compensation and retention measures for certain qualified key employees of the Company.

OTHER

This segment includes various corporate activities of Raymond James Financial, Inc.

COMPETITION

The Company is engaged in intensely competitive businesses. The Company competes with many larger, more well capitalized providers of financial services, including other securities firms, most of which are affiliated with major financial services companies, insurance companies, banking institutions and other organizations. The Company also competes with a number of firms offering on-line financial services and discount brokerage services, usually with lower levels of service, to individual clients. The Company competes principally on the basis of the quality of its associates, service, product selection, location and reputation in local markets.

In the financial services industry, there is significant competition for qualified associates. The Company's ability to compete effectively in its businesses is substantially dependent on its continuing ability to attract, retain, and motivate qualified associates, including successful Financial Advisors, investment bankers, trading professionals, portfolio managers and other revenue-producing or specialized personnel.

REGULATION

The following discussion sets forth some of the material elements of the regulatory framework applicable to the financial services industry and provides some specific information relevant to the Company. The regulatory framework is intended primarily for the protection of customers and the securities markets, depositors and the Federal Deposit Insurance Fund and not for the protection of creditors or shareholders. Under certain circumstances, these rules may limit the ability of the Company to make capital withdrawals from its broker-dealer subsidiaries.

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the Company’s business.

Broker-dealers are subject to regulations that cover all aspects of the securities business, including:

·  sales methods
·  trading practices
·  uses and safekeeping of clients' funds and securities
·  capital structure and financial soundness
·  record keeping
·  the conduct of directors, officers and employees
·  internal controls
·  insurance requirements

8



The financial services industry in the U.S. is subject to extensive regulation under federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Financial services firms are also subject to regulation by state securities commissions in those states in which they conduct business. RJA and RJFS are currently registered as broker-dealers in all 50 states. In addition, financial services firms are subject to regulation by various foreign governments, securities exchanges, central banks and regulatory bodies, particularly in those countries where they have established offices. The Company has offices in France, the United Kingdom, Germany, Switzerland, Belgium, Luxemburg, Turkey, British Virgin Islands, Canada and Latin America.

Much of the regulation of broker-dealers in the U.S. and Canada, however, has been delegated to self-regulatory organizations ("SROs"), principally FINRA, the IDA and other securities exchanges. These SROs adopt and amend rules (which are subject to approval by government agencies) for regulating the industry and conduct periodic examinations of member broker-dealers.

The SEC, SROs and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and can have an adverse impact on the reputation of a broker-dealer.

The Company's U.S. broker-dealer subsidiaries are required by federal law to belong to SIPC. When the SIPC fund falls below a certain amount, members are required to pay annual assessments of up to 1% of adjusted gross revenues. As a result of adequate SIPC fund levels, each of the Company's domestic broker-dealer subsidiaries was required to pay only the minimum annual assessment of $150 in fiscal 2007. The SIPC fund provides protection for securities held in customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. In December 2003, RJA joined with other major U.S. securities brokerage firms to form Customer Asset Protection Company (“CAPCO”), a licensed Vermont insurance company, to provide excess SIPC coverage. CAPCO provides account protection for the total net equity of client accounts of participating firms with no aggregate limit. CAPCO has received a financial strength rating of A+ from Standard and Poor’s. These coverages do not protect against market fluctuations.

RJ Ltd. is currently registered in all provinces and territories in Canada. The financial services industry in Canada is subject to comprehensive regulation under both federal and provincial laws. Securities commissions have been established in all provinces and territorial jurisdictions which are charged with the administration of securities laws. Investment dealers in Canada are also subject to regulation by SROs which are responsible for the enforcement of and conformity with securities legislation for their members and have been granted the powers to prescribe their own rules of conduct and financial requirements of members. RJ Ltd. is regulated by the securities commissions in the jurisdictions of registration as well as by the SROs, the IDA and Market Regulation Services Inc.

RJ Ltd. is required by the IDA to belong to the Canadian Investors Protection Fund ("CIPF"), whose primary role is investor protection. The CIPF may charge member firms assessments based on revenues and risk premiums. The CIPF provides protection for securities and cash held in client accounts up to CDN$1,000,000 per client with separate coverage of CDN$1,000,000 for certain types of accounts. This coverage does not protect against market fluctuations.

See Note 19 of the Notes to Consolidated Financial Statements for further information on SEC, FINRA and IDA regulations pertaining to broker-dealer regulatory minimum net capital requirements.
 
        The Company's investment advisory operations, including the Company-sponsored mutual funds, are also subject to extensive regulation. The Company's U.S. asset managers are registered as investment advisors with the SEC and are also required to make notice filings in certain states. Virtually all aspects of the asset management business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the asset management clients and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict an investment advisor from conducting its asset management business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed for a failure include the suspension of individual employees, limitations on the asset managers engaging in the asset management business for specified periods of time, the revocation of registrations, and other censures and fines. A regulatory proceeding, regardless of whether it results in a sanction, can require substantial expenditures and can have an adverse effect on the reputation of an asset manager.
 
        RJBank is subject to various regulatory capital requirements established by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on RJBank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, RJBank must meet specific capital guidelines that involve quantitative measures of RJBank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. RJBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require RJBank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets (as defined in the regulations). See Note 19 of the Notes to the Consolidated Financial Statements for further information and capital analysis.
 
         The Company's two state-chartered trust companies are subject to regulation by the states in which they are chartered. These regulations focus on, among other things, the soundness of internal controls in place at the trust companies.

 

9

 
        As a public company whose common stock is listed on the NYSE, the Company is subject to corporate governance requirements established by the SEC and NYSE, as well as federal and state law. Under the Sarbanes-Oxley Act, the Company is required to meet certain requirements regarding business dealings with members of the Board of Directors, the structure of its Audit Committee, and ethical standards for its senior financial officers. Under SEC and NYSE rules, the Company is required to comply with other standards of corporate governance, including having a majority of independent directors serve on its Board of Directors, and the establishment of independent audit, compensation and corporate governance committees.
 
         Under Section 404 of the Sarbanes-Oxley Act, the Company is required to complete an assessment of its internal controls over financial reporting and to obtain a report from its independent auditors regarding their opinion of the Company's internal control over financial reporting. This requirement imposes additional costs on the Company, reflecting internal staff and management time, as well as additional audit fees and fees for outside service providers and consultants since the Act went into effect.

OTHER INFORMATION MADE AVAILABLE BY THE COMPANY
 
        The Company's internet address is www.raymondjames.com. The Company makes available, free of charge, through links to the U.S. Securities and Exchange Commission website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Investors can find this information under “About Our Company – Investor Relations – Financial Reports – SEC Filings”. These reports are available through the Company’s website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The Company also makes available on its website its Annual Report to Shareholders and its proxy statements in PDF format under “About Our Company- Investors Relations – Financial Reports.”
 
        Additionally, the Company makes available on its website under “About Our Company – Investor Relations – Corporate Governance”, a number of its corporate governance documents. These include; the Corporate Governance Principles, the charters of the Audit Committee and the Corporate Governance, Nominating and Compensation Committee of the Board of Directors, the Senior Financial Officers’ Code of Ethics and the Codes of Ethics for Employees and the Board of Directors. Printed copies of these documents will be furnished to any shareholder who requests them. The information on the Company's websites are not incorporated by reference into this report.

Factors Affecting “Forward-Looking Statements”

From time to time, the Company may publish “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, are discussed in Item 1A, “Risk Factors” in this report. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.
 
Table of Contents
 
ITEM 1A.    RISK FACTORS

The Company’s operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect its business, financial condition, results of operations, cash flows, and the trading price of its common stock.

Economic and Political Developments and Their Impact on Securities Markets Could Adversely Affect the Company’s Business

The Company is engaged in various financial services businesses. As such, the Company is directly affected by general economic and political conditions, changes in the rate of inflation and the related impact on securities markets, fluctuations in interest and currency rates, investor confidence, and changes in volume and price levels of the securities markets. Severe market fluctuations or weak economic conditions could reduce the Company’s trading volume and net revenues and adversely affect its profitability.

The Company Faces Intense Competition

The Company is engaged in intensely competitive businesses. See the section entitled “Competition” of Item 1 of this report for additional information about the Company’s competitors. Competitive pressures experienced by the Company could have an adverse affect on its business, results of operations, financial condition and liquidity.

10



Regulatory and Legal Developments Could Adversely Affect the Company’s Business

The securities industry is subject to extensive regulation and broker-dealers are subject to regulations covering all aspects of the securities business. See the section entitled “Regulation” of Item 1 of this report for additional information regarding the Company’s regulatory environment and Item 3, “Legal Proceedings”, for a discussion of the Company’s legal matters. The Company could be subject to civil liability, criminal liability, or sanctions, including revocation of its subsidiaries’ registrations as investment advisors or broker-dealers, revocation of the licenses of its Financial Advisors, censures, fines, or a temporary suspension or permanent bar from conducting business, if it violates such laws or regulations. Any such liability or sanction could have a material adverse effect on the Company’s financial condition, results of operations, and business prospects. The Company’s banking operations also expose it to a risk of loss resulting from failure to comply with banking laws. In addition, the regulatory environment in which the Company operates frequently changes and has seen significant increased regulation in recent years. The Company may be adversely affected as a result of new or revised legislation or regulations, changes in federal, state or foreign tax laws, or by changes in the interpretation or enforcement of existing laws and regulations.

The Company’s Business Is Highly Dependent on Technology

The Company’s businesses rely extensively on electronic data processing and communications systems, and its continued success will depend upon its ability to successfully maintain and upgrade the capability of those systems and retain skilled information technology employees. Failure of those systems, which could result from events beyond the Company’s control, could result in financial losses, liability to clients and damage to the Company’s reputation.

The Company Is Exposed to Market Risk

The Company, directly and indirectly, is affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect the Company’s net interest margin – the difference between the yield the Company earns on its assets and the interest rate the Company pays for deposits and other sources of funding – which could in turn affect the Company’s net interest income and earnings. Market risk is inherent in the financial instruments associated with the Company’s operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Market conditions that may shift from time to time, thereby exposing the Company to market risk, include fluctuations in interest rates, equity prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.

The Company Is Exposed to Credit Risk

The credit quality of the Company’s loan and investment portfolios can have a significant impact on earnings. Credit risk is the risk of loss from a debtor’s inability to meet financial obligations in accordance with agreed upon terms. Risks associated with credit quality include adverse changes in the financial performance or condition of the Company’s debtors that could affect the debtors’ repayment of outstanding obligations, and that the strength of the U.S. economy may be different than expected resulting in deterioration in credit quality or a reduced demand for credit.

The Company Is Exposed to Operational Risk

The Company’s diverse operations are exposed to risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk exists in every activity, function, or unit of the Company, and includes: internal or external fraud, employment and hiring practices, an error in meeting a professional obligation, business disruption or system failures, and failed transaction processing. Also, increasing use of automated technology has the potential to amplify risks from manual or system processing errors, including outsourced operations. Damage to the Company’s reputation could also result from a significant operational loss.

The Company’s Operations Could Be Adversely Affected By Serious WeatherConditions

The Company’s principal operations are located in St. Petersburg, Florida. During 2004 and 2005, there was a significant increase in hurricane activity on the Gulf Coast which directly affected other parts of Florida. While the Company has a business continuity plan that permits significant operations to be conducted from its Southfield, Michigan location (see Item 1, “Business” in this report), the Company’s operations could be adversely affected by hurricanes or other serious weather conditions that could affect processing of transactions and communications. In addition, as a result of high levels of storm induced damage during these years in Florida and along the Gulf Coast, insurance coverage for wind and flood damage has become harder to obtain and substantially more expensive. As a consequence, the Company has been forced to pay more for the limited coverage it obtained and self-insure against these risks to a greater degree than in the past.

The Company’s Business is Dependent on Fees Generated from the Distribution of Financial Products and on Fees Earned from the Management of Client Accounts By Our Asset Management Subsidiaries

A large portion of the Company’s revenues are derived from fees generated from the distribution of financial products such as mutual funds and variable annuities. Changes in the structure or amount of the fees paid by the sponsors of these products could directly affect the Company’s revenues and profits.  Further, changes in market values or in the fee structure of asset management accounts could affect the Company’s revenues and profits.

11



Insurance Risks

The Company’s operations and financial results are subject to risks and uncertainties related to its use of a combination of insurance, self-insured retention and self-insurance for a number of risks, including, without limitation, property and casualty, workers’ compensation, general liability, and the Company-funded portion of employee-related health care benefits.

Other Risks

See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in this report regarding the Company’s exposure to, and approaches to managing, market risk, interest rate risk, equity price risk, credit risk, operational risk and regulatory and legal risk.
 
Table of Contents
 
ITEM 1B.     UNRESOLVED STAFF COMMENTS

Not applicable.
 
Table of Contents
 
ITEM 2.    PROPERTIES

The Company's headquarters is located on approximately 55 acres within the Carillon office park in St. Petersburg, Florida. The headquarters complex currently includes four main towers which encompass a total of 884,000 square feet of office space, the Raymond James Bank building, which is a 26,000-square-foot two-story building, and two five-story parking garages. At this location, the Company has the ability to add approximately 490,000 square feet of new office space. Raymond James also has 30,000 square feet of leased space near Carillon. The Company’s facilities are used to some extent for current operations of all segments. The Company relocated its Detroit, Michigan operations to a newly renovated 84,000 square foot building on 14 acres in Southfield, Michigan. The Company owns that real estate and has sold the 45,000 square foot building in Detroit that previously housed those operations.

The Company leases offices in various locations throughout the U.S. and in certain foreign countries. With the exception of a Company-owned RJA branch office building in Crystal River, FL, RJA branches are leased with various expiration dates through 2014. RJ Ltd. leases premises for main offices in Vancouver, Calgary, and Toronto and for branch offices throughout Canada. These leases have various expiration dates through 2013. RJ Ltd. does not own any land or buildings. See Note 13 to the Consolidated Financial Statements for further information regarding the Company's leases.

Leases for branch offices of RJFS, the independent contractors of RJ Ltd. and RJIS are the responsibility of the respective independent contractor Financial Advisors.
 
Table of Contents
 
ITEM 3.   LEGAL PROCEEDINGS

Raymond James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate, was assessed for the year 2001 approximately $7.6 million by the Turkish tax authorities. The authorities applied a significantly different methodology than in the prior year’s audit which the Turkish tax court affirmed. RJY is vigorously contesting most aspects of this assessment and has filed an appeal with the Turkish Counsel of State. A significant portion of the matters at issue involved the activities of an employee terminated in 2004. Audits of 2002 through 2004 are anticipated and their outcome is unknown in light of the change in methodology and the pending litigation. As such, the potential tax liability combined for these subsequent years could range from a few hundred thousand dollars to $7.5 million. The Company has recorded a provision for loss in its consolidated financial statements for its net equity interest in this joint venture. As of September 30, 2007, RJY had total capital of approximately $12.2 million, of which the Company owns approximately 73%.

The Company is a defendant or co-defendant in various lawsuits and arbitrations incidental to its securities business. The Company is contesting the allegations in these cases and believes that there are meritorious defenses in each of these lawsuits and arbitrations. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In the opinion of the Company's management, based on current available information, review with outside legal counsel, and consideration of amounts provided for in the accompanying consolidated financial statements with respect to these matters, ultimate resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and upon the level of income for such period.
 
Table of Contents
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

12


Table of Contents

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

The Company's common stock is traded on the NYSE under the symbol “RJF”. At November 19, 2007 there were approximately 14,000 holders of the Company's common stock. The following table sets forth for the periods indicated the high and low trades for the common stock (as adjusted for the three-for-two stock split in March 2006):

 
2007
2006
 
High
Low
High
Low
First Quarter
$ 33.63
$ 28.53
$ 25.72
$ 20.25
Second Quarter
32.52
27.38
31.45
24.47
Third Quarter
34.62
29.10
31.66
26.34
Fourth Quarter
36.00
28.65
30.57
26.45

See Quarterly Financial Information in Item 8 for the amount of the quarterly dividends paid.

13



The Company expects to continue paying cash dividends. However, the payment and rate of dividends on the Company's common stock is subject to several factors including operating results, financial requirements of the Company, and the availability of funds from the Company's subsidiaries, including the broker-dealer subsidiaries, which may be subject to restrictions under the net capital rules of the SEC, FINRA and the IDA; and RJBank, which may be subject to restrictions by federal banking agencies. Such restrictions have never limited the Company's dividend payments. (See Note 19 of the Notes to Consolidated Financial Statements for more information on the capital restrictions placed on RJBank and the Company's broker-dealer subsidiaries).

See Note 15 of the Notes to Consolidated Financial Statements for information regarding repurchased shares of the Company's common stock.
 
Table of Contents
 
ITEM 6.    SELECTED FINANCIAL DATA

 
Year Ended
 
September 30,
 
September 30,
 
September 30,
 
September 24,
September 26,
 
2007
 
2006
 
2005
 
2004
2003
 
(in 000’s, except per share data)
Operating Results:
               
                 
Gross Revenues
$   3,109,579
 
$   2,645,578
 
$ 2,168,196
 
$ 1,829,776
$ 1,497,571
Net Revenues
$   2,609,915
 
$   2,348,908
 
$ 2,050,407
 
$ 1,781,259
$ 1,451,960
Net Income
$      250,430
 
$      214,342
 
$    151,046
 
$    127,575
$      86,317
Net Income per
               
Share - Basic: *
$            2.17
 
$            1.90
 
$          1.37
 
$          1.16
$            .79
Net Income per
               
Share - Diluted: *
$            2.11
 
$            1.85
 
$          1.33
 
$          1.14
$            .78
                 
Weighted Average
               
Common Shares
               
Outstanding - Basic: *
115,608
 
112,614
 
110,217
 
110,093
109,236
Weighted Average
               
Common and Common
               
Equivalent Shares
               
Outstanding - Diluted: *
118,693
 
115,738
 
113,048
 
111,603
110,624
                 
Cash Dividends Declared
               
per Share *
$             0.40
 
$            0.32
 
$          0.21
 
$          0.17
$          0.16
                 
Financial Condition:
               
                 
Total Assets
$  16,254,168
 
$ 11,516,650
 
$ 8,369,256
 
$ 7,621,846
$ 6,911,638
Long-Term Debt
$       214,864
     **
$      286,712
     **
$    280,784
  **
$    174,223
$    167,013
                 
Shareholders' Equity
$    1,757,814
 
$   1,463,869
 
$ 1,241,823
 
$ 1,065,213
$    924,735
Shares Outstanding *
116,649
***
114,064
***
113,394
 
110,769
109,148
                 
Book Value per Share
               
at End of Period*
$           15.07
 
$          12.83
 
$        10.95
 
$          9.62
$          8.47
                 
*
2005, 2004 and 2003 amounts have been adjusted for the March 22, 2006 3-for-2 stock split and 2003 amounts have been adjusted for the March 24, 2004 3-for-2 stock split.
     
**
Includes loans payable related to investments by variable interest entities in real estate partnerships, which are non-recourse to the Company.
     
***
Excludes non-vested shares.
     


14

 
Table of Contents

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Company. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, the Company’s consolidated financial statements and accompanying notes to the consolidated financial statements.

The Company’s results continue to be highly correlated to the direction of the U.S. equity markets and are subject to volatility due to changes in interest rates, valuation of financial instruments, economic and political trends and industry competition. During 2007, the market was impacted by rising energy prices, a housing market slowdown, a subprime lending collapse, a growing economy, a weakening US dollar and stable interest rates. The Company’s Private Client Group’s recruiting and retention of Financial Advisors was positively impacted by industry consolidation. RJBank benefited from the widening interest rate spreads and the availability of attractive loan purchases as a result of the subprime lending crisis.


15



Results of Operations - Total Company

The Company currently operates through the following eight business segments: Private Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets; Stock Loan/Borrow; Proprietary Capital and certain corporate activities in the Other segment.

The following table presents consolidated and segment financial information for the Company for the years indicated:

 
Year Ended
 
September 30,
 
September 30,
 
September 30,
 
2007
 
2006
 
2005
 
(in 000's)
Total Company
         
Revenues
$ 3,109,579 
 
$ 2,645,578 
 
$ 2,168,196 
Pre-tax Earnings
392,224 
 
342,066 
 
247,971 
           
Private Client Group
         
Revenues
1,938,154 
 
1,679,813 
 
1,397,578 
Pre-tax Earnings
219,864 
 
168,519 
 
102,245 
           
Capital Markets
         
Revenues
506,498 
 
487,419 
 
455,151 
Pre-tax Earnings
68,966 
 
78,221 
 
77,333 
           
Asset Management
         
Revenues
234,875 
 
207,821 
 
179,845 
Pre-tax Earnings
60,517 
 
48,749 
 
40,442 
           
RJBank
         
Revenues
279,572 
 
114,692 
 
45,448 
Pre-tax Earnings
27,005 
 
16,003 
 
14,204 
           
Emerging Markets
         
Revenues
59,083 
 
55,263 
 
38,768 
Pre-tax Earnings
3,640 
 
2,857 
 
5,927 
           
Stock Loan/Borrow
         
Revenues
68,685 
 
59,947 
 
31,876 
Pre-tax Earnings
5,003 
 
8,001 
 
5,962 
           
Proprietary Capital
         
Revenues
8,280 
 
17,312 
 
10,952 
Pre-tax Earnings
3,577 
 
8,468 
 
4,182 
           
Other
         
Revenues
14,432 
 
23,311 
 
8,578 
Pre-tax Earnings (Loss)
3,652 
 
11,248 
 
(2,324)


16



Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Total Company

The Company had record annual revenues and earnings for the fourth consecutive year, with 2007 total revenues surpassing $3 billion and net income surpassing $250 million. Revenues exceeded the prior year by 18% while net income exceeded the prior year by 17%.  Net revenues were $2.6 billion, or up 11% over the prior year, thus positive operating leverage was realized. Non-interest expenses also rose by 11%. Once again, results were driven by an increase in net interest earnings, which were up 31%. All of the Company’s four major segments had higher revenues and three of the four had higher pre-tax income than in the prior year.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 - Total Company

The Company had record annual revenues and earnings for the third consecutive year, with net revenues surpassing $2.3 billion. Non-interest expenses rose by 12%, contrasted to a 15% increase in net revenues. Net income exceeded $200 million for the first time in the Company's history, up 42% from the prior year. All of the Company’s four major segments had higher revenues and pre-tax income than in the prior year, driven by a 36% increase in net interest earnings (see table below) combined with solid increases in investment advisory fees (14%) and securities commissions and fees (10%), a modest (6%) increase in investment banking revenues and an increase in financial service fees (33%).

Total firm net revenues increased 15%, while pre-tax profits after consideration of minority interest were up 38% over the prior year.

Net Interest Analysis

The following table presents average balance data and interest income and expense data for the Company, as well as the related net interest income:
 
 


 
Year Ended
 
September 30, 2007
September 30, 2006
September 30, 2005
   
Operating
Average
 
Operating
Average
 
Operating
Average
 
Average
Interest
Yield/
Average
Interest
Yield/
Average
Interest
Yield/
 
Balance
Inc./Exp.
Cost
Balance
Inc./Exp.
Cost
Balance
Inc./Exp.
Cost
 
($ in 000's)
Interest-Earning Assets:
                 
Margin Balances
$1,401,931
$ 108,368
7.73%
$1,327,121
$  98,417
7.42%
$1,218,486
$  68,125
5.59%
Assets Segregated Pursuant
                 
to Regulations and Other
                 
Segregated Assets
3,738,106
195,356
5.23%
2,983,853
141,741
4.75%
2,390,174
65,847
2.75%
Interest-Earning Assets
                 
of RJBank (1)
4,544,875
278,248
6.12%
1,967,225
114,065
5.80%
1,055,684
45,017
4.26%
Stock Borrow
 
68,685
   
59,947
   
31,876
 
Interest-Earning Assets
                 
of Variable Interest Entities
 
955
   
1,008
   
822
 
Other
 
75,380
   
54,803
   
33,875
 
                   
Total Interest Income
 
726,992
   
469,981
   
245,562
 
                   
Interest-Bearing Liabilities:
                 
Client Interest Program
$4,619,292
204,158
4.42%
$3,793,570
143,428
3.78%
$3,228,443
58,486
1.81%
Interest-Bearing Liabilities
                 
of RJBank (1)
4,187,365
193,747
4.63%
1,796,481
73,529
4.09%
966,627
22,020
2.28%
Stock Loan
 
59,276
   
47,593
   
22,873
 
Interest-Bearing Liabilities of
                 
Variable Interest Entities
 
6,972
   
8,368
   
3,934
 
Other
 
35,511
   
23,752
   
10,476
 
                   
Total Interest Expense
 
499,664
   
296,670
   
117,789
 
                   
Net Interest Income
 
$ 227,328
   
$ 173,311
   
$ 127,773
 

(1) See Results of Operations - RJBank in Item 7 of Part II for details.

17


Net interest income at RJBank increased over 100%, representing 81% of the $54 million increase in the Company’s net interest earnings. Average interest-earning assets at RJBank increased 131% over the prior year. Average bank loan balances have doubled from $1.6 billion to $3.2 billion.  This increase was funded by a second bulk transfer of client cash deposits of $1.3 billion in March 2007 and growth in new client cash balances which are a result of the positive recruiting results.

Average customer margin balances grew modestly during 2007, thus the increased client cash balances in the firm’s Client Interest Program led to a significant increase in assets segregated pursuant to regulations. Net interest on the stock loan/borrow business declined 24%, due to decreased interest spreads despite slightly higher balances. Other interest revenue and expense include earnings on corporate cash, inventory balances, interest on overnight borrowings and the mortgage on the headquarters facility.

Results of Operations - Private Client Group

The following table presents consolidated financial information for the Private Client Group segment for the years indicated:

 
Year Ended
 
September 30,
 
% Incr.
 
September 30,
 
% Incr.
 
September 30,
 
2007
 
(Decr.)
 
2006
 
(Decr.)
 
2005
 
($ in 000's)
Revenues:
                 
Securities Commissions And Fees
$ 1,451,899 
 
15% 
 
$ 1,262,751 
 
12% 
 
$ 1,132,291 
Interest
317,378 
 
28% 
 
248,709 
 
77% 
 
140,807 
Financial Service Fees
85,018 
 
(9%)
 
93,421 
 
40% 
 
66,774 
Other
83,859 
 
12% 
 
74,932 
 
30% 
 
57,706 
Total Revenues
1,938,154 
 
15% 
 
1,679,813 
 
20% 
 
1,397,578 
                   
Interest Expense
192,722 
 
38% 
 
139,593 
 
130% 
 
60,796 
Net Revenues
1,745,432 
 
13% 
 
1,540,220 
 
15% 
 
1,336,782 
                   
Non-Interest Expenses:
                 
Sales Commissions
1,070,479 
 
14% 
 
940,567 
 
14% 
 
825,889 
Admin & Incentive Comp and Benefit Costs
265,038 
 
13% 
 
233,684 
 
13% 
 
207,368 
Communications and Information Processing
55,224 
 
4% 
 
53,064 
 
8% 
 
49,183 
Occupancy and Equipment
57,310 
 
12% 
 
51,101 
 
11% 
 
46,114 
Business Development
57,216 
 
13% 
 
50,555 
 
21% 
 
41,719 
Clearance and Other
20,449 
 
(52%)
 
42,836 
 
(34%)
 
65,166 
Total Non-Interest Expenses
1,525,716 
 
11% 
 
1,371,807 
 
11% 
 
1,235,439 
Income Before Taxes and Minority Interest
219,716 
 
30% 
 
168,413 
 
66% 
 
101,343 
Minority Interest
(148)
 
 
 
(106)
 
 
 
(902)
Pre-tax Earnings
$   219,864 
 
30% 
 
$   168,519 
 
65% 
 
$   102,245 
Margin on Net Revenues
12.6%
     
10.9%
     
7.6%

The following table presents a summary of Private Client Group Financial Advisors as of the periods indicated:

   
Independent
2007
2006
 
Employee
Contractors
Total
Total
Private Client Group - Financial Advisors:
       
RJA
1,087
-
1,087
1,028
RJFS
-
3,068
3,068
3,254
RJ Ltd
186
139
325
312
RJIS
-
81
81
71
Total Financial Advisors
1,273
3,288
4,561
4,665


18



Year ended September 30, 2007 Compared with the Year ended September 30, 2006 – Private Client Group

The Private Client Group (“PCG”) was significantly impacted by the successful recruiting of employee Financial Advisors and increased productivity throughout domestic PCG. RJA added a net 59 employee Financial Advisors and increased average production per Financial Advisor 22% to $493,000, resulting in a 31% increase in RJA PCG securities commissions and fees. Average assets under management per RJA Financial Advisor increased 24% to $72 million. RJA continues to benefit from the industry consolidation and the resultant unrest and Financial Advisor turnover. Securities commissions and fees increased 10% in RJFS despite a 6% decline in the number of Financial Advisors, most of which was by design in the strategic upgrading initiative. The increased commission and fee revenue is the result of a 16% increase in average production to $316,000 per Financial Advisor. RJ Ltd’s 4% increase in number of Financial Advisors generated a 6.5% increase in securities commissions and fees.

Financial service fees in the prior year included a one-time adjustment of approximately $10 million related to the change in accounting for IRA fees. Excluding this adjustment, financial service fees increased modestly over the prior year. Other revenue increased $9 million, or 12% over the prior year, as a result of increased mutual fund networking and educational and marketing support fees from mutual fund companies.

Commission expense within PCG was up 14%, relatively proportional to the increase in commission revenues and fees of 15%. Administrative compensation, occupancy and business development expenses increased proportionately to net revenues. These increases include expenses associated with new branches, sales support staff, home office visits and account transfer fees. Information processing expenses rose only 4% and reflect the benefit of operating leverage despite continued investment in systems upgrades. The decrease in other expense is the result of lower legal costs and settlements as the last of the outstanding large cases related to the 2000 – 2002 market decline were settled in the prior year.

Overall PCG margins increased by 16% over the prior year, reaching 12.6%.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 – Private Client Group

The Private Client Group's results include a $130 million increase in commission and fee revenues. While commission and fee revenues increased in the PCG segment of all three broker-dealers, the increases were far more significant in RJA and RJ Ltd. where there has been an increase in the number of Financial Advisors due to successful recruiting. RJA added a net 65 employee Financial Advisors and increased the average production from $379,000 in fiscal 2005 to $404,000 in fiscal 2006. In addition, average assets under management per RJA Financial Advisor has increased to an all time high of $58 million from $50 million at September 2005. RJA has successfully focused on recruiting high-producing Financial Advisors and continued to benefit from industry consolidation. RJA commissions and fees increased 23%. RJ Ltd. added 20 employee Financial Advisors and 13 independent contractor Financial Advisors. RJ Ltd. commissions and fees increased 27%. The modest 5.7% increase in RJFS commissions and fees is primarily attributable to a $65.7 million, or 15.6%, increase in fee based business and mutual fund trailing commissions.

PCG net interest earnings increased 36% over the prior fiscal year, a combined result of increased client margin balances (up 9%) and increased customer cash balances, on which a spread is earned. Net interest represented 65% of the segment's pre-tax earnings, down from 78% in fiscal 2005.

Financial service fees in the PCG segment increased $26.6 million, or 40% over the prior year. The increase included a one-time adjustment of approximately $10 million related to a change from cash to accrual accounting for IRA fees. The increase in other revenue of $17.2 million is predominantly made up of increased mutual fund networking fees and the newly introduced educational and marketing support fee from mutual fund companies.

Commission expenses increased 2% more than commission revenue, the result of an increased number of independent contractors (who receive higher payouts) in RJ Ltd, the advances associated with recruiting at RJA and higher payout levels to more productive Financial Advisors. Administrative and incentive compensation increased due to the increase in the segment’s profits and an increased number of support staff related to the growing number of Financial Advisors in RJA and increased compliance staff in RJFS. Business development expense increased as it includes advertising costs and increased travel and other expenses related to recruiting. Other expenses declined as prior years' expense included historically high legal costs and settlements related to the 2000 – 2002 market decline.

PCG margins increased by more than 3% over the prior year, reaching 10.9%. The prior year was negatively impacted by the historically high legal costs and settlements, and the expense of the early stages of the independent contractor business in the UK and at RJ Ltd.

19



Results of Operations – Capital Markets

The following table presents consolidated financial information for the Capital Markets segment for the years indicated:

 
Year Ended
 
September 30,
 
% Incr.
 
September 30,
 
% Incr.
 
September 30,
 
2007
 
(Decr.)
 
2006
 
(Decr.)
 
2005
 
($ in 000's)
Revenues:
                 
Institutional Sales Commissions:
                 
Equity
$   210,343 
 
(3%)
 
$   217,840 
 
13% 
 
$   193,001 
Fixed Income
44,454 
 
6% 
 
41,830 
 
(37%)
 
66,431 
Underwriting Fees
93,712 
 
11% 
 
84,303 
 
8% 
 
77,900 
Mergers & Acquisitions Fees
59,929 
 
34% 
 
44,693 
 
5% 
 
42,576 
Private Placement Fees
2,262 
 
(3%)
 
2,334 
 
(56%)
 
5,338 
Trading Profits
9,262 
 
(58%)
 
21,876 
 
15% 
 
19,089 
Raymond James Tax Credit Funds
35,123 
 
11% 
 
31,710 
 
19% 
 
26,630 
Interest
46,772 
 
29% 
 
36,311 
 
74% 
 
20,847 
Other
4,641 
 
(29%)
 
6,522 
 
95% 
 
3,339 
Total Revenue
506,498 
 
4% 
 
487,419 
 
7% 
 
455,151 
                   
Interest Expense
56,841 
 
23% 
 
46,126 
 
133% 
 
19,838 
Net Revenues
449,657 
 
2% 
 
441,293 
 
1% 
 
435,313 
                   
Non-Interest Expenses
                 
Sales Commissions
98,903 
 
2% 
 
96,649 
 
(3%)
 
99,223 
Admin & Incentive Comp and Benefit Costs
204,512 
 
2% 
 
200,453 
 
2% 
 
197,170 
Communications and Information Processing
32,366 
 
20% 
 
27,084 
 
13% 
 
24,071 
Occupancy and Equipment
13,196 
 
9% 
 
12,073 
 
(4%)
 
12,563 
Business Development
23,468 
 
6% 
 
22,177 
 
17% 
 
18,995 
Clearance and Other
23,054 
 
16% 
 
19,907 
 
38% 
 
14,395 
Total Non-Interest Expense
395,499 
 
5% 
 
378,343 
 
3% 
 
366,417 
Income Before Taxes and Minority Interest
54,158 
 
(14%)
 
62,950 
 
(9%)
 
68,896 
Minority Interest
(14,808)
 
 
 
(15,271)
 
 
 
(8,437)
Pre-tax Earnings
$    68,966 
 
(12%)
 
$    78,221 
 
1% 
 
$    77,333 

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 – Capital Markets

The Capital Markets segment pre-tax earnings declined 12% despite a 2% increase in net revenues. Commission revenue was down slightly, the net of a decline in equity commissions related to the decline in commissions generated by underwriting transactions, and an increase in fixed income commissions, a result of the increased volatility. Commissions generated by underwriting transactions reached a record $41 million in the prior year and were only $22 million in the current year.

The increase in underwriting fees included increases of $3 million at RJA, despite a decline in the number of deals from 97 to 78, and $3 million at RJ Ltd. on 30 deals versus 29 in the prior year. Merger and acquisition fees were up $15 million, reaching an all time record level of $60 million for the year. During fiscal 2007, RJA closed 15 individual merger and acquisition transactions with fees in excess of $1 million. Trading profits were down 58% from the prior year, reflecting a particularly difficult fixed income trading environment during the fourth quarter. As credit issues drove fixed income product values down there was a flight to quality and the firm’s economic hedges (short positions in US Treasuries) contributed additional losses. Meanwhile, there were also increased losses in equity customer facilitations and OTC market making. Raymond James Tax Credit Fund (“RJTCF”) revenues increased 11% as they invested $375 million for institutional investors versus $277 million in the prior year. Interest revenue increased related to higher average fixed income inventory levels.

20



Expenses were generally in line with revenue growth with two exceptions.  Communications and information processing increased predominantly due to increased costs associated with market information systems and software development costs. Other expense reflects a shift to the use of electronic and other non-exchange clearing methods and includes transaction related underwriting expenses incurred by RJTCF.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 – Capital Markets

The Capital Markets segment’s revenues and pre-tax profits increased just slightly from the prior year’s record results. Commission revenues in the segment were flat, as a 37% decline in fixed income commissions was offset by the 13% increase in institutional equity commissions, the latter continuing to be fueled by an active new issue market. RJA equity market conditions remained strong, allowing RJA to complete 97 managed or co-managed domestic underwritings, just one short of the record 98 underwritings completed in fiscal 2005. RJ Ltd. completed a record 29 managed or co-managed underwritings, up nine from fiscal 2005. Merger and acquisition fees increased modestly from the prior year's record level, offsetting the decline in private placement fees. Equity Capital Market's most active strategic business units in fiscal 2006 were Energy, Technology, Financial Services and Real Estate.

The $16 million increase in interest income, predominantly on RJA's fixed income inventories, was offset by an equal increase in interest expense to finance these inventories. Higher interest income and expenses were primarily the result of higher interest rates.

RJTCF's revenues were up 19%, to $31.7 million, as RJTCF invested over $277 million for institutional investors in 78 real estate transactions compared to $250 million in 93 deals in fiscal 2005.

Non-interest expense increased 3% over the prior year, with the most significant increase in other expense. This increase was due to increases within the RJTCF variable interest entities (“VIEs”), of which 99% is eliminated through minority interest.

Results of Operations - Asset Management

The following table presents consolidated financial information for the Asset Management segment for the years indicated:

 
Year Ended
 
 
September 30,
 
% Incr.
 
September 30,
 
% Incr.
 
September 30,
 
 
2007
 
(Decr.)
 
2006
 
(Decr.)
 
2005
 
 
($ in 000's)
 
Revenues
                   
Investment Advisory Fees
$   192,763 
 
14% 
 
$   169,055 
 
14% 
 
$   148,393 
 
Other
42,112 
 
9% 
 
38,766 
 
23% 
 
31,452 
 
Total Revenues
234,875 
 
13% 
 
207,821 
 
16% 
 
179,845 
 
                     
Expenses
                   
Admin & Incentive Comp and Benefit Costs
72,887 
 
9% 
 
66,689 
 
14% 
 
58,343 
 
Communications and Information Processing
18,360 
 
11% 
 
16,523 
 
12% 
 
14,722 
 
Occupancy and Equipment
4,296 
 
3% 
 
4,163 
 
4% 
 
4,003 
 
Business Development
8,876 
 
6% 
 
8,379 
 
16% 
 
7,216 
 
Investment Advisory Fees
46,368 
 
18% 
 
39,281 
 
19% 
 
33,062 
 
Other
22,945 
 
(3%)
 
23,588 
 
8% 
 
21,853 
 
Total Expenses
173,732 
 
10% 
 
158,623 
 
14% 
 
139,199 
 
Income Before Taxes And Minority Interest
61,143 
 
24% 
 
49,198 
 
21% 
 
40,646 
 
Minority Interest
626 
     
449 
     
204 
 
Pre-tax Earnings
$    60,517 
 
24% 
 
$    48,749 
 
21% 
 
$    40,442 
 


21



The following table presents assets under management at the dates indicated:

 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
Assets Under Management:
($ in 000's)
           
Eagle Asset Mgmt., Inc.
         
Retail
$    6,925,930 
24% 
$   5,600,806 
19% 
$   4,719,275 
Institutional
7,601,374 
11% 
6,862,611 
1% 
6,823,906 
Total Eagle
14,527,304 
17% 
12,463,417 
8% 
11,543,181 
           
Heritage Family of Mutual Funds
         
Money Market
5,524,598 
(12%)
6,306,508 
4% 
6,058,612 
Other
3,956,677 
32% 
3,004,816 
19% 
2,534,975 
Total Heritage
9,481,275 
2% 
9,311,324 
8% 
8,593,587 
           
Raymond James Consulting Services
9,638,691 
22% 
7,915,168 
20% 
6,573,448 
Awad Asset Management
622,860 
(37%)
996,353 
(18%)
1,222,199 
Freedom Accounts
8,144,920 
59% 
5,122,733 
105% 
2,496,772 
           
Total Assets Under Management
42,415,050 
18% 
35,808,995 
18% 
30,429,187 
           
Less:  Assets Managed for Affiliated Entities
(5,305,506)
33% 
(3,991,281)
36% 
(2,936,804)
           
Third Party Assets Under Management
$ 37,109,544 
17% 
$ 31,817,714 
16% 
$ 27,492,383 

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Asset Management

The Asset Management segment has benefited significantly from the successful recruiting in PCG. New Financial Advisors bring additional client assets, a portion of which is often directed into an asset management alternative. In addition, both Eagle and Heritage have been successful in their efforts to increase their presence on outside broker-dealer platforms. Eagle’s retail sales to outside broker-dealers were 33% of their total 2007 sales, while Heritage’s were 78% of their total sales. Revenues in this segment increased 13% on a 17% increase in assets under management, as there continues to be some fee compression. Expenses increased only 10%, generating a 24% increase in pre-tax earnings and a 26% margin as a result of operating leverage. Money market fund balances declined as a result of the transfer of $1.3 billion to RJBank in March 2007.
  
Year ended September 30, 2006 Compared with the Year ended September 30, 2005 - Asset Management

Investment Advisory fees increased over $20 million, or 14%, on a 16% increase in assets under management. Increases in assets under management were positively impacted by the recruiting of RJA Financial Advisors. New Financial Advisors brought significant assets into the Company's asset management programs, particularly Eagle and Raymond James Consulting Services ("RJCS"). New managed assets brought in by RJA Financial Advisors totaled $3.9 billion for fiscal 2006, a 70% increase over $2.3 billion added in fiscal 2005. Eagle's total retail assets increased 19% over the prior year.  Of Eagle's retail asset total, 35% were introduced by Financial Advisors outside the Raymond James system. Account cancellations exceeded sales in Eagle's institutional accounts due to the loss of a few significant accounts and the closing of the Institutional Growth division in September. RJCS offers 40 independent investment advisors to the Company's clients. Assets managed within the program increased 20% over the prior year. The Company's managed mutual fund product (Freedom) continued to experience significant growth (105%) as this concept continues to be embraced by clients and Financial Advisors. Heritage Asset Management's non-money market funds increased 19% with 65% of the sales through broker-dealers outside of the Raymond James family. Heritage money market accounts increased 4% despite the movement of just over $1 billion to RJBank sweep option during the year.

Expenses in this segment increased $19 million (14%) with $8 million of that increase in compensation. The Compensation increase included increased salary expense, costs associated with closing Eagle's institutional growth division, and increased incentive compensation related to the 21% increase in pre-tax profits. The other notable increase in expense was a $6.2 million (19%) increase in investment advisory fees related to the growth in assets in accounts managed by independent investment advisors.

22



Results of Operations - RJBank

The following table presents consolidated financial information for RJBank for the years indicated:

 
Year Ended
 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
 
($ in 000's)
Interest Earnings
         
Interest Income
$ 278,248
144% 
$ 114,065
153% 
$ 45,017
Interest Expense
193,747
163% 
73,529
234% 
22,020
Net Interest Income
84,501
108% 
40,536
76% 
22,997
           
Other Income
1,324
111% 
627
45% 
431
Net Revenues
85,825
109% 
41,163
76% 
23,428
           
Non-Interest Expense
         
Employee Compensation and Benefits
7,778
27% 
6,135
14% 
5,388
Communications and Information Processing
1,052
16% 
907
14% 
799
Occupancy and Equipment
719
14% 
629
32% 
478
    Provision for Loan Losses and Unfunded          
  Commitments
32,150
134% 
13,760
891% 
1,388
Other
17,121
359% 
3,729
218% 
1,171
Total Non-Interest Expense
58,820
134% 
25,160
173% 
9,224
Pre-tax Earnings
$  27,005
69% 
$  16,003
13% 
$ 14,204

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - RJBank

The Company completed its second bulk transfer of cash balances into the RJBank Deposit Program in March 2007, moving another $1.3 billion. This, combined with organic growth from the influx of new client assets, resulted in a $2.6 billion increase in average deposit balances. This  increase in average deposit balances provided the funding for the $1.6 billion increase in average loan balances. This increase was 38% purchased residential mortgage pools and 62% corporate loans, 98% of which are purchased interests in corporate loan syndications with the remainder originated by RJBank. As a result of this growth, RJBank net interest income increased 108% to $84.5 million. Due to robust loan growth, the associated allowance for loan losses that are established upon recording a new loan and making new unfunded commitments required a provision of over $32 million in 2007. Accordingly, RJBank’s pre-tax income increased only 69%. During periods of growth when new loans are originated or purchased, an allowance for loan losses is established for potential losses inherent in those new loans. Accordingly, a robust period of growth generally results in charges to earnings in that period, while the benefits of higher interest earnings are realized in later periods.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 - RJBank

Assets at RJBank grew a substantial $1.8 billion during the year. The increase was driven by a $1.7 billion increase in deposits, $1.3 billion of which were redirected from the Company’s Heritage Cash Trust or customer brokerage accounts, representing the introduction of a new sweep program for certain brokerage accounts. This alternative offers clients a money market equivalent interest rate and FDIC insurance. The Company intends to expand this offering over the next several years, transferring an additional $2 to $4 billion. During the year, RJBank deployed $1.3 billion of the increased deposits into loans. Purchased residential loan pools increased $700 million and corporate loans increased $600 million. This growth, combined with increased rates, generated an increase in net interest income of nearly $18 million. Pre-tax income increased only $1.8 million, due to the $13.8 million provision for loan loss associated with the increase in loans outstanding.


23



The following table presents average balance data and operating interest income and expense data for the Company's banking operations, as well as the related interest yields and rates and interest spread for the years indicated:

 
Year Ended
 
September 30, 2007
September 30, 2006
September 30, 2005
   
Operating
Average
 
Operating
Average
 
Operating
Average
 
Average
Interest
Yield/
Average
Interest
Yield/
Average
Interest
Yield/
 
Balance
Inc./Exp. (2)
Cost
Balance
Inc./Exp.
Cost
Balance
Inc./Exp.
Cost
 
($ in 000’s)
 
(continued on next page)
Interest-Earning Banking Assets:
                 
Loans, Net of Unearned
                 
Income (1)
$ 3,180,331
$204,959
6.44%
$ 1,601,708
$ 95,366
5.95%
$   800,566
$ 37,163
4.64%
Reverse Repurchase
                 
Agreements
878,822
46,438
5.28%
122,301
6,497
5.31%
-
-
-
Agency Mortgage backed
                 
Securities
199,514
11,086
5.56%
157,454
7,833
4.97%
181,419
5,561
3.07%
Non-agency Collateralized
                 
Mortgage Obligations
229,108
12,808
5.59%
21,204
1,151
5.43%
5,791
208
3.59%
Other Government Agency
                 
Obligations
-
-
-
8,314
404
4.86%
-
-
-
Corporate Debt and Asset
                 
Backed Securities
-
-
-
8,839
499
5.65%
2,986
109
3.65%
Money Market Funds, Cash and
                 
Cash Equivalents
49,979
2,533
5.07%
34,469
1,607
4.66%
59,869
1,778
2.97%
FHLB Stock
7,121
424
5.95%
12,936
708
5.47%
5,053
198
3.92%
Total Interest-Earning
                 
Banking Assets
4,544,875
278,248
6.12%
1,967,225
114,065
5.80%
1,055,684
45,017
4.26%
Non-Interest-Earning
                 
Banking Assets
16,410
   
13,329
   
8,327
   
                   
Total Banking Assets
$ 4,561,285
   
$ 1,980,554
   
$ 1,064,011
   
                   
Interest-Bearing Banking Liabilities:
                 
Retail Deposits:
                 
Certificates of Deposit
$    239,478
$  11,021
4.60%
$    269,949
$ 10,872
4.03%
$    191,097
$  6,577
3.44%
Money Market, Savings,
                 
and NOW (2) Accounts
3,890,955
179,741
4.62%
1,293,104
51,313
3.97%
698,895
12,041
1.72%
FHLB Advances
56,932
2,985
5.24%
233,428
11,344
4.86%
76,635
3,402
4.44%
                   
Total Interest-Bearing
                 
Banking Liabilities
4,187,365
193,747
4.63%
1,796,481
73,529
4.09%
966,627
22,020
2.28%
                   
Non-Interest-Bearing
                 
Banking Liabilities
98,117
   
11,781
   
7,933
   
                   
Total Banking
                 
Liabilities
4,285,482
   
1,808,262
   
974,560
   
Total Banking
                 
Shareholder's
                 
Equity
275,803
   
172,292
   
89,451
   
                   
Total Banking
                 
Liabilities and
                 
Shareholder's
                 
Equity
$ 4,561,285
   
$ 1,980,554
   
$ 1,064,011
   
                   

24

 


 
Year Ended
 
September 30, 2007
September 30, 2006
September 30, 2005
     
Operating
Average
   
Operating
Average
   
Operating
Average
 
Average
 
Interest
Yield/
Average
 
Interest
Yield/
Average
 
Interest
Yield/
 
Balance
 
Inc./Exp.
Cost
Balance
 
Inc./Exp.
Cost
Balance
 
Inc./Exp.
Cost
 
($ in 000’s)
 
(continued)
Excess of Interest-
                       
    Earning Banking
                       
    Assets Over Interest-
                       
    Bearing Banking
                       
    Liabilities/Net
                       
    Operating
                       
    Interest Income
$   357,510
 
$   84,501
 
$    170,744
 
$ 40,536
 
$    89,057
 
$ 22,997
 
                         
Bank Net Operating
                       
Interest (3):
                       
  Spread
     
1.49%
     
1.71%
     
1.98%
Margin (Net Yield on
                       
Interest- Earning
                       
Bank Assets)
     
1.86%
     
2.06%
     
2.18%
Ratio of Interest
                       
Earning Banking
                       
Assets to Interest-
                       
Bearing Banking
                       
Liabilities
     
108.54%
     
109.50%
     
109.21%
Return On Average (4):
                       
Total Banking Assets
     
0.38%
     
0.48%
     
0.81%
Total Banking
                       
   Shareholder's Equity
     
6.27%
     
5.54%
     
9.59%
Average Equity to
                       
Average Total
                       
Banking Assets
     
6.05%
     
8.70%
     
8.41%

 
(1)  
Corporate loans purchased are recorded in the loan portfolio as of the earlier of the settlement date or the delayed settlement compensation commencement date. Unsettled floating rate loans recognized in the loan portfolio earn compensation from the loan’s seller for the delayed settlement at the net margin over LIBOR. The funded equivalent yield of Loans, Net of Unearned Income above would be 6.58% for 2007 if the unsettled loans had earned at the full loan rate. Additionally, nonaccrual loans are included in the average loan balances. Income on such nonaccrual loans is recognized on a cash basis. Fee income on loans included in interest income for the years ended September 2007, 2006, and 2005, respectively was $8.1 million, $3.5 million, and $0.7 million.

(2)  
Negotiable Order of Withdrawal (“NOW”) account.

(3)  
The decline in interest spreads is due to the growth in the deposit balances from two bulk transfers of client deposits of $1.3 billion each to RJBank, which were then invested over time. This process left significant cash balances invested at low rates until the cash could be deployed and used to purchase loans, depressing overall interest spreads.

(4)  
RJBank has gone through a period of rapid loan growth and accordingly established allowances for loan losses for potential losses inherent in the loan portfolios. These charges to earnings have a negative impact on returns during periods of loan growth.

25


Increases and decreases in operating interest income and operating interest expense result from changes in average balances (volume) of interest-earning banking assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on RJBank's interest-earning assets and the interest incurred on its interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately.  

 
2007 Compared to 2006
2006 Compared to 2005
 
Increase (Decrease) Due To
Increase (Decrease) Due To
 
Volume
Rate
Total
Volume
Rate
Total
 
(in 000’s)
Interest Revenue
           
Interest-Earning Banking Assets:
           
Loans, Net of Unearned Income
$  93,992 
$ 15,601 
$ 109,593 
$ 37,190 
$ 21,013 
$ 58,203 
Reverse Repurchase Agreements
40,189 
(248)
39,941 
6,497 
6,497 
Agency Mortgage Backed Securities
2,092 
1,161 
3,253 
(735)
3,007 
2,272 
Non-agency Collateralized Mortgage Obligations
11,285 
372 
11,657 
554 
389 
943 
Other Government Agency Obligations
(404)
(404)
404 
404 
Corporate Debt and Asset Backed Securities
(499)
(499)
214 
176 
390 
Money Market Funds, Cash and Cash Equivalents
723 
203 
926 
(754)
583 
(171)
FHLB Stock
(318)
34 
(284)
309 
201 
510 
             
Total Interest-Earning Banking Assets
$ 147,060 
$ 17,123 
$ 164,183 
$ 43,679 
$ 25,369 
$ 69,048 
             
Interest Expense
           
Interest-Bearing Banking Liabilities:
           
Retail Deposits:
           
Certificates Of Deposit
$    (1,227)
$   1,377 
150 
$   2,714 
$   1,581 
$   4,295 
Money Market, Savings and
           
NOW Accounts
103,372 
25,055 
128,427 
10,272 
29,000 
39,272 
FHLB Advances
(8,577)
218 
(8,359)
6,960 
982 
7,942 
             
Total Interest-Bearing Banking Liabilities
93,568 
26,650 
120,218 
19,946 
31,563 
51,509 
             
Change in Net Operating Interest Income
$  53,492 
$  (9,527)
$  43,965 
$ 23,733 
$  (6,194)
$ 17,539 


26


Results of Operations – Emerging Markets

 
Year Ended
 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
 
($ in 000's)
Revenues
         
Securities Commissions and
         
Investment Banking Fees
$ 41,879 
(4%)
$ 43,703 
46% 
$ 29,928 
Investment Advisory Fees
2,846 
48% 
1,919 
(34%)
2,890 
Interest Income
4,042 
11% 
3,647 
90% 
1,919 
Trading Profits
5,254 
41% 
3,720 
18% 
3,141 
Other
5,062 
123% 
2,274 
156% 
890 
Total Revenues
59,083 
7% 
55,263 
43% 
38,768 
           
Interest Expense
1,075 
(27%)
1,467 
195% 
497 
Net Revenues
58,008 
8% 
53,796 
41% 
38,271 
           
Non-Interest Expense
         
Compensation Expense
28,071 
(4%)
29,185 
48% 
19,758 
Other Expense
23,302 
17% 
19,867 
93% 
10,294 
Total Non-Interest Expense
51,373 
5% 
49,052 
63% 
30,052 
           
Minority Interest
2,995 
 
1,887 
 
2,292 
Pre-tax Earnings
$   3,640 
27% 
$   2,857 
(52%)
$   5,927 

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 – Emerging Markets

This segment consists of the results of the Company’s joint ventures in Argentina, Uruguay and Turkey. Securities commissions declined in Turkey, increased in Argentina, and the joint venture in India generated $2 million in commissions in fiscal 2006 whereas none were included in fiscal 2007 due to the Company’s sale of its interest in this joint venture early in 2007. Investment banking revenues were flat. Trading profits increased $3.5 million in Argentina, stemming from a large volume of ADR trades. Other income includes the $2.5 million gain on the sale of the Company’s interest in its joint venture in India.

The $2 million increase in expense is predominantly related to the accrual of estimated tax liabilities in Turkey.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 – Emerging Markets

This segment consists of the results of the Company’s joint ventures in India, Argentina, Uruguay and Turkey. Securities commissions increased $9 million or 31% over the prior year. The vast majority of this increase was in the Company’s joint venture in Turkey. Investment banking revenues were $2.7 million, primarily from a single large Latin American underwriting fee. Investment Advisory fees declined as the Company generated $1 million less in asset management fees in India.

The $20 million increase in expense is made up predominantly of a $10 million increase in compensation related to increased revenues and increased other expense related to the accrual of an estimated tax liability in Turkey.

Results of Operations – Stock Loan/Borrow

 
Year Ended
 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
 
($ in 000's)
Interest Income and Expense
         
Interest Income
$ 68,685 
15% 
$ 59,947 
88% 
$ 31,876 
Interest Expense
59,276 
25% 
47,593 
108% 
22,873 
Net Interest Income
9,409 
(24%)
12,354 
37% 
9,003 
           
Expenses
4,406 
1% 
4,353 
43% 
3,041 
Pre-tax Earnings
$   5,003 
(37%)
$   8,001 
34% 
$   5,962 


27



Year ended September 30, 2007 Compared with the Year ended September 30, 2006 – Stock Loan/Borrow

The Company’s stock borrow balances averaged $1.1 billion during fiscal year 2007 vs. $1.0 billion in fiscal 2006. The Company’s stock loan balances are predominantly the result of a matched-book however, box loan/borrow balances are also carried. As the Company’s stock loan business is predominantly a matched-book business, stock borrow balances were similar. Average spreads decreased from 2.0% in fiscal 2006 to 0.5% in 2007, resulting in a 24% decrease in net interest income and a 37% decrease in pre-tax profits.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 – Stock Loan/Borrow

The Company’s stock borrow balances averaged $1.0 billion during fiscal year 2006 vs. $1.1 billion in fiscal 2005. As the Company’s stock loan business is predominantly a matched-book business, stock loan balances were similar. Average spreads increased from 0.9% in fiscal 2005 to 2.0% in 2006 largely due to rising interest rates, resulting in a 37% increase in net interest income and a 34% increase in pre-tax profits.

Results of Operations – Proprietary Capital

The following table presents consolidated financial information for the Propriety Capital segment for the years indicated:

 
Year Ended
 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
 
($ in 000's)
Revenues
         
Investment Advisory Fees
$      746 
(54%)
$    1,625 
(38%)
$    2,608 
Other
7,534 
(52%)
15,687 
88% 
8,344 
Total Revenues
8,280 
(52%)
17,312 
58% 
10,952 
           
Expenses
         
Compensation Expense
2,348 
(21%)
2,959 
50% 
1,976 
Other Expenses
747 
(26%)
1,003 
114% 
469 
Total Expenses
3,095 
(22%)
3,962 
62% 
2,445 
           
Minority Interest
1,608 
 
4,882 
 
4,325 
Pre-tax Earnings
$   3,577 
(58%)
$    8,468 
102% 
$    4,182 

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 – Proprietary Capital

Proprietary Capital results are driven by the valuations made within Raymond James Capital, Inc., Raymond James Capital Partners, L.P., Ballast Point Ventures, L.P., the EIF Funds and the third party private equity funds in which RJF is invested. Fiscal 2006 included write-ups within Ballast Point of $3.6 million versus a write-down of $1 million in fiscal 2007. Fiscal 2007 included valuation adjustments to the RJF private equity investment portfolio.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 – Proprietary Capital

Fiscal 2006 included the $3.6 million write-up on Ballast Point investments. Fiscal 2006 also included net valuation adjustments to the RJF private equity investment portfolio of $3.2 million versus $1.4 million in 2005.

28



Results of Operations - Other

The following table presents consolidated financial information for the Other segment for the years indicated:

 
Year Ended
 
September 30,
% Incr.
September 30,
% Incr.
September 30,
 
2007
(Decr.)
2006
(Decr.)
2005
 
($ in 000's)
Revenues
         
Interest Income
$   7,773 
89% 
$   4,114 
(10%)
$   4,588 
Other
6,659 
(65%)
19,197 
381% 
3,990 
Total Revenues
14,432 
(38%)
23,311 
172% 
8,578 
           
Other Expense
10,780 
(11%)
12,063 
11% 
10,902 
Pre-tax Earnings (Loss)
$   3,652 
(68%)
$ 11,248 
584% 
$  (2,324)

Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Other

Revenue in the Other segment includes $1 million in gains  on corporate investments, including Eagle asset managed accounts, and nearly $3 million in proceeds from company owned life insurance. Interest income represents earnings on available corporate cash balances. Expenses in this segment are predominantly executive compensation.

Year ended September 30, 2006 Compared with the Year ended September 30, 2005 - Other

Revenue in the Other segment includes the $16.1 million pre-tax gain from the sale of the Company's NYSE and Montreal Exchange seats, and approximately $3 million from other corporate investments.

Statement of Financial Condition Analysis

The Company’s statement of financial condition consists primarily of cash and cash equivalents (a large portion of which are segregated for the benefit of customers), receivables and payables. The items represented in the statement of financial condition are primarily liquid in nature, providing the Company with flexibility in financing its business. Total assets of $16.3 billion at September 30, 2007 were up approximately 41% over September 30, 2006. Most of this increase is due to the significant increases in reverse repurchase agreements, brokerage client cash deposits (leading to a similar increase in segregated cash balances on the asset side), and growth of RJBank, with the increased loan balances being largely funded by deposits. RJBank loan balances increased significantly as the Company continued to increase its use of a newly introduced bank sweep offering to brokerage customers. The Company initiated the first phase of this option in July 2006 and the second phase took place in March 2007. The Company plans to continue to expand use of this offering for the next several years, which will result in continued growth in RJBank balances. The other significant increase in assets was in Available For Sale Securities. Trade and Other Payables increased $311.9 million from the prior year primarily due to RJBank’s purchases of $300.6 million in syndicated loans which were not settled as of September 30, 2007. The broker-dealer gross assets and liabilities, including trading inventory, stock loan/borrow, receivables and payables from/to brokers, dealers and clearing organizations and clients fluctuate with the Company's business levels and overall market conditions.

Liquidity and Capital Resources

Cash provided by operating activities during the fiscal year ended September 30, 2007 was approximately $436.6 million, primarily attributable to the increase in brokerage client deposits (directly correlated to the increase in segregated assets), an increase in payables associated with the Company’s stock loan/borrowed business, an increase in payables to broker-dealers and clearing organizations, an increase in securities sold under agreements to repurchase, and an increase in trading instruments sold but not yet purchased. This was partially offset by an increase in segregated assets, and an increase in receivables from brokerage clients.

Investing activities used $2.9 billion, which is primarily due to activity at RJBank, including loans originated and purchased, purchases of securities under agreements to resell, and purchases of available for sale securities.  This was partially offset by loan repayments at RJBank and maturations and repayments of available for sale securities.

Financing activities provided $2.7 billion, the result of an increase in deposits at RJBank and cash provided from the exercise of stock options and employee stock purchases. This was partially offset by the payment of cash dividends and the repayments of borrowings.

At September 30, 2007 and September 30, 2006, the Company had loans payable of $122.6 million and $141.6 million, respectively. The balance at September 30, 2007 is comprised of a $65 million loan for its home-office complex, $55 million in Federal Home Loan Bank advances (RJBank), and various short-term borrowings totaling $2.6 million (used to fund increased levels of trading instruments).

29



In addition, the Company and its subsidiaries have the following lines of credit: RJF has a committed $200 million line of credit, RJA has uncommitted bank lines of credit aggregating $1.035 billion with commercial banks, Raymond James Credit Corporation has a line of credit for $25 million, and RJ Ltd. has a CDN$40 million uncommitted line of credit (see Note 10 of the Notes to the Consolidated Financial Statements for further information on the Company's lines of credit). There were no outstanding balances against these lines of credit at September 30, 2007. The Company’s committed $200 million line of credit is subject to a 0.125% per annum facility fee. RJBank has $55.0 million in FHLB advances outstanding at September 30, 2007, which are comprised of one short-term, fixed rate advance and several long-term, fixed rate advances. RJBank had $1.32 billion in credit available from the FHLB at September 30, 2007. During the three months ended June 30, 2007, RJA entered into a $500 million uncommitted tri-party repurchase agreement line of credit. Under this agreement, the Company pledges certain of its trading inventory as collateral against borrowings on this line. The required market value of the collateral is generally 102% of the cash borrowed. The rate is set each day at 25 basis points over the opening Fed Funds rate and this agreement can be terminated by any party on any business day. Under this agreement, there were secured short-term borrowings of $195,000,000 outstanding at September 30, 2007 which are included in Securities Sold Under Agreement to Repurchase.

The Company’s joint ventures in Turkey and Argentina have multiple settlement lines of credit. The Company has guaranteed certain of these settlement lines of credit as follows: four in Turkey totaling $22.5 million and one in Argentina for $3 million. At September 30, 2007, there were no outstanding balances on the settlement lines in Argentina or Turkey. At September 30, 2007, the aggregate unsecured settlement lines of credit available were $76.5 million, and there were outstanding balances of $2.7 million on these lines. The Company has also from time to time authorized performance guarantees for the completion of trades with counterparties in Argentina and Turkey. At September 30, 2007, there were no outstanding performance guarantees in Argentina or Turkey.

As of September 30, 2007, the Company's liabilities are comprised primarily of brokerage client payables of $5.7 billion at the broker-dealer subsidiaries and deposits of $5.6 billion at RJBank, as well as deposits held on stock loan transactions of $1.3 billion. The Company primarily acts as an intermediary in stock loan/borrow transactions. As a result, the liability associated with the stock loan transactions is related to the $1.3 billion receivable comprised of the Company's cash deposits for stock borrowed transactions. To meet its obligations to clients, the Company has approximately $4.8 billion in cash and segregated assets. The Company also has client brokerage receivables of $1.7 billion and $4.7 billion in loans at RJBank.

The Company will continue its implementation of a new cash sweep option available to its clients from RJBank. This new cash sweep option will require substantial capital to be contributed to RJBank to meet regulatory requirements, and therefore may require the Company to infuse an additional $150 to $200 million over the next several years for this purpose.

As of September 30, 2007, RJBank had not settled the purchases of $300.6 million in syndicated loans. These loans are expected to be settled during the three months ended December 31, 2007.

The Company has committed a total of $46.6 million, in amounts ranging from $200,000 to $2 million, to 41 different independent venture capital or private equity partnerships. As of September 30, 2007, the Company has invested $30.4 million of that amount and has received $27 million in distributions. The Company expects to increase its net investment in external private equity funds up to $50 million.

Additionally, the Company is the general partner in two internally sponsored private equity limited partnerships to which it has committed $14 million. Of that amount, the Company has invested $12.2 million and has received $8.6 million in distributions as of September 30, 2007.

The Company’s Board of Directors approved the use of up to $200 million in mezzanine financing to facilitate investment banking transactions. As of September 30, 2007, the Company had not utilized this investment facility. During the first quarter of fiscal year 2008, the Company entered into a credit agreement and pursuant to this agreement, the Company funded a $37.5 million loan participation. The Board of Directors also approved the use of up to $50 million for investment in proprietary merchant banking opportunities. As of September 30, 2007, the Company has invested $13.1 million.

Management has been authorized by the Board of Directors to repurchase its common stock at their discretion for general corporate purposes. There is no formal stock repurchase plan at this time. In May 2004 the Board authorized the repurchase of up to $75 million of shares. As of September 30, 2007 the unused portion of this authorization was $65.4 million.

The Company has committed to lend to or guarantee obligations of its wholly owned subsidiary, RJTCF, of up to $100 million upon request, subject to certain limitations as well as annual review and renewal. RJTCF borrows in order to invest in partnerships which purchase and develop properties qualifying for tax credits. These investments in project partnerships are then sold to various tax credit funds, which have third party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells these investments within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings. Additionally, RJTCF may make short-term loans or advances to project partnerships on behalf of the tax credit funds in which it serves as managing member or general partner. At September 30, 2007, cash funded to invest in either loans or investments in project partnerships was $38.7 million. In addition, at September 30, 2007, RJTCF is committed to additional future fundings of $6.1 million related to project partnerships that have not yet been sold to various tax credit funds.

In September 2007, Sirchie Acquisition Company, LLC (“SAC”), a 100% owned indirect subsidiary of the Company, entered into two agreements. Under the Stock Purchase Agreement SAC will acquire 51% of the common stock of Law Enforcement Associates Corporation from two sellers. Under the Stock and Asset Purchase Agreement with several sellers, SAC will acquire substantially all of the business, assets, and properties of Sirchie Finger Print Laboratories, Inc., the assets or stock of several other companies and certain real estate. SAC and sellers negotiated a single purchase price for all of the items to be acquired under the two agreements. At closing, one of the sellers will become a member of SAC. The Company’s share of the purchase price obligation is approximately $50 million. The closing of the two agreements is expected to occur before January 31, 2008.

30



The Company believes its existing assets, which are highly liquid in nature, together with funds generated from operations, should provide adequate funds for continuing operations.

The Company is the lessor in a leveraged commercial aircraft transaction with Continental Airlines, Inc. (“Continental”). The Company's ability to realize its expected return is dependent upon this airline’s ability to fulfill its lease obligation. In the event that this airline defaults on its lease commitment and the Trustee for the debt holders is unable to re-lease or sell the plane with adequate terms, the Company would suffer a loss of some or all of its investment. The value of the Company’s leveraged lease with Continental was approximately $9.9 million as of September 30, 2007. The Company's equity investment represented 20% of the aggregate purchase price; the remaining 80% was funded by public debt issued in the form of equipment trust certificates. The residual value of the aircraft at the end of the lease term of approximately 17 years is projected to be 15% of the original cost. This lease expires in May 2014. Although Continental remains current on its lease payments to the Company, the inability of Continental to make its lease payments, or the termination or modification of the lease through a bankruptcy proceeding, could result in the write-down of the Company's investment and the acceleration of certain income tax payments. The Company continues to monitor this lessee for specific events or circumstances that would increase the likelihood of a default on Continental’s obligations under this lease.

The Company was also the lessor in a leveraged commercial aircraft transaction with Delta Air Lines, Inc. (“Delta”). Delta filed for bankruptcy protection on September 14, 2005. Accordingly, the Company recorded a $6.5 million pre-tax charge in 2005 to fully reserve the balance of its investment in the leveraged lease of an aircraft to Delta. The Company had taken a $4 million pre-tax charge in 2004 to partially reserve for this investment. No amount of these charges represented a cash expenditure. During the second quarter of fiscal 2007, the Company sold its interest in the Delta transaction for $2 million, which was recognized as a pre-tax gain within Other Revenue. Upon closing, certain income tax obligations of approximately $8.5 million were accelerated and paid during the quarter. These tax payments did not impact net earnings, as these amounts were previously recorded as deferred tax liabilities.

The Company’s Turkish affiliate was assessed for the year 2001 approximately $7.6 million by the Turkish tax authorities. This affiliate is vigorously contesting most aspects of this assessment and has filed an appeal with the Turkish Counsel of State. A significant portion of the matters at issue involved the activities of an employee terminated in 2004. Audits of 2002 through 2004 are anticipated and their outcome is unknown in light of the change in methodology from the prior year’s audit and the pending litigation. As such, the potential tax liability combined for these subsequent years could range from a few hundred thousand dollars to $7.5 million. As of September 30, 2007, this affiliate had total capital of approximately $12.2 million, of which the Company owns approximately 73%.

The Company's broker-dealer subsidiaries are subject to requirements of the SEC and the IDA relating to liquidity and capital standards. The domestic broker-dealer subsidiaries of the Company are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. RJA, a member firm of FINRA, is also subject to the rules of FINRA, whose requirements are substantially the same. Rule 15c3-1 requires that aggregate indebtedness, as defined, not exceed 15 times net capital, as defined. Rule 15c3-1 also provides for an “alternative net capital requirement”, which RJA, RJFS, and HFD have elected. It requires that minimum net capital, as defined, be equal to the greater of $250,000 or two percent of Aggregate Debit Items arising from client transactions. FINRA may require a member firm to reduce its business if its net capital is less than four percent of Aggregate Debit Items and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than five percent of Aggregate Debit Items. RJA, RJFS, and HFD all had net capital in excess of minimum requirements as of September 30, 2007.
 
        RJ Ltd. is subject to the Minimum Capital Rule (By-Law No. 17 of the IDA) and the Early Warning System (By-Law No. 30 of the IDA). The Minimum Capital Rule requires that every member shall have and maintain at all times Risk Adjusted Capital greater than zero calculated in accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such requirements as the Board of Directors of the IDA may from time to time prescribe. Insufficient Risk Adjusted Capital may result in suspension from membership in the stock exchanges or the IDA. The Early Warning System is designed to provide advance warning that a member firm is encountering financial difficulties. This system imposes certain sanctions on members who are designated in Early Warning Level 1 or Level 2 according to its capital, profitability, liquidity position, frequency of designation or at the discretion of the IDA. Restrictions on business activities and capital transactions, early filing requirements, and mandated corrective measures are sanctions that may be imposed as part of the Early Warning System. RJ Ltd. was not in Early Warning Level 1 or Level 2 during fiscal 2007 or 2006.

RJBank is subject to various regulatory and capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, RJBank must meet specific capital guidelines that involve quantitative measures of RJBank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. RJBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require RJBank to maintain minimum amounts and ratios of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of September 30, 2007, that the Bank meets all capital adequacy requirements to which it is subject.

Critical Accounting Policies

The Company’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. The following is a summary of the Company’s critical accounting policies. For a full description of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. The Company believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgments based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company.

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Valuation of Securities and Other Assets

“Trading instruments” and “Available for sale securities” are reflected in the Consolidated Statements of Financial Condition at fair value or amounts that approximate fair value. In accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, unrealized gains and losses related to these financial instruments are reflected in net income or other comprehensive income, depending on the underlying purpose of the instrument. The following table presents the Company’s trading instruments and available for sale securities segregated into trading securities (i.e., non-derivative), derivative contracts, and available for sale securities:

 
September 30, 2007
 
 
Financial
Instruments Owned
at Fair Value
Financial
Instruments Sold
but not yet Purchased
at Fair Value
 
(in 000’s)
     
Trading Securities
$    437,158
$  141,284
Derivative Contracts
30,603
8,445
Available for Sale Securities
569,952
-
Total
$ 1,037,713
$  149,729

Trading Securities, Available for Sale Securities and Derivative Contracts

When available, the Company uses prices from independent sources such as listed market prices, or broker or dealer price quotations to derive the fair value of the instruments. For investments in illiquid, privately held or other securities that do not have readily determinable fair values, the Company uses estimated fair values as determined by management. Fair values for derivative contracts are obtained from pricing models that consider current market and contractual prices for the underlying financial instruments, as well as time value and yield curve or volatility factors underlying the positions. The following table presents the carrying value of trading securities, available for sale securities, and derivative contracts for which fair value is measured base