Results of Operations

Set forth below is the Company's discussion of the results of its operations, as viewed by management, for the fiscal years 2008, 2007 and 2006 respectively. This discussion refers to both GAAP results and adjusted marked-to-market information, in accordance with the information presented in Item 6, 'Selected Financial Data'. For the international equities, international debt capital markets, foreign exchange trading and asset management segments, there are no differences between the GAAP results and the adjusted marked-to-market results. Only the commodities trading segment has differences between the GAAP results and the adjusted marked-to-market results. However, this means that there are differences between the GAAP basis and marked-to-market basis total operating revenues, total contribution and net income. Please note that any term below that contains the word 'adjusted' refers to non-GAAP, marked-to-market information.

Financial Overview

The following table shows an overview of our financial results.



(in millions)
                                                                 %                        %
Year Ended September 30,                           2008        Change        2007       Change       2006
FINANCIAL OVERVIEW
Adjusted total operating revenues (non-GAAP)      $ 100.5          31 %     $ 77.0          77 %    $ 43.4
Interest expense                                     11.2          19 %        9.4         348 %       2.1

Net revenues (non-GAAP)                              89.3          32 %       67.6          64 %      41.3
Non-interest expenses                                68.6          37 %       49.9          75 %      28.5

Income before income tax and minority interest
(non-GAAP)                                           20.7          17 %       17.7          38 %      12.8
Pro forma income tax expense (non-GAAP)               7.9          16 %        6.8          51 %       4.5
Minority interest in income of consolidated
entities                                              0.4         (33 )%       0.6         500 %       0.1

Income from continuing operations                    12.4          20 %       10.3          26 %       8.2
Loss from discontinued operations, net of
taxes                                                 1.4         600 %        0.2         n/m          -

Pro forma net income (non-GAAP)                   $  11.0           9 %     $ 10.1          23 %    $  8.2

Reconciliation of operating revenues from GAAP to adjusted, non-GAAP numbers:

Total operating revenues, (GAAP)                  $ 127.4                   $ 53.6                  $ 35.9
Gross marked to market adjustment                   (26.9 )                   23.4                     7.5

Operating revenues (non-GAAP)                     $ 100.5                   $ 77.0                  $ 43.4

Reconciliation of income tax expense from GAAP to pro forma, non-GAAP numbers:

Income tax expense (benefit) (GAAP)               $  18.0                   $ (2.0 )                $  1.7
Pro forma taxes on gross marked to market
adjustment at 37.5%                                 (10.1 )                    8.8                     2.8

Pro forma income tax expense (non-GAAP)           $   7.9                   $  6.8                  $  4.5

2008 Operating Revenues vs. 2007 Operating Revenues

The Company's operating revenues under GAAP for 2008 and 2007 were $127.4 million and $53.6 million, respectively. The Company's adjusted operating revenues were $100.5 million in 2008, 31% higher than the operating revenues of $77.0 in 2007. This was attributable to adjusted operating revenue increases of 69% in foreign exchange trading, 62% in commodities trading and 23% in equities market-making, offset by decreases of 33% in debt capital markets and 13% in asset management. Our trading and market-making segments generally performed well throughout the year, with the equities and foreign exchange trading businesses both experiencing a strong fourth quarter and the commodities trading business performing very well in the first half of the year. However, total adjusted operating revenues during the second half of the year and particularly in the fourth quarter were adversely affected by losses in the asset management segment. These arose as a result of reduced investment advisory fees and marked-to-market losses on the Company's seed capital investments, directly related to redemptions from funds under management and to declining values of assets as the global financial crisis gathered pace. The Company's assets under management in the asset management segment increased from $1.3 billion at September 30, 2007 to $2.3 billion at June 30, 2008 but then declined to $1.2 billion by September 30, 2008. The debt arrangement and placement business, accounted for in our debt capital markets segment, was also adversely affected by a sharp reduction in investment appetite during the year. See the segmental analysis below for additional information on activity in each of the segments.

2007 Operating Revenues vs. 2006 Operating Revenues

The Company's operating revenues under GAAP for 2007 and 2006 were $53.6 million and $35.9 million, respectively. The Company's adjusted operating revenues were $77.0 million in 2007, 78% higher than the operating revenues of $43.4 million in 2006. Adjusted operating revenues increased in all the Company's business segments: by 977% in asset management, 167% in debt capital markets, 67% in commodities trading, 53% in equities market-making and 10% in foreign exchange trading. See the segmental analysis below for additional information on activity in each of the segments, including information on the 2006 accounting treatment of the Company's asset management joint venture, INTL Consilium, which helps to explain the large increase in operating revenues in the asset management segment. Assets under management more than doubled, from $505 million at the end of 2006 to $1.3 billion at the end of 2007. The increased adjusted operating revenues in the commodities trading business was largely as a result of improved revenues in the precious metals business. Increased volumes of trades drove the increased profitability in the equities market-making business.

2008 Expenses vs. 2007 Expenses

Interest expense: Interest expense increased by 19% from $9.4 million in 2007 to $11.2 million in 2008 as a result of increased average borrowings during the year, though at lower absolute interest rates.

Non-interest expenses: The following table sets forth information concerning non-interest expenses.

       (in millions)
                                                     %                   %
       Year Ended September 30,            2008    Change      2007    Change      2006
       NON-INTEREST EXPENSES
       Compensation and benefits          $ 40.0       32 %   $ 30.4       82 %   $ 16.7
       Clearing and related expenses        15.5       31 %     11.8       53 %      7.7
       Other non-interest expenses
       - Occupancy and equipment rental      1.5       36 %      1.1       83 %      0.6
       - Professional fees                   2.3       21 %      1.9      138 %      0.8
       - Depreciation and amortization       1.0       25 %      0.8      100 %      0.4
       - Business development                2.8       65 %      1.7       55 %      1.1
       - Insurance                           0.4       33 %      0.3       50 %      0.2
       - Other                               5.1      168 %      1.9       90 %      1.0

                                            13.1       70 %      7.7       88 %      4.1

       Total non-interest expenses        $ 68.6       37 %   $ 49.9       75 %   $ 28.5

Non-interest expenses: Non-interest expenses increased by 37% from $49.9 million in 2007 to $68.6 million in 2008.

Compensation and Benefits: Compensation and benefits expense grew by 32% from $30.4 million to $40.0 million. These represented 58% of total non-interest expenses in 2008, compared with 61% in 2007. Total variable compensation paid to traders increased 37% from $13.0 million in 2007 to $17.8 million in 2008, as a result of increased revenues. Administrative and executive bonuses, including deferred compensation expenses (a proportion of current year bonuses allocated to restricted stock awards is deferred and expensed as vesting occurs), were $2.7 million, compared with $3.2 million in 2007. Stock option expense in 2008 was $0.8 million, compared with $0.7 million in 2007. Salaries and benefits increased 31% from $14.3 million in 2007 to $18.7 million. The number of employees in the Company grew 15% from 170 at the end of 2007 to 195 at the end of 2008.

Clearing and Related Expenses: Clearing and related expenses increased by 31% from $11.8 million in 2007 to $15.5 million in 2008. The increase was mainly a result of increased equities volumes and commissions paid in the foreign exchange trading business. Clearing and related expenses include bank charges, which increased from $0.8 million in 2007 to $1.3 million in 2008. Bank charges include commitment and arrangement fees paid to banks.

Other Non-Interest Expenses: Other non-interest expenses increased by 70% from $7.7 million in 2007 to $13.1 million in 2008. $2.4 million of the amount in 2008 relates to the write-off of a receivable from one of the Company's customers. The Company provided for $1.2 million of this amount during the second fiscal quarter of 2008. Following deterioration of the value of the customer's assets from which payment might have been expected, the Company has decided to write off the balance of the amount owing. There was a 21% increase in professional fees, which included fees for legal action taken against the defaulting customer referred to above, additional fees for tax advice and increased audit fees. Business development costs increased by $1.1 million, or 65%, from $1.7 million to $2.8 million, largely as a result of establishing and building new customer bases from offices that were set up during 2007, and additional management travel. Other increases related to the general expansion of the Company's business.

Provision for Taxes: The effective income tax rate on a GAAP basis was 37.8% in 2008, compared with 34.8% in 2007. This change was primarily due to changes in the geographic mix of profits or losses.

Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix or our earnings, the level of our pre-tax earnings and the level of our tax credits.

Minority Interest: The minority interest in income of consolidated entities decreased from $0.6 million in 2007 to $0.4 million in 2008. This represents the minority interests in our two joint ventures, INTL Consilium and INTL Commodities DMCC, and in INTL Gainvest Capital Uruguay S.A.

Loss from Discontinued Operations: The loss from discontinued operations was $0.2 million in 2007 and $1.4 million in 2008. On August 1, 2008, the Company notified the employees of its Hong Kong subsidiary, INTL Global Currencies (Asia) Ltd., of its intention to discontinue its foreign exchange margin trading operations. As of September 30, 2008, the Company was in the process of effecting the orderly liquidation of this subsidiary, which is expected to be completed before the end of the first quarter of fiscal 2009. The Company incurred losses before taxes of $2.4 million and $0.2 million in this subsidiary during fiscal years 2008 and 2007, respectively. The Company expects to realize a tax benefit of $1.0 million for the 2008 fiscal year.

2007 Expenses vs. 2006 Expenses

Interest Expense: The Company's interest expense was $9.3 million in 2007, compared to $2.1 million in 2006. The expense in 2007 included $1.9 million of interest payable to holders of the Company's senior subordinated convertible notes, $0.4 million of convertible note issuance expense and liquidated damages liability amortized and charged as interest, $1.2 million of interest incurred in the Company's equity and debt capital markets businesses, including interest to prime brokers for managed accounts, $1.1 million of interest paid to banks in the foreign exchange trading business, $3.8 million of interest paid in the commodities business and $1.0 million of interest paid to banks for general borrowing purposes.

Non-Interest Expenses: The Company's total non-interest expenses increased by approximately 75% to $49.9 million in 2007 from $28.5 million in 2007. The increase of approximately $21.4 million was primarily due to higher compensation and benefit expenses, which increased by $13.7 million, or 82%, as a result of increased variable compensation and bonuses and increased employee numbers. The balance of the increase was attributable to costs associated with the expansion of the Company's business.

Compensation and Benefits: The Company's compensation and benefit expense increased 82% to $30.4 million in 2007 from $16.7 million in 2006. Variable compensation to traders increased by 102%, from $6.4 million to $13.0 million, as a result of increased revenues. Administrative and executive bonuses increased from $2.4 million to $3.2 million. The number of employees increased by 91%, from 89 at the end of 2006 to 170 at the end of 2007. Salaries and benefits for INTL Consilium are included in the Company's 2006 Consolidated Statement of Operations from August 1, 2006, the date from which the accounts of INTL Consilium were consolidated by the Company.

Clearing and related expenses: Clearing and related expenses increased by 53% to $11.8 million in 2007 from $7.7 million in 2006, mainly as a result of increased securities activity. Securities related clearing expenses increased by 40% to $9.4 million in 2007 from $6.7 million in 2006. Total ADR fees decreased from approximately $2.7 million in 2006 to $2.2 million in 2007 as a result of fewer shares converted, and negotiation of better fees. Bank charges are included in clearing and related expenses. These amounted to $0.8 million in 2007, compared to $0.6 million in 2006 and include commitment and arrangement fees paid to banks.

Other Non-Interest Expenses: Other non-interest expenses increased by 88% from $4.1 million in 2006 to $7.7 million in 2007, mainly as a result of the expansion of the Company's activities. The number of offices increased from 4 at the end of 2006 to 11 at the end of 2007. The number of companies in the group increased from 10 at the end of 2006 to 20 at the end of 2007. As mentioned above, the number of employees increased from 89 at the end of 2006 to 170 at the end of 2007. Professional fees, in particular, which consist mainly of legal, taxation, auditing and accounting fees, showed a large increase, from $0.8 million in 2006 to $2.3 million in 2007, mainly as a result of the increased number of companies, initial compliance with section 404 of the Sarbanes-Oxley Act, accounting fees in the asset management business and legal fees.

Provision for Taxes: The effective income tax rate on a GAAP basis was 35.1% in 2007, compared with 32.1% in 2006. This change was primarily due to changes in the geographic mix of profits or losses.

Minority Interest: The minority interest in income of consolidated entities increased from $0.1 million in 2006 to $0.6 million in 2007. In 2007 this represented the minority interests in our two joint ventures, INTL Consilium and INTL Commodities DMCC, and in INTL Gainvest Capital Uruguay S.A. In 2006 this represented only the minority interest in INTL Consilium.

Segment Information: The following table sets forth information concerning the Company's principal business segments.

(in millions)
                                                                  %                         %
Year Ended September 30,                          2008          Change        2007        Change       2006
SEGMENTAL RESULTS
International equities market-making
- operating revenues                            $    33.9           23 %     $  27.5          53 %    $ 18.0
- variable expenses                                  16.3           19 %        13.7          57 %       8.7

- contribution                                       17.6           28 %        13.8          48 %       9.3

Foreign exchange trading
- operating revenues                                 23.8           68 %        14.2          10 %      12.9
- variable expenses                                   6.1           97 %         3.1           3 %       3.0

- contribution                                       17.7           59 %        11.1          12 %       9.9

Commodities trading
- adjusted operating revenues (non-GAAP)             22.8           61 %        14.2          69 %       8.4
- variable expenses                                   4.5           61 %         2.8         100 %       1.4

- contribution (non-GAAP)                            18.3           61 %        11.4          63 %       7.0

International debt capital markets
- operating revenues                                  4.3          (33 )%        6.4         167 %       2.4
- variable expenses                                   0.5          (72 )%        1.8         350 %       0.4

- contribution                                        3.8          (17 )%        4.6         130 %       2.0

Asset management
- operating revenues                                 12.2          (13 )%       14.0         977 %       1.3
- variable expenses                                   2.8           65 %         1.7         240 %       0.5

- contribution                                        9.4          (24 )%       12.3       1,438 %       0.8

Other
- operating revenues                                  3.5          400 %         0.7          75 %       0.4
- variable expenses                                   0.2          n/m           0.1         n/m          -

- contribution                                        3.3          450 %         0.6          50 %       0.4

Total Segmental Results
- operating revenues (non-GAAP)                     100.5           31 %        77.0          77 %      43.4
- variable expenses                                  30.4           31 %        23.2          66 %      14.0

- contribution (non-GAAP)                       $    70.1           30 %     $  53.8          83 %    $ 29.4

Reconciliation of commodities trading operating revenues from GAAP to adjusted, non-GAAP numbers:

Total operating revenues, (GAAP)                $    49.7                    $  (9.2 )                $  0.9
Gross marked to market adjustment                   (26.9 )                     23.4                     7.5

Operating revenues (non-GAAP)                   $    22.8                    $  14.2                  $  8.4

Reconciliation of commodities trading contribution from GAAP to adjusted, non-GAAP numbers:

Total commodities trading contribution,
(GAAP)                                          $    45.2                    $ (12.0 )                $ (0.5 )
Gross marked to market adjustment                   (26.9 )                     23.4                     7.5

Commodities trading contribution (non-GAAP)     $    18.3                    $  11.4                  $  7.0

Reconciliation of total operating revenues from GAAP to adjusted, non-GAAP numbers:

Total operating revenues, (GAAP)                $   127.4                    $  53.6                  $ 35.9
Gross marked to market adjustment                   (26.9 )                     23.4                     7.5

Operating revenues (non-GAAP)                   $   100.5                    $  77.0                  $ 43.4

Reconciliation of contribution from GAAP to adjusted, non-GAAP numbers:

Total contribution, (GAAP)                      $    97.0                    $  30.4                  $ 21.9
Gross marked to market adjustment                   (26.9 )                     23.4                     7.5

Contribution (non-GAAP)                         $    70.1                    $  53.8                  $ 29.4

2008 vs. 2007 Segmental Analysis

The adjusted net contribution of all the Company's business segments increased 30% from $53.8 million in 2007 to $70.1 million in 2008. Net contribution consists of operating revenues less direct clearing and clearing related charges and variable compensation paid to traders. Variable compensation is paid to traders on the basis of a fixed percentage of the aggregate of revenues less clearing and related charges, base salaries and a fixed overhead allocation. Net contribution is one of the key measures used by management to assess the performance of each segment.

International equities market-making - Operating revenues increased by 23% from $27.5 million in 2007 to $33.9 million in 2008. 2008 produced monthly revenues ranging from $1.7 million to $4.6 million, and an average of $2.8 million. The volume of trades was higher in 2008 than in 2007 by approximately 60%, due to increased customer activity. Both volumes and market volatility are the drivers of this business. Equity market-making operating revenues include the trading profits earned by the Company before the related expense deduction for ADR conversion fees. These ADR fees are included in the statement of operations as clearing and related expenses.

The contribution attributable to this segment increased 28% from $13.8 million to $17.6 million. Variable expenses expressed as a percentage of operating revenues decreased from 50% to 48%.

Foreign exchange trading - Operating revenues increased by 68% from $14.2 million in 2007 to $23.8 million in 2008 as the customer base expanded and the Company rolled out a system that allows customers to place trades electronically. The profitability of this business also depends on the extent of dislocation in the developing world currency markets in which it operates, with instability producing opportunities for greater profitability.

The contribution attributable to this segment increased 59% from $11.1 million to $17.7 million. Variable expenses expressed as a percentage of operating revenues increased from 22% to 26%, mainly as a result of commissions paid to introducers for additional business.

Commodities trading - Operating revenues under GAAP increased from a loss of $9.2 million in 2007 to operating revenues of $49.7 million in 2008. Adjusted operating revenues increased by 61% from $14.2 million in 2007 to $22.8 million in 2008.

Precious metals adjusted operating revenues increased 51% from $7.0 million in 2007 to $10.6 million in 2008. Base metals adjusted operating revenues increased 69% from $7.2 million in 2007 to $12.2 million in 2008. Precious metals operating revenues have increased as a result of increased customer business and additional business done by our Dubai joint venture and from our Singapore office. Base metals operating revenues benefited during the first half of 2008 from a disparity between the price of auto batteries, which the Company recycles for their lead content, and the price at which it was able to sell lead to customers. With the rapid decline in lead prices during calendar 2008, this disparity also declined to the extent that recycling became less attractive in the second half of fiscal 2008.

The adjusted contribution attributable to this segment increased 61% from $11.4 million to $18.4 million. Variable expenses expressed as a percentage of operating revenues decreased marginally from 20% to 19%.

International debt capital markets - Operating revenues decreased by 33% from $6.4 million in 2007 to $4.3 million in 2008. The composition of the operating revenues in this segment changed between 2007 and 2008, shifting from trading revenues to fee revenues as the Company changed its focus to the arranging and placing of debt issues and asset backed securitization. Trading revenues were $2.0 million in 2007 but negligible in 2008. However, a sharp decline in the market's appetite for risk during 2008 resulted in an overall decrease in operating revenue.

The contribution attributable to this segment decreased 17% from $4.6 million to $3.8 million. Variable expenses expressed as a percentage of operating revenues decreased from 28% to 12%, as a result of a decrease in variable compensation.

Asset management - The Company's asset management segment revenues include management and performance fees, commissions and other revenues received by the Company for management of third party assets and investment gains or losses on the Company's investments in registered funds or proprietary accounts managed either by the Company's investment managers or by independent investment managers. The Company has invested in registered funds in order to provide seed capital. In addition, a proprietary account managed by the Company's asset management joint venture, INTL Consilium, was established to produce a track record for the launch of a fund specializing in African investments. This fund, the Legacy Greater Africa Alpha Fund, advised by INTL Consilium, was established in July 2008 with an initial $25 million investment by an African bank.

Operating revenues decreased by 13% from $14.0 million in 2007 to $12.2 million in 2008. Total operating revenues in this segment were $16.2 million for the nine months to June 30, 2008. Redemptions from and losses in funds managed by the Company during the fourth quarter of 2008 reduced total third party assets under management in this segment from $2.3 billion at June 30, 2008 to $1.2 billion at September 30, 2008. Performance in the funds did not meet required hurdles and there was a reversal of performance fees previously accrued. Management fees were earned on a lower asset base. The Company also suffered marked-to-market losses in its proprietary investments (investments in registered funds and the proprietary account referred to above) of $4.2 million during the fourth quarter of 2008. The fair value of the Company's proprietary investments was $37.9 million at September 30, 2008 and $33.4 million at September 30, 2007.

The contribution attributable to this segment decreased by 24% from $12.3 million to $9.4 million. Variable expenses expressed as a percentage of operating revenues increased from 12% to 23% as a result of increases in fund accounting expenses.

2007 vs. 2006 Segmental Analysis

The adjusted net contribution of all the Company's business segments increased 82% from $29.5 million in 2006 to $53.8 million in 2007.

International equities market-making- Operating revenues increased 53% to $27.5 million in 2007 from $18.0 million in 2006. Volumes increased as a result of . . .