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Article by DailyStocks_admin    (07-23-08 05:13 AM)

FCStone Group Inc. CEO Paul G Anderson bought 12000 shares on 7-17-2008 at $16.94

BUSINESS OVERVIEW

General



FCStone Group, Inc. is an integrated commodity risk management company providing risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. We assist primarily middle market customers in optimizing their profit margins and mitigating their exposure to commodity price risk. In addition to our risk management consulting services, we operate one of the leading independent clearing and execution platforms for exchange-traded futures and options contracts. We serve more than 7,500 customers and in fiscal 2007, executed more than 61.7 million derivative contracts in the exchange-traded and over-the-counter (“OTC”) markets. As a natural complement to our commodity risk management consulting and execution services, we also assist our customers with the financing, transportation and merchandising of their physical commodity requirements and inventories.



We began offering commodity risk management consulting services to grain elevators in 1968. Since that time, our business has evolved to meet the changing needs of our customers. In response to these changing needs, we expanded our risk management products to include derivatives on agricultural commodities, energy commodities, forest products and food products. We originally operated as a member-owned cooperative that was governed by a mission to deliver professional marketing and risk management programs to enhance the profitability of our members and other customers. In 2000, we acquired the assets of another futures commission merchant (“FCM”), Saul Stone & Company, which enhanced our execution and clearing capabilities and gave us the ability to clear all U.S. exchange-traded commodity futures and options contracts. In connection with the acquisition, we reorganized into a holding company structure. In 2004, we converted to a stock corporation to improve our access to financial capital and to facilitate continued growth in our operations. In 2007, we successfully completed our initial public offering, or IPO, of common stock in which we issued and sold 8,797,500 post-split shares of common stock at a public offering split-adjusted price of $16.00 per share. We raised a total of $140.8 million in gross proceeds from the IPO, or approximately $129.6 million in net proceeds after deducting underwriting discounts and commissions and costs of the offering.

We provide our customers with various levels of commodity risk management services, ranging from value-added consulting services delivered through our Integrated Risk Management Program (“IRMP”) to lower-margin clearing and execution services for exchange-traded derivative contracts. Our consultative focus is demonstrated by our IRMP, which involves providing our customers with commodity risk management consulting services that are designed to help them mitigate their exposure to commodity price risk and maximize the amount and certainty of their operating profits. In performing consulting services, we educate our customers as to the commodity risks that they may encounter and how they can use the derivative markets to mitigate those risks. The IRMP forms the basis of our value-added approach, and serves as a competitive advantage in customer acquisition and retention. We offer our customers access to both exchange-traded and OTC derivative markets, integrating the two platforms into a seamless product offering delivered by our approximately 120 commodity risk management consultants.



We also offer clearing and execution services to a broad array of participants in exchange-traded futures and options markets including commercial accounts, professional traders, managed futures funds, introducing brokers and retail customers. We are an FCM with clearing-member status at all of the major U.S. commodity futures and options exchanges. As of August 31, 2007, we were the third largest FCM in the U.S., as measured by required customer segregated assets, not affiliated with a major financial institution or commodity producer, intermediary or end-user. Our exchange-traded futures and options transaction volumes have grown from 10.6 million contracts in fiscal year 2002 to 61.0 million contracts in fiscal 2007. As of August 31, 2007, we had $997.4 million in customer segregated assets.



In addition to our Commodity and Risk Management and Clearing and Execution Services segments discussed above, we also operate in two other related business segments. In our Financial Services segment, through FCStone Financial, Inc. (“FCStone Financial”) and FCStone Merchant Services, LLC (“FCStone Merchant Services”), we offer financing and facilitation for our customers with respect to physical commodity inventories and operations. FCStone Financial offers financing services that help our customers finance physical grain inventories, while FCStone Merchant Services provides the same services for grain inventories, as well as, other commodities. FCStone Merchant Services also provides financing in transactions where it shares in profits with customers in commodity or commodity-related projects in exchange for financial support.



In the Grain Merchandising segment, we currently operate through our minority interest in FGDI, LLC (“FGDI”). FGDI acts as a grain dealer in the United States and international markets, primarily Asia, Latin America and Canada. It also manages a pool of grain originated by a group of grain elevators in Texas. The primary role of FGDI is to link merchandisers of grain products through its network of industry contacts, serving as an intermediary to facilitate the purchase and sale of grain. Prior to June 1, 2007, we were the majority owner of FGDI, and included its assets, liabilities, revenues and expenses into our consolidated financial statements. On June 1, 2007, the Company closed an equity purchase agreement to sell a portion of its interest in FGDI to Agrex, Inc. (“Agrex”), a subsidiary of Mitsubishi, and the other existing member of FGDI. Subsequent to the sale, we account for this non-controlling interest on the equity method of accounting. As such, the assets and liabilities of FGDI are no longer consolidated (see Notes 3 and 23 to our consolidated financial statements for additional information).



Operating Segments



We operate through a number of wholly-owned subsidiaries with offices and facilities in twelve states, China, Brazil, Canada and Ireland. See Note 23 to our consolidated financial statements for a description of segment financial information. Our principal business activities consist of four operating segments as follows: commodity and risk management services, clearing and execution services, grain merchandising, and financial services. On June 1, 2007, we sold our majority interest in FGDI, which represents our Grain Merchandising segment. Accordingly, in the future we expect to discontinue reporting a Grain Merchandising segment.

Commodity and Risk Management Services



The Commodity and Risk Management (“C&RM”) segment is the foundation of our company. Consistent with our original mandate as a cooperative to serve our grain elevator members, we approach middle-market intermediaries, end-users and producers of commodities with the objective of serving as their commodity risk manager. Some of these customers are sophisticated and knowledgeable of the derivative markets and how they operate, understanding the inherent commodity risk of their business and pursuing their own risk management policies. At the same time, many of our customers look for guidance and consulting with regard to their commodity risk exposure and the use of the derivative markets to mitigate that risk.



Within the C&RM segment, we serve customers through a force of approximately 120 risk management consultants with a level of service that maximizes our abilities and the opportunity to retain the customer. Among more sophisticated customers, we provide less in the way of consulting services and focus more on providing a breadth of products and competitive pricing, while among our customers with less experience in the derivative markets, we provide a broad range of consulting services that are demonstrated most clearly in our IRMP. The IRMP is a fee-based commodity risk management consulting service that is based upon a review of our customers’ commodity inputs and outputs in their products and services, with exposures identified and quantified. We use the information obtained in this review to determine commodity exposures and design strategies intended to optimize our customers’ profit margins and mitigate their risks to changing commodity prices. We advise the client through monthly account reviews and an evaluation of existing hedge positions, as well as by review of year-to-date performance of the program.



We believe that our consulting services, including the IRMP, serve as a value-added competitive advantage in the acquisition and development of new customers. We provide our IRMP customers and other risk management consulting customers with assistance in the execution of their hedging strategies through our exchange-traded futures and options clearing and execution operations as well as access to more customized alternatives provided by our OTC trading desk. As our clients increase their knowledge and acceptance of risk management practices, they become more independent in their hedging decision-making and, in some cases, will transition to fully self-directed trading over a three-to-five year period. However, we often continue to provide transactional advice and consulting services to fully self-directed trading customers. Generally, our customers direct their own trading activity and we do not have discretionary authority to transact trades on behalf of our customers.



We maintain an extensive proprietary database of historical price information for each local market in which our customers operate. Local prices tend to react to similar fundamentals each year relative to the benchmark futures prices. Accordingly, these local characteristics can be analyzed and factored into a customer-specific risk analysis. A commodity price hedging program must recognize and account for these local differences because physical commodity prices are often driven by local supply and demand dynamics such as weather, transportation costs and availability, storage and insurance costs. While exchange-traded futures and options prices reflect the world market, we consider local markets to be more relevant to mid-sized commodity users. Therefore, we provide our customers with a tailored program reflective of the market characteristics within which they operate.



Reflective of the local nature of our product, we service our customers through 12 U.S. offices and four international offices. We currently serve approximately 500 customers through our IRMP.



We deliver our consulting services through an experienced force of approximately 120 risk management consultants. The average tenure of our consultants is eight years, while the annual turnover rate has averaged approximately 9% over the past four fiscal years. We maintain a formal training program for our incoming consultant trainees, which provides a foundation in the basics of our business, including risk management, futures and options markets, OTC markets, financial statement analysis and derivative accounting. As part of the training process, new consultants apprentice with an experienced risk management consultant for up to two years before independently managing customer relationships.
We organize our marketing efforts into customer industry segments. We currently serve customers in the following areas:




Commercial Grain— The commercial grain customer segment represents the foundation of our C&RM segment, as the roots of our company can be traced back to this business. Within this sector we provide services to grain elevators, traders, processors, manufacturers and end-users.




Energy— The energy customer segment targets companies where energy represents a significant input cost into the production of their product or service. Customers in this segment include producers, refiners, wholesalers, transportation companies, convenience store chains, auto and truck fleet operators, industrial companies, railroads and municipalities.




Introducing Brokers— Introducing Brokers within our C&RM segment include individuals or organizations that maintain relationships with customers and intermediate transactions between the customer and ourselves. The customers within this segment are primarily agricultural producers.




Latin America/Brazil— The customers within this customer segment are located predominantly in Mexico and Brazil. Our customers are involved in all sectors of agribusiness, including livestock production and feeding, flour milling and bakery, oilseed crushing and refining, grain merchandising, meat processing and sugar/ethanol production. We believe there are significant opportunities to deepen the penetration of risk management practices within this customer segment in this region.




China— The China customer segment represents both Chinese FCMs as well as commercial companies seeking to hedge their commodity risk exposures. The Chinese FCMs are similar to introducing brokers, facilitating the transactions of their clients in the U.S. commodities markets. The commercial accounts, generally, represent significant processors of grain or other commodities.




Renewable Fuels— The renewable fuels customer segment targets producers of ethanol and biodiesel products, capitalizing on the rapid growth occurring in the alternative fuels industry.




Other— We maintain a number of developing customer segments where the adoption of risk management practices is increasing and our consultative approach is serving as a catalyst to customer adoption. These customer segments currently include customers with risk management needs in the areas of forest products, food services, transportation and weather-related products. We also offer foreign exchange (“Forex”) trading services to customers seeking to mitigate currency risk or to profit from currency trading. In addition, we are participating in the development of markets for carbon and emission credits. We have entered into agreements that would, depending on further developments, enable us to market carbon and emission credits generated by third parties and share in the proceeds from sales of such credits.



Our integrated platform allows our customers, aided by our risk management consultants, to execute and clear commodity futures and options contracts for the purpose of establishing and maintaining their hedge positions through our C&RM segment. Alternatively, we are able to meet more customized hedging needs through our OTC trading desk. Our OTC trading desk, through broad access to commodity market participants as well as major financial institutions, is able to design hedge arrangements that may contain features with respect to contract performance, time period, commodity types, and transaction size that are not achievable in the highly-standardized exchange-traded commodity futures and options markets. Further, our OTC capability has provided an ability to create products that assist our customers, in turn, to offer value-added services to their clients. We believe that we are unique in offering both exchange-traded and OTC products to our middle-market target customers.

Within our C&RM business, we have experienced strong growth in contract trading volumes. Since 2002, growth in exchange-traded contract trading and OTC contract trading have both been robust.



In fiscal 2007, the C&RM segment had consolidated income before minority interest and income tax of $45.7 million, an increase of $23.8 million, or 108.7%, from $21.9 million in fiscal 2006. In fiscal 2007, the C&RM segment represented approximately 78% of our consolidated income before minority interest, income tax and corporate overhead.



See Note 23 of the notes to consolidated financial statements for a table showing a summary of the Company’s consolidated revenues by geographic area.



Clearing and Execution Services



We seek to provide economical clearing and execution of exchange-traded futures and options for the institutional and professional trader market segments through the Stone division of our subsidiary, FCStone LLC. Through our platform, we accept customer orders and direct those orders to the appropriate exchange for execution. We then facilitate the clearing of our customers’ transactions. Clearing involves the matching of our customers’ trades with the exchange, the collection and management of margin deposits to support the transactions, and the accounting and reporting of the transactions to our customers. We seek to leverage our capabilities and capacity by offering facilities management or outsourcing solutions to other FCMs.



FCStone LLC is a registered FCM and a clearing member of all major U.S. commodity futures exchanges including the Chicago Mercantile Exchange (“CME”), the Chicago Board of Trade (“CBOT”), the New York Mercantile Exchange (“NYMEX”), COMEX Division of NYMEX, New York Board of Trade (“NYBOT”), Kansas City Board of Trade (“KCBT”) and the Minneapolis Grain Exchange. We are one of the largest clearing members on the NYBOT and NYMEX as measured by contracts cleared.

We service our customers though a Wholesale Division and a Professional Trading Division:



Wholesale Division. Wholesale division customers generally consist of non-clearing FCMs, introducing brokers and clearing FCMs for which we provide back-office services such as trade processing and accounting. These customers serve as intermediaries to the ultimate customer transacting the futures or options contract.



Professional Trading Division. The professional trading customers consist of retail-oriented introducing brokers, professional traders and floor traders. In this division, we target high-volume users of the futures and options markets. We hold the largest share of the professional floor trader market at the NYBOT and the COMEX Division of NYMEX. Through our retail division, we also target managed futures funds, hedge funds and commodity trading advisors. We believe that this segment of our customer base will benefit from the increasing significance of electronic trading, providing them a greater opportunity to trade across markets and commodities.

In fiscal 2007, the Clearing and Execution segment had consolidated income before minority interest and income tax of $9.6 million, a decrease of $1.4 million, or 12.7%, from $11.0 million in fiscal 2006. In fiscal 2007, the Clearing and Execution Services segment represented approximately 16% of our consolidated income before minority interest, income tax and corporate overhead. The decrease in segment consolidated income before minority interest and income tax is a direct result of a loss incurred on excess segregated funds invested with Sentinel Management Group, Inc. Excluding this non-operating loss, segment consolidated income before minority interest and income tax would have increased to $15.2 million.



Financial Services



Our Financial Services segment is comprised of FCStone Financial and FCStone Merchant Services. FCStone Financial serves as a grain financing and facilitation business through which we lend to commercial grain-related companies against physical grain inventories. We use sale/repurchase agreements to purchase grain evidenced by warehouse receipts at local grain elevators subject to a simultaneous agreement to sell such grain back to the original seller at a later date. We account for these transactions as product financing arrangements, and accordingly no grain inventory and grain purchases and sales are recorded.

FCStone Merchant Services serves as a financing vehicle for a number of different commodities, including grain, energy products and renewable fuels. These arrangements can take the form of fixed repurchase agreements, hedged commodity transactions or traditional lending arrangements, backed by letters of credit, depending on the risk, underlying commodity and borrower involved in the transaction.



We believe that our commodity risk management, merchandising and transportation expertise, along with our experience in the renewable fuels area, can be applied to the rapidly growing alternative fuels industry. Our presence in these markets and our interest in renewable fuels created an opportunity for us to provide financing to a startup biodiesel company. In fiscal 2006, we loaned $1.5 million to Green Diesel LLC (“Green Diesel”) as part of its financing to build a biodiesel production facility located in Houston, Texas. The terms of the loan agreement included the issuance of warrants exercisable for up to 48% of the equity of Green Diesel. Subsequently, Green Diesel decided to raise additional equity in order to build a larger production facility with an annual production capacity of approximately 46 million gallons. In order to prevent the dilution of our potential 48% interest in Green Diesel, we invested an additional $2.4 million. During fiscal 2007, FCStone Merchant Services loaned an additional $1.6 million to Green Diesel to finance the expanded facility and to commence the testing phase. Additionally, FCStone Merchant Services agreed to provide working capital to Green Diesel. At August 31, 2007, FCStone Merchant Services has advanced $4.3 million to Green Diesel, secured by commodity inventory. On April 9, 2007, Fortis Capital Corp. (“Fortis”) established an uncommitted line of credit for Green Diesel, in an initial amount of $10.0 million, which can be increased under certain conditions to $22.5 million. Green Diesel’s obligations under the Fortis line of credit are guaranteed by FCStone Merchant Services, which is supported in part by a $2.0 million guarantee to Fortis from the Company. As of August 31, 2007, no amounts were outstanding under the Fortis line of credit. We are not contractually bound to invest additional equity in Green Diesel, although we may do so. We believe the Green Diesel production facility will begin commercial production in the first calendar quarter of 2008. We continue to explore other avenues to increase our presence in the renewable fuels area.



On November 9, 2007, we agreed to provide funding for equipment upgrades to the Green Diesel biodiesel plant and for operating costs during the period of modification. We agreed to provide additional loans of up to $2.5 million for this purpose and in connection therewith obtained improved priority status for our investment, as well as majority ownership and control. If the modifications are made on schedule and perform as anticipated, commercial operations are expected to commence in calendar year 2008. Effective November 9, 2007, we have majority ownership of, and control of, Green Diesel, and anticipate that Green Diesel will be included in the consolidated financial statements as of November 30, 2007.



Grain Merchandising



As a complement to our commodity risk management consulting services, we assist our customers and utilize our market contacts to link merchandisers of grain products, through our minority interest in FGDI, which serves as an intermediary to facilitate the purchase and sale of physical grain. On June 1, 2007, we closed an equity purchase agreement to sell a portion of our interest in FGDI to Agrex for $6,750,000 in cash. This entity represents the entire Grain Merchandising segment discussed in Note 23 of the notes to the consolidating financial statements. The resulting gain on the transaction, before taxes, was approximately $2.6 million and recognized during the fourth quarter of 2007. Subsequent to the sale, we retain a 25% interest in the equity of FGDI and account for this non-controlling interest on the equity method of accounting. The Company does not plan to continue reporting the Grain Merchandising segment in fiscal 2008.



FGDI’s services help elevators and grain marketers maximize the value of their grain by locating domestic and international buyers and assisting the originator in retaining ownership and margins as far into the marketing pipeline as possible. FGDI consistently offers value-added opportunities for its customers to merchandise their inventories beyond their traditional channels.



In the grain merchandising segment, FGDI earns revenue primarily through the sale of grain which is driven by the volume and price of grain it merchandises.

For the end-users, processors and exporters, FGDI provides a dedicated and efficient method of sourcing the specific type and quality of grain, and assures consistent delivery to match a buyer’s needs. Because FGDI works closely with a wide range of customers, it is able to regularly link customers in mutually beneficial transactions. FGDI manages and operates approximately 1,000 grain rail cars in conjunction with its merchandising program. During the nine month period ended May 31, 2007, which has been included in our consolidated financial statements, FGDI merchandised 174.1 million bushels of grain.



Regulatory Matters



We are regulated by several governmental agencies and self-regulatory organizations in connection with various aspects of our business. Compliance with these laws and regulations is material to our operations. The following discussion describes the material licenses and registrations that we maintain.



FCStone, LLC is a registered FCM with the Commodity Futures Trading Commission (“CFTC”) and a member of the National Futures Association (“NFA”), both of which have regulatory authority over our company. FCStone, LLC is also a clearing member of all major U.S. futures exchanges. The CME is its Designated Self-Regulatory Organization for regulatory purposes and performs an annual examination of FCStone, LLC’s activities. FCStone LLC must file monthly and annual financial reports with the CFTC, NFA, and CME and is subject to the various rules and regulations of the CFTC, NFA, and CME.



FCStone Forex, LLC operates as material affiliated person (“MAP”) of FCStone, LLC and is subject to regulatory oversight by the NFA.



FCStone Investments, Inc., is registered as a commodity pool operator with the CFTC and a member of the NFA and acts as the general partner or managing member of commodity pools. FCStone Investments, Inc. must file with the NFA disclosure documents or an offering memorandum and annual financial reports for the commodity pools it operates. FCStone Advisory, Inc. is registered with the NFA as a commodity trading advisor and provides market commentary.



FCC Futures, Inc., and Westown Commodities, LLC, are introducing brokers (“IB”) guaranteed by FCStone, LLC. These IB’s are registered with the CFTC and members of the NFA.



FCC Investments, Inc. is a registered broker-dealer with the Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers (“NASD”). FCC Investments, Inc. must file quarterly and annual Financial and Operational Combined Uniform Single reports with the SEC and is subject to the various rules and regulations of the NASD.



In addition, we are subject to other general legal and regulatory provisions applicable to trading services and commodities dealing.



Sales and Marketing



We have a comprehensive sales and marketing program that is primarily implemented by our staff of risk management consultants. Our risk management consultants are compensated on a commission basis and are responsible for developing new customers and providing services to new and existing customers. Our executive management team also engages in significant sales and marketing activities.



Sales efforts are primarily centered on consulting services and on presenting our ability to obtain and utilize commodity intelligence information to support customer needs and improve customer profitability. Specifically, we emphasize our IRMP, which provides the most comprehensive level of service offered by the Company. Sales efforts are supported by systems, staff and resources, including current commodity information and intelligence systems, communications systems, archives of commodity basis and pricing information and related presentation and analytical tools, marketing materials, an internet web site, advertising, and educational materials.

We engage in direct sales efforts to seek new customers with a strategy of extending our services from our existing customer base to similar customers not yet served and to different kinds of customers that have risk management needs similar to those of our existing customer base. We seek to serve not only those customers that currently use risk management methods, but also those customers that we believe should use risk management methods. We are expanding our services into new business segments and are expanding our services geographically into foreign markets, particularly in Asia, Latin America and Canada.



We stay in regular contact with existing customers to provide commodity information and services, usually on a daily basis, by direct personal contact and by issuing current market commentary by fax or e-mail. We also offer educational programs on risk management methods and regular outlook meetings for our customers as well as the customers of our customers.



Competition



The commodity and risk management industry can generally be classified into four basic types of companies: (1) pure consultants, (2) clearing FCMs providing trade execution but not broad-based consulting services, (3) captive businesses providing consulting and trade execution as divisions of financial institutions or larger commodity-oriented companies, and (4) integrated FCMs providing both consulting and trade execution from an independent platform. As a result, we compete with a large number of smaller firms that focus on personalized service, and a smaller number of large, better-capitalized companies that focus less on personalized service but have significant execution capabilities and market presence. We believe that our C&RM segment, which operates as an integrated FCM, serves the needs of middle market companies that require both the personalized consulting services provided by our risk management consultants and the trade execution services that we offer as an FCM.



We compete with a large number of firms in the exchange-traded futures and options execution sector and in the OTC derivatives sector. We compete primarily on the basis of price and value of service. Our competitors in the exchange-traded futures and options sector include international brokerage firms, national brokerage firms, regional brokerage firms (both cooperatives and non-cooperatives) as well as local introducing brokers, with competition driven by price level and quality of service. Many of these competitors offer OTC trading programs as well. In addition, there are a number of financial firms and physical commodities firms that participate in the OTC markets, both directly in competition with us and indirectly through firms like us. We compete in the OTC market by making specialized OTC transactions available to our customers in contract sizes smaller than those usually available from major counter-parties.



In the Financial Services segment we compete with traditional lenders, including banks and asset-based lenders. In addition, we also compete with specialized investment groups that seek to earn an investment return based on commodities transactions. We compete on price and service and by managing commodity risks that traditional lenders may seek to avoid. We are an extremely small participant in the financial services industry, which consists of a very large number of large and small firms. We do not attempt to compete generally in this industry. Rather, we focus our energies on filling a specific niche of supporting commodities transactions.



The grain merchandising segment competes for both the purchase and sale of grain. Competition is intense and profit margins are low. Our major competitors have substantially greater financial resources than those available to us, but we believe that our relationships, primarily with cooperative customers, give us a broad origination capability. Competition for grain sales is based on price, services and ability to provide the desired quantity and quality of grains. Our grain merchandising operations compete with numerous larger grain merchandisers, including major grain merchandising companies such as Archer-Daniels-Midland Co., Cargill, Incorporated, CHS Inc., ConAgra Foods, Inc., Bunge Ltd., and Louis Dreyfus Group, each of which handles grain volumes of more than one billion bushels annually.

Technology



We utilize front-end electronic trading, mid office, back office and accounting systems that process transactions on a daily basis. These systems are integrated to provide recordkeeping, trade reporting to exchange clearing, internal risk controls, and reporting to government entities, corporate managers, risk managers and customers. Our futures back office system is maintained by a service bureau which is located in Chicago with a disaster recovery site in New York. All other systems are maintained in our West Des Moines information technology headquarters data center and system backups are stored off-site.



All of these systems are accessed through a wide area network. All systems are protected by a firewall and require proper security authorization for access. Our wide area network is managed by a service bureau which has redundant data facilities in Kansas City. We are currently building a disaster recovery plan to utilize the West Des Moines and Kansas City data centers to house redundant systems.



Our risk managers access market information from network-based software systems. Market information includes real-time quotes, market history (futures/cash), news and commentaries. Market information also includes our historic database of market pricing and trend information used in the IRMP. This information is used to analyze the markets to help risk managers determine the best strategy for a customer to minimize risk and maximize profit margins, especially when used in conjunction with the IRMP.



We use the RISC back office trade system to process exchange-traded futures and options trades. We also commenced use of the KIODEX and a proprietary back office trade system to process OTC/derivative trades beginning in fiscal 2007. We use Globex, Clearport, eAcess, CQG, Transact, TT, RTS, RANorder and PATS electronic trading/order routing platforms.



Employees



As of August 31, 2007, we employed 374 people. This total is broken down by business segment as follows: C&RM had 216 employees; Clearing and Execution Services had 115 employees; Financial Services had 2 employees; and Corporate had 41 employees. We believe our relationship with our employees is good, and we have not suffered any work stoppages or labor disputes. None of our employees operate under a collective bargaining agreement. Many of our employees are subject to employment agreements. It is our current policy to obtain an employment agreement containing noncompetition provisions from each risk management consultant.

CEO BACKGROUND

Paul G. (Pete) Anderson has served as a director of our company since November 9, 2006. He has been employed by our company since 1987 and has served as president and chief executive officer since 1999. Prior to becoming president, Mr. Anderson was the vice president of operations. Mr. Anderson is the past president of the Kansas Cooperative Council and past founding chairman of the Arthur Capper Cooperative Center at Kansas State University. Mr. Anderson sits on the board of directors of Associated Benefits Corporation and is a member of National Council of Farmer Cooperatives, the National Feed and Grain Association and several other state associations.

David Andresen has served as a director of our company since January 6, 2005. Mr. Andresen is the general manager of 4 Seasons Cooperative and Petroleum Partners LLC in Britton, South Dakota and has served in that capacity for nine years. Mr. Andresen has served as the president of the South Dakota Managers Association, South Dakota Association of Cooperatives, Britton Area Chamber of Commerce and currently is the mayor of Britton, South Dakota.

Brent Bunte has served as a director of our company since 2000 and is the former chairman of our audit committee. Mr. Bunte is the manager of the NEW Cooperative in Fort Dodge, Iowa, and has been with NEW Cooperative for 22 years. Mr. Bunte has held directorships with First American Bank and Associated Benefits Corporation.

Douglas Derscheid has served as a director of our company since 2003. Mr. Derscheid is the president and chief executive officer of the Central Valley Ag Cooperative in O’Neill, Nebraska and has been with Central Valley, and one of its predecessors, Central Farmers Cooperative, for the past 15 years. Prior to his work with Central Farmers, Mr. Derscheid was the general manager of Farmers Cooperative Elevator in Plymouth, Nebraska for seven years. Mr. Derscheid is currently chairman of the board of Cooperative Mutual Insurance Company and is the treasurer for the O’Neill Airport Authority. Mr. Derscheid previously served as a board member of the Nebraska Propane Gas Association and a Trustee for the Nebraska Managers Association.

Jack Friedman has served as a director of our company since 1996 and is a vice chairman. Mr. Friedman is the chief executive officer of Innovative Ag Services in Monticello, Iowa and has been with that firm or its predecessor company for 31 years. For the past 15 years, Mr. Friedman had served as manager of Swiss Valley Ag Center in Monticello, Iowa. Mr. Friedman serves as a director of Western Dubuque Biodiesel LLC.

Kenneth Hahn has served as a director of our company since 2002. Mr. Hahn is the general manager of Planters Cooperative in Lone Wolf, Oklahoma and has been with Planters Cooperative for a total of 32 years, 24 years as manager and eight years as assistant manager. Mr. Hahn has held director positions with the Coop Retirement Board and Oklahoma Grain and Feed Association.

Daryl Henze has served as a director of our company since November 9, 2006. On that date he also was appointed to serve as the chairman of our audit committee. Mr. Henze is a consultant in the area of finance and accounting. He spent 36 years with the accounting firm KPMG LLP before his retirement in 2001, including 28 years as an audit partner. Mr. Henze serves on the board of directors of Wellmark, Inc., as well as the boards of two other private companies. He is a former president of the Minnesota State Mankato Alumni Association and on the Iowa State University Accounting Advisory Board. He is the past president of the Iowa Society of Certified Public Accountants and served on the Iowa Accountancy Examining Board for nine years.

Bruce Krehbiel has served as a director of our company since 1988 and is our chairman. Mr. Krehbiel is the manager of Kanza Cooperative Association in Iuka, Kansas, and has worked for Kanza Cooperative Association since 1986. Mr. Krehbiel has held director positions on the boards of the Midwest Chapter of the National Society of Accountants for Cooperatives, CenKan, LLC, and Agri-Business Benefit Group.

Tom Leiting has served as a director of our company since 1997. Mr. Leiting is the manager of the River Valley Cooperative in Clarence, Iowa. He has been employed by River Valley or one of its parent companies for the past 19 years. Prior to his position with River Valley, Mr. Leiting was employed by Swiss Valley Farms Services for eight years. Mr. Leiting is currently a member of the Associated Benefits Corporation board of directors.

Eric Parthemore has served as a director of our company since 1996 and as a vice chairman of our company since January, 2007. He served as our secretary and treasurer until January, 2007. Mr. Parthemore is the president and chief executive officer of the Farmers Commission Company in Upper Sandusky, Ohio and has held that position since 1996. For the previous five years, he was the general manager of U.S. Commission Company. Mr. Parthemore was appointed in January 2004 to serve on the Ohio Agricultural Commodity Advisory Commission by the Secretary of Agriculture in the State of Ohio. Mr. Parthemore is a director on the Ohio AgriBusiness Association and serves as a trustee of the OABA Education Trust.

David Reinders has served as a director of our company since 2001. Mr. Reinders is the general manager of Sunray Co-op in Sunray, Texas and has held that position since January 2004. Prior to his service at Sunray Co-op, Mr. Reinders was general manager of United Farmers Coop in George, Iowa, for ten years. Mr. Reinders formerly was a director of the Iowa Institute of Coops, the Agribusiness Association of Iowa and Land O’Lakes.

Rolland Svoboda previously served as a director of our company from January 1999 to January 2002 and currently is serving a term as director that commenced in January 2004. Mr. Svoboda is the general manager of Pro Cooperative in Gilmore City, Iowa. He has been with Pro Cooperative since 1999. Prior to his current position, Mr. Svoboda served for five years as the general manager of Farmers Coop in Hemingford, Nebraska.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview



We are an integrated commodity risk management company providing risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. We assist primarily middle market customers in optimizing their profit margins and mitigating commodity price risk. In addition to our risk management consulting services, we operate one of the leading independent clearing and execution platforms for exchange-traded futures and options contracts. In fiscal 2007, we served more than 7,500 customers and transacted more than 61.7 million contracts in the exchange-traded and OTC markets. As a natural complement to our commodity risk management consulting and execution services, we also assist our customers with the financing, transportation and merchandising of their physical commodity inventories.



In the mid 1990’s, utilizing the expertise developed in providing risk management consulting services to our traditional grain-related customers, we began a period of growth driven by our strategic decision to expand into new products and customer segments. This expansion was further accelerated when we acquired Saul Stone & Company, which enhanced our execution and clearing capabilities and gave us the ability to clear all U.S. exchange-traded commodity futures and options contracts. As our business expanded, revenues from customers who were not among our cooperative members increased significantly. In late 2004, we recognized the need to align our corporate structure with the changed dynamics of our business and to provide access to capital to finance anticipated increases in our CFTC regulatory capital requirements. In March 2005, our members approved a restructuring plan, which resulted in our ceasing to operate as a cooperative and converted the interests of our members into common stock. In March 2007, the Company completed its IPO of common stock in which a total of 8,797,500 post-split shares were issued and sold at an IPO split-adjusted price of $16.00 per share, raising a total of $140.8 million in gross proceeds from the IPO, and approximately $129.6 million in net proceeds after deducting underwriting discounts and commission expenses and other operating costs. Proceeds from the IPO were used to fund a share redemption, reduce general corporate and subordinated debt and to increase the net capital in our FCM.



We operate in four reportable segments consisting of Commodity and Risk Management Services (“C&RM”), Clearing and Execution Services, Financial Services and Grain Merchandising. We also report a Corporate and Other segment, which contains corporate expenses and equity investments not directly attributable to our operating segments. On June 1, 2007, we sold our majority interest in FGDI, which represents our Grain Merchandising segment. Accordingly, in the future we expect to discontinue reporting a Grain Merchandising segment, and our remaining equity interest in FGDI will be included in the Corporate and Other segment.



Our profitability is primarily driven by the C&RM and Clearing and Execution Services segments of our business, as shown in the table below. While the revenues of our Grain Merchandising segment represent a large proportion of our total revenue, that segment is characterized by low operating profit margins. As a result, it is important that you read our consolidated financial statements in conjunction with the segment disclosure included below and in the notes to our consolidated financial statements. The following table sets forth for each segment the income (loss) before minority interest and income tax expense for each of the three fiscal years ended August 31, 2007.

Factors that Affect Our Business



Our results of operations have been, and we expect will continue to be, affected principally by customer acceptance of risk management, commodity price volatility, transaction volumes, interest rates and our ability to develop new products for our customers.



Customer Acceptance of Risk Management



The growing sophistication of company managers and the heightened expectations of investors have increased the acceptance of commodity risk management strategies. Demand for risk management consulting services is growing in industries that have not traditionally been significant users of hedging techniques and the derivatives market. This increased demand drives our fee revenue from risk management consulting services and our commission and interest income generated from the trading activity of our customers. As we expand our customer base beyond the traditional users of derivative products, our ability to provide an analysis of the commodity markets and advise our customers about how to manage the commodity risk inherent in their businesses will continue to be an important driver in our ability to generate future revenues.



Commodity Price Volatility



Rising commodity price volatility historically has led to increases in transaction volume and better financial performance in both our C&RM and Clearing and Execution Services segments. High commodity price volatility affects our financial performance by increasing the uncertainty of the profit margins of intermediaries, end-users and producers, which ultimately leads them to derivatives as a way of mitigating their financial risk from changing prices. At the same time, market volatility creates opportunities for professional traders, who find derivatives a more efficient way to transact relative to traditional physical commodities. In general, high commodity price volatility increases the demand for risk management consulting services and trade execution and clearing by commodity producers, intermediaries, end-users and professional traders.



Transaction Volumes



Since 2001, market transaction volume, as measured by numbers of contracts, has increased due to higher commodity price volatility, product innovation and a shift to electronic trading. As noted above, high commodity price volatility results in increased demand for risk management consulting services and increased transaction volumes. In addition, product innovation in both the international exchange-traded and OTC markets has resulted in higher transaction volumes. The continued convergence of derivatives and cash markets and the expanded use of derivatives for hedging and investment purposes have been the primary drivers of this industry trend. The shift from open outcry, pit-based trading to electronic trading platforms has increased trading volume as customers are drawn to more efficient and lower cost markets.

Interest Rates



The level of prevailing short-term interest rates affects our profitability because a portion of our revenue is derived from interest earned from the investment of funds deposited with us by customers in our C&RM and Clearing and Execution Services segments. Our financial performance generally benefits from rising interest rates. Rising interest rates increase the amount of interest income earned from these customer deposits. In contrast, declining interest rates decrease the amount of interest income earned on customer deposits.



Product Development



Our ability to develop customized products to meet our customers’ specialized needs affects the overall profitability of our operations. These customized products often have unique and complex structures based on OTC traded contracts and we provide value-added service components to our customers that make these products more profitable for us.



Statement of Operations



Revenues



Our revenues are comprised of: (1) commissions and clearing fees, (2) risk management service, consulting and related brokerage fees, (3) interest income, (4) other revenues and (5) sales of physical commodities.



Commissions and clearing fees. Commissions and clearing fees represent revenues generated from exchange-traded and Forex transactions that we execute or clear in our C&RM and Clearing and Execution Services segments. Commissions and clearing fee revenue is a product of the number of transactions we process for our customers and the rate charged on those transactions. The rate that we charge our customers varies by type of customer, type of transaction and a customer’s volume of trading activity. The following table shows commissions and clearing fees by exchange trades and Forex trades and the number of exchange-traded contracts that we have executed or cleared for our customers in the C&RM and Clearing and Execution Services segments over the three fiscal years ended August 31, 2007.

Commissions and clearing fees increased from $76.7 million in fiscal 2005, to $145.1 million in fiscal 2007. This growth was primarily related to the current fiscal year price rally and price volatility in the grain markets, increased trading of energy products, due to continued volatility in the energy markets, and the large increase in customer Forex trading. Additionally, growth was due to new customers in the Clearing and Execution Services segment, as well as new customers in the renewable fuels and the Brazilian/China divisions within the C&RM segment.



Service, consulting and brokerage fees. Service, consulting and brokerage fees are revenue generated in the C&RM segment. Service revenues are monthly fees charged to IRMP customers for customized risk management consulting services. Brokerage fees are generated from OTC derivative trades executed with our customers and with other counterparties. These brokerage fees vary on a per trade basis depending on the level of service provided and the type of transaction. Consulting fees are primarily fees we charge for providing various other risk management-related consulting services to customers, which are generally performed on either a monthly or project-by-project basis. The following table sets forth our service, consulting and brokerage fees and OTC contract volume for the three fiscal years ended August 31, 2007.

Service, consulting and brokerage fees have increased period from $18.9 million in fiscal 2005, to $47.7 million in fiscal 2007. This increase was primarily due to increased OTC contract volume during that period. OTC volume is higher primarily due to new products in our commodity risk management business and due to new customers in the Brazilian and renewable fuels divisions. Additionally, growth in this revenue category has resulted from an increase in the number of and average fees from our IRMP clients.



Interest income. Interest income is revenue generated from customer funds deposited with us to satisfy margin requirements and from our internally-generated cash balances invested at short-term interest rates. In addition, we earn interest income from financing fees related to grain inventory repurchase programs within our Financial Services segment. Interest revenue is primarily driven by the level of customer segregated assets deposited with us and the level of short-term interest rates. The level of customer segregated assets deposited with us is directly related to transaction volume and open contract interest of our customers. The following table sets forth interest income, customer segregated assets and average 90-day Treasury bill rates for the three fiscal years ended August 31, 2007.

Interest income has increased from $8.2 million in fiscal 2005, to $43.0 million in fiscal 2007. This increase is primarily the result of an increase in both investable exchange customer segregated assets and OTC customer margin assets and higher short-term interest rates. The increase in investable exchange customer segregated assets and OTC customer margin assets are related to the increase in exchange contract and OTC contract trading volumes.



Other revenues. Other revenues represents railcar sublease income and profit-share arrangements in our Financial Services segment, service revenues and patronage income from our Grain Merchandising segment, and income from equity investments. Additionally, we have historically included income received from non-recurring items such as litigation settlements, gains on the sale of exchange membership stock or exchange seats, special dividends and other non-recurring items which can vary significantly. The following table sets forth other revenues for the three fiscal years ended August 31, 2007.

In fiscal 2005, we experienced a significant amount of other revenues due to the sale of exchange memberships and the gain on the termination of a profit sharing agreement with a customer. Other revenue in fiscal 2006 reflects the lack of similar non-recurring gains during the year. In fiscal 2007, in addition to the normal revenues discussed above, other revenues included several significant non-recurring items, including a $3.7 million gain on the sale of excess CME Group, Inc. stock, a $2.6 million gain from the sale of a portion of its membership interest in FGDI and the CBOT’s special dividend of $0.5 million. Offsetting these gains was an investment loss on funds deposited with Sentinel Management Group, Inc of $5.6 million.

Sales of commodities. Sales of commodities represents revenue generated from the sale of grain in the Grain Merchandising segment, the sale of fuel in the C&RM segment and the sale of various commodities in the Financial Services segment. The price of grain is volatile and is affected by various factors, including changes in the weather, economy and other factors affecting the supply and demand for grain. Although commodity sales generate a significant amount of our revenue, for management purposes we focus on the margin (gross profit) from commodity sales. The focus on gross profit from commodity sales removes the effect of commodity price driven changes on revenue and cost of goods sold, which may not have an effect on net income. The margin on commodity sales also provides a more meaningful comparison from period to period. The following table sets forth sales of commodities, commodities gross profit and grain bushels sold for the three years ended August 31, 2007.

Total revenues from the sale of commodities decreased from $1.3 billion in fiscal 2005, to $1.1 billion in fiscal 2007. The sales volume of commodities underlying revenue from sales of commodities varied by the type of commodity. Grain volume sales over this period declined due to both lower bushel volume and lower commodity prices. Lower bushel volume for fiscal 2007 was related to including FGDI’s nine months activity in fiscal 2007 compared to the traditional full fiscal year activity in 2005 and 2006. Margin per bushel increased during fiscal 2007 as a result of the strong export market and demand for grain domestically from the renewable fuels market.

Results of Operations

Year Ended August 31, 2006, Compared to Year Ended August 31, 2007

Executive Summary

Net income increased $18.0 million or 118.1% from $15.3 million in fiscal 2006, to $33.3 million in fiscal 2007. This increase was primarily driven by higher exchange-traded and OTC contract trading volumes from new and existing customers, along with higher interest rates applicable to larger segregated customer balances.

Revenues and Cost of Commodities Sold



Revenues, net of cost of commodities sold, increased $75.5 million, or 41.6%, from $181.9 million in fiscal 2006, to $257.4 million in fiscal 2007.



Sale of Commodities and Cost of Commodities Sold. Sales of commodities decreased by $28.2 million, or 2.5%, from $1,130.0 million in fiscal 2006, to $1,101.8 million in fiscal 2007. Cost of commodities sold decreased $28.7 million, or 2.6%, from $1,112.9 million in fiscal 2006, to $1,084.2 million in fiscal 2007. The decrease in sales and cost of commodities sold was due to a decrease in the number of financing transactions we entered into as a principal, in the Financial Services segment, accounting for a $21.1 million decrease in energy sold and a $7.5 million decrease in arrangements whereby we periodically participate as a principal in back-to-back ethanol transactions in the C&RM segment.



In addition, the sales of commodities and cost of commodities sold from our Grain Merchandising segment reflected similar revenue and related cost totals, however the fiscal 2007 amounts only include nine months of activity, as described above. Grain bushels handled were 235.9 million bushels in fiscal 2006 and 174.1 million bushels in the first nine months of fiscal 2007. The discrepancy in the bushels handled was offset by the significant increase in grain prices during fiscal 2007.



Gross profit on commodities sold increased $0.5 million, or 3.0%, from $17.0 million in fiscal 2006, to $17.5 million in fiscal 2007 with the gross margin percentage increasing slightly from 1.5% to 1.6%.



Commissions and Clearing Fees. Commissions and clearing fees increased $39.5 million, or 37.4%, from $105.6 million in fiscal 2006, to $145.1 million in fiscal 2007. Total exchange-traded contract volume increased by 13.5 million exchange-traded contracts, or 28.5%, from 47.5 million contracts in fiscal 2006, to 61.0 million contracts in fiscal 2007, which accounted for $26.3 million of the increase. This increase was primarily the related to the fiscal year’s significant price rally and its continuing effects and volatility in the grain markets and continued volatility in the energy markets. Revenues increased in line with trading volume, as there was little change in the average revenue per trade during the year. Additionally, Forex trades increased significantly due to the addition of several large customers and accounted for approximately $13.1 million of the higher commissions and fees.



Service, Consulting and Brokerage Fees. Service, consulting and brokerage fees increased $14.3 million, or 42.8%, from $33.4 million in fiscal 2006, to $47.7 million in fiscal 2007. This increase was primarily due to a significant increase in OTC contract volume from our energy, renewable fuels, grain risk management and Brazilian and Chinese customers. OTC contract volume increased 425,124 contracts, or 130.5%, from 325,785 contracts in fiscal 2006, to 750,909 contracts in fiscal 2007. The overall OTC rate per contract was lower as we had an increase in lower-rate renewable fuels trades during the year. In addition, we experienced an increase in consulting fees due to more customers and higher average fees in the IRMP.



Interest Income. Interest income increased $19.8 million, or 85.4%, from $23.2 million in fiscal 2006, to $43.0 million in fiscal 2007. The increase was primarily due to increased exchange customer segregated assets and OTC customer margin assets, higher short-term interest rates and increased activity in the grain inventory financing programs.



Other Revenues. Other revenues increased by $1.6 million, or 58.7%, from $2.6 million in fiscal 2006, to $4.2 million in fiscal 2007. This increase was primarily the result of several non-recurring items, including a $3.7 million gain on the sale of excess CME Group Inc. stock, a $2.6 million gain on the sale of a portion of our FGDI membership units, a $0.5 million special dividend from CBOT and a $0.1 million gain on the conversion of a membership seat to common stock. These gains were offset by the $5.6 million loss on investments held at Sentinel Management Group, Inc (“Sentinel”). As a result of the merger between the CBOT and the CME, the share requirements to trade on the exchanges were revised and resulted in the Company having excess shares of CME that no longer need to be pledged for clearing purposes. The loss on investments resulted when a portion of our excess segregated funds invested with Sentinel were sold to an unaffiliated third-party at a significant discount—see Note 4 to the consolidated financial statements.



Other Costs and Expenses



Employee Compensation and Broker Commissions. Employee compensation and broker commissions increased $5.3 million, or 12.0%, from $44.2 million in fiscal 2006, to $49.5 million in fiscal 2007. The expense increase was primarily a result of volume-related increased broker commissions driven by higher revenues in our C&RM segment, and to a lesser extent, additional personnel.



Pit Brokerage and Clearing Fees. Pit brokerage and clearing fees increased $20.4 million, or 42.8%, from $47.6 million in fiscal 2006, to $68.0 million in fiscal 2007. This increase was directly related to increased volume of exchange-traded and Forex traded contracts.



Introducing Broker Commissions. Introducing broker commissions expense increased $13.2 million, or 57.9%, from $22.8 million in fiscal 2006, to $36.0 million in fiscal 2007. The increase was due to higher contract trading volumes from customers introduced by our introducing brokers in both the C&RM and Clearing and Execution Services segments.



Employee Benefits and Payroll Taxes. Employee benefits and payroll taxes increased $0.9 million, or 9.0%, from $9.8 million in fiscal 2006, to $10.7 million in fiscal 2007, primarily due to higher payroll taxes from increased employee compensation and broker commissions.



Interest Expense. Interest expense increased $4.2 million, or 74.2%, from $5.7 million in fiscal 2006, to $9.9 million in fiscal 2007. The increase was primarily due to higher borrowings as a result of significantly increased activity in the grain inventory financing programs and higher borrowings in the first nine months of our grain merchandising operations. Additionally, higher short-term interest rates were also a factor of the increased interest expense.



Depreciation Expense. Depreciation expense was $1.7 million in fiscal 2006 and 2007, respectively.



Bad Debt Expense. Bad debt expense decreased $0.3 million, or 14.5%, from $1.9 million in fiscal 2006, to $1.6 million in fiscal 2007. Bad debt expense in fiscal 2006 related primarily to a $1.0 million charge resulting from the bankruptcy of a customer in our Grain Merchandising segment. In fiscal 2007 the expense is primarily due to the inability of a commodity pool limited partnership, for which a subsidiary of the Company acted as a general partner and commodity pool operator, to meet a margin call from assets of the pool. The resulting liquidation of the pool positions under continuing adverse market conditions resulted in a charge of $1.3 million.



Other Expenses. Other expenses increased $2.4 million, or 10.3%, from $23.6 million in fiscal 2006, to $26.0 million in fiscal 2007. This additional expense was due primarily to a $1.1 million increase in professional fees, which include costs of Sarbanes-Oxley compliance and development of our carbon credits program, a $0.8 million increase in data processing fees and a $0.3 million increase in insurance costs.



Income Tax Expense. Our provision for income taxes increased $10.5 million, or 110.5%, from $9.5 million in fiscal 2006, to $20.0 million in fiscal 2007. This increase was due primarily to higher profitability, as income before income taxes was $24.8 million in 2006 compared to $53.3 million in 2007. Our effective income tax rate was 38.4% in fiscal 2006 compared to 37.5% in fiscal 2007. The amount of permanent differences was lower, which had the effect of reducing our effective income tax rate.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended May 31, 2008 Compared to Three Months Ended May 31, 2007

Executive Summary

Net income decreased $0.1 million, or 0.8%, from $8.1 million in the three months ended May 31, 2007, to $8.0 million in the three months ended May 31, 2008 and included losses from discontinued operations, net of tax, of $0.1 million and $0.4 million in such three month periods, respectively.

Net income from continuing operations increased $0.2 million, or 2.5%, from $8.2 million in the three months ended May 31, 2007, to $8.4 million in the three months ended May 31, 2008. We experienced strong growth in commission and clearing fee revenue and service, consulting and brokerage fee revenue, resulting from significant increases in exchange-traded and OTC contract trading volumes from new and existing customers. During the period, exchange-traded contract volume increased by 12.4 million contracts, or 87.8%, from 14.2 million in the three months ended May 31, 2007, to 26.6 million in the three months ended May 31, 2008. The exchange-traded contract volume and related commission revenue increases in the C&RM segment continued to be affected by ongoing volatility in the grain markets. In the Clearing and Execution Services segment, we continue to show significant increases in exchange-traded contract volume stemming from the considerable amount of high-volume electronic trades from several large customers acquired during the fourth quarter of fiscal 2007. OTC contract trading volume also increased by approximately 117,775 contracts, or 66.8%, from 176,266 in the three months ended May 31, 2007, to 294,041 in the three months ended May 31, 2008. The growth in OTC contract trading volume was primarily due to continued growth in our renewable fuels and Latin America\Brazilian businesses. Offsetting these increases in commission and clearing fee revenue and service, consulting and brokerage fee revenue, was decreased interest income primarily due to the continued decline in short-term interest rates and a significant decline in the value of interest rate derivative contracts that were liquidated during May 2008. During the three months ended May 31, 2008, the fair value of the interest rate derivative contracts declined with the effect of reversing previously recognized unrealized gains of $4.9 million on the mark-to-market valuation of those contracts. The contracts were entered into for the purpose of managing a portion of our exposure to changes in interest rates, and previously reported as interest income in the six months ended February 29, 2008.

Also, as a result of our sale of our controlling interest in FGDI on June 1, 2007, we no longer include the assets, liabilities, revenues and expenses of FGDI in our consolidated financial statements. Subsequent to the sale date, the remaining 25% equity interest in FGDI is recorded using the equity method, as a component of other revenues within the Corporate and Other segment. Sale of commodities and cost of commodities sold included in the consolidated statement of operations for the third quarter of fiscal 2007 related to FGDI were $298.8 million and $293.4 million, respectively.

Revenues and Cost of Commodities Sold

Revenues, net of cost of commodities sold, increased $18.9 million, or 29.3%, from $64.5 million in the three months ended May 31, 2007, to $83.4 million in the three months ended May 31, 2008.

Sale of Commodities and Cost of Commodities Sold. Sales of commodities decreased by $303.3 million, or 99.8%, from $303.9 million in the three months ended May 31, 2007, to $0.6 million in the three months ended May 31, 2008. Cost of commodities sold decreased $298.3 million, or 99.9%, from $298.5 million in the three months ended May 31, 2007, to $0.2 million in the three months ended May 31, 2008. The decrease in sales and cost of commodities sold is primarily due to the fact that beginning in the fourth quarter of fiscal 2007, we no longer include the financial statements of FGDI in our consolidated financial statements. During the three months ended May 31, 2008, sales and costs of commodities sold relate to CCX CFIs purchased and sold through FCStone Carbon LLC’s (“FCStone Carbon”) operations, which are included in the C&RM operating segment.

Gross profit on commodities sold decreased $4.9 million from $5.3 million in the three months ended May 31, 2007, to $0.4 million in the three months ended May 31, 2008, primarily as a result of FGDI’s operations no longer being included in the consolidated statement of operations in 2008.

Commissions and Clearing Fees. Commissions and clearing fees increased $14.1 million, or 40.1%, from $35.3 million in the three months ended May 31, 2007, to $49.4 million in the three months ended May 31, 2008. The following table shows commissions and clearing fees by exchange trades and Forex trades and the number of exchange-traded contracts that we have executed or cleared for our customers in the C&RM and Clearing and Execution Services segments for the three months ended May 31, 2007 and 2008.

Overall exchange-traded total volume increased by 12.4 million, or 87.8%, from 14.2 million contracts in the three months ended May 31, 2007, to 26.6 million contracts in the three months ended May 31, 2008. This increase was primarily related to a book of business acquired in the fourth quarter of fiscal 2007, which features an increased amount of high-volume, low-margin electronic trades from several large customers, which provide incremental profit. Commissions and fees related to Forex trades increased by approximately $0.6 million, primarily as a result of an increase in customer trading activity.

Service, Consulting and Brokerage Fees . Service, consulting and brokerage fees increased $15.9 million, or 147.9%, from $10.7 million in the three months ended May 31, 2007, to $26.6 million in the three months ended May 31, 2008. This increase was primarily related to OTC brokerage fees, due to an increase in OTC contract volume from our energy, renewable fuels, Latin American/Brazilian and Chinese customers. The following table sets forth our OTC contract volume for the three months ended May 31, 2007 and 2008.

The decrease in interest income was due to a combination of the significant decrease in short-term interest rates, despite the increase in investable customer segregated and OTC funds and the decline in the value of certain interest related derivative contracts. The derivative contracts were entered into for the purpose of managing a portion of our exposure to changes in interest rates and were reported at fair value through a mark-to-market adjustment. During May 2008, we liquidated these derivative contracts and realized a loss for the three months ended May 31, 2008 of approximately $5.0 million. This had the effect of reversing a $4.9 million unrealized gain recognized in the six months ended February 29, 2008. Decreased activity in the commodity inventory financing program also contributed to the decline in interest income.

Other Revenues . Other revenues increased by $0.6 million from $1.0 million in the three months ended May 31, 2007, to $1.6 million in the three months ended May 31, 2008. The increase was primarily the result of a $0.4 million increase in income from equity investments, mainly resulting from our remaining equity interest in FGDI.

Costs and Expenses

Employee Compensation and Broker Commissions . Employee compensation and broker commissions increased $6.6 million, or 57.8 %, from $11.5 million in the three months ended May 31, 2007, to $18.1 million in the three months ended May 31, 2008. The expense increase was primarily a result of volume-related increased broker commissions driven by higher exchange-contract commissions and OTC revenues in the C&RM segment, offset by employee compensation of FGDI no longer being consolidated. Excluding FGDI’s employee compensation and broker commissions in the three months ended May 31, 2007, employee compensation and broker commission increased $8.2 million.

Pit Brokerage and Clearing Fees . Pit brokerage and clearing fees increased $9.8 million, or 55.2% from $17.6 million in the three months ended May 31, 2007, to $27.4 million in the three months ended May 31, 2008. This increase was entirely related to increased volumes of exchange-traded contracts.

Introducing Broker Commissions . Introducing broker commissions remained relatively flat in total, at $8.8 million in the three months ended May 31, 2007 and 2008, respectively. Increases in introducing broker commissions related to exchange-traded contracts were offset by a decrease in introducing broker commissions related to Forex trades in the C&RM segment.

Employee Benefits and Payroll Taxes . Employee benefits and payroll taxes increased $1.0 million, or 34.7%, from $2.9 million in the three months ended May 31, 2007, to $3.9 million in the three months ended May 31, 2008. This increase was primarily related to the additional payroll taxes from increased employee compensation and broker commissions and offset by employee benefit and payroll expense of FGDI no longer being consolidated. Excluding FGDI’s employee benefits and payroll taxes in the three months ended May 31, 2007, employee benefits and payroll expense increased $1.4 million.

Interest . Interest expense decreased $1.2 million, or 46.0%, from $2.6 million in the three months ended May 31, 2007, to $1.4 million in the three months ended May 31, 2008. This decrease was due partially to the fact that we no longer consolidate the financial statements of FGDI, which utilized lines of credit extensively. Excluding FGDI’s interest expense for the three months ended May 31, 2007, interest expense decreased $0.1 million due to lower short-term rates and a decrease in activity in the commodity inventory financing programs.

Depreciation and Amortization . Depreciation and amortization increased $0.1 million, or 32.2%, from $0.5 million in the three months ended May 31, 2007, to $0.6 million in the three months ended May 31, 2008. Offsetting this increase, is the fact that we no longer consolidate the financial statements of FGDI, which carried a significant amount of fixed assets related to equipment and grain storage facilities. Excluding FGDI’s depreciation for the three months ended May 31, 2007, depreciation and amortization increased $0.3 million, which is primarily a result of the amortization of intangible assets with determinable lives, to which value was assigned as part of acquisitions completed in fiscal 2008.

Bad Debt Expense . Bad debt expense increased $1.6 million, from $0.1 million in the three months ended May 31, 2007, to $1.7 million in the three months ended May 31, 2008. The increase in bad debt expense reflects the increase in the allowance for doubtful accounts, net of recoveries, and direct write-offs in the C&RM segment and Clearing and Execution segment for specific customer deficit accounts arising during the three months ended May 31, 2008. Certain customer account deficits related to unprecedented synthetic settlement pricing in the cotton market occurring on March 3, 2008, as the customers were unable to meet the margin calls to the Company in the amounts as required by the exchange.

Other Expenses . Other expenses increased $1.0 million, or 14.3%, from $7.3 million in the three months ended May 31, 2007, to $8.3 million in the three months ended May 31, 2008. Excluding FGDI’s other expenses for the three months ended May 31, 2007, other expenses increased $2.3 million. This increase is primarily due to increases in various professional fees in support of the business, insurance premiums and volume based data processing transaction fees.

Income Tax Expense . Our provision for income taxes was $4.9 million in the three months ended May 31, 2007 and 2008. Our effective income tax rate was 37.4% in the three months ended May 31, 2007 and 37.0% for the three months ended May 31, 2008.

CONF CALL

William Dunaway

I would like to welcome you to FCStone’s Fiscal Third Quarter 2008 Earnings Conference Call. Shortly before the market opened today, FCStone issued a press release reporting it’s earnings for the fiscal third quarter 2008. The press release is available on our web site at www.fcstone.com. Additionally, we are conducting a live web cast of this call which will also be available on our web site after the calls conclusion.

During today’s call, Pete Anderson, our President and CEO will first provide an overview of our results and commentary on our business in the current market environment. I will then provide some details on our financial performance for the third quarter and year-to-date. Pete will then conclude our presentation with some closing remarks, before we open the question up for some Q&A.

Please note that today’s conference call is copyrighted material of FCStone and cannot be rebroadcast without the company’s express, written consent.

I would also like to remind you that during the course of this call management will make projections or other forward-looking remarks regarding future events of the future financial performance of the company. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial means.

It is important to note that such statements about or anticipated future results, prospects, or other non historical facts or forward-looking statements can reflect FCStone’s current prospective of existing trends and information as of today’s date. FCStone disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Actual results can be affected by inaccurate assumptions, including the risks, uncertainties, and assumptions described in the company’s filings with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking statements in this earnings call may not occur and actual results could differ materially from what was anticipated or implied in the forward-looking statements. When you consider these forward-looking statements you should keep in mind these risk factors and cautionary statements during the earnings call.

I would now like to turn the call over to Pete Anderson, our President and CEO.

Pete Anderson

I want to welcome everyone and thank you for joining the call. We are pleased to report FCStone’s third fiscal quarter 2008 results. It has been an exciting time for FCStone as a result of extraordinary volatility in the commodity and financial markets.

As you can see from this mornings release, our third quarter numbers net of extraordinary items continue to reflect growth in our core operating segments as we generated stronger revenue and earnings results. Our results have been driven by our focus on our core business segment of commodity and risk management services, which has shown steadily improved performance over the past several quarters.

The clearing and execution business segment also continues to experience strong performance. Revenue for the third quarter of fiscal 2008 was $83.4 million, which was up 29% from $64.5 million in the third quarter of fiscal 2007. Net income for the third quarter of fiscal 2008 was $8 million or $0.28 per diluted share, which represents a decrease versus third quarter fiscal 2007 net income of $8.1 million or $0.29 per diluted share.

Results for the three months ended May 31, 2008 includes an after tax reduction in net income of $4.2 million or $0.14 per diluted share. This after tax reduction in net income included a $1.1 million net bad debt write off primarily related to the consequences of unprecedented synthetic settlement pricing in the cotton market and a $3.1 million decline in the fair value of interest rate derivative hedge instruments, which had the effect of reversing previously recognized unrealized gains. These derivative instruments were liquidated during the three months ended May 31, 2008 and were entered into to manage FCStone’s consolidated exposure to short-term answer straights. Excluding these particular items our net income for the third quarter of fiscal 2008 would have been $12.2 million or $0.42 per diluted share.

Before we review the company’s performance for our third fiscal quarter, I’d like to briefly address some of the recent macro economic trends and events that have impacted the markets and FCStone.

Similar to our earnings report for the second fiscal quarter, the third fiscal quarter represented a period of substantial head winds for the company in the financial services arena as well as the agricultural and energy industries. Historically high volatility commodity price levels and constrained credit capacity in both deregulated and OTC commodity derivative markets are having an impact on FCStone’s operating environment. We believe that each of these concerns should be placed into context.

In terms of the impact to either FCStone or its customers, I want to be very clear. We are making no fundamental changes to our operating model. Despite these macro-economic circumstances, our business continues to operate under the same risks, assumptions, and opportunities today as it has in the past. Rest assured that we are prudently monitoring domestic and international economic environments both for our customers and FCStone as a whole. We believe that we have the people and processes in place to mitigate potential issues as we continue to improve our methods and operating standards including, in particular, our risk management function.

Recent trends in agriculture have caused significant concerns about anticipated grain production for the current crop year and the access to adequate capital and credit capacity to produce future crops, carry inventories, and maintain hedge positions.

In order to understand the current situation, we must look at historical supply and demand. The 2007 corn crop in the United States as reported by the USDA set an all time record with 93.6 million acres planted and production of 13.1 billion bushels. By comparison, the latest USDA projection of corn production for 2008 was 86 million acres, with projected production of 11.7 billion bushels.

The current estimates for potential loss of production this year caused by current flooding conditions across the mid western corn belt would reduce USDA estimates to 11.3 billion bushels. Despite a significant loss of production from flooding and crop damage, if the above estimates hold true, the 2008 corn crop would still be the third largest domestic corn crop in history.

In addition, the state of the soybean and wheat crop must be taken into account. Both soybean and wheat production have seen increases over the past year. If considered in terms of the June 8, 2008 USDA domestic bushel production estimates of corn, soybeans and wheat for crop year 2007 to 2008 the expected reduction currently stands at only 2.56%. Although this volume reduction will be reflected in the amount of corn and soybeans that FCStone’s commercial customers handle, merchandise or consumed, we expect declines in bushels of corn and soybeans hedged will be offset by the continued volatility and strong volume in both domestic and international commodity markets we serve.

FCStone may also benefit from increased funds required to be deposited by customers as a result of higher absolute price levels for corn and soybeans resulting in potential margin increases from increased volatility.

Another concern for us and our investors is the continuing ability of our commercial customers in both the agricultural and energy sectors to access adequate financial capacity to carry inventories and adequately margin hedge positions. Today, and to the great credit of lenders in both the agricultural and energy industries, such lenders have done a stellar job in providing leverage to their borrowers and our customers through these turbulent and volatile periods. Both industries in general have moved to a spot market to provide liquidity and to maintain a reserve against significant moves on the market they use to hedge; however, we recognize that credit capacity is not unlimited and it is FCStone’s responsibility in conjunction with our customers and their lenders to manage demands for capital within specific limits.

Thus far the credit capacity of our customers have been adequate and we anticipate, with measures taken to provide liquidity to the market, the shortened tenor of positions, as well as customers obtaining increased leverage were warranted, we will continue to see adequate financing in the agricultural and energy markets.

During this critical time of extreme volatility and tight credit, the industry experienced an unprecedented circumstance in the cotton markets. In early March the exchange settled the cotton contracts synthetically, leaving the commercial industry and market participants unprepared or unable to meet the margin call. As a result of this situation, FCStone experienced bad debt write offs of $1.1 million or $0.03 per diluted share for the quarter. FCStone’s customers were adequately margined for a lemon move that neither they nor we could have anticipated that settlement prices would be established synthetically by the exchange. We are aggressively pursuing collection of these debts and understand and have received assurance that the process of synthetically settling commodity prices will not be used again.

In spite of the current macro economic headwinds and industry environment, FCStone’s growth initiatives continue to be implemented and accelerated in the current environment. This is evidenced by our continued growth in the contract volumes in both the exchange-based instruments as well as OTC and instruments instructors.

In the commodity and risk management section, exchange volume was up 220,580 contracts year-to-date for an increased year-over-year of 9.9%, while OTC volumes are up over 500,000 contracts for a year-over-year increase of 108.8%.

The clearing and execution segment has also seen significant growth with an increase of 36.6 million contracts for an increase of 90.5% year-to-date versus the same period in 2007.

The growth in all market segments as a company has been driven by volatility in virtually every commodity and financial market around the world. This volatility is a reflection of the increased demand and consumption of underlying energy, agricultural products, metal, and soft commodities around the globe, as well as the increased speculative interest in commodities as an investment asset class.

All of the demands for additional production and inventories of underlying commodities has taken place during a period of tightening credit access. This atmosphere has increased the necessity to manage volatility through conservative risk management, services, products, platforms, and structures that are offered by FCStone. Beyond our traditional core business of agriculture and energy, we anticipate continued growth opportunities in the areas of renewable energy, particularly bio diesel, international markets, food service, dairy production and consumption, livestock, cotton and textile, forest products, carbon credits, and foreign exchange.

Internationally the company continues to expand in Brazil where the focus is on the company’s core competency of commercial grain production and handling. Other commodities and industries that represent significant growth in Brazil include sugar, ethanol, coffee, foreign exchange, and consulting. Revenues through fiscal third quarter 2008 have increased 109% versus the same period in 2007.

As the United States market and domestic demand for grain and production increases, we expect Brazil to see continued expansion in grain production and exports, with China driving the consumption side of worldwide demand.

Our China division continues to add customers in commercial grain processing and handling, metals, energy, cotton and foreign exchange. Revenues for this region have increased through fiscal third quarter 2008 by 90% over the same period in 2007.

The recent purchase of Downes-O’Neill and Globecot demonstrates our ability to further expand our presence and service offerings in new industries through successful add on acquisitions. These types of acquisitions allow us to both, leverage our industry experience, while also adding seasoned, high quality consultants to the FCStone family.

We continue to explore opportunities with potential acquisition candidates that have similar interests and philosophies in servicing customers and we will continue to remain disciplined regarding the price we would be willing to pay and the returns we would need to see from such an opportunity. The company’s focus and interest regarding strategic acquisitions is in all the various commodities and industries we serve, both here domestically and internationally.

None of this growth would be possible without the hard work of our risk management consultants. Our current roster of 130 consultants, trainees, and interns, has been built through a combination of hiring established industry expertise, our internal training program and through acquisitions.

The mix of consultants includes 28 focused on international business in Latin America, Asia and Europe, with the balance targeting the domestic markets. We continue to reassess and develop our training programs to address new and developing products as well as additional industries and regions that have growth potential and will make the necessary additions where we deem appropriate.

Our goal through acquisitions and additional hires is to add five to ten additional consultants by the end of our fiscal year.

Finally, I’d like to provide an update on a few other recent initiatives that FCStone has been diligently working on.

We continue to make solid progress on Agora-X, our innovative OTC trading platform that we are developing in partnership with NASDAQ OMX. When completed, this platform will provide liquidity, transparency, and trading efficiency for FCStone, our clients and qualified institutional participants.

Agora-X is currently in discussions with a number of potential qualified equity participants that will make an investment in the platform as well as commit to significant transactional volume. The platform is also negotiating with a number of plain facilities to provide centralized clearing for Agora-X. We anticipate that the platform will be operational in the last calendar quarter of 2008.

FCStone Carbon also continues to develop aggregation agreements. Technology and the carbon credit inventory that it has burned [ph]. To date the coming at several aggregation agreements that represent creation of significant tons of carbon credit annually after underlying protocol to validate and verify. As the carbon markets mature, we believe that the FCStone carbon is positioned to effectively represent our customers and marketing their carbon credit production or emission credit needs.

We are confident in our ability to drive in all market environments and remain excited about the new growth prospects that we have in place as well as our ability to continue to expand the business and grow over the long-term by focusing both domestically and internationally on the corn issues and business segments that have been the foundation of the organization, the agricultural and energy markets.

Now I would like to turn the call over to Bill Dunaway, our CFO, for a detailed financial review.

William Dunaway

As Pete mentioned we are pleased to report continued growth across our core operating segments during our third fiscal quarter, as revenues net of cost of commodities sold reached $83.4 million. Compared to the prior year period of $64.5 million, the third quarter’s revenues increased 29%.

Our pretax income was $13.2 million of the quarter, compared to $13 million for the same period last year. Our net income was $8 million of the third quarter this year, compared to $8.1 million for the prior year period. As Pete mentioned earlier, excluding the effective interest rate derivative instrument and the bad debt write off, our net income for the quarter would have been $12.2 million, a 51% increase over the prior year period.

Now let me take a few minutes to talk through the main components of the quarters results, starting with the $18.9 million increase in revenue.

First, commissions and clearing fees were up more than $14.1 million or 40% with approximately $13.5 million of this increase coming from exchange credit contracts and the other $600,000 of this increase coming from 4X commissions.

Next, our service, consulting and brokerage fees, which are primarily our over the counter brokerage fees, were up $15.9 million or 147% for the quarter over the same period last year. $15.5 million of this increase was related to over the counter brokerage with the remaining $400,000 comprised of an increase in consulting fees.

The increase in the over the counter brokerage was driven by continued strong growth in our international operations, primarily Brazil, as well as with our renewable fields’ customers. Continued volatility in the energy markets has also driven growth in our over the counter brokerage with customers in that industry.

Interest income was $5.3 million for the quarter, down from $12 million in the same period last year. $5 million of this decrease was attributable to the decline in the fair value of the interest rate derivative hedge, which was liquidated during the third quarter. The remainder of the decline in interest income was a result of significantly lower short-term interest rates during the third quarter when compared to the prior year quarter. This was partially offset by much higher customer segregated and over the counter margin deposits that we were carrying during the quarter.

Now I would like to address some of the issues we have experienced this quarter related to the interest rate market.

Across our two primary operating segments we have recognized a substantial impact during the recent quarters based on market interest rates. During the month of September 2007, the first month of FCStone’ fiscal year, the average charge refill rate for 90 day T-bills, set at 3.99%. Since that time, the average monthly 90-day T-bill hit a low in this past quarter, in April, of 1.32%.

During the first nine months of the current fiscal year the average rate earned on our money markets investments declined from 4.82% in September 2007 to 2.68% in May 2008. In spite of this substantial headwind, FCStone experienced a $6.4 million increase in interest income during the first nine months of the current fiscal year, when compared to the same period for the previous fiscal year, driven by growth in customer segregated assets from $997 million at the beginning of the fiscal year, to $1.4 billion at the conclusion of our third quarter.

The company also saw substantial increases in its customer deposits in its over the counter platform from FCStone trading during the period.

At the same time net interest rates began to decline, we began to scale in hedges on FCStone’s exposure to short-term interest rates using three-month LIBOR instruments with a two-year tenor. While the instruments were intended to be hedges against interest rate declines over a two-year period, in order to meet GAAP accounting standards, FCStone was required to mark the infrastructures to market at the end of each quarter. During the current fiscal year we recognized a $652,000 unrealized gain on our first quarter or $1.4 cents per dilute share and a $4.4 million unrealized gain in our second quarter or roughly $0.10 per diluted share.

The difficulty that this commentator presents is the fact that the hedge instrument is structured for a 24-month period, but the gain is recognized at each snap shot in time. While the three months LIBOR settings were virtually unchanged during the third quarter, the LIBOR curve steepened sharply with two-year LIBOR softs rising 106 basis points during the quarter. The entire structure was liquidated during our fiscal third quarter with substantially no gain, which had the effect of reversing all of the previously recognized unrealized gains, reducing the companies income for the third quarter by $0.11 per diluted share.

As we look at our total expenses, our expenses net of the cost of commodities sold increased approximately $19 million for the quarter over the same period last year. Upon a closer examination of the expenses, revenue volume related variable expenses of brokerage commissions and compensations as well as benefits and pit brokeraging currencies accounted for approximately $16.4 million of these increased expenses.

This increase was offset by lower interest income, fair interest expense of $1.2 million primarily due to the sale of our majority interest in our grain-merchandising segment that we no longer consolidate. In addition, as discussed by Pete earlier, bad debt expense increased to $1.6 million over the previous year period.

Taking a closer look at the performance within our two main business segments, our commodity and risk management full service segment generated operating income of $15.4 million compared to $90.9 million last year. This segment benefited some significantly higher OTC revenues, as noted earlier, and exchange related commissions and clearing fees were up $3.9 million. This total increase was offset by $4.7 million in lower interest revenues from this segment.

Our clearing and execution segment had operating income of $1.3 million compared to $3.8 million in the prior year. The segment had a 44% increase in commissions and clearing fee revenue, but interest income declined by $1.7 million.

Reviewing our balance sheet, our total assets are $2.43 billion as of May 31, 2008, up from the $1.42 billion as of August 31, 2007. This $1 billion increase was primarily the result of approximately $400 million in additional customer segregated funds, $142 million from additional OTC customer margin deposits, a $272 million increase in the value of open customer over the counter positions, $31 million from our financial services repurchase program.

These increases were primarily driven by continued commodity volatility and increased trading volumes of our customers related to higher margin deposits. Despite several items discussed earlier, operationally we had another strong quarter with growth in our core revenues of commission and clearing fees and service consulting and brokerage fees in comparison to both the prior year quarter and the second quarter of the current fiscal year. Additionally, with the significant increase in customer margin deposits, we are positioned to benefit from a rise in short-term interest rates. We remain excited about the core growth of our company and anticipate a continued trajectory of growth moving forward.

With that I’ll turn it back over to Pete for some concluding remarks.

Pete Anderson

FCStone remains to its mission of improving our customer’s bottom line results by leveraging the expertise and experience of our consultants, as well as utilizing the most appropriate platform or instrument to manage commodity risk. FCStone intends to leverage the industry dynamics and momentum that are in place to drive our volumes and the growth of the company in the future. We believe the company is well positioned for long-term success and to drive shareholder value.

With that, that concludes our prepared remarks.

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