This Item contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and the industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of words such as "may," "could," "should," "would," "believe," "anticipate," "forecast," "estimate," "expect," "intend," "plan," "project," "outlook," "will," "potential" and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of this Form 10-K, which include, without limitation, the adverse effect from a decline in securities markets or in the relative investment performance of our products, our inability to pay future dividends, the loss of existing distribution channels or the inability to access new ones, a reduction of the assets we manage on short notice, and adverse results of litigation and/or arbitration. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following should be read in conjunction with the "Selected Financial Data" and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Executive Overview

We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets, particularly United States equity markets, can have a material impact on our results of operations, financial condition and cash flows.

Revenue Sources

We derive our revenues primarily from providing investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management fees, a substantial source of our revenues, are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues, another substantial source of revenues, consist of commissions derived from sales of investment and insurance products, distribution fees on certain variable products, and fees earned on fee-based asset allocation products, as well as advisory services. The products sold have various commission structures and the revenues received from product sales vary based on the type and amount sold. Rule 12b-1 service and distribution fees earned for servicing and/or distributing certain mutual fund shares are based upon assets under management and fluctuate based on sales, redemptions and financial market conditions. Other service fees include transfer agency fees, custodian fees for retirement plan accounts and portfolio accounting.

Expense Drivers

Our major expenses are underwriting and distribution-related commissions, employee compensation, amortization of deferred sales commissions, subadvisory fee expenses and information technology expense.

Our Distribution Channels

One of our distinctive qualities is that we are a significant distributor of investment products. Our retail products are distributed through our Advisors channel sales force of independent financial advisors or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors (including the retirement advisors of Legend) and various retirement platforms. We also market our investment advisory services to institutional investors, either directly or through consultants, in our Institutional channel.

In the Advisors channel, our sales force consists of 2,366 independent financial advisors providing personal financial planning services to our clients across the United States, focusing on investment strategies for retirement, education funding, insurance, estate planning and other specific needs.

In our Wholesale channel, we distribute retail mutual funds through broker/dealers, registered investment advisors, including Legend, our Florida-based retirement planning subsidiary and various retirement platforms. A team of 35 national wholesalers lead the efforts in this channel.

Through our Institutional channel we manage assets for defined benefit pension plans, other investment companies (as a subadvisor), defined contribution plans, endowments and high net worth clients.

Market Developments

During the past fiscal year, we operated in a period of high volatility in the financial markets. Over the twelve month period the Dow Jones Industrial Average declined 34% and the Standard & Poor's 500 Index declined 38%. Almost every class of financial assets experienced significant price declines and high volatility. Although the U.S. government took steps to stabilize the financial markets and the banking system and ensure continued availability of commercial and consumer credit, the economic outlook remains uncertain and we anticipate a challenging business climate in the year ahead.

Consequences of Market Developments

Due to our assets under management at year-end being substantially less than our average assets under management for the year, we will likely experience a significant decline in revenues in 2009 unless market conditions improve.

We took steps in the fourth quarter of 2008 to manage our expenses in response to current market conditions; however, we expect our net income and operating margins may be adversely affected, especially in the near future.

During the fourth quarter of 2008 we offered a voluntary separation program to our employees that included enhanced severance benefits. A total of 169 employees accepted the program, which for most was effective by December 31, 2008. Related to this program, we recorded a restructuring charge of $16.5 million in general and administrative expenses. The restructuring charge includes $0.7 million for termination of various projects under development. We also reversed $7.9 million of previously recorded bonus accruals to reflect lower bonus awards for 2008.

Due to significant asset redemption activity and our review of the recoverability of our deferred sales commission assets in the fourth quarter of 2008, we recorded $6.5 million in additional amortization ($0.7 million related to Class B shares and $5.8 million related to Class C shares), partially offset by higher CDSC revenue received during the fourth quarter as a result of higher redemption activity.

Based on a review of goodwill and intangibles in the fourth quarter, we recorded a goodwill impairment charge of $7.2 million related to ACF based on declines in ACF's assets under management and the related adverse impact on its earnings potential.

Assets Under Management

Assets under management of $47.5 billion on December 31, 2008 were 27% lower than the $64.9 billion reported a year earlier primarily due to market depreciation of $25.4 billion. Almost 90% of the year's market depreciation occurred during the last six months of the year. Net sales of $7.8 billion ($7.1 billion of which was generated by the Wholesale channel) partially offset market declines and increased redemptions.

Change in Assets Under Management (1)

                                Advisors      Wholesale     Institutional
                                Channel        Channel         Channel          Total
                                                    (in millions)
    December 31, 2008
    Beginning Assets            $   34,562        21,537              8,769       64,868
    Sales (net of
    commissions)                     3,724        15,599              2,359       21,682
    Redemptions                    (3,771)       (8,541)            (1,561)     (13,873)

    Net Sales                         (47)         7,058                798        7,809
    Net Exchanges                    (150)           145                  -          (5)
    Reinvested Dividends
    and Capital Gains                  325         (271)                119          173

    Net Flows                          128         6,932                917        7,977
    Market Depreciation           (11,218)      (10,980)            (3,163)     (25,361)

    Ending Assets               $   23,472        17,489              6,523       47,484

    December 31, 2007
    Beginning Assets            $   29,905        10,819              7,677       48,401
    Sales (net of
    commissions)                     3,551         9,470              1,883       14,904
    Redemptions                    (3,829)       (2,795)            (2,128)      (8,752)

    Net Sales                        (278)         6,675              (245)        6,152
    Net Exchanges                    (180)           173                  -          (7)
    Reinvested Dividends
    and Capital Gains                  245          (24)                105          326

    Net Flows                        (213)         6,824              (140)        6,471
    Market Appreciation              4,870         3,894              1,232        9,996

    Ending Assets               $   34,562        21,537              8,769       64,868

    December 31, 2006
    Beginning Assets            $   27,187         6,729              7,947       41,863
    Sales (net of
    commissions)                     3,216         4,541                968        8,725
    Redemptions                    (3,325)       (1,915)            (1,748)      (6,988)

    Net Sales                        (109)         2,626              (780)        1,737
    Net Exchanges                    (194)           185                  -          (9)
    Reinvested Dividends
    and Capital Gains                  232            16                111          359

    Net Flows                         (71)         2,827              (669)        2,087
    Market Appreciation              2,789         1,263                399        4,451

    Ending Assets               $   29,905        10,819              7,677       48,401

º (1)
º Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the year over year change in ending assets under management, increased by 13% as compared to 2007. However, average assets under management for the fourth quarter of 2008 were $48.4 billion, a 23% decrease from the fourth quarter average of $62.5 billion in 2007. The significant decline in our assets under management which took place in the second half of 2008 will continue to drive down our average assets under management if market conditions do not improve.

Average Assets Under Management

                                 2008                       2007                     2006
                                     Percentage               Percentage               Percentage
                         Average      of Total     Average     of Total     Average     of Total
                                          (in millions, except percentage data)
  Distribution
  Channel:
     Advisors
     Channel
         Equity          $  24,201           80%     27,048           84%     23,821           84%
         Fixed
         income              4,490           15%      4,154           13%      3,901           14%
         Money
         market              1,428            5%      1,046            3%        798            2%

     Total               $  30,119          100%     32,248          100%     28,520          100%

     Wholesale
     Channel
         Equity          $  23,268           98%     14,395           97%      8,499           95%
         Fixed
         income                413            2%        380            3%        344            4%
         Money
         market                152            0%         64            0%         70            1%

     Total               $  23,833          100%     14,839          100%      8,913          100%

     Institutional
     Channel
         Equity          $   7,445           93%      7,199           92%      7,120           92%
         Fixed
         income                584            7%        614            8%        624            8%
         Money
         market                  -             -          -             -          -             -

     Total               $   8,029          100%      7,813          100%      7,744          100%

  Total by Asset
  Class:
         Equity          $  54,914           89%     48,642           89%     39,440           87%
         Fixed
         income              5,487            9%      5,148            9%      4,869           11%
         Money
         market              1,580            2%       1110            2%        868            2%

     Total               $  61,981          100%     54,900          100%     45,177          100%

The following table summarizes our five largest mutual funds as of December 31, 2008 by ending assets under management and investment management fees for the last three years. The assets under management and management fees of our five largest mutual funds are presented as a percentage of our total assets under management and total management fees.

Five Largest Mutual Funds by Ending Assets Under Management and Investment

Management Fees

                                         2008                        2007                      2006
                                             Percentage                 Percentage                Percentage
                                Ending        of Total      Ending       of Total      Ending      of Total
                                                   (in millions, except percentage data)
By Assets Under Management:
     Ivy Asset Strategy         $  10,430            22%       8,419            14%      2,008             4%
     Ivy Global Natural
     Resources                      2,618             5%       8,464            15%      4,519             9%
     Advisors Asset
     Strategy                       2,411             5%       3,118             5%      1,899             4%
     Advisors Core
     Investment                     2,377             5%       4,240             7%      4,155             9%
     Advisors Science &
     Technology                     1,670             4%       2,851             5%      2,521             5%

            Total               $  19,506            41%      27,092            46%     15,102            31%

                                                  (in thousands, except percentage data)
By Management Fees:
     Ivy Asset Strategy         $  71,957            18%      24,802             7%      7,094             2%
     Ivy Global Natural
     Resources (1)                 56,247            14%      50,944            14%     31,454            10%
     Advisors Core
     Investment                    21,053             5%      25,861             7%     25,635             8%
     Advisors Asset
     Strategy                      19,966             5%      15,696             4%     10,654             3%
     Advisors Science &
     Technology                    19,202             5%      22,310             6%     20,676             7%

            Total               $ 188,425            47%     139,613            38%     95,513            30%

º (1)
º For the years ended December 31, 2008, 2007 and 2006, we paid subadvisory fees of $28.8 million, $25.6 million and $15.8 million, respectively, to MFC for subadvisory services. The subadvisory agreement with MFC is renewable on an annual basis.

Results of Operations

Fourth Quarter 2008

Due to the effects of the negative market developments summarized earlier, we experienced a significant decline in assets under management and associated revenues concentrated in the last six months of 2008. These declines were a contributing factor to several actions taken by the company during the fourth quarter which resulted in one-time charges to our income statement. The table below details the components of operating income for the quarters ended December 31, 2008 and 2007. Significant changes to individual line items are summarized below.

                                               For the Quarter Ended
                                                   December 31,               Variance
                                                                              2008 vs.
                                               2008               2007          2007
                                             (in thousands, except percentage data)

  Investment management fees                $       76,397         105,296         -27%
  Underwriting and distribution fees                89,343         106,345         -16%
  Shareholder service fees                          25,304          24,476           3%

      Total revenues                               191,044         236,117         -19%
  Underwriting and distribution                    114,164         122,745          -7%
  Compensation and related costs                    21,140          31,901         -34%
  General and administrative                        32,894          13,819         138%
  Subadvisory fees                                   5,385          12,532         -57%
  Depreciation                                       3,481           3,140          11%
  Goodwill impairment                                7,222               -           NM

      Total operating expenses                     184,286         184,137           0%

  Operating income                          $        6,758          51,980         -87%

Investment management fee revenue declined due to an average asset decline in the fourth quarter of 2008 of 23% compared to last year's fourth quarter. A lower effective management fee rate (62.8 basis points in the current quarter compared to 66.9 basis points in the fourth quarter of 2007) also impacted revenues. The decline in rate is due to a mix-shift in assets under management to lower fee products. A significant decrease in underwriting and distribution fee revenue of $14.0 million occurred in the Advisors channel compared to the same period last year, primarily due to lower Rule 12b-1 asset-based service and distribution fees based on a decline in average assets under management. The decrease was partially offset by increased revenues related to the sale of insurance products of $1.7 million and fee-based asset allocation products of $1.4 million. CDSC revenues also increased $2.7 million in the Wholesale channel compared to the prior year due to higher redemptions in 2008.

Due to significant asset redemption activity and our review of the recoverability of our deferred sales commission assets in the fourth quarter of 2008, we recorded $6.5 million in additional amortization ($0.7 million related to Class B shares and $5.8 million related to Class C shares), partially offset by higher CDSC revenue recorded during the fourth quarter based on higher redemptions. Amortization of deferred sales commission assets is included in Underwriting and distribution expense in the statements of income.

Compensation and related costs were lower in this year's fourth quarter primarily due to the reversal of previously accrued bonuses of $7.9 million and an overall lower bonus pool in 2008 to reflect current market and economic conditions. General and administrative expenses increased significantly due to the

restructuring charge of $16.5 million. Subadvisory fees declined due to the decline in subadvised average assets under management ($5.0 billion in the fourth quarter of 2008 compared to $12.0 billion in the same quarter last year). We also recorded a goodwill impairment charge of $7.2 million in this year's fourth quarter related to ACF based on declines in ACF's assets under management and the related adverse impact on its earnings potential.

Our available for sale investment portfolio had unrealized losses of $6.2 million as of December 31, 2008. If market conditions persist and the decline in value is determined to be other than temporary, it is possible that future periods could include the realization of these losses as a charge to net income.

Fiscal Year 2008

Net Income

                                      For the Year Ended
                                         December 31,                    Variance
                                                                   2008 vs.     2007 vs.
                                 2008        2007        2006        2007         2006
                                         (in thousands, except percentage data)

       Net Income               $ 96,163     125,497     46,112         -23%         172%
       Earnings per share:
            Basic               $   1.17        1.55       0.57         -25%         172%
            Diluted             $   1.15        1.52       0.55         -24%         176%
       Operating Margin              18%         23%        12%          -5%          11%

We reported net income of $96.2 million, or $1.15 per diluted share, in 2008 compared to $125.5 million, or $1.52 per diluted share in 2007 and $46.1 million, or $0.55 per diluted share in 2006.

Operating results for 2008 include a restructuring charge of $16.5 million, a goodwill impairment charge of $7.2 million related to our subsidiary ACF based on declines in ACF's assets under management and the related adverse impact on its earnings potential and $6.5 million in additional amortization to reduce our deferred acquisition cost asset.

Operating results for 2006 include a charge of $55.0 million related to our settlement with the SEC, the New York Attorney General and the Kansas Securities Commission regarding market timing allegations, $12.0 million of which represented non-deductible penalties. During 2006 we also recorded a goodwill impairment charge of $20.0 million related to ACF based on the negative impact of the decline in ACF's assets under management and diminished involvement of ACF's investment staff in mutual fund advisory responsibilities, which adversely impacted its earnings potential. Fiscal 2006 also included a restructuring charge of $1.9 million at ACF for employee separation costs, in response to a decline in investment performance and related loss of assets under management.

Total Revenues

    Total revenues increased 10% and 17% for the fiscal years 2008 and 2007,
respectively, attributable to growth in average assets under management of 13%
and 22% for the two years.

                                       For the Year Ended
                                          December 31,                    Variance
                                                                    2008 vs.    2007 vs.
                                  2008        2007        2006        2007        2006
                                         (in thousands, except percentage data)

      Investment management
      fees                      $ 399,863     372,345     311,525          7%         20%
      Underwriting and
      distribution fees           416,762     371,085     317,458         12%         17%
      Shareholder service
      fees                        102,495      94,124      89,672          9%          5%

          Total revenues        $ 919,120     837,554     718,655         10%         17%

Investment Management Fee Revenues

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts. Investment management fee revenues increased $27.5 million, or 7%, in 2008 and $60.8 million, or 20%, in 2007.

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Advisors and the Wholesale channels, were $364.7 million in 2008 and increased $31.9 million, or 10%, compared to 2007, while the related retail average assets increased 15%. Investment management fee revenues increased less than the related retail average assets due to significant sales growth in our Asset Strategy funds, which have lower than average management fee rates. Investment management fee revenues in 2007 were impacted by the decrease in management fee rates on certain funds in compliance with the New York Attorney General settlement that took place in the fourth quarter of 2006 and has reduced management fees by approximately $5.0 million on an annual basis. Revenues from investment management services provided to our retail mutual funds were $332.8 million in 2007 and increased $62.6 million, or 23%, compared to 2006, while the related retail average assets increased 26%. Retail sales in 2008 and 2007 were $19.3 billion and $13.0 billion, respectively, representing a 48% and 68% increase over sales in 2007 and 2006, respectively, with the majority of the growth in retail sales occurring in our Wholesale channel.

Institutional and separate account revenues were $35.2 million, $39.5 million and $41.3 million in 2008, 2007 and 2006, respectively. The decrease in account revenues in 2008 was primarily attributable to a management fee rate decrease on certain institutional accounts. The decrease in account revenues in 2007 was attributable to a decline in ACF's average assets by 27% and a management fee rate decrease on certain institutional accounts.

Long-term redemption rates (which exclude money market fund redemptions) in . . .