Business Environment

The U.S. economy remained generally sluggish throughout fiscal 2002. The equity market was already well into a slower period following declines in the technology and "dot com" equities when the events of September 11, 2001 shook the country's and the world's sense of well-being. These events, followed by the announcements by the likes of Enron and Worldcom, eroded investor confidence, particularly that of individual investors. Further discoveries of less than desirable accounting treatments and unethical management, ongoing investigations, continued market uncertainty and loan defaults have continued to plague the marketplace and resulted in not only a volatile and declining equity market but also in weaker credit markets. The U.S. Federal Reserve lowered the overnight interest rate three times during the fiscal year (following eight rate reductions in the first three quarters of calendar 2001), in an attempt to stimulate some economic recovery. While this may have helped the housing market and, combined with auto manufacturer incentives, spurred auto sales, it had not stimulated a resurgence of the equity markets by fiscal year end. This is evidenced by the fact the Dow Jones Industrial Average had its worst September performance in 65 years and its worst quarterly showing since 1987.

Results of Operations

Although 2002 revenues were the third highest in the Company's history, they also marked the second consecutive year of decline as poor equity markets continued. Revenues of $1,515,923,000 were down 9% from the prior year, with the decline in interest revenue accounting for more than all of this difference. Net income declined 18%, but only 10% when the prior year is adjusted to remove the positive $8.7 million impact of the reversal of the excess reserve for the Corporex litigation. Fiscal 2001's revenues were down 2% from fiscal 2000 and net income declined 23% (36% excluding the effects of the Corporex litigation reserve). The correlation of the decrease in revenues with the decrease in earnings in the current year reflects a combination of variable expenses and the Company's adjustments to the poor market environment through improved cost control efforts.

Consistent with the prior year, the retail business continued to be plagued by poor equity markets combined with eroding investor confidence, resulting in lower commission revenues. The number of retail FAs increased 7.4% between September 2001 and September 2002 and transaction volume increased slightly, but due to lower security prices and smaller trades, retail commissions were down 5%. The number of retail FAs increased 10% between September 2000 and September 2001, including the addition of 229 retail FAs through the acquisition of RJ Ltd. Despite this increase, retail commission revenues declined from fiscal 2000's all-time high, which reflected a period of vibrant equity market conditions and a positive investor frame of mind for most of the year.

The retail segment has been dramatically impacted by both the recent market environment and by the recent interest rate environment. Clients have continued to become more conservative in their investing, borrowing less and holding cash in their accounts as the equity market remains weak. The decline in customer margin borrowing has been the primary reason for the decline in interest revenues. Interest income from margin loans has declined 64% ($83 million) from its peak in fiscal 2000 and 52% ($50 million) from fiscal 2001. The spread earned by the Company through short-term investment of customer interest-bearing cash balances is much smaller than that earned through lending such funds as margin loans, and is negatively impacted by a declining rate scenario. Accordingly, net interest income has declined over this entire period. Net interest represented 63% of pre-tax income in fiscal 2002, 67% in fiscal 2001, and 57% in fiscal 2000 when margin balances were high; the consistency of this figure is further evidence of the strong positive correlation between market direction, investor trading activity and the use of margin debt.

The Capital Markets segment turned in a strong performance in 2002 despite the generally poor equity market conditions. Institutional commissions increased 14% in fiscal 2002 over 2001, following an increase of 30% in fiscal 2001 over 2000. Two-thirds of these increases were related to the sales of fixed income products. In addition to the increased institutional sales, investment banking results improved in 2002 over the level of the prior two years. This improvement was due to an increased number of public offerings, particularly during the spring of 2002, and increases in private placement fees in 2002. The number of U.S. lead-managed and co-managed underwritings, the vast majority of which were equity-related offerings, and the dollar volume of these transactions were as follows: 2002 - 50 new issues for $6.9 billion; 2001 - 25 new issues for $3.7 billion; and 2000 - 23 new issues for $3.6 billion. Merger and acquisition fees include $7.5 million from RJ Ltd. in fiscal 2002 and $6.5 million in fiscal 2001, accounting for most of the increase over fiscal 2000. The third significant component of this segment's revenues is trading profits, which remained strong. Throughout this period, trading results in fixed income products represented the largest component of this line item.

The Asset Management segment revenues, consisting predominantly of investment advisory fees, have been negatively impacted by the decline in equity markets since the majority of managed assets are equities. The Company's primary investment advisor, Eagle Asset Management, has had strong investment performance, with most of the retail objectives outperforming their benchmark averages during the last three years and institutional results currently ranking in the top decile of equivalent managers. The Company's mutual fund management company, Heritage Asset Management, has four funds that have received a four or five star overall Morningstar rating. Unfortunately, the declining equity market has outweighed the relatively strong performance and positive sales results. Investment advisory fees were flat between fiscal 2001 and fiscal 2000 after several years of benefiting from overall asset appreciation.

Interest income represents over 95% of RJBank's revenue. Interest rates have declined from the high point during the three year period in the quarter ended December 2000, when RJBank was earning an average rate of 7.3%, to average rates ranging from 3.8% to 3.3 % during fiscal 2002. Average assets, consisting mainly of mortgage backed securities, purchased whole loan pools, and mortgage, consumer and commercial loans, have increased from $674 million in fiscal 2000 to $806 million in fiscal 2001 and to $877 million in fiscal 2002. As RJBank maintains a substantially duration-matched balance sheet, interest rates on the expense side have also declined, from an average rate of 5.7% in December 2000 - yielding a 1.6% spread - to average rates ranging from 2.6% to 1.6% during fiscal 2002. Spreads went as low as 1.2% during periods of rapidly declining interest rates but have recovered and were an average of 1.5% for fiscal 2002, a spread consistent with the previous two years.

The "Other" segment consists of the securities lending business, the Company's joint ventures in emerging markets and certain items not attributable to an existing or specific segment of business operations, such as the Corporex litigation. The Company does predominantly "matched book" Stock Loan/Stock Borrow business. Interest revenues and related expense in this business are down both due to lower rates and lower balances, the latter due to the weak equity markets.

RJ Ltd., which the Company purchased in January of 2001, accounts for expenses of $84 million in fiscal 2002 and $65 million in fiscal 2001.

Commission expense generally fluctuates in proportion to commission income. The increase in non-commission compensation expense between fiscal 2001 and 2002 is almost entirely attributable to including a full twelve months of RJ Ltd. vs. nine months in fiscal 2001 coupled with increased incentive compensation earned by capital markets professionals, both in the equity and fixed income departments. These increases were somewhat offset by cost control efforts in the RJA operations departments where headcount has declined from its high of 1,725 in March 2001 to 1,612 in September 2002, and in retail where branch support personnel count was reduced in branches that have been unable to maintain historic production levels.

The increase in non-commission compensation expense between fiscal 2000 and 2001 was a combination of the purchase of RJ Ltd., adding $16 million, and increases in RJA as capital markets, retail and operations reached their peak in the number of personnel during 2001 before beginning to scale back due to market conditions. Beginning in fiscal 2003 the Company will expense stock options in accordance with SFAS 123 "Accounting for Stock-based Compensation", which is expected to negatively impact earnings. The Financial Accounting Standards Board has a proposal outstanding which will provide additional transition alternatives to companies adopting SFAS 123. The Company has evaluated the alternatives proposed and if the proposal is enacted in its current form, the Company will elect the alternative to apply the fair value method to all awards granted after the beginning of fiscal 2003 and to the unvested portion of all outstanding previous awards. Had this policy been in effect in fiscal 2002 the impact would have resulted in a reduction of net income of approximately $4 million.

Throughout this period there continued to be significant efforts to improve and support our information processing and to further automate processes. The effect of these efforts is reflected in the increased communications and information processing expenses. In addition, communications and information processing expense includes write-downs of our investment in CSS (our software joint venture in Colorado) as we converted to the equity method of accounting this year due to the increase in the Company's ownership percentage. These efforts affect all segments of the Company's business, but retail in particular, as it has the largest transaction volume and is therefore allocated the largest percentage of processing expenses.

Due to the current market conditions there has been a renewed emphasis on cost control, particularly with respect to travel costs, advertising and other business development expenses.

Year to year comparisons of "other" expense are distorted by the large addition to reserves for the Corporex judgment in fiscal 2000, of which $16 million was subsequently reversed in fiscal 2001 when the case was settled. Fiscal 2002 "other" expense is up $18 million, excluding the prior year reversal, substantially all related to additional legal costs and reserves related to the retail segment, including the adverse resolution of certain recruiting claims. The number and magnitude of client claims has increased dramatically in the current negative equity market environment, including three significant matters described in Part 1 under Legal Matters.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (see Summary of Significant Accounting Policies in the consolidated financial statements). The Company believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company.

Substantially all financial instruments are reflected in the consolidated financial statements at fair value or amounts that approximate fair value, these include: cash, cash equivalents, and securities purchased under agreements to resell; deposits with clearing organizations; securities owned; and securities sold but not yet purchased. Unrealized gains and losses related to these financial instruments are reflected in net earnings or other comprehensive income in accordance with FASB 115, depending on the underlying purpose of the instrument. Where available, the Company uses prices from independent sources such as listed market prices, or broker or dealer price quotations. Fair values for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In addition, even where the value of a security is derived from an independent market price or broker or dealer quote, certain assumptions may be required to determine the fair value. For instance, the Company generally assumes that the size of positions in securities that the Company holds would not be large enough to affect the quoted price of the securities if the Company were to sell them, and that any such sale would happen in an orderly manner. However, these assumptions may be incorrect and the actual value realized upon disposition could be different from the current carrying value.

Intangible assets consist predominantly of goodwill related to the acquisitions of Roney & Co. and Goepel McDermid, Inc. (now called RJ Ltd). This goodwill, totaling $63 million, was allocated to the reporting units within the retail and capital markets segments pursuant to SFAS No. 142. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," indefinite-life intangible assets and goodwill are not amortized.

The Company reviews its goodwill in order to determine whether its value is impaired on at least an annual basis. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the fair value of the reporting unit, the Company uses valuation techniques based on multiples of revenues, earnings, book value and discounted cash flows similar to models employed in analyzing the purchase price of an acquisition target. If the value of the goodwill is impaired, the difference between the value of the goodwill reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs. See further discussion in "Effects of recently issued accounting standards".

The Company records reserves related to legal proceedings in "other payables". The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client's account; the basis and validity of the claim; the possibility of wrongdoing on the part of an employee of the Company; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions of management in determining the estimates of reserves may be incorrect and the actual disposition of a legal proceeding could be greater or less than the reserve amount.

The Company also records reserves or allowances for doubtful accounts related to client and Financial Advisor receivables. Client loans are collateralized by securities, real estate or other property. Reserves at RJBank are established and reviewed in accordance with banking regulations. Client loans at the broker-dealers are collateralized by securities; however, if there is a decline in the value of the collateral and the Company cannot obtain more collateral or collect on the loan, a reserve is established. The Company also makes loans or pays advances to Financial Advisors. Reserves are established on these receivables if the Financial Advisor is no longer associated with the Company and the receivable has not been promptly repaid or if it is determined that it is probable the amount will not be collected.

Net cash provided by operating activities during fiscal 2002 was approximately $54 million. Cash was provided by decreased stock borrow balances exceeding decreased stock loan balances, decreased balances in the client margin accounts, and increased client interest balances, and the fluctuations in various other asset and liability accounts net of increased segregated cash and cash equivalents.

Investing activities required $12 million during fiscal 2002. The additions to fixed assets consumed $26 million; $5.6 million for the construction of the parking garage, $2 million to date toward the construction of Tower IV and the remainder for the purchase of computers, office furniture and equipment. Net purchases, sales and maturations of investments provided $14 million during the year.

Financing activities used $28 million, the result of the payment of cash dividends net of the exercise of stock options and employee stock purchases, and the net repayment on borrowings.

The Company has loans payable consisting primarily of a $37.1 million mortgage on its headquarters office complex, $60 million in Federal Home Loan Bank advances at RJBank and a $50 million three year term loan at RJF. On October 21, 2002 the term loan was renewed for another three years and increased to $60 million. On December 13, 2002, the Company refinanced the mortgage through a twenty year, $75 mortgage to be taken down in two draws; the initial $48 million drawn on December 13, 2002 and the remaining $27 million upon the completion of the fourth headquarters building, projected to be January 2004. In addition, RJF has a $100 million line of credit and RJ Ltd. has a CDN $40 million line of credit. RJA has uncommitted bank lines of credit aggregating $380 million with commercial banks.

The Company has committed a total of $31 million, ranging in amount from $500,000 to $1,500,000, to thirty-two different independent venture capital or private equity partnerships. As of September 27, 2002, $20 million has been invested by the Company.

Management has been authorized by the Board of Directors to repurchase its common stock at their discretion for general corporate purposes. There is no formal stock repurchase plan at this time. As of September 27, 2002, the Board has authorized the repurchase of 2,000,000 shares.

The Company's broker-dealer subsidiaries are subject to requirements of the SEC and the Investment Dealers Association of Canada ("IDA") relating to liquidity and capital standards. The domestic broker-dealer subsidiaries of the Company are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. RJA, a member firm of the New York Stock Exchange, Inc. ("NYSE"), is also subject to the rules of the NYSE, whose requirements are substantially the same. Rule 15c3-1 requires that aggregate indebtedness, as defined, not exceed fifteen times net capital, as defined. Rule 15c3-1 also provides for an "alternative net capital requirement", which RJA has elected. It requires that minimum net capital, as defined, be equal to the greater of $250,000 or two percent of Aggregate Debit Items arising from client transactions. The NYSE may require a member firm to reduce its business if its net capital is less than four percent of Aggregate Debit items and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than five percent of Aggregate Debit items.

RJ Ltd. is subject to the Minimum Capital Rule (By-Law No. 17 of the IDA) and the Early Warning System (By-Law No. 30 of the IDA). The Minimum Capital Rule requires that every member shall have and maintain at all times Risk Adjusted Capital greater than zero calculated in accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such requirements as the Board of Directors of the IDA may from time to time prescribe. Insufficient Risk Adjusted Capital my result in suspension from membership in the stock exchanges or the IDA. (See Note 13 to Consolidated Financial Statements).

The Early Warning System is designed to provide advance warning that a member firm is encountering financial difficulties. This system imposes certain sanctions on members who are designated in Early Warning level 1 or level 2 according to its capital profitability and liquidity position from time to time and frequency of designation or at the discretion of the IDA. Restrictions on business activities and capital transactions, early filing requirements, and mandated corrective measures are sanctions that may be imposed as part of the Early Warning System. RJ Ltd. was not in Early Warning level 1 or level 2 during fiscal 2002 or 2001.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination shall be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment at least annually, as well as under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulated amortization. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however the Company elected to early-adopt the standard as of the beginning of fiscal 2002. As a result, the Company ceased all goodwill amortization and therefore did not recognize $4.7 million of goodwill amortization expense that would have been recognized ratably during 2002 under the previous accounting standard.

The following table presents the impact of SFAS 142 on net income and net income per share had the standard been in effect for the fiscal years ended September 28, 2001 and September 29, 2000 (in 000's, except per share data):

In accordance with the requirements of SFAS 142 the Company completed its transitional impairment testing and determined that there is no indication of impairment as of the date of adoption. The Company will be required to perform goodwill impairment tests on at least an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

As of September 27, 2002 and September 28, 2001, total purchased intangible assets, other than goodwill, consisted only of a noncompete agreement with an original gross carrying amount of $3 million arising from the acquisition of RJ Ltd.. The noncompete agreement is included in other assets and is being amortized over a two-year period and will be fully amortized at the end of the first quarter of fiscal 2003, resulting in an expense of $375,000 per quarter until that time.

Risks are an inherent part of the Company's business and activities. Management of these risks is critical to the Company's fiscal soundness and profitability. Risk management at the Company is a multi-faceted process that requires communication, judgment and knowledge of financial products and markets. The Company's senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment, monitoring and control of various risks. The principal risks involved in the Company's business activities are market, credit, operational, regulatory and legal.

The potential for changes in the value of financial instruments owned by the Company is referred to as "market risk". Market risk is inherent to both derivative and non-derivative financial instruments and, accordingly, the scope of the Company's market risk management procedures extends beyond derivatives to include financial instruments deemed sensitive to market risk.

The tables above primarily represent trading inventories associated with the Company's customer facilitation, market-making activities and RJBank investments, and include net long and short fair values, which is consistent with the way risk exposure is managed. See Notes 2 and 3 of the Notes to Consolidated Financial Statements for the related gross long and short fair values of financial instruments owned and investments.

The Company trades tax exempt and taxable debt obligations including: U.S. Treasury bills, notes, and bonds; U.S. Government agency and municipal notes and bonds; bank certificates of deposit; mortgage backed securities; and corporate obligations. The Company is also an active market-maker in over-the-counter equity securities. In connection with these activities, the Company maintains inventories in order to ensure availability and to facilitate customer transactions. The Company also invests for its own proprietary equity investment account and takes interest rate swap and Eurodollar futures positions.

Changes in value of the Company's trading and investment inventories may result from fluctuations in interest rates, credit ratings, equity prices and the correlation among these factors, along with the level of volatility.

The Company manages its trading inventories by product type and has established trading divisions that have responsibility for each product type. The trading inventories are managed with a view toward facilitating client transactions, considering the risk and profitability of each inventory.

The Company's primary method of controlling risk in its trading and investment inventories is through the use of limits. As of September 27, 2002, the absolute fixed income inventory limits were $1,307,000,000 and absolute equity limits were $65,300,000.  The average absolute fixed income inventory balance was $443,957,000 and the average absolute equity inventory balance was $15,834,000 during the year ended September 27, 2002. Position limits in trading inventory accounts are established and monitored on a daily basis. Consolidated position and exposure reports are prepared and distributed to senior management. Limit violations are carefully monitored. Management monitors inventory levels and results of the trading groups, as well as inventory aging, pricing, concentration and securities ratings. Mark to Market prices are obtained from an external vendor and are compared to internal valuations. Summarized results are reviewed and a valuation adjustment is determined by management to record the instrument at estimated fair value.

The Company is exposed to interest rate risk as a result of maintaining inventories of interest-rate-sensitive financial instruments and from changes in the interest rates on its interest-earning assets (including client loans, stock borrow activities, investments, and inventories) and its funding sources (including client cash balances, stock lending activities, and bank borrowings), which finance these assets. The collateral underlying client (margin) loans, interest rate swaps and stock borrow/loan activities at the broker-dealer is repriced daily, thus there are no unrecorded gains or losses in value. Interest rates on client balances and stock borrow and lending activities produce a positive spread to the Company, with the rates generally fluctuating in parallel. However, in times of rapid changes in interest rates the spreads may be impacted.

The Company manages its inventory exposure to interest rate risk by setting and monitoring limits and, where feasible, economically hedging with offsetting positions in securities with similar interest rate risk characteristics. While a significant portion of the Company's securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over several times per year.

The Company utilizes interest rate swap contracts to economically hedge a significant portion of its debt inventory. These interest rate swap contracts and debt inventory are recorded at fair value with the changes in fair value recognized in earnings. In addition, interest rate swap contracts are used at RJBank to hedge against the effect of fluctuating interest rates on the variable cash flow paid on the deposit base which serves as the funding source for loans. RJBank assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. RJBank maintains risk management control systems to monitor interest rate cash flow risk attributable to both RJBank's outstanding debt obligations as well as RJBank's offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on RJBank's future cash flows. RJBank accounts for its swap activity as cash flow hedges under SFAS 133 and monitors this activity by reviewing effectiveness of the hedges in accordance with criteria of SFAS 133. The effective portion of the gain or loss is accumulated in other comprehensive income and the gain or loss on the ineffective portion is recognized in earnings immediately.

The Company also conducts an interest rate swap business with its institutional clients and takes trading positions to facilitate this business. The interest rate swap activities, aside from the RJBank activity, have limits which are established and monitored through daily reports to the accounting department and weekly reports circulated to senior management of RJA and RJF. These reports reflect total market exposure of all open positions and the market value of outstanding positions with respect to each counter-party. See Note 8 to the consolidated financial statements for further discussion.

For interest rate swap contracts the Company uses notional (contract) amounts, daily mark to markets, as well as limited value-at-risk analysis and stress testing to measure and assess risks associated with this derivative and related cash activity. Notional amounts are not included on the Company's consolidated statement of financial condition as these contract amounts are not actually paid or received. Notional amounts allow the Company to calculate the cash flows to be exchanged and are not necessarily indicative of overall market risk. The value-at-risk approach is used to derive a quantitative measure specifically for market risks under normal market conditions. For a given portfolio, value-at-risk measures the possible future loss (in terms of market value) which, under normal market conditions, will not be exceeded within a defined probability in a certain period. Stress testing supplements other analyses of market risk as it helps to determine the possible effects of potentially extreme market movements on the market value of the Company's assets.

The Company is exposed to equity price risk as a consequence of making markets in equity securities. The Company's activities as a dealer are client-driven, with the objective of meeting clients' needs while earning a trading profit to compensate for the risk associated with carrying inventory. The Company attempts to reduce the risk of loss inherent in its inventory of equity securities by monitoring those security positions constantly throughout each day and establishing position limits. The Company's equity securities inventories are repriced on a regular basis and there are no unrecorded gains or losses.

The Company is engaged in various trading and brokerage activities whose counterparties primarily include broker-dealers, banks and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the credit worthiness of the counterparty and/or the issuer of the instrument. The Company manages this risk by imposing and monitoring individual and aggregate position limits for each counterparty, monitoring trading counterparties, conducting regular credit reviews of financial counterparties, reviewing security concentrations, holding and marking to market collateral on certain transactions and conducting business through clearing organizations, which guarantee performance.

The Company's client activities involve the execution, settlement, and financing of various transactions on behalf of its clients. Client activities are transacted on either a cash or margin basis. Credit exposure associated with the Company's retail client business consists primarily of customer margin accounts, which are monitored daily and are collateralized. When clients execute a purchase on margin the Company is at some risk that the client will renege on the trade. If this occurs the Company may have to liquidate the position at a loss. However, for over three quarters of the retail purchase transactions clients have cash in the account before the trade is executed. The Company monitors exposure to industry sectors and individual securities and performs analysis on a regular basis in connection with its margin lending activities. The Company adjusts its margin requirements if it believes its risk exposure is not appropriate based on market conditions.

In addition, RJBank offers a variety of loan products including mortgage, commercial real estate, and consumer loans which are collateralized and corporate loans for which the borrower is carefully evaluated and monitored. RJBank's policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by RJBank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate, and income-producing commercial properties. By using derivative financial instruments to hedge exposures to changes in interest rates, RJBank exposes itself to credit risk. RJBank minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is investment grade.

The Company is subject to concentration risk if it holds large positions, extends large loans to, or has large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (e.g. in the same industry). Securities purchased under agreement to resell represent approximately 35% of the Company's total assets at September 27, 2002 and consist entirely of securities issued by the U.S. government. Receivables from and payables to clients and stock borrow and lending activities are conducted with a large number of clients and counterparties and potential concentration is carefully monitored. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. The Company seeks to limit this risk through careful review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the company, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.

The Company is the lessor in two leveraged commercial aircraft transactions with two major domestic airlines (Continental and Delta). The Company's ability to realize its expected return is dependent upon the airlines' ability to fulfill its lease obligations. In the unlikely event that the airlines default on their lease commitments and the Company is unable to re-lease or sell the plane with adequate terms the Company would suffer a loss of some or all of its investment. As of September 27, 2002, it is management's opinion that the value of this investment is not impaired.

Operational risk generally refers to the risk of loss resulting from the Company's operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in the Company's technology or financial operating systems and inadequacies or breaches in the company's control processes. The Company operates different businesses in diverse markets and is reliant on the ability of its employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, the Company could suffer financial loss, regulatory sanctions and damage to its reputation. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate. In order to mitigate and control operational risk, the Company has developed and continues to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Accounting, Operations, Information Technology, Legal, Compliance and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that the Company's various businesses are operating within established corporate policies and limits.

A Compliance and Standards Committee comprised of senior executives meets monthly to consider policy issues. The Committee reviews material customer complaints and litigation, as well as issues in operating departments, for the purpose of identifying issues that present risk exposure to customers or to the Company. The Committee adopts policies to deal with these issues, which are then disseminated throughout the Company.

The Company has established a Quality of Markets Committee that meets regularly to review execution of customer orders by the OTC, Option and Listed trading departments. This Committee is comprised of representatives from the Retail firms, Correspondent services, Compliance and Legal and is under the direction of a senior officer of RJF. This Committee reviews reports from OTC, Option and Listed trading departments and recommends action for improvement when necessary.

Legal risk includes the risk of large numbers of retail customer claims, a potentially sizable adverse legal judgement and of non-compliance with applicable legal and regulatory requirements. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts business. The Company has designated an Anti-money Laundering Compliance Officer who has instituted procedures to assure compliance with regulations adopted under the U.S.A. Patriot Act. The Company has comprehensive procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, money-laundering and record keeping. The Company acts as an underwriter or selling group member in both equity and fixed income product offerings. Particularly when acting as lead or co-lead manager, the Company has legal exposure. To manage this exposure, a committee of senior executives reviews proposed underwriting commitments to assess the quality of the offering and the adequacy of due diligence investigation.

The compliance departments are responsible for monitoring compliance with regulatory requirements at the respective branch offices of each broker-dealer. In addition, there are compliance officers concentrating on fixed income, equity capital markets and asset management who focus on the regulations specific to those businesses.

The Company has experienced an increase in the number of retail claims as a result of the downturn in the equity markets. While these claims may not individually be for large amounts and may not be the result of any wrongdoing, the Company does, at a minimum, incur costs associated with investigating and possibly defending against such claims. See further discussion on the Company's reserve policy under "Critical Accounting Policies"; see also "Legal Proceedings".

The Company's assets are primarily liquid in nature and are not significantly affected by inflation. Management believes that the replacement cost of property and equipment would not materially affect operating results. However, the rate of inflation affects the Company's expenses, including employee compensation and benefits, communications and occupancy, which may not be readily recoverable through charges for services provided by the Company.

From time to time, the Company may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets; (ii) the volatility of the securities markets; (iii) fluctuations in interest rates; (iv) changes in regulatory requirements which could affect the cost of doing business or the profitability of certain segments of the Company's business; (v) fluctuations in currency rates; (vi) general economic conditions, both domestic and international; (vii) changes in the rate of inflation and related impact on securities markets; (viii) competition from existing financial institutions and other new participants in the securities markets; (ix) legal developments affecting the litigation experience of the Company or the securities industry generally; (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company; (xi) natural disasters; (xii) political and military events which would affect the United States of America or world markets, which could disrupt the Company's communications and securities processing capabilities or other operations; and (xiii) changes in investor confidence which could adversely affect the sale of the Company's products and services. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.

1. Financial statements, schedules and exhibits filed under this item are