"Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including fair value of financial instruments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

All amounts in this disclosure are in thousands (except share and per share data) unless otherwise noted.

Overview

We are a financial services company specializing in credit-related fixed income investments. We were founded in 1999 as an investment firm focused on small-cap banking institutions, but have grown to provide an expanding range of capital markets, investment banking, and asset management solutions to institutional investors, corporations, and other small broker-dealers. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.

• Capital Markets: Our Capital Markets business segment consists primarily of credit-related fixed income sales, trading and financing, as well as new issue placements in corporate and securitized products and advisory services . Our fixed income sales and trading group provides trade execution to corporate, institutional investors, and other smaller broker-dealers. We specialize in a variety of products, including but not limited to: corporate bonds and loans, ABS, MBS, CMBS, RMBS, CDOs, CLOs, CBOs, CMOs, municipal securities, TBAs, SBA loans, U.S. government bonds, U.S. government agency securities, brokered deposits and CDs for small banks, and hybrid capital of financial institutions including TruPS, whole loans, and other structured financial instruments. We also offer execution and brokerage services for equity products. We had offered execution and brokerage services for equity derivative products until December 31, 2012, when we sold our equity derivatives brokerage business to a new entity owned by two of our former employees. See note 5 to our consolidated financial statements included in this Annual Report on Form 10-K. We carry out our capital market activities primarily through our subsidiaries: JVB and PrinceRidge in the United States and CCFL in Europe.

• Asset Management: Our Asset Management business segment manages assets within CDOs, permanent capital vehicles, managed accounts and investment funds (collectively, "Investment Vehicles"). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of a default, the lenders will have recourse only to the assets securing the loan. Our Asset Management business segment includes our fee-based asset management operations which include on-going base and incentive management fees. As of December 31, 2012, we had approximately $6.3 billion in AUM of which 95.7%, or $6.1 billion, was in CDOs.

• Principal Investing: Our Principal Investing business segment is comprised primarily of our investments in Investment Vehicles we manage, as well as investments in structured products, and the related gains and losses that they generate.

We generate our revenue by business segment primarily through:

Capital Markets:

• our trading activities, which include execution and brokerage services, securities lending activities, riskless trading activities, as well as gains and losses (unrealized and realized) and income and expense earned on securities classified as trading; and

• new issue and advisory revenue comprised of: (a) origination fees for corporate debt issues originated by us; (b) revenue from advisory services; and (c) new issue revenue associated with arranging and placing the issuance of newly created debt, equity, and hybrid financial instruments;

Asset Management:

• asset management fees for our on-going asset manager services provided to these Investment Vehicles, which may include fees both senior and subordinate to the securities issued by the Investment Vehicle; and

• incentive management fees earned based on the performance of the various Investment Vehicles;

Principal Investing:

• gains and losses (unrealized and realized) and income and expense earned on securities, primarily in investments in Investment Vehicles we manage, classified as other investments, at fair value; and

• income or loss from equity method affiliates (see "- Critical Accounting Policies and Estimates - Valuation of Financial Instruments" beginning on page 97).

Business Environment

Our business is materially affected by economic conditions in the financial markets, political conditions, and broad trends in business and finance, changes in volume and price levels of securities transactions, and changes in interest rates, all of which can affect our profitability, and all of which are unpredictable and are beyond our control. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. Severe market fluctuations or weak economic conditions could continue to reduce our trading volume and revenues and adversely affect our profitability.

The markets remain uneven and vulnerable to changes in investor sentiment. We believe the general business environment will continue to be challenging for 2013.

A portion of our revenues is generated from net trading activity. We engage in proprietary trading for our own account, provide securities financing to our customers, as well as execute "riskless" trades with a customer order in hand resulting in limited market risk to us. The inventory of securities held for our own account as well as held to facilitate customer trades and our market making activities are sensitive to market movements.

A portion of our revenues is generated from new issue and advisory engagements. The fees charged and volume of these engagements are sensitive to the overall business environment.

A portion of our revenues is generated from management fees. Our ability to charge management fees and the amount of those fees is dependent upon the underlying investment performance and stability of the investment vehicles. If these types of investments do not provide attractive returns to investors, the demand for such instruments will likely fall, thereby reducing our opportunity to earn new management fees or maintain existing management fees. Approximately ninety-six percent of our existing AUM are CDOs. The creation of

CDOs and permanent capital vehicles has depended upon a vibrant securitization market. Since 2008, volumes within the securitization market have dropped significantly and have not recovered since that time. Consequently, we have been unable to complete a new securitization since 2008.

A portion of our revenues is generated from principal investing activities. Therefore, our revenues are impacted by the underlying operating results of these investments. As of December 31, 2012, we had $38,323 of other investments, at fair value representing our principal investment portfolio. Of this amount, $37,560, or 98%, is comprised of investments in four separate investment funds and permanent capital vehicles: Star Asia, EuroDekania, Tiptree, and the Star Asia Special Situations Fund. Furthermore, the investment in Star Asia is our largest single principal investment and, as of December 31, 2012, had a fair value of $30,169, representing 79% of the total amount of other investments, at fair value. Star Asia seeks to invest in Asian commercial real estate structured finance products, including CMBS, corporate debt of REITs and real estate operating companies, whole loans, mezzanine loans, and other commercial real estate fixed income investments, and in real property in Japan. Therefore, our results of operations and financial condition will be significantly impacted by the financial results of these investments and, in the case of Star Asia, the Japanese real estate market in general. Our investment in Star Asia and our principal investing revenue was impacted by the earthquake, tsunami, and nuclear disaster in Japan that occurred during the first quarter of 2011. See "- Year Ended December 31, 2011 compared to the Year Ended December 2010 - Revenues - Principal Transactions and Other Income" below.

Margin Pressures in Corporate Bond Brokerage Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors that are beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including the level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the volatility of the equity and fixed income markets, the level and shape of the various yield curves, and the volume and value of trading in securities.

Since 2010, both margins and volumes in certain products and markets within the corporate bond brokerage business have decreased materially as competition has increased and general market activity has declined. Further, we continue to expect that competition will increase over time, resulting in continued margin pressure.

Our response to this margin compression has included: (i) building a diversified securitized product trading platform; (ii) expanding our European capital markets business; (iii) acquiring new product lines, including through the acquisitions of JVB and PrinceRidge in 2011; and (iv) monitoring our fixed costs. During the third quarter of 2011, the Company implemented significant cost savings initiatives. These initiatives included the elimination of duplicative costs that arose with the PrinceRidge transaction as well as net reductions in overall costs to address adverse market conditions. The initiatives included: termination of staff, reductions in compensation and benefits of remaining staff, the sublease and termination of duplicative leases, termination of or reduction in pricing of subscriptions, and other measures. More recently we have undertaken additional cost-cutting initiatives by merging support functions among and across many of our subsidiaries and business lines. However, there can be no certainty that these efforts will be sufficient. If insufficient, we will likely see a continued decline in profitability.

Legislation Affecting the Financial Services Industry

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets, including credit and derivative transactions. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over the next several years, thus making it difficult to assess the impact on the financial industry, including us, at this time. The Dodd-Frank Act establishes enhanced compensation and

corporate governance oversight for the financial services industry, provides a specific framework for payment, clearing and settlement regulation, and empowers the SEC to adopt regulations requiring new fiduciary duties and other more stringent regulation of broker-dealers, investment companies and investment advisers. We will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expect to adapt successfully to any new applicable legislative and regulatory requirements.

Recent Events or Transactions

Departure of Certain Officers of PrinceRidge

On July 19, 2012, PrinceRidge, IFMI, and the Operating LLC entered into a series of separate agreements with Michael Hutchins, the former CEO and board member of PrinceRidge, and John Costas, the former Chairman of the board of PrinceRidge, whereby (i) PrinceRidge repurchased all of the equity and profit units in PrinceRidge held by Mr. Costas and Mr. Hutchins; (ii) Mr. Costas and Mr. Hutchins resigned as employees and board members of PrinceRidge;
(iii) Mr. Costas and Mr. Hutchins agreed to forfeit all of their unvested equity awards both from PrinceRidge and IFMI; and (iv) Mr. Costas and Mr. Hutchins withdrew as members of PrinceRidge GP and as partners of CCPRH. Daniel G. Cohen, our Chairman and CEO, was appointed Chairman and CEO of PrinceRidge by the Board of Managers of PrinceRidge GP.

See note 18 to our consolidated financial statements included in this Annual Report on Form 10-K.

Sale of Equity Derivatives Brokerage Business

We entered into a purchase agreement, dated as of January 27, 2012, as amended on November 30, 2012 and December 31, 2012, whereby, we agreed, subject to approval by FINRA and other customary closing conditions, to sell our equity derivatives brokerage business to an entity owned by two individuals that were employed by the us until December 31, 2012 (the "FGC Buyer"). In connection with the sale of our equity derivative brokerage business, the FGC Buyer received certain intellectual property, books and records and rights to the "FGC" name. The transaction was subject to FINRA approval which was obtained in November 2012 and the equity derivatives brokerage business was transferred to the FGC Buyer on December 31, 2012, the closing date of the transaction. All of our equity derivatives employees were terminated and joined the FGC Buyer.

See note 5 to our consolidated financial statements included in this Annual Report on Form 10-K.

Repurchase of Mandatorily Redeemable Equity Interests

On October 5, 2012, PrinceRidge, IFMI, and the Operating LLC entered into a Separation, Release and Repurchase Agreement (collectively, the "PrinceRidge Separation Agreements") with each of Ahmed Alali, Ronald J. Garner and Matthew G. Johnson (collectively, the "PrinceRidge Separated Employees"). Under the PrinceRidge Separation Agreements, the PrinceRidge Separated Employees resigned from all positions and offices held with PrinceRidge and its affiliates including, with respect to Messrs. Alali and Johnson, as members of the Board of Managers of PrinceRidge GP.

See notes 17 and 18 to our consolidated financial statements included in this Annual Report on Form 10-K.

Consolidated Results of Operations

The following section provides a comparative discussion of our consolidated results of operations for the specified periods. The period-to-period comparisons of financial results are not necessarily indicative of future results.

Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

The following table sets forth information regarding our consolidated results of operations for the year ended December 31, 2012 and 2011.

                     INSTITUTIONAL FINANCIAL MARKETS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (Dollars in Thousands)

                                  (Unaudited)



                                         Year ended December 31,                        Favorable/(Unfavorable)
                                       2012                  2011                 $ Change                   % Change
Revenues
Net trading                         $    69,486          $     73,167         $         (3,681 )                       (5 )%
Asset management                         23,172                21,698                    1,474                          7 %
New issue and advisory                    5,021                 3,585                    1,436                         40 %
Principal transactions and
other income                             (2,439 )               1,881                   (4,320 )                     (230 )%

Total revenues                           95,240               100,331                   (5,091 )                       (5 )%

Operating expenses
Compensation and benefits                62,951                78,227                   15,276                         20 %
Business development,
occupancy, equipment                      5,795                 6,565                      770                         12 %
Subscriptions, clearing, and
execution                                11,446                12,025                      579                          5 %
Professional fees and other
operating                                13,448                19,441                    5,993                         31 %
Depreciation and amortization             1,305                 2,238                      933                         42 %

Total operating expenses                 94,945               118,496                   23,551                         20 %

Operating income / (loss)                   295               (18,165 )                 18,460                        102 %

Non operating income /
(expense)
Interest expense, net                    (3,732 )              (5,976 )                  2,244                         38 %
Gain on repurchase of debt                   86                    33                       53                        161 %
Other income / (expense)                 (4,357 )                  -                    (4,357 )                      N/M
Income/(loss) from equity
method affiliates                         5,052                 6,232                   (1,180 )                      (19 )%

Income / (loss) before income
taxes                                    (2,656 )             (17,876 )                 15,220                         85 %
Income tax expense/(benefit)               (615 )              (1,149 )                   (534 )                      (46 )%

Net income / (loss)                      (2,041 )             (16,727 )                 14,686                         88 %
Less: Net income / (loss)
attributable to the
non-controlling interest                 (1,073 )              (7,339 )                 (6,266 )                      (85 )%

Net income / (loss)
attributable to IFMI                $      (968 )        $     (9,388 )       $          8,420                         90 %

N/M = Not Meaningful

Revenues

Revenues decreased by $5,091, or 5%, to $95,240 for the year ended December 31, 2012 from $100,331 for the year ended December 31, 2011. As discussed in more detail below, the change was comprised of decreases of $3,681 in net trading and $4,320 in principal transactions and other income, partially offset by increases of $1,436 in new issue and advisory revenue and $1,474 in asset management revenue.

Net Trading

Net trading revenue decreased by $3,681, or 5%, to $69,486 for the year ended December 31, 2012 from $73,167 for the year ended December 31, 2011.

The following table provides detail on net trading revenue by operation. JVB was acquired effective January 1, 2011 and PrinceRidge was acquired on May 31, 2011. The PrinceRidge and other capital markets line includes the operations of PrinceRidge since its acquisition on May 31, 2011, as well as the results from the Company's other capital markets professionals not included in the JVB or CCFL lines for 2011. In conjunction with the acquisition of PrinceRidge, we contributed substantially all of our capital markets professionals (with the exception of those within JVB and CCFL) to PrinceRidge. Therefore, the revenues earned from PrinceRidge during the period we owned them include the revenues earned by the capital markets professionals contributed.

                                          December 31,       December 31,
                                              2012               2011           Change
 JVB.                                    $       23,070     $       18,634     $   4,436
 PrinceRidge and other capital markets           38,293             48,711       (10,418 )
 CCFL                                             8,123              5,822         2,301

 Total                                   $       69,486     $       73,167     $  (3,681 )

The increase in revenue in JVB was primarily due to an increase in trading revenue associated with US agency and structured product new issues. The increase in revenue in CCFL was primarily due to an increase in structured product trading. The decline in PrinceRidge and other capital markets was primarily due to the decline in trading revenue earned from trading in securitized products such as CDOs and CLOs.

Our net trading revenue includes unrealized gains on our trading investments, as of the applicable measurement date, that may never be realized due to changes in market or other conditions not in our control that may adversely affect the ultimate value realized from these investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions. Our ability to derive trading gains from trading positions is subject to overall market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized during the year ended December 31, 2012, may not be indicative of future results. Furthermore, some of the assets included in the Investments - trading line of our consolidated balance sheets represent level 3 valuations within the FASB fair value hierarchy. Level 3 assets are carried at fair value based on estimates derived using internal valuation models and other estimates. See notes 8 and 9 to our consolidated financial statements included in this Annual Report on Form 10-K. The fair value estimates made by the Company may not be indicative of the final sale price at which these assets may be sold.

Asset Management

Assets Under Management

Our assets under management, or AUM, equals the sum of: (1) the gross assets included in CDOs that we have sponsored and manage; plus (2) the NAV of the permanent capital vehicles and investment funds we manage; plus (3) the NAV of other accounts we manage.

Our calculation of AUM may differ from the calculations used by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. This definition of AUM is not necessarily identical to a definition of AUM that may be used in our management agreements.

                            ASSETS UNDER MANAGEMENT

                             (dollars in thousands)



                                                               As of December 31,
                                                    2012             2011              2010
Company sponsored CDOs                           $ 6,051,678      $ 7,859,755      $  9,730,374
Permanent capital vehicles                           145,326          169,237           171,028
Investment funds                                      84,659               -            129,027
Managed accounts (1)                                  43,924           33,644           288,608

Assets under management (end of period) (2)      $ 6,325,587      $ 8,062,636      $ 10,319,037

Average assets under management - company
sponsored CDOs                                   $ 6,559,087      $ 8,835,773      $ 12,199,716

(1) Represents client funds managed pursuant to separate account arrangements. Subsequent to March 28, 2011, certain separate account arrangements were excluded due to the sale of those management contracts to a new entity owned by two former Company employees, known as Strategos Capital Management, LLC (the "SCM Buyer"). See note 5 to our consolidated financial statements included in this Annual Report on Form 10K.

(2) AUM for company sponsored CDOs, permanent capital vehicles, investment funds and other managed accounts represents total AUM at the end of the period indicated.

Asset management fees increased by $1,474, or 7%, to $23,172 for the year ended December 31, 2012 from $21,698 for the year ended December 31, 2011, as discussed in more detail below. The following table provides a more detailed comparison of the two periods:

                                ASSET MANAGEMENT

                             (dollars in thousands)



                                                 December 31,         December 31,
                                                     2012                 2011             Change
Collateralized debt obligations and related
service agreements                              $       21,729       $       19,055       $  2,674
Investment funds and other                               1,443                2,643         (1,200 )

Total                                           $       23,172       $       21,698       $  1,474

CDOs

Asset management revenue from company-sponsored CDOs increased by $2,674 to $21,729 for the year ended December 31, 2012 from $19,055 for the year ended December 31, 2011. The following table summarizes the periods presented by asset class:

                           FEES EARNED BY ASSET CLASS

                             (dollars in thousands)



                                                 December 31,         December 31,
                                                     2012                 2011            Change
TruPS and insurance company debt - U.S.         $       11,504       $       11,916       $  (412 )
High grade and mezzanine ABS                             1,538                2,282          (744 )
TruPS and insurance company debt - Europe                6,429                3,121         3,308
Broadly syndicated loans - Europe                        2,258                1,736           522

Total                                           $       21,729       $       19,055       $ 2,674

Asset management fees for TruPS and insurance company debt of United States companies decreased primarily because the average AUM in this asset class declined as a result of the continued decline of the collateral balances due to deferrals, defaults, and prepayments of the underlying assets.

On July 29, 2010, we entered into a Master Transaction Agreement (the "Master Transaction Agreement") pursuant to which we sold to a third party the collateral management rights and responsibilities arising after the sale relating to the Alesco X through XVII securitizations. In connection with the . . .