Aggregate amortization expense related to intangible assets was $833 and $197 for the three months ending September 30, 2007 and 2006, respectively and $2,010 and $600 for the nine months ending September 30, 2007 and 2006, respectively. Estimated annual amortization expense for the next five years is: 2007 - $2,320 (including $2,010 recognized during the first nine months); 2008 - $2,421; 2009 - $1,878; 2010 - $1,751; 2011 - $1,688; and 2012-$1,548.

Deposits consist of customer bank deposits, savings accounts and time deposits. Deposits at September 30, 2007 are summarized as follows (in thousands):

The weighted average interest rate on deposits was approximately 4.8% at September 30, 2007.

The scheduled maturities of certificates of deposit at September 30, 2007 were as follows (in thousands):

At September 30, 2007, the amount of deposits includes deposits of related parties, including $95,778 of brokerage customer's deposits from Stifel Nicolaus and deposits of the Stifel Bank & Trust's holding company of approximately $1,600. Such deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates) as those prevailing at the time for comparable transactions with other persons.

At September 30, 2007, $60 of customer demand deposit overdrafts have been recorded to Loans.

At September 30, 2007, the Company had advances aggregating $1,000 from the FHLB with a weighted-average interest rate of 5.14%. The advances are scheduled to mature in 2007. The advances are secured by a blanket assignment of loans held by the Company.

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NOTE K - DEBENTURE TO STIFEL FINANCIAL CAPITAL TRUST III And IV

On March 30, 2007, the Company completed its private placement of $35,000 of 6.79% Cumulative Trust Preferred Securities. The Preferred Securities were offered by Stifel Financial Capital Trust III ("Trust III"), a non-consolidated wholly-owned Delaware business trust subsidiary of the Company. The Trust Preferred Securities mature on June 6, 2037, but may be redeemed by the Company and in turn, Trust III would call the debenture beginning June 6, 2012. Trust III requires quarterly distributions of interest to the holder of the Trust Preferred Securities. Distributions will be payable quarterly in arrears at a fixed interest rate equal to 6.79% per annum from the issue date to June 6, 2012 and then will be payable at a floating interest rate equal to three-month London Interbank Offered Rate ("LIBOR") plus 1.85% per annum. The trust preferred securities represent an indirect interest in a junior subordinated debenture purchased from the Company by Trust III. The debenture bears the same terms as the trust preferred securities and is presented as "Debentures to Stifel Financial Capital Trust III" in the Company's Condensed Consolidated Statements of Financial Condition. The net proceeds to the Company from the sale of the Junior Subordinated Debentures to Trust III were utilized to fund the acquisition of First Service Financial Company.

On June 28, 2007, the Company completed its private placement of $35,000 of 6.78% Cumulative Trust Preferred Securities. The Preferred Securities were offered by Stifel Financial Capital Trust IV ("Trust IV"), a non-consolidated wholly-owned Delaware business trust subsidiary of the Company. The Trust Preferred Securities mature on September 6, 2037, but may be redeemed by the Company and in turn, Trust IV would call the debenture beginning September 6, 2012. Trust IV requires quarterly distributions of interest to the holder of the Trust Preferred Securities. Distributions will be payable quarterly in arrears at a fixed interest rate equal to 6.78% per annum from the issue date to September 6, 2012 and then will be payable at a floating interest rate equal to three-month London Interbank Offered Rate ("LIBOR") plus 1.85% per annum. The trust preferred securities represent an indirect interest in a junior subordinated debenture purchased from the Company by Trust IV. The debenture bears the same terms as the trust preferred securities and is presented as "Debentures to Stifel Financial Capital Trust IV" in the Company's Condensed Consolidated Statements of Financial Condition. The net proceeds to the Company from the sale of the Junior Subordinated Debentures to Trust IV were used to call on July 13, 2007 the Company's $34,500, 9% Cumulative Trust Preferred Securities, issued through Stifel Financial Capital Trust I on April 25, 2002 and callable June 30, 2007.

The Company's reportable segments include the Private Client Group, Equity Capital Markets, Fixed Income Capital Markets, Banking, and Other. The Private Client Group segment includes branch offices and independent contractor offices of the Company's broker-dealer subsidiaries located throughout the U.S., primarily in the Midwest and Mid-Atlantic regions. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, to their private clients. The Equity Capital Markets segment includes corporate finance management and participation in underwritings (exclusive of sales credits, which are included in the Private Client Group segment), mergers and acquisitions, institutional sales, trading, research, and market making. The Fixed Income Capital Markets segment includes public finance, institutional sales and competitive underwriting, and trading. The Banking segment includes the results of operations from the Company's wholly-owned subsidiary, Stifel Bank & Trust, beginning prospectively from the date of acquisition on April 2, 2007 and includes residential, consumer, and commercial lending activities, as well as FDIC-insured deposit accounts to customers of the Company's broker-dealer subsidiaries and to the general public. The "Other" segment includes clearing revenue, interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; acquisition charges related to the LM Capital Markets and the Ryan Beck acquisitions, and general administration.

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Intersegment net revenues and charges are eliminated between segments. The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenues.

Information concerning operations in these segments of business is as follows:

Information regarding net revenue by geographic area is as follows:

Our foreign operations are conducted through our wholly-owned subsidiary, SN Ltd. Net revenues in the preceding table are attributable to the country or territory in which our subsidiaries are located.

The Company has an ongoing authorization, as amended, from the Board of Directors to repurchase its common stock in the open market or in negotiated transactions in order to meet obligations under the Company's employee benefit plans and for general corporate purposes. In May 2005, the Company's Board of Directors authorized the repurchase of an additional 2,000,000 shares, for a total authorization to repurchase up to 3,000,000 shares. During the first nine months of 2007, the Company repurchased 50,397 shares of its common stock, at an average price of $49.68 per share. The Company reissued 46,053 shares of common stock and issued 629,585 new shares for its employee benefit plans in the first nine months of 2007.

As partial consideration of the purchase price of Ryan Beck, the Company issued 2,467,600 shares of Company common stock valued at $41.55 per share and issued five-year immediately exercisable warrants, upon obtaining shareholder approval on June 22, 2007, to purchase up to 500,000 shares of Company common stock at an exercise price of $36.00 per share. Additionally, on June 22, 20076, the Company obtained shareholder approval (1) for the issuance of up to 1,000,000 additional shares of common stock for the payment of earn-out consideration relating to the Company's acquisition of Ryan Beck Holdings, Inc. in the event the Company elects to make the contingent earn-out payments in shares of common stock and (2) adopting the Stifel Financial Corp. 2007 Incentive Stock Plan (For Ryan Beck Employees) which provides for the issuance of up to 1,200,000 additional shares to provide incentive equity compensation to certain employees of Ryan Beck Holdings. See further discussion of the Ryan Beck acquisition at Note E - Acquisitions.

On June 22, 2007, the Company issued 280,242 restricted stock units under the Stifel Financial Corp. 2007 Incentive Stock Plan (for Ryan Beck Employees) in exchange for Ryan Beck appreciation units held by Ryan Beck employees under Ryan Beck's deferred compensation plans. The value of the restricted stock units issued was $59.60 which was the price as of the date on which stockholder approval for the Plan was obtained, according to the agreement. On June 29, 2007, the Ryan Beck deferred compensation plans were amended, resulting in the Company recording a $20,254 compensation charge in the second quarter of 2007 and the reclassification of $16,405 from liabilities to additional paid-in capital. See additional discussion at Note B - Stock-Based Compensation Plans. Additionally, on June 22, 2007 the Company issued 394,179 restricted stock units valued at $23,493 using the closing stock price on that date as part of the retention program established for certain associates of Ryan Beck.

Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS includes dilutive stock options and stock units under the treasury stock method.

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The components of the basic and diluted EPS calculations for the three and nine months ended September 30 are as follows:

On July 13, 2006, the FASB issued Interpretation No.48 ("FIN 48") Accounting for Uncertainty in Income Taxes-An interpretation of FAS Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption, after recognition of the cumulative change, was $3,626 including interest and penalties. As a result of the implementation of FIN 48, the Company recognized a $138 increase in the liability for unrecognized tax benefits (including interest and penalties), which was accounted for as an $83 increase to the January 1, 2007 balance of retained earnings and a $221 increase in net deferred tax assets.

Included in the balance of January 1, 2007, are $2,849 of tax positions that, if recognized, would affect the effective tax rate. Also included in the total amount of unrecognized tax benefits as of the date of adoption are $777 of tax benefits that, if recognized, would result in adjustment to other tax accounts, primarily deferred taxes.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in the tax provision. Upon adoption of FIN 48 on January 1, 2007, the Company had an accrual for interest and penalties of $627.

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within 12 months of the date of adoption and of the current interim reporting date by a decrease in an amount ranging from $586 to $701 related to the anticipated amendments to prior tax filings. This change would not affect the annual effective tax for 2007.

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The Company is subject to taxation in the US and various states and foreign jurisdictions. The Company is no longer subject to US federal tax examinations for years before 2004. With few exceptions, state, local and foreign examinations by tax authorities remain open for years after 2001.

In the ordinary course of business, Stifel Bank & Trust has commitments to originate loans, standby letters of credit and lines of credit.

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established by the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash commitments. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At September 30, 2007, Stifel Bank & Trust had outstanding commitments to originate loans aggregating approximately $10,996. The commitments extended over varying periods of time with all scheduled to be disbursed within the next month.

Standby letters of credit are irrevocable conditional commitments issued by Stifel Bank & Trust to guarantee the performance of a customer to a third-party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should Stifel Bank & Trust be obligated to perform under the standby letters of credit, it may seek recourse from the customer for reimbursement of amounts paid. At September 30, 2007, Stifel Bank & Trust had total outstanding letters of credit totaling $344 with terms ranging from one to four years.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Stifel Bank & Trust uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At September 30, 2007, Stifel Bank & Trust has granted unused lines of credit to commercial and consumer borrowers aggregating $22,167.

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NOTE P - IMPACT OF THE NYSE/ARCHIPELAGO MERGER

On March 7, 2006, the New York Stock Exchange ("NYSE") and Archipelago Holdings Inc. ("Archipelago") completed the combination of their businesses through a series of mergers into a new holding company, NYSE Group, Inc. ("NYSE Group"). Shares of NYSE Group common stock were listed on the NYSE under the ticker symbol "NYX" and commenced trading on March 8, 2006. As a result of the merger, the Company received $371 in cash and 80,177 shares of NYSE Group common stock for its NYSE seat membership. The shares are subject to certain transfer restrictions that expire ratably over a three-year period, unless the NYSE Group board of directors elects to remove or reduce the restrictions. As a result of the closing, the Company recorded a gain of $5,071 which was included in "Other revenues" in the Company's Condensed Consolidated Statements of Operations for the three months ending March 31, 2006. The gain was impacted by a valuation adjustment for the transfer restrictions on the shares received. Subsequent gains and losses will be recorded as the share price of NYSE Group stock fluctuates and the transfer restrictions lapse. As a result of the fluctuation in the NYSE Group share price, the Company recorded an after tax gain of approximately $61 and an after tax loss of approximately $200 for the three and nine-months ended September 30, 2007, respectively.

******

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of federal securities laws. Words such as "anticipates," "estimates," "believes," "expects" and similar expressions or words are intended to identify forward-looking statements made on behalf of the Company. Actual results are subject to risks and uncertainties, including both those specific to the Company, and in particular any potential benefit to Stifel from acquiring Ryan Beck Holdings, Inc. and its wholly-owned broker-dealer subsidiary Ryan Beck & Company, Inc. ("Ryan Beck") business, including its ability to capitalize on the relationships that benefited the Ryan Beck business, as well as statements relating to Stifel's ability to integrate the personnel and operations, and those specific to the industry, which could cause results to differ materially from those contemplated. Additional risks and uncertainties relate specifically to our acquisition of First Service Financial Company ("First Service") and our ability to successfully integrate the companies, the risk of borrower, depositor and other customer attrition, and the risk of a material adverse change in the financial condition, results of operations or prospects of First Service. Other risks and uncertainties include, but are not limited to, general economic and business conditions, actions of competitors, regulatory actions, changes in legislation and technology changes, changes in the interest rate environment, deposit flows, loan demand and real estate values and other risks and uncertainties set forth in reports and other documents filed with the United States Securities and Exchange Commission ("SEC") from time to time. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Quarterly Report. The Company does not undertake any obligation to publicly update any forward-looking statements.

For a description of critical accounting policies and estimates, including those that involve varying degrees of judgment, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. In addition, see Note A of Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 for a more comprehensive listing of significant accounting policies. In addition, with the Company's acquisition of First Service, now referred to as Stifel Bank & Trust, on April 2, 2007, the Company has determined that the allowance for loan losses is a critical accounting policy. For a description of the accounting policy related to allowance for loan losses, see Note A - Reporting Policies, Bank Loans and Allowance for Loan Losses, to the Condensed Consolidated Financial Statements included herein.

In addition to those estimates referred to above, the Company's employee compensation and benefit expense for interim periods is impacted by estimates and assumptions. A substantial portion of the Company's employee compensation and benefits expense represents discretionary bonuses, generally determined and paid at year-end. The Company estimates the interim periods' discretionary bonus expenses based upon individual departmental profitability and total Company pre-tax profits and accrues accordingly.

Despite a challenging business environment driven by a global credit crisis resulting primarily from concerns about sub-prime mortgages, the key indicators of the markets' performances, the Dow Jones Industrial Average ("DJIA"), the Standard and Poor's 500 Index ("S&P 500") and the NASDAQ composite, continued to improve. At September 30, 2007, the DJIA, the NASDAQ and the S&P 500 increased approximately 11%, 12%, and 8%, respectively, from their December 31, 2006 closing prices, and closed up approximately 19%, 20% and 14%, respectively, over their September 30, 2006 closing prices. The U.S. Federal Reserve System's Federal Open Market Committee voted on September 18, 2007 to reduce the federal funds rate from 5.25% to 4.75% to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time." This represented the first change in the federal funds rate since mid 2006. Long-term interest rates, as measured by the 10-year U.S. Treasury bond, were 4.59% at September 30, 2007, down from 5.03% at June 30, 2007 and 4.65% at March 31, 2007. This compares to 4.71% at December 31, 2006 and 4.64% at September 30, 2006.

While the major market indices have signaled increased investor confidence in the markets, concerns over inflation, energy costs, and geopolitical issues, and the slowing residential real estate market including the sub-prime mortgage sector remain, and the recent results of the third quarter and first nine months may not be indicative of future results.

The Company's overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity markets and increased activity from the successful integration of the LM Capital Markets business acquired on December 1, 2005, the Ryan Beck acquisition on February 28, 2007, the First Service acquisition on April 2, 2007, and the Company's continued expansion of the Private Client Group ("PCG"), including the Miller Johnson Steichen and Kinnard ("MJSK") purchase on December 5, 2006. As a result of the Ryan Beck and MJSK acquisitions, the Company added 1,013 employees and 51 offices.

The Company's quarterly and year to date results have been impacted by the increased operating costs resulting from the intergration of Ryan Beck which was acquired on February 28, 2007. The conversion of Ryan Beck Private Client offices to Stifel Nicolaus was completed during the third quarter of 2007. The Company does not anticipate significant conversion related changes in the future.

The third quarter and year to date results include inventory losses (see Results of Operations for Fixed Income Capital Market for the three and nine months) as a result of the reduction of the long-term interest rates noted in the Business and Enviornment discussion. As a result, the Company reduced its inventory in fixed income products during the third quarter.

The Company does not have any significant direct exposure to the sub prime market crisis, but is subject to the market fluctuations resulting from the sub prime mortgage write-downs and interest rate fluctuations.

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Results of Operations for the Company

Except as noted in the following discussion of variances for the total Company and the ensuing segment results, the underlying reasons for the increase in revenue and expense categories can be attributed principally to the acquisitions and increased number of PCG offices and PCG financial advisors.

The Company's net revenues (total revenues less interest expense) increased $228.9 million to $550.9 million, a 71% increase over the $322.0 million recorded in the first nine months of 2006.

Commissions and principal transactions increased 52% to $316.5 million from $208.7 million in the prior year nine-month period with revenue increases of 78%, 28%, and 6% in the Private Client Group, Equity Capital Markets, and Fixed Income Capital Markets segments, respectively, resulting from improved markets for equity based products and the aforementioned growth.

Investment banking revenues increased 170% to $138.0 million from $51.2 million in 2006. During the second quarter of 2007 the Company closed on a significant corporate finance investment banking transaction which contributed $24.3 million in revenue. Capital raising revenue increased 264% to $80.9 million as a result of increased number of completed transactions for both equity and fixed income underwriting. In addition, strategic advisory fees increased 97% to $57.1 million.

Asset management and service fees increased 70% to $72.0 million from $42.3 million in the prior year resulting from a 29% increase in the number of Stifel Nicolaus managed accounts and a 39% increase in the value of assets under management in those accounts attributable to the continued growth of the Private Client Group (See Results of Operations for Private Client Group).

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Other revenues decreased $4.2 million principally due to a $5.1 net gain on investments recorded in the first quarter of 2006 on the Company's NYSE seat membership as a result of the New York Stock Exchange merger with Archipelago Holdings, Inc. (See Note P of Notes to Condensed Consolidated Financial Statements).

Interest revenue increased 68% to $43.4 million as a result of interest revenue generated from the newly acquired Stifel Bank & Trust (Banking segment), increased revenue on fixed income inventory held for sale to clients, and increased revenue on customer margin accounts, partially offset by decreased revenue from stock borrow activities. Increases in revenue on customer margin accounts resulted from an increase in average margin borrowings. Interest expense increased 63% as a result of interest related to money market, savings, and time deposit accounts of Stifel Bank & Trust, interest related to increased costs to carry higher levels of firm inventory, increased interest expense resulting from the debentures issued in the first and second quarter of 2007, and increased rates charged for bank borrowings and stock loans to finance customer borrowings. Weighted average effective external rates increased 39% to 5.77% from 4.16% in the prior year.

Employee compensation and benefits increased 68% to $401.3 million in the first nine months of 2007 from $238.5 million in the nine months ending September 30, 2006. As a percentage of revenue, employee compensation and benefits totaled 73% and 74% for the nine month periods in 2007 and 2006, respectively. A portion of employee compensation and benefits includes transition pay, principally in the form of upfront notes and accelerated payout in connection with the Company's continuing expansion efforts, of $18.3 million (3.3% of net revenue) and $10.2 million (3.2% of net revenue) for the nine months ended September 30, 2007 and September 30, 2006, respectively. The upfront notes are amortized over a five to ten year period.

In addition, for the nine months ended September 30, 2007, compensation and benefits includes: 1) compensation charges of approximately $17.7 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation; and 2) $22.7 million in connection with the Ryan Beck acquisition, primarily a charge related to the acceleration of vesting arising from the amendment of the Ryan Beck deferred compensation plans. The Ryan Beck deferred compensation plans were amended to reduce the service requirement for vesting in the plans. For the nine months ended September 30, 2006 compensation and benefits includes $32.3 million consisting of 1) a compensation charge of approximately $9.8 million for the difference between the $25.00 per share offering price and the grant date fair value of $34.27 per share for the private placement of its common stock to key associates of the LM Capital Markets business; and 2) compensation charges of $22.5 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation. Excluding the acquisition related charges, compensation and benefits as a percentage of net revenue totaled 66% for 2007 and 64% for 2006. The Company excludes acquisition related expenses in its analysis of compensation and benefits, a non-GAAP measure; because it believes exclusion of acquisition related compensation is a more useful tool in measuring compensation as a percentage of net revenue.

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A reconciliation of GAAP Employee compensation and benefits to Employee compensation and benefits excluding acquisition related compensation is included in the table below.

Occupancy and equipment rental, communications and office supplies, and commissions and floor brokerage expenses increased 81%, 61% and 46%, respectively during the first nine months of 2007 as compared to the first nine months of 2006 primarily due to the acquisitions and continued expansion of the Private Client Group and the conversion costs associated with integrating Ryan Beck into Stifel Nicolaus.

Other operating expenses increased $17.0 million, or 76%, to $39.5 million in the nine months ended September 30, 2007 as compared to $22.5 million in the nine months ended September 30, 2006, representing approximately 7% of net revenues for each period. The increase in operating expenses in the first nine months of 2007 can be attributed to the increased expenditures for home office infrastructure for the Ryan Beck conversion. In addition, the first nine months of 2007 includes a $1.3 million charge for the write off of deferred issuance costs related to the 9% Trust Preferred Securities called on July 13, 2007.

Net income increased $10.1 million to $18.3 million in the first nine months of 2007 compared to $8.2 million in the first nine months of 2006. Net income in 2007 was impacted by pre-tax acquisition-related charges of $46.9 million described above. The first nine months of 2006 net income was impacted by $33.5 million pre-tax acquisition related charges, primarily stock based compensation, related to the LM Capital Markets acquisition. The provision for income taxes was $12.4 million, representing an effective tax rate of 40.4% for the first nine months 2007 as compared to $5.8 million, representing an effective tax rate of 41.4% for the first nine months of 2006. The decrease in the effective tax rate is primarily attributable to a tax benefit received on Company owned life insurance polices of Ryan Beck.

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Three months ended September 30, 2007 as compared to three months ended September 30, 2006

Except as noted in the following discussion of variances for the total Company and the ensuing segment results, the underlying reasons for the three month variances to the prior period are substantially the same as the comparative nine month discussion and the statements contained in that discussion also apply for the three month discussion.

The Company's net revenues (total revenues less interest expense) increased $73.2 million to $183.0 million, a 67% increase over the $109.8 million recorded in the third quarter of 2006.

Commissions and principal transactions increased 64% to $114.6 million from $70.0 million during the prior year period with revenue increases of 96%, 41%, and 4% in the Private Client Group, Equity Capital Markets, and Fixed Income Capital Markets segments, respectively.

Investment banking revenues increased 57% to $31.0 million from $19.7 million in 2006. Capital raising revenue increased 87% to $19.6 million as a result of increased number of completed transactions for both equity and fixed income underwriting. In addition, strategic advisory fees increased 24% to $11.4 million.

Asset management and service fees increased 86% to $27.1 million from $14.6 million in the prior year quarter resulting from a 32% increase in the number of Stifel Nicolaus managed accounts and a 41% increase in the value of assets under management in those accounts attributable to the continued growth of the Private Client Group (See Results of Operations for Private Client Group).

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Interest revenue increased 61% to $16.0 million as a result of interest revenue generated from the newly acquired Stifel Bank & Trust (Banking segment), increased revenue on fixed income inventory held for sale to clients, and increased revenue on customer margin accounts. Interest expense increased 45% as a result of interest related to money market, savings, and time deposit accounts of Stifel Bank & Trust, interest related to increased costs to carry higher levels of firm inventory, increased interest expense resulting from the debentures issued in the first and second quarter of 2007, and increased rates charged for bank borrowings and stock loans to finance customer borrowings.

Employee compensation and benefits increased 63% to $126.7 million in the three months ending September 30, 2007 from $77.5 million in the three months ending September 30, 2006. As a percentage of revenue, employee compensation and benefits totaled 69% and 70% for the three month periods in 2007 and 2006, respectively. A portion of employee compensation and benefits includes transition pay, principally in the form of upfront notes and accelerated payout in connection with the Company's continuing expansion efforts, of $6.9 million (3.8% of net revenue) and $3.7 million (3.4% of net revenue) for the three months ended September 30, 2007 and September 30, 2006, respectively. The upfront notes are amortized over a five to ten year period.

In addition, for the three months ended September 30, 2007, compensation and benefits includes acquisition-related expenses associated with the Ryan Beck and LM Capital Markets acquisitions consisting of 1) compensation charges of approximately $6.1 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation; and 2) $948,000 in compensation charges for Ryan Beck positions which will be eliminated by year-end. For the three months ended September 30, 2006 compensation and benefits includes compensation charges of $7.1 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation. Excluding the acquisition related charges, compensation and benefits as a percentage of net revenue totaled 65% for the third quarter of 2007 and 64% for the third quarter of 2006. The Company excludes acquisition related expenses in its analysis of compensation and benefits, a non-GAAP measure; because it believes exclusion of acquisition related compensation is a more useful tool in measuring compensation as a percentage of net revenue.

A reconciliation of GAAP Employee compensation and benefits to Employee compensation and benefits excluding acquisition related compensation is included in the table below.

Occupancy and equipment rental, communications and office supplies, and commissions and floor brokerage expenses increased 86%, 76% and 35%, respectively during the third quarter of 2007 as compared to the third quarter of 2006.

Other operating expenses increased $7.6 million, or 110%, to $14.5 million in the three months ended September 30, 2007 as compared to $6.9 million in the three months ended September 30, 2006, representing approximately 8% of net revenues for the 2007 third quarter and 6% of net revenues for the 2006 third quarter.

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Net income increased $2.7 million to $8.1 million in the third quarter of 2007 compared to $5.4 million in the third quarter of 2006. Net income in 2007 was impacted by pre-tax acquisition-related charges of $9.9 million discussed above. Net income in the third quarter of 2006 was impacted by pre-tax acquisition-related charges of $7.3 million, primarily stock based compensation, related to the LM Capital Markets acquisition. The provision for income taxes was $5.2 million, representing an effective tax rate of 39.3% for the third quarter 2007 as compared to $3.8 million, representing an effective tax rate of 41.3% for the third quarter of 2006. The decrease in the effective tax rate is primarily attributable to a tax benefit received on Company owned life insurance polices of Ryan Beck.

As a result of the acquisitions, the Company reports Core Earnings; a non-GAAP financial measure. Core Earnings represents GAAP net income before acquisition related charges, principally compensation expense recorded for stock based awards offered to key associates of LM Capital Markets accounted for under Statement of Accounting Standards No. 123 (Revised 2004) "Share-Based Payment"("SFAS No. 123R") and the charge in 2007 for the acceleration of vesting for individuals in the Ryan Beck deferred compensation plans. Management believes the supplemental disclosure of Core Earnings helps investors, rating agencies, and financial analysts better understand the performance of their business and enhances the comparison of their performance from period to period. Management uses Core Earnings to evaluate the performance of their business. Core Earnings should not be considered an alternative to any measure of performance as promulgated under GAAP (such as net income), nor should this data be considered an indicator of our overall financial performance or liquidity. Also, the calculation of Core Earnings used by the Company may not be comparable to similarly titled measures reported by other companies.

After adjusting for acquisition related charges, principally stock based awards offered to key associates of LM Capital Markets, non-GAAP net income and non-GAAP earnings per diluted share, our Core earnings, were $14.3 million and $0.80 per diluted share, respectively, for the third quarter of 2007 compared to 2006 third quarter Core earnings of $9.6 million and Core earnings per diluted share of $0.69. Included in these acquisition-related charges are: 1) compensation charges of approximately $6.1 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation; 2) $1.0 million in compensation charges for Ryan Beck positions which will be eliminated by year-end; and 3) other non-compensation acquisition charges of $2.8 million. After adjusting for acquisition related charges, principally compensation expense for acceleration of deferred compensation for the Ryan Beck deferred compensation plans and stock-based awards offered to key associates of LM Capital Markets, non-GAAP net income and non-GAAP earnings per diluted share, our Core earnings, for the nine months ended September 30, 2007 were $46.3 million and $2.75 per diluted share, respectively, compared to $27.7 million or $1.99 per diluted share for the nine months ended September 30, 2006. Core Earnings for the nine months ended September 30, 2007 excludes pre-tax acquisition charges of approximately $46.9 million or $1.66 per diluted share. Included in these acquisition related charges are: 1) compensation charges of approximately $17.7 million for amortization of units awarded to LM Capital Markets associates, severance, and contractually based compensation above standard performance based compensation; 2) $22.7 million, principally for the amendment and acceleration of the Ryan Beck deferred compensation plan; and 3) other non-compensation acquisition charges of $6.5 million.

Net income for the three and nine months ended September 30, 2006 was impacted by pre-tax acquisition related costs, primarily stock based compensation, of $7.3 million or $0.30 per diluted share and $33.5 million or $1.40 per diluted share respectively, associated with the acquisition of the LM Capital Markets business from Citigroup Inc.

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A reconciliation of Core Earnings to Net Income, and Core Earnings per Basic and Diluted Share to Net Income per Basic and Diluted Share, the most directly comparable measure under GAAP, is included in the table below.