Overview

We are engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services and trust services through our principal subsidiaries, Securities America, Inc. (collectively with related companies, "Securities America"), Triad Advisors, Inc. ("Triad"), Investacorp, Inc. (collectively with related companies, "Investacorp"), Ladenburg Thalmann & Co. Inc. ("Ladenburg"), Ladenburg Thalmann Asset Management Inc. ("LTAM") and Premier Trust, Inc. ("Premier Trust"). We are committed to establishing a significant presence in the financial services industry by meeting the varying investment needs of our clients.

Through our acquisitions of Securities America in November 2011, Triad in August 2008 and Investacorp in October 2007, we have established a leadership position in the independent broker-dealer industry. During the past decade, this has been one of the fastest growing segments of the financial services industry. With approximately 2,700 financial advisors located in 50 states, we have become one of the approximately 10 largest independent broker-dealer networks. We believe that we have the opportunity through acquisitions, recruiting and internal growth to continue expanding our market share in this segment over the next several years. Since 2007, our plan has been to marry the more stable and recurring revenue and cash flows of the independent broker-dealer business with Ladenburg's traditional investment banking, capital markets, institutional equity and related businesses. Ladenburg's businesses are generally more volatile and subject to the cycles of the capital markets than our independent broker-dealer subsidiaries, but historically have enjoyed strong operating margins in good market conditions. Our goal has been to build sufficient scale in our independent brokerage business, with the accompanying more steady cash flows it can produce, so regardless of capital market conditions, we as a firm can generate significant operating cash to create value for our shareholders.

The appealing growth profile of the independent brokerage and advisory business has been a key factor in setting our strategic path. The independent brokerage channel has expanded significantly over the past decade, driven in large part by demographic trends, including the aging of America, the retirement of the baby boomer generation and the rollover of retirement assets from corporate 401(k) and other pension plans to individual IRA accounts. The increasing responsibility of individuals to plan for their own retirement has created demand for the financial advice provided by financial advisors in the independent channel, who are not tied to a particular firm's proprietary products. These developments have been occurring against a backdrop of the steady migration of client assets and advisors from the wirehouse, insurance and bank channels to the independent channel.

Each of our independent broker-dealers operates separately under its own management team, which reflects our recognition that each firm has its own unique culture and strengths. We believe this is an important part of the glue that helps bind the advisors to the firm. At the same time, we have taken advantage of the scale we have created across the multiple firms by spreading costs in areas that are not directly visible to the advisors and their clients, such as technology, accounting and other back office functions. Our acquisition of Securities America has provided opportunities that have added value to our existing businesses. We have rolled out Securities America's industry best practice development and coaching tools to our other advisors, while at a firm-wide level we expect to benefit from adding its management expertise and systems to strengthen risk management and financial reporting. In turn, Securities America's advisors have gained additional resources to enhance their practices, including access to Ladenburg's proprietary research and investment banking, Premier Trust's trust services and LTAM's wealth management solutions.

Ladenburg is a full service broker-dealer that has been a member of the New York Stock Exchange since 1879. It provides its services principally for middle market and emerging growth companies and high net worth individuals through a coordinated effort among corporate finance, capital markets, asset management, brokerage and trading professionals.

LTAM is a registered investment advisor. LTAM offers various asset management products utilized by Ladenburg and Premier Trust's clients, as well as clients of our independent financial advisors.

Premier Trust, a Nevada trust company, provides trust administration of personal and retirement accounts, estate and financial planning, wealth management and custody services. We acquired Premier Trust in September 2010 to differentiate ourselves from the competition and to provide our network of independent financial advisors with access to a broad array of trust services. This was an important strategic step in our efforts to increase the products and services we offer clients through our independent broker-dealer platform.

Each of Ladenburg, Securities America, Investacorp and Triad is subject to regulation by, among others, the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), the Municipal Securities Rulemaking Board and is a member of the Securities Investor Protection Corporation. Securities America is also subject to regulation by the Commodities Futures Trading Commission and the National Futures Association. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.

Acquisition Strategy

We continue to explore opportunities to grow our businesses, including through potential acquisitions of other securities and investment banking firms, both domestically and internationally. These acquisitions may involve payments of material amounts of cash, the incurrence of material amounts of debt, which may increase our leverage, or the issuance of significant amounts of our equity securities, which may be dilutive to our existing shareholders. We cannot assure you that we will be able to complete any such potential acquisitions on acceptable terms or at all or, if we do, that any acquired business will be profitable. We also may not be able to integrate successfully acquired businesses into our existing business and operations.

There have been no material changes from the critical accounting policies set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our annual report on Form 10-K for the year ended December 31, 2011, as amended. Please refer to those sections for disclosures regarding the critical accounting policies related to our business.

(in thousands, except share and per share data)

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The unaudited condensed consolidated financial statements include our accounts and the accounts of Ladenburg, Securities America (since November 4, 2011), Investacorp, Triad, Premier and our other subsidiaries.

                                           Three months ended              Six months ended
                                                 June 30,                      June 30,
                                           2012            2011           2012           2011
Total revenues                          $   163,385     $   60,231     $  318,100     $  117,433
Total expenses                              168,971         59,710        331,612        116,157
Pre-tax (loss) income                        (4,939 )          521         (7,310 )        1,276
Net (loss) income                            (4,983 )          200         (7,962 )          609

Reconciliation of EBITDA, as
adjusted, to net (loss) income:
EBITDA, as adjusted                     $     7,645     $    3,348     $   12,954     $    6,766
Add:
Interest income                                  49             15             93             30
Change in fair value of contingent
consideration                                   647              -          6,202              -
Less:
Interest expense                             (6,192 )         (820 )      (12,252 )       (1,648 )
Income tax expense                              (44 )         (321 )         (652 )         (667 )
Depreciation and amortization                (4,070 )         (895 )       (8,133 )       (1,788 )
Non-cash compensation                        (1,227 )       (1,127 )       (2,591 )       (2,084 )
Amortization of retention loans              (1,791 )            -         (3,583 )            -
Net (loss) income                       $    (4,983 )   $      200     $   (7,962 )   $      609

Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for change in fair value of contingent consideration, amortization of retention loans made in connection with the Securities America acquisition, non-cash compensation expense, and interest expense is a key metric we use in evaluating our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our financial performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our board of directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance, such as change in fair value of contingent consideration and amortization of retention loans made in connection with the Securities America acquisition, or do not involve a cash outlay, such as stock-related compensation. The presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as non-cash compensation, which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.

Second quarter 2012 EBITDA, as adjusted, was $7,645, an increase of $4,297 from second quarter 2011 EBITDA, as adjusted, of $3,348, primarily because of increased revenue for the 2012 period. For the six months ended June 30, 2012, EBITDA, as adjusted, was $12,954, an increase of $6,188 from EBITDA, as adjusted, of $6,766 for the six months ended June 30, 2011, primarily because of increased revenues in the 2012 period.

Segment Description

We have two operating segments:

· Independent brokerage and advisory services - includes the broker-dealer and investment advisory services provided by Securities America, Investacorp and Triad to their independent contractor financial advisors and wealth management services provided by Premier Trust; and

· Ladenburg - includes the investment banking, sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM.

                                            Three months ended             Six months ended
                                                 June 30,                      June 30,
                                           2012            2011           2012           2011
Revenues:
Independent brokerage and advisory
services (1)                            $   149,988     $   47,132     $  293,792     $   89,238
Ladenburg                                    13,322         13,185         24,198         28,451
Corporate                                        75            (86 )          110           (256 )
Total revenues                          $   163,385     $   60,231     $  318,100     $  117,433

Pre-tax (loss) income:
Independent brokerage and advisory
services (1) (2)                        $    (1,829 )   $    1,816     $     (514 )   $    3,063
Ladenburg                                       322            525             57          2,102
Corporate (3)                                (3,432 )       (1,820 )       (6,853 )       (3,889 )
Total pre-tax (loss) income             $    (4,939 )   $      521     $   (7,310 )   $    1,276

(1) Amounts for 2012 include Securities America which was acquired on November 4, 2011.

(2) Includes income of $647 and $6,202 from change in the fair value of contingent consideration related to Securities America acquisition for the three and six months ended June 30, 2012, respectively.

(3) Includes interest on revolving credit and forgivable loan notes, compensation, professional fees and other general and administrative expenses.

Three months ended June 30, 2012 versus three months ended June 30, 2011

For the quarter ended June 30, 2012, we had a net loss of $4,983 compared to net income of $200 for the quarter ended June 30, 2011, primarily due to increased interest, depreciation and amortization expenses and non-cash compensation expense in the 2012 period arising from the Securities America acquisition as described below, partially offset by a decrease in fair value of contingent consideration. The 2012 period included $6,192 of interest expense, $4,070 of depreciation and amortization expense and $1,227 of non-cash compensation expense as compared to $820 of interest expense, $895 of depreciation and amortization expense and $1,127 of non-cash compensation expense for the 2011 period.

Our total revenues for the three months ended June 30, 2012 increased $103,154 (171%) from the 2011 period primarily due to the Securities America acquisition. Second quarter 2012 revenues included increased commissions of $53,543, advisory fees of $39,818 and service fees and other income of $8,995, partially offset by decreased investment banking revenue of $470. Revenues for the second quarter of 2012 include $100,697 from Securities America. Excluding Securities America, revenues in our independent brokerage and advisory services segment increased $2,159 (5%) from the 2011 period, primarily due to improved market conditions and successful recruitment of higher-producing financial advisors.

Our total expenses for the three months ended June 30, 2012 increased by $109,261 (183%) from the 2011 period, primarily as a result of an increase in commissions and fees expense of $82,864, compensation and benefits expense of $8,484, interest expense of $5,372, other expenses of $5,041, depreciation and amortization of $3,175 and amortization of retention loans made in connection with the Securities America acquisition of $1,791. 2012 expenses include $105,283 from Securities America.

The $53,543 (178%) increase in commissions revenue for the three months ended June 30, 2012 as compared to the 2011 period was primarily attributable to $51,275 from the addition of Securities America and successful recruitment of higher-producing financial advisors in our independent brokerage and advisory services segment. Excluding Securities America, commissions revenue in our independent brokerage and advisory services segment increased $1,561 (6%) from the 2011 period.

The $39,818 (232%) increase in advisory fee revenue for the three months ended June 30, 2012 as compared to the 2011 period was primarily due to $38,695 from the addition of Securities America and a 1.4% increase in average assets under management at LTAM, Triad and Investacorp. We expect asset management revenue to increase in the near term due to newly-added advisory assets.

The $470 (4%) decrease in investment banking revenue for the three months ended June 30, 2012 was primarily due to an unusually high level of strategic advisory fees in the quarter ended June 30, 2011. Strategic advisory fees decreased $768 for the three months ended June 30, 2012 as compared to the 2011 period, primarily due to the completion of several large transactions in the 2011 period and were partially offset by an increase in capital raising revenue of $298 for the quarter ended June 30, 2012. We derived investment banking revenue for the three months ended June 30, 2012 from Ladenburg's capital raising activities, including underwritten public offerings and private placements, and strategic advisory services. Revenue from underwritten public offerings was $9,733 for the 2012 period, as compared to $8,857 for the 2011 period. Private placement revenue was $160 for the second quarter of 2012, including $17 in warrants received as investment banking fees, as compared to $738 for the 2011 period, including $586 in warrants received as investment banking fees due to difficult market conditions in the quarter ended June 30, 2012. Strategic advisory services revenue was $186 for the 2012 period as compared to $954 for the 2011 period.

The $1,041 (789%) increase in interest and dividends revenue for the three months ended June 30, 2012 as compared to the 2011 period was primarily due to $1,015 earned on the acquired assets of Securities America. We expect increased interest and dividends revenue in 2012 as compared to 2011due to the addition of Securities America.

The $8,995 (314%) increase in service fees and other income for the three months ended June 30, 2012 as compared to 2011 was primarily attributable to $9,710 of service fees and other income earned by Securities America. Excluding Securities America, service fees and other income decreased in our independent brokerage and advisory services segment primarily due to decreased conference revenue of $645, resulting from the rescheduling of an annual conference to the third quarter from the second quarter as in 2011, and decreased transaction-related fees of $265, which was partially offset by increased revenue of $247 in direct investment marketing allowances received from product sponsor programs.

The $82,864 (219%) increase in commissions and fees expense for the three months ended June 30, 2012 as compared to the 2011 period was directly correlated to the increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment, including $80,553 from the addition of Securities America. Commissions and fees expense comprises compensation payments earned by the registered representatives who serve as independent contractors in our independent brokerage and advisory services segment. These payments to the independent contractor registered representatives are calculated based on a percentage of revenues generated by such persons and vary by product. Accordingly, when the independent contractor registered representatives increase their business, both our revenues and expenses increase as our representatives earn additional compensation based on the revenue produced.

The $8,484 (68%) increase in compensation and benefits expense for the three months ended June 30, 2012 as compared to 2011 was primarily due to a $6,868 increase from the addition of Securities America, and a $1,018 increase in compensation at our Ladenburg and corporate segments. Excluding Securities America, compensation and benefits in our independent brokerage and advisory services segment increased $599. Compensation and benefits expense at our Ladenburg and corporate segments increased $1,018.

The $100 (9%) increase in non-cash compensation expense for the three months ended June 30, 2012 as compared to the 2011 period was primarily attributable to an increase of $383 from stock option grants to Securities America employees and financial advisors and $397 from stock options granted after June 30, 2011, partially offset by a decrease of $686 from stock option grants that fully vested after June 30, 2011.

The $637 (33%) increase in brokerage, communication and clearance fees expense for the three months ended June 30, 2012 as compared to the 2011 period was primarily due to a $549 increase from the addition of Securities America and an increase of $99 in our Ladenburg and corporate segments. Clearing expense at Ladenburg decreased as a result of clearing expense reduction credits provided by our primary clearing firm.

The $813 (103%) increase in rent and occupancy, net of sublease revenue for the three months ended June 30, 2012 as compared to the 2011 period was primarily attributable to an $831 increase from the addition of Securities America.

The $984 (103%) increase in professional services expense for the three months ended June 30, 2012 was primarily due to additional expense from Securities America of $1,136, which was partially offset by a decrease of $152 in legal, audit, tax and consulting expense.

The $5,372 (655%) increase in interest expense for the three months ended June 30, 2012 as compared to the 2011 period resulted from increased average debt balances following the Securities America acquisition and increased average interest rates. An average debt balance of approximately $211,380 was outstanding for the second quarter of 2012, as compared to an average outstanding debt balance of approximately $31,515 for the 2011 period. The average interest rate was 11.6% for the second quarter of 2012 as compared to 10.3% for the 2011 period.

The $3,175 (355%) increase in depreciation and amortization expense for the three months ended June 30, 2012 as compared to 2011 was primarily due to an additional $942 of depreciation and amortization of Securities America fixed assets and additional expense of $2,291, which is attributed to the amortization of intangible assets acquired in the Securities America acquisition.

The $5,041 (173%) increase in other expense for the three months June 30, 2012 as compared to 2011 is primarily attributable to the addition of $5,393 in other expense from Securities America. Excluding Securities America, the decrease in other expense, was attributable to a $637 decrease in conference and related expenses, as a result of the current year's conference being scheduled for the third quarter instead of the second quarter, a $151 decrease in other trading-related expenses, partially offset by a $243 increase in travel, meals and entertainment, a $82 increase in registration fees, a $54 increase in office expenses and a $22 increase in insurance expense.

The $647 decrease in fair value of contingent consideration for the three months ended June 30, 2012 was due to decreases in projected revenues based on actual revenues achieved for the six months ended June 30, 2012.

We incurred income tax expense of $44 for the three months ended June 30, 2012 as compared to $321 for the 2011 period. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at June 30, 2012 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. A net deferred tax liability of approximately $19,593 was recorded on the acquisition of Securities America for the excess financial statement basis over the tax basis of the acquired assets and assumed liabilities. As Securities America will be included in our consolidated federal and certain combined state and local income tax returns, deferred federal and a substantial portion of state and local tax liabilities assumed in the acquisition are able to offset the reversal of our pre-existing deferred tax assets. The effective tax rate for the 2012 period differed from the federal statutory tax rate of 34%, primarily as a result of the change in fair value of contingent consideration not subject to income tax and the increase in the valuation allowance against the net deferred tax asset (without regard to deferred tax liabilities related to indefinite-lived intangibles) related to the tax benefit of the pre-tax loss as adjusted for permanent differences.

Six months ended June 30, 2012 versus six months ended June 30, 2011

Our net loss for the six months ended June 30, 2012 was $7,962 compared to a net income of $609 for the six months ended June 30, 2011. The decrease in net income of $8,571 was primarily due to increased interest, depreciation and amortization expenses and non-cash compensation expense for the 2012 period arising from the Securities America acquisition as described below, partially offset by a decrease in fair value of contingent consideration. The 2012 period included $12,252 of interest expense, $8,133 of depreciation and amortization expense and $2,591 of non-cash compensation expense as compared to $1,648 of interest expense, $1,788 of depreciation and amortization expense and $2,084 of non-cash compensation expense for the 2011 period.

Our total revenues for the six months ended June 30, 2012 increased $200,667 (171%) from the 2011 period, primarily due to the Securities America acquisition, increased commissions of $104,480, advisory fees of $79,498 and other income of $19,638, partially offset by decreased investment banking revenue of $4,961. 2012 revenues include $198,277 from Securities America. Excluding Securities America, revenues in our independent brokerage and advisory services segment increased $6,277 (7%) from the 2011 period, primarily due to improved market conditions and recruitment of higher-producing financial advisors.

Our total expenses for the six months ended June 30, 2012 increased by $215,455 (185%) from the 2011 period, primarily as a result of an increase in commissions and fees expense of $163,080, compensation and benefits expense of $13,981, other expenses of $12,874, interest expense of $10,604, depreciation and amortization expense of $6,345 and amortization of retention loans made in connection with the Securities America acquisition of $1,791. 2012 expenses include $208,647 from Securities America.

The $104,480 (178%) increase in commissions revenue for the six months ended June 30, 2012 as compared to the 2011 period was primarily attributable to $99,829 from the addition of Securities America and successful recruitment of higher-producing financial advisors in our independent brokerage and advisory services segment. Excluding Securities America, commissions revenue in our independent brokerage and advisory services segment increased $3,712 (7%) from the 2011 period.

The $79,498 (241%) increase in advisory fee revenue for the six months ended June 30, 2012 as compared to the 2011 period was primarily due to $77,014 from the addition of Securities America and an 11% increase in average assets under management at LTAM, Triad and Investacorp. We expect asset management revenue to increase in the near term due to newly-added advisory assets.

The $4,961 (23%) decrease in investment banking revenue for the six months ended June 30, 2012 as compared to the 2011 period was primarily due to unusually high levels of investment banking in the six months ended June 30, 2011. Capital raising revenue decreased $4,334 and strategic advisory services revenue decreased $627 due to the completion of several large transactions in the 2011 period. We derived investment banking revenue for the six months ended June 30, 2012 from Ladenburg's capital raising activities, including underwritten public offerings and private placements, and strategic advisory services. Revenue from underwritten public offerings was $15,861 for the 2012 period, as compared to $17,930 for the 2011 period. Private placement revenue was $312 for the 2012 period, including $149 in warrants received as investment banking fees, as compared to $2,577 for the 2011 period, including $1,322 in warrants received as investment banking fees. Strategic advisory services revenue was $528 for the 2012 period, as compared to $1,156 for the 2011 period.

The $1,762 (610%) increase in interest and dividends revenue for the six months . . .