**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (D) OF THESECURITIES EXCHANGE ACT OF 1934

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (D) OF THESECURITIES EXCHANGE ACT OF 1934

**FORTHE TRANSITION PERIOD FROM                 TO                 **

**CommissionFile No: 000-51103**

**GFI GROUP INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **80-0006224**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S .Employer     |
| incorporation or  organization)           |   | Identification  No.) |
| **100 Wall Street, New York, NY**         |   | **10005**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

**Registrant’s telephone number, includingarea code:**(212) 968-4100

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. YES x  NO o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):
| Large accelerated filer o | Accelerated filer  o | Non-accelerated  filer x |
|---------------------------|----------------------|--------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x

The number of shares of registrant’s common stockoutstanding on April 28, 2006 was 28,195,025.

 

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**Table of Contents**

**Part I—FinancialInformation**
| Item 1.                                 |         | Financial  Statements Condensed Consolidated Statements of Financial Condition as of  March 31, 2006 (unaudited) and December 31, 2005                | 4      |   |
|-----------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                    |         | Condensed  Consolidated Statements of Income for the three months ended March 31,  2006 (unaudited) and March 31, 2005 (unaudited)               | 5      |   |
|                                    |         | Condensed  Consolidated Statements of Comprehensive Income for the three months ended March 31,  2006 (unaudited) and March 31, 2005 (unaudited) | 6      |   |
|                                    |         | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2006 (unaudited) and March 31, 2005 (unaudited)           | 7      |   |
|                                    |         | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                               | 8      |   |
| Item 2.                                 |         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                     | 22     |   |
| Item 3.                                 |         | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                     | 33     |   |
| Item 4.                                 |         | Controls  and Procedures                                                                                                                                        | 34     |   |
| **Part II—Other Information** |
| Item 1.                                 |         | Legal  Proceedings                                                                                                                                              | 35     |   |
| Item 1A.                                | Risk Factors | 35                                                                                                                                                              |   |
| Item 2.                                 |         | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                    | 35     |   |
| Item 6.                                 |         | Exhibits                                                                                                                                                        | 36     |   |

 

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**AvailableInformation**

Our Internet website address is *www.gfigroup.com*. Through our Internetwebsite, we make available, free of charge, the following reports as soon asreasonably practicable after electronically filing them with, or furnishingthem to, the Securities and Exchange Commission (the “SEC”): our annual reportson Form 10-K; our proxy statements for our annual meetings; ourquarterly reports on Form 10-Q; our current reports on Form 8-K;Forms 3, 4 and 5 filed on behalf of directors and executive officers; andamendments to those reports filed or furnished pursuant to Section 13(a) ofthe Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’).

Information relating to corporate governance of theCompany is also available on our website, including information concerning ourdirectors, board committees, including committee charters, our code of businessconduct and ethics for all employees and for senior financial officers and ourcompliance procedures for accounting and auditing matters. In addition, theInvestor Relations page of our website includes supplemental financialinformation that we make available from time to time.

Our Internet website and the information containedtherein or connected thereto are not incorporated into this Quarterly Report onForm 10-Q.

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**GFI GROUP INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(In thousands except share and per share amounts)**

| ** **                                                                                                                                                                        | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                     |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                         |       |                     | $          | 128,447                     |       |   |   | $ | 144,148 |   |   |
| Deposits with clearing organizations                                                                                                                                              |       |                     | 7,845      |                        |       |   | 7,824 |   |   |
| Accrued commissions receivable, net of allowance for  doubtful accounts                                                                                                           |       |                     | 112,061    |                        |       |   | 89,727 |   |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                     |       |                     | 416,916    |                        |       |   | 208,938 |   |   |
| Property, equipment and leasehold improvements, net                                                                                                                               |       |                     | 33,433     |                        |       |   | 31,674 |   |   |
| Software inventory, net                                                                                                                                                           |       |                     | 6,317      |                        |       |   | 5,687 |   |   |
| Goodwill                                                                                                                                                                          |       |                     | 26,707     |                        |       |   | 26,683 |   |   |
| Intangible assets, net                                                                                                                                                            |       |                     | 1,994      |                        |       |   | 2,355 |   |   |
| Other assets                                                                                                                                                                      |       |                     | 61,228     |                        |       |   | 59,101 |   |   |
| TOTAL ASSETS                                                                                                                                                                      |       |                     | $          | 794,948                     |       |   |   | $ | 576,137 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                     |       |                        |       |   |   |   |   |
| LIABILITIES                                                                                                                                                                       |       |                     |       |                        |       |   |   |   |   |
| Accrued compensation                                                                                                                                                              |       |                     | $          | 86,423                      |       |   |   | $ | 88,628 |   |   |
| Accounts payable and accrued expense                                                                                                                                              |       |                     | 26,205     |                        |       |   | 22,455 |   |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                                          |       |                     | 357,657    |                        |       |   | 165,766 |   |   |
| Notes payable, net                                                                                                                                                                |       |                     | 25,110     |                        |       |   | 31,247 |   |   |
| Other liabilities                                                                                                                                                                 |       |                     | 36,067     |                        |       |   | 28,914 |   |   |
| Lease termination costs payable to affiliate                                                                                                                                      |       |                     | 617        |                        |       |   | 875 |   |   |
| Total Liabilities                                                                                                                                                                 |       |                     | $          | 532,079                     |       |   |   | $ | 337,885 |   |   |
| Commitments and  contingencies                                                                                                                                                    |       |                     |       |                        |       |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                         |       |                     |       |                        |       |   |   |   |   |
| Preferred Stock, $0.01 par value; 5,000,000 shares  authorized and none outstanding at March 31, 2006 and December 31,  2005                                            |       |                     | —     |                        |       |   | — |   |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized; 28,147,460 and 27,904,568 shares outstanding at  March 31, 2006 and December 31, 2005, respectively |       |                     | 281        |                        |       |   | 279 |   |   |
| Additional paid in capital                                                                                                                                                        |       |                     | 203,323    |                        |       |   | 195,360 |   |   |
| Retained earnings                                                                                                                                                                 |       |                     | 61,773     |                        |       |   | 44,790 |   |   |
| Accumulated other comprehensive loss                                                                                                                                              |       |                     | (2,508     | )                           |       |   | (2,177 | ) |   |
| Total Stockholders’ Equity                                                                                                                                                   |       |                     | 262,869    |                        |       |   | 238,252 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                  |       |                     | $          | 794,948                     |       |   |   | $ | 576,137 |   |   |

 

See notes to condensed consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(In thousands except share and per share amounts)**

| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| REVENUES:                                    |       |                                                 |       |   |   |
| Brokerage  revenues:                         |       |                                                 |       |   |   |
| Agency commissions                           |       | $                                                    | 136,910    |   | $ | 87,971 |   |
| Principal transactions                       |       | 41,060                                               |       | 28,112 |   |
| Total brokerage revenues                     |       | 177,970                                              |       | 116,083 |   |
| Analytics and market data                    |       | 5,194                                                |       | 5,402 |   |
| Interest income                              |       | 2,233                                                |       | 1,060 |   |
| Other income (loss)                          |       | 191                                                  |       | (251 | ) |
| Total revenues                               |       | 185,588                                              |       | 122,294 |   |
| EXPENSES:                                    |       |                                                 |       |   |   |
| Compensation and employee benefits           |       | 116,845                                              |       | 75,477 |   |
| Communications and quotes                    |       | 7,653                                                |       | 5,799 |   |
| Travel and promotion                         |       | 7,531                                                |       | 5,761 |   |
| Rent and occupancy                           |       | 5,613                                                |       | 3,428 |   |
| Depreciation and amortization                |       | 3,836                                                |       | 4,092 |   |
| Professional fees                            |       | 4,044                                                |       | 2,469 |   |
| Clearing fees                                |       | 5,477                                                |       | 3,371 |   |
| Interest                                     |       | 1,752                                                |       | 1,244 |   |
| Other expenses                               |       | 3,556                                                |       | 4,009 |   |
| Total Expenses                               |       | 156,307                                              |       | 105,650 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES    |       | 29,281                                               |       | 16,644 |   |
| PROVISION FOR  INCOME TAXES                  |       | 12,298                                               |       | 7,490 |   |
| NET INCOME                                   |       | $                                                    | 16,983     |   | $ | 9,154 |   |
| EARNINGS PER SHARE                           |       |                                                 |       |   |   |
| Basic                                        |       | $                                                    | 0.61       |   | $ | 0.36 |   |
| Diluted                                      |       | $                                                    | 0.59       |   | $ | 0.35 |   |
| WEIGHTED AVERAGE SHARES  OUSTANDING BASIC    |       |                                                 |       |   |   |
| Class A common stock                    |       | —                                               |       | 1,964,615 |   |
| Common stock                                 |       | 28,041,598                                           |       | 21,221,199 |   |
| WEIGHTED AVERAGE SHARES  OUTSTANDING DILUTED |       | 28,957,497                                           |       | 26,268,828 |   |

 

See notes to condensed consolidated financial statements

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**GFI GROUP INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVE INCOME(UNAUDITED)**

**(In thousands)**

| ** **                                                            | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **   2006   **                       | ** ** | **   2005   ** | ** ** |
| NET INCOME                                                            |       | $                                                                  | 16,983     |   | $ | 9,154 |   |
| OTHER  COMPREHENSIVE INCOME (LOSS):                                   |       |                                                               |       |   |   |
| Unrealized loss on foreign exchange derivative  contracts, net of tax |       | (393                                                               | )          | (1,238 | ) |
| Foreign currency translation adjustment, net of tax                   |       | 62                                                                 |       | (94 | ) |
| COMPREHENSIVE INCOME                                                  |       | $                                                                  | 16,652     |   | $ | 7,822 |   |

 

See notes to condensed consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)**

| ** **                                                                     | ** ** | **Three Months Ended March 31,**                                                                 | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                                                                                                                 |       |   |   |   |   |   |   |
| Net income                                                                     |       |                                                                                                                 | $          | 16,983 |   |   |   | $ | 9,154 |   |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                                                                                                 |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                 |       |                                                                                                                 | 3,836      |   |   |   | 4,092 |   |   |
| Amortization of loan  fees                                                     |       |                                                                                                                 | 74         |   |   |   | 74 |   |   |
| Provision for allowance  for doubtful accounts                                 |       |                                                                                                                 | 324        |   |   |   | 97 |   |   |
| Deferred compensation                                                          |       |                                                                                                                 | 1,943      |   |   |   | 1,141 |   |   |
| Benefit from deferred  taxes                                                   |       |                                                                                                                 | (1,012     | ) |   |   | (2,230 | ) |   |
| Loss on foreign currency  exchange for notes payable                           |       |                                                                                                                 | 296        |   |   |   | — |   |   |
| Loss on Fenics purchase  obligation                                            |       |                                                                                                                 | —     |   |   |   | 2,030 |   |   |
| Loss on foreign exchange  derivative contracts                                 |       |                                                                                                                 | 1,911      |   |   |   | 21 |   |   |
| (Increase) decrease in operating assets:                                       |       |                                                                                                                 |       |   |   |   |   |   |   |
| Deposits with clearing  organizations                                          |       |                                                                                                                 | (21        | ) |   |   | (875 | ) |   |
| Accrued commissions  receivable                                                |       |                                                                                                                 | (22,659    | ) |   |   | (15,417 | ) |   |
| Receivables from  brokers, dealers and clearing organizations                  |       |                                                                                                                 | (207,978   | ) |   |   | (95,129 | ) |   |
| Software inventory                                                             |       |                                                                                                                 | (813       | ) |   |   | (645 | ) |   |
| Other assets                                                                   |       |                                                                                                                 | (2,375     | ) |   |   | (1,546 | ) |   |
| Increase (decrease) in operating liabilities:                                  |       |                                                                                                                 |       |   |   |   |   |   |   |
| Accrued compensation                                                           |       |                                                                                                                 | (2,205     | ) |   |   | (4,208 | ) |   |
| Accounts payable and  accrued expenses                                         |       |                                                                                                                 | 3,750      |   |   |   | (5,525 | ) |   |
| Payables to brokers,  dealers and clearing organizations                       |       |                                                                                                                 | 191,890    |   |   |   | 89,695 |   |   |
| Income taxes payable                                                           |       |                                                                                                                 | —     |   |   |   | 3,241 |   |   |
| Other liabilities                                                              |       |                                                                                                                 | 6,445      |   |   |   | 2,090 |   |   |
| Cash used in operating  activities                                             |       |                                                                                                                 | (9,611     | ) |   |   | (13,940 | ) |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                                                                                                                 |       |   |   |   |   |   |   |
| Cash used for  acquisition of minority interest in Fencis Limited              |       |                                                                                                                 | (87        | ) |   |   | — |   |   |
| Purchase of property,  equipment and leasehold improvements                    |       |                                                                                                                 | (5,051     | ) |   |   | (1,299 | ) |   |
| Payments on foreign  exchange derivative contracts                             |       |                                                                                                                 | (529       | ) |   |   | — |   |   |
| Cash used in investing  activities                                             |       |                                                                                                                 | (5,667     | ) |   |   | (1,299 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |                                                                                                                 |       |   |   |   |   |   |   |
| Repayment of notes  payable                                                    |       |                                                                                                                 | (23,000    | ) |   |   | (54,500 | ) |   |
| Proceeds from notes  payable                                                   |       |                                                                                                                 | 17,000     |   |   |   | 4,000 |   |   |
| Repayment of loan notes  payable                                               |       |                                                                                                                 | —     |   |   |   | (9,250 | ) |   |
| Issuance of common stock                                                       |       |                                                                                                                 | —     |   |   |   | 73,937 |   |   |
| Payment of loan fees                                                           |       |                                                                                                                 | (507       | ) |   |   | — |   |   |
| Proceeds from exercise  of stock options                                       |       |                                                                                                                 | 2,756      |   |   |   | 80 |   |   |
| Cash paid for taxes on  vested restricted stock units                          |       |                                                                                                                 | (455       | ) |   |   | — |   |   |
| Tax benefit from stock  option exercises                                       |       |                                                                                                                 | 3,721      |   |   |   | — |   |   |
| Cash (used in) provided  by financing activities                               |       |                                                                                                                 | (485       | ) |   |   | 14,267 |   |   |
| Effects of foreign  currency translation adjustment                            |       |                                                                                                                 | 62         |   |   |   | (94 | ) |   |
| DECREASE IN CASH AND  CASH EQUIVALENTS                                         |       |                                                                                                                 | (15,701    | ) |   |   | (1,066 | ) |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                |       |                                                                                                                 | 144,148    |   |   |   | 105,161 |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                      |       |                                                                                                                 | $          | 128,447 |   |   |   | $ | 104,095 |   |   |
| SUPPLEMENTAL DISLCOSURE:                                                       |       |                                                                                                                 |       |   |   |   |   |   |   |
| Interest paid                                                                  |       |                                                                                                                 | $          | 1,690 |   |   |   | $ | 1,560 |   |   |
| Income taxes paid, net of refunds                                              |       |                                                                                                                 | $          | 2,133 |   |   |   | $ | 6,471 |   |   |

 

See notes to condensed consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands except share and per share amounts)**

**1.**                 ORGANIZATION ANDBUSINESS

The condensed consolidatedfinancial statements include the accounts of GFI Group Inc. and itssubsidiaries (collectively the “Company”). The Company, through its sole wholly-ownedsubsidiary GFInet inc. (“GFInet”), provides brokerage services, market data andanalytics software products to institutional clients in markets for a range ofcredit, financial, equity and commodity instruments. The Company complementsits brokerage capabilities with value-added services, such as data andanalytics products for decision support, which it licenses to the financialservices industry and other corporations. The Company’s principal operatingsubsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI Group LLC, GFISecurities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI Group PTELtd. and Fenics Limited and its subsidiaries (“Fenics”). As of March 31,2006, Jersey Partners, Inc. (“JPI”) owned approximately 49% of the Company’soutstanding common shares. The Company’s chief executive officer, MichaelGooch, is a controlling shareholder of JPI.

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Basis ofPresentation***—The Company’s condensed consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require management tomake estimates and assumptions that affect the reported amounts of assets andliabilities, revenues and expenses, and the disclosure of contingencies in thecondensed consolidated financial statements. Management believes that theestimates utilized in the preparation of the condensed consolidated financialstatements are reasonable and prudent. Actual results could differ materiallyfrom these estimates.

All material intercompany transactions and balanceshave been eliminated.

The condensed consolidated financial statements shouldbe read in conjunction with the Company’s consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005 (the “2005 Form 10-K”). The condensedconsolidated financial statements reflect all adjustments that are, in theopinion of management, necessary for the fair statement of the results for theinterim period. The results of operations for interim periods are notnecessarily indicative of results for the entire year.

***Cash and CashEquivalents******—******Cash*** andcash equivalents consist of cash and highly liquid investments with maturities,when purchased, of three months or less.

***Receivables fromand Payables to Brokers and Dealers***—Receivablesfrom and payables to brokers and dealers primarily represent securitiestransactions which have not settled as of their stated settlement dates. Thesetransactions relate primarily to the simultaneous purchase and sale ofsecurities by GFI Securities Limited and GFI Securities LLC to facilitateprincipal brokerage transactions. Securities transactions executed by GFISecurities LLC and cleared through a clearing broker on a fully-disclosed basisare presented net.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

***Accrued CommissionsReceivable******—******Accrued*** commissionsreceivable represents amounts due from brokers, dealers, banks and otherfinancial and nonfinancial institutions for the execution of securities,commodities, foreign exchange and derivative brokerage transactions. Accruedcommissions receivable are presented net of allowance for doubtful accounts ofapproximately $3,393 and $3,202 as of March 31, 2006 and December 31,2005, respectively. The allowance is based on management’s estimate and is reviewedon a periodic basis based on the aging of outstanding receivables andcounterparty exposure.

***BrokerageTransactions***—The Company provides brokerageservices to its clients in the form of either agency or principal transactions.

***Agency Commissions***—Inagency transactions, the Company charges commissions for executing transactionsbetween buyers and sellers. Agency commissions revenues and related expensesare recognized on a trade date basis.

***PrincipalTransactions***—Principal transaction revenue isprimarily derived from matched principal transactions. In matched principaltransactions, the Company simultaneously agrees to buy instruments from onecustomer and sell them to another customer. A very limited number of brokeragedesks are allowed to enter into unmatched principal transactions to facilitatea customer’s execution needs for transactions initiated by such customers orfor the purpose of proprietary trading to arbitrage the value between anexchange traded fund and its component securities. These unmatched positionsare intended to be held short term. The Company earns revenue from principaltransactions on the spread between the buy and sell price of the security thatis brokered.

Additionally, from time to time, under thecircumstances described above or if a transaction fails to settle on a timelybasis, the Company may hold securities positions overnight. These positions aremarked to market on a daily basis. Principal transactions revenues and relatedexpenses are recognized on a trade date basis.

***Analytics andMarket Data Revenue Recognition****—*Analyticsrevenue consists mostly of fees for licenses of analytical software products aswell as maintenance, installation, customer training and technical support ofthose products. Market data revenue primarily consists of subscription fees andfees from customized one-time sales. Analytics revenue is recognized when allof the following criteria are met: persuasive evidence of an arrangementexists, delivery of the product has occurred and no significant implementationobligations remain, the fee is fixed and determinable, and collectibility isprobable. Fees for future updates of software products are considered separatearrangements and related revenues are recognized when the customer acknowledgesparticipation in the update and delivery occurs. Market data revenue fromsubscription fees is recognized over the term of the subscription period, whichis generally two years. Market data revenue from customized one-time sales isrecognized upon delivery of the data.

The Company markets its analytics and market dataproducts through its direct sales force and indirectly through resellers. TheCompany’s license agreements for such products do not provide for a right ofreturn.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

***Goodwill andIntangible Assets****—*In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142*Goodwill and Intangible Assets* (“SFAS 142”),goodwill and intangible assets with indefinite lives are no longer amortized,but instead are tested for impairment annually or more frequently ifcircumstances indicate impairment may have occurred. The Company has selected January 1st as the date to perform the annual impairmenttest. Intangible assets with definite lives are amortized on a straight-linebasis over their estimated useful lives.

***DerivativeFinancial Instruments******—******The***Companyuses foreign exchange derivative contracts to reduce the effects offluctuations in certain receivables and payables denominated in foreigncurrencies. Certain of these foreign exchange derivative contracts aredesignated and qualify as foreign currency cash flow hedges under SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, as amended (“SFAS 133”). The Companyreclassifies gains and losses on the designated foreign exchange derivativecontracts included in other comprehensive income into earnings at the time thehedged transactions are recognized. The Company measures effectiveness byassessing the changes in the expected future cash flows of the hedged items.The ineffective portion of the hedges, if any, is included in other expenses.There is no portion of the derivative instruments’ gains or losses that hasbeen excluded from the assessment of effectiveness. For foreign exchangederivative contracts that do not qualify for hedge accounting under SFAS 133,the Company records these contracts at fair value and all realized andunrealized gains and losses are included in other income in the CondensedConsolidated Statement of Income.

***Foreign CurrencyTranslation Adjustments and Transactions******—******Assets***andliabilities of foreign subsidiaries having non-U.S. dollar functionalcurrencies are translated at the average rates of exchange for the period, andrevenue and expenses are translated at end-of-month rates of exchange. Gains orlosses resulting from translating foreign currency financial statements arereflected in foreign currency translation adjustments and are reported as aseparate component of comprehensive income and included in accumulated othercomprehensive loss in stockholders’ equity. Gains or losses resulting fromforeign currency transactions are included in net income as other income.

***Segment andGeographic Information***—The Company’s onlyoperating segment consists of its brokerage and analytics and market dataoperations. This segment operates across domestic and international markets.Substantially all of the Company’s identifiable assets are in the United Statesand the United Kingdom.

***Share-BasedCompensation******—******The***Company’sshare-based compensation consists of stock options and restricted stock units(the “RSUs”). Effective January 1, 2003, the Company adopted the fairvalue recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”), asamended by SFAS No. 148, *Accounting forStock-Based Compensation Transition and Disclosure*, prospectively toall awards granted, modified, or settled after January 1, 2003. Pursuantto this method, the Company expenses the grant-date fair value of optionsissued to employees on or after January 1, 2003 over the related vestingperiod and the compensation expense related to modifications of outstandingoptions is calculated as the difference between fair value of the existing andmodified options on the date of modification. Prior to January 1, 2003,the Company used the intrinsic method as prescribed by Accounting PrinciplesBoard Opinion No. 25, *Accounting forStock Issued to Employees*, as permitted by SFAS 123. For RSUs,the fair value at the date of grant is recorded as deferred compensation and isamortized to compensation expense over the vesting period of the grants.

10

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Thefollowing pro forma financial information shows the effect, net of tax, on netincome for the three months ended March 31, 2005 as if the fair valuemethod had been applied.

| Net income—as  reported                                                                        |   | $      | 9,154  |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Add:                                                                                                |   |   |   |
| Effect of stock-based  employee compensation included in reported net income, net of tax  |   | 682    |   |
| Deduct:                                                                                             |   |   |   |
| Total stock-based  employee compensation determined under fair value method, net of tax   |   | (811   | )      |
| Net income—pro forma                                                                           |   | $      | 9,025  |   |
| Basic earnings per share—as reported                                                           |   | $      | 0.36   |   |
| Basic earnings  per share—pro forma                                                            |   | $      | 0.35   |   |
| Diluted earnings  per share—as reported                                                        |   | $      | 0.35   |   |
| Diluted earnings per  share—pro forma                                                          |   | $      | 0.34   |   |

 

The Company adopted SFAS No. 123(R),*Share-Based Payment*(“SFAS 123(R)”),effective on January 1, 2006, using the modified prospective approach. SFAS123(R) revised the fair value-based method of accounting for share-basedpayment liabilities, forfeitures and modifications of stock-based awards and clarifiedguidance in several areas, including measuring fair value, classifying an awardas equity or as a liability and attributing compensation cost to serviceperiods. Additionally, under SFAS 123(R), actual tax benefits recognizedin excess of tax benefits previously established upon grant are reported as afinancing cash flow. Prior to adoption, such excess tax benefits were reportedas an increase to operating cash flows. Upon adoption, the Company recognized a$142 ($90 after-tax) gain, which was recorded in compensation and employeebenefits in the Consolidated Statements of Income, in the first quarter of 2006resulting from the requirement to estimate forfeitures at the date of grantinstead of recognizing them as incurred. This adjustment was not reflected as acumulative effect adjustment, net of tax, because the amount was not materialto the Consolidated Statements of Income.

**3.**                 RECEIVABLES FROMAND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

| ** **                                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Receivables from  brokers, dealers and clearing organizations: |       |                     |       |                        |       |   |   |
| Contract value of fails to deliver                             |       | $                        | 404,356    |                        |       | $ | 161,069 |   |   |
| Balance receivable from clearing organizations                 |       | 12,560                   |       |                        | 47,869     |   |   |
| Total                                                          |       | $                        | 416,916    |                        |       | $ | 208,938 |   |   |
| Payables to  brokers, dealers and clearing organizations:      |       |                     |       |                        |       |   |   |
| Contract value of fails to receive                             |       | $                        | 281,860    |                        |       | $ | 148,971 |   |   |
| Balance payable to clearing organizations                      |       | 61,455                   |       |                        | 466        |   |   |
| Payable to financial institutions                              |       | 14,342                   |       |                        | 16,329     |   |   |
| Total                                                          |       | $                        | 357,657    |                        |       | $ | 165,766 |   |   |

 

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Substantially all openfail to deliver and fail to receive transactions at March 31, 2006 and December 31,2005 have subsequently settled at the contracted amounts.

**4.**                 GOODWILLAND INTANGIBLE ASSETS

During the first quarter of 2006, the Companycompleted the annual goodwill impairment test that is required by SFAS No. 142,*Goodwill and Other Intangible Assets.*Theresults of Company’s testing did not indicate any goodwill impairment.

Intangibleassets consisted of the following:

| ** **                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Gross intangible  assets       |       |                     |       |                        |       |   |   |   |   |
| Customer base/relationships    |       |                     | $          | 2,490                       |       |   |   | $ | 2,490 |   |   |
| Trade name                     |       |                     | 1,750      |                        |       |   | 1,750 |   |   |
| Core technology                |       |                     | 3,230      |                        |       |   | 3,230 |   |   |
| Covenants not to compete       |       |                     | 550        |                        |       |   | 550 |   |   |
| Patent                         |       |                     | 34         |                        |       |   | 34 |   |   |
| Total gross  intangible assets |       |                     | 8,054      |                        |       |   | 8,054 |   |   |
| Accumulated amortization       |       |                     | 6,060      |                        |       |   | 5,699 |   |   |
| Net intangible assets          |       |                     | $          | 1,994                       |       |   |   | $ | 2,355 |   |   |

 

Amortization for the three months ended March 31,2006 and 2005 was $361 and $201, respectively.

At March 31,2006, expected amortization expense for the definite lived intangible assets isas follows:

| 2006 (remaining  nine months) |   | $   | 672    |   |
|-------------------------------|--------|-----|--------|--------|
| 2007                          |   | 361 |   |
| 2008                          |   | 260 |   |
| 2009                          |   | 260 |   |
| 2010                          |   | 255 |   |
| Total                         |   | $   | 1,808  |   |

 

**5.**                 NOTESPAYABLE

In February 2006, the Company amended andrestated the terms of its credit agreement with Bank of America N.A. andcertain other lenders (the “2004 Credit Agreement”). The amended and restatedcredit agreement (the “2006 Credit Agreement”) provides for maximum borrowingsof $135,000 and has an expiration date of February 24, 2011. Under the2006 Credit Agreement, loans will bear interest at the London Interbank OfferedRate plus a margin determined by our consolidated leverage ratio as defined inthe 2006 Credit Agreement. The 2006 Credit Agreement contains covenants whichrestrict, among other things, our ability to borrow, pay dividends, makeinvestments or acquisitions, distribute assets, guarantee debts of others andlend funds to affiliated companies and requires the Company to maintain certainfinancial levels and ratios, all as defined in the 2006 Credit Agreement. Substantiallyall of the assets of the 

12

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Company and certain assetsof the Company’s subsidiaries have been pledged to secure the outstandingamounts under the 2006 Credit Agreement.

TheCompany has outstanding borrowings under its 2006 Credit Agreement as of March 31,2006 and under its 2004 Credit Agreement as of December 31, 2005 asfollows:

| ** **                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Loan Available(1)              |       | $                        | 135,000    |                        |       | $ | 80,000 |   |   |
| Loans Outstanding              |       | $                        | 26,101     |                        |       | $ | 31,805 |   |   |
| Letters of Credit  Outstanding |       | $                        | 6,500      |                        |       | $ | 6,500 |   |   |

----

(1)          Amounts availableinclude up to $50,000 and $30,000 for letters of credit as of March 31,2006 and December 31, 2005, respectively.

These borrowings boreinterest rates of 5.58% and 5.39% at March 31, 2006 and December 31,2005, respectively. At March 31, 2006 and December 31, 2005, notespayable were recorded net of unamortized loan fees of $991 and $558,respectively.

**6.**                 EARNINGS PERSHARE

Basic and diluted earningsper share for the three months ended March 31, 2006 and 2005 were asfollows:

| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Basic earnings per share**                                                   |       |                                                 |       |   |   |
| Net income  applicable to stockholders                                         |       | $                                                    | 16,983     |   | $ | 9,154 |   |
| Income allocated  to participating preferred stockholders                      |       | —                                               |       | (903 | ) |
| Income available  to common stockholders                                       |       | $                                                    | 16,983     |   | $ | 8,251 |   |
| Weighted average common shares outstanding:                                    |       |                                                 |       |   |   |
| Class A  common stock                                                     |       | —                                               |       | 1,964,615 |   |
| Common stock                                                                   |       | 28,041,598                                           |       | 21,221,199 |   |
| Weighted average  common shares outstanding                                    |       | 28,041,598                                           |       | 23,185,814 |   |
| Basic earnings  per share—Class A common stock and Common stock |       | $                                                    | 0.61       |   | $ | 0.36 |   |
| **Diluted earnings per share**                                                 |       |                                                 |       |   |   |
| Net income applicable to  stockholders                                         |       | $                                                    | 16,983     |   | $ | 9,154 |   |
| Weighted average common  shares outstanding                                    |       | 28,041,598                                           |       | 23,185,814 |   |
| Effect of dilutive shares:                                                     |       |                                                 |       |   |   |
| Options and  warrant                                                           |       | 915,899                                              |       | 834,821 |   |
| Convertible  preferred shares                                                  |       | —                                               |       | 1,007,011 |   |
| Redeemable  convertible preferred shares                                       |       | —                                               |       | 1,241,182 |   |
| Weighted average  shares outstanding and common stock equivalents              |       | 28,957,497                                           |       | 26,268,828 |   |
| Diluted earnings  per share                                                    |       | $                                                    | 0.59       |   | $ | 0.35 |   |

 

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Options to purchase100,000 shares that were outstanding at March 31, 2005 were excluded fromthe respective computation of diluted earnings per share because their effectwould be anti-dilutive. In addition, 208,067 and 143,488 RSUs were alsoexcluded from the computation of diluted earnings per share for the threemonths ended March 31, 2006 and 2005, respectively, because their effectwould be anti-dilutive.

**7.**                 SHARE-BASEDCOMPENSATION

The Company issues RSUs to its employees under the GFIGroup Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”). Thefair value of the RSUs is determined at the date of grant. Additionally, thefair value of the RSUs is recorded as deferred compensation and is amortized tocompensation expense over the vesting period of the grants, which is generallyover three years.

Thefollowing is a summary of RSU transactions under the 2004 Equity Incentive Planduring the three months ended March 31, 2006:

| ** **                          | ** ** | **RSUs** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|-------------------------------------|------------|----------|------------|------------------------------------------------------------|------------|
| Outstanding December 31,  2005 |       | 599,225  |       |                                                       | $          | 32.03 |   |   |
| Granted                             |       | 208,067  |       |                                                       | 54.32      |   |   |
| Vested                              |       | (47,121  | )          |                                                       | 21.70      |   |   |
| Cancelled                           |       | (6,773   | )          |                                                       | 30.04      |   |   |
| Outstanding  March 31, 2006    |       | 753,398  |       |                                                       | 38.85      |   |   |

 

The weighted average grant-date fair value of RSUsgranted for the three months ended March 31, 2006 was $54.32 per unit,compared with $21.00 per unit for the same period in the prior year. For thethree months ended March 31, 2006 and 2005, total compensation expenserecognized in relation to the issuance of RSUs was $1,863 and $186,respectively, and the related income tax benefits recognized in earnings was$700 and $79, respectively. At March 31, 2006, total unrecognizedcompensation cost related to the RSUs prior to the consideration of expectedforfeitures is approximately $25,686 and is expected to be recognized over aweighted-average period of 2.48 years. The total fair value of shares vestedduring the three months ended March 31, 2006 and 2005 was $1,023 and $0,respectively.

As of March 31, 2006, the Company had stock optionsoutstanding under the GFI Group Inc. 2002 Stock Option Plan (the “GFI Group2002 Plan”) and the GFInet inc. 2000 Stock Option Plan (the “GFInet 2000 Plan”).No additional grants will be made under these plans. For stock optionspreviously granted or modified, the fair value was estimated on the date ofgrant or modification using the Black-Scholes option pricing model.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Thefollowing is a summary of stock option transactions during the three monthsended March 31, 2006:

| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2005 |       | 953,437                                |       |                                       | $          | 13.75 |   |   | 658,662 |   |   | $ | 11.88 |   |   |
| Exercised                           |       | (62,085                                | )          |                                       | 14.17      |   |   | (158,710 | ) |   | 11.90 |   |   |
| Terminated                          |       | (3,685                                 | )          |                                       | 14.49      |   |   | (526 | ) |   | 9.50 |   |   |
| Outstanding  March 31, 2006    |       | 887,667                                |       |                                       | $          | 13.72 |   |   | 499,426 |   |   | $ | 11.88 |   |   |

 

Thefollowing table summarizes information about options outstanding under the GFIGroup 2002 Plan as of March 31, 2006:

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | ** **               | ** ** | **Stock Options Exercisable**             | ** ** |
|-------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number    Exercisable  ** | ** ** | **Weighted  Average  Exercise    Price  ** | ** ** |
| $11.88                  |       |                                    | 708,320    |                     |       |                                                | 7.99       |   |   |   | $ | 11.88 |   |   |   | 549,376 |   |   |   | 11.88 |   |   |
|   21.00       |       |                                    | 179,347    |                     |       |                                                | 8.25       |   |   |   | $ | 21.00 |   |   |   | 29,393 |   |   |   | 21.00 |   |   |
|                         |            |                                         |            |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes information about options outstanding under theGFInet 2000 Plan as of March 31, 2006:

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | ** **               | ** ** | **Stock Options Exercisable**             | ** ** |
|-------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   Exercisable ** | ** ** | **Weighted  Average  Exercise   Price ** | ** ** |
| $  9.50       |       |                                    | 341,008    |                     |       |                                                | 4.16       |   |   |   | $ | 9.50 |   |   |   | 341,008 |   |   |   | $ | 9.50 |   |   |
|   11.88       |       |                                    | 47,659     |                     |       |                                                | 6.49       |   |   |   | 11.88 |   |   |   | 47,659 |   |   |   | 11.88 |   |   |
|   14.25       |       |                                    | 15,628     |                     |       |                                                | 4.73       |   |   |   | 14.25 |   |   |   | 15,628 |   |   |   | 14.25 |   |   |
|   19.00       |       |                                    | 74,875     |                     |       |                                                | 4.85       |   |   |   | 19.00 |   |   |   | 74,875 |   |   |   | 19.00 |   |   |
|   23.75       |       |                                    | 20,256     |                     |       |                                                | 4.28       |   |   |   | 23.75 |   |   |   | 20,256 |   |   |   | 23.75 |   |   |
|                         |            |                                         |            |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three months ended March 31, 2006 and2005, total compensation expense recognized in relation to stock options was$80 and $955 and the related income tax benefits recognized in earnings were$31 and $380, respectively. At March 31, 2006, total unrecognizedcompensation cost related to unvested stock option awards prior to the considerationof expected forfeitures is approximately $554 and is expected to be recognizedover the weighted average period of 0.7 years.

For the three months endedMarch 31, 2006 and 2005, the total fair value of vested options was $152and $166, respectively. The total intrinsic value of options exercised for thethree months ended March 31, 2006 and 2005 was $8,883 and $112,respectively. Additionally, the total intrinsic value of options outstandingand exercisable at March 31, 2006 was $46,424 and $35,186, respectively.

15

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

**8.**                 COMMITMENTSAND CONTINGENCIES

*OperatingLeases—**In* February 2006, the Companyceased using its leased office located on Christopher Street in London. Thelease provides for an early termination option without penalty in February 2008.Consequently, the Company recorded the remaining two years of rent plus othercharges of  £463 (approximately $801)during the first quarter of 2006.

*PurchaseObligations—**The* Company has variousunconditional purchase obligations. Certain of these obligations include thepurchase of quotes from a number of information service providers during thenormal course of business. As of March 31, 2006, the Company had totalpurchase commitments for quotes of approximately $14,607, with $9,487 duewithin the next twelve months and $5,120 due between one to two years.

*Contingencies—**In* the normal courseof business, the Company and certain subsidiaries included in the condensedconsolidated financial statements are, and have been in the past, named asdefendants in various lawsuits and proceedings and are, and have been in thepast, involved in certain regulatory examinations. Additional actions,investigations or proceedings may be brought from time to time in the future.The Company is subject to the possibility of losses from these variouscontingencies. Considerable judgment is necessary to estimate the probabilityand amount of any loss from such contingencies. An accrual is made when it isprobable that a liability has been incurred or an asset has been impaired andthe amount of loss can be reasonably estimated. The Company accrues a liabilityfor the estimated costs of adjudication or settlement of asserted andunasserted claims existing as of the reporting period.

The Company is subject to regular examinations by varioustax authorities in jurisdictions in which the Company has significant businessoperations. The Company regularly assesses the likelihood of additional taxassessments that may result from these examinations in each of the taxjurisdictions. Tax reserves have been established, which the Company currentlybelieves to be adequate in relation to the potential for additional taxassessments. Once established, reserves may be adjusted based on newinformation or events. The imposition of additional tax assessments, penaltiesor fines by a tax authority could have a material impact on the Company’seffective tax rate.

Additionally, the Company has recorded reserves forcertain contingencies to which it may have exposure, such as reserves forcertain income tax and litigation contingencies and contingencies related tothe employer portion of National Insurance Contributions in the U.K.

It is not presently possible to determine the Company’sultimate exposure to these matters and there is no assurance that theresolution of these matters will not significantly exceed the reserves accruedby the Company. It is the opinion of the Company’s management, afterconsultation with counsel, that the ultimate resolution of these matters, whilenot likely to have a material adverse effect on the consolidated financialcondition of the Company, could be material to the Company’s operating resultsfor any particular period.

*Risksand Uncertainties—**The* Company primarily generates itsrevenues by executing and facilitating transactions for its customers. Revenuesfor these services are transaction based. As a result, the Company’s revenuescould vary based upon the transaction volume of certain securities,commodities, foreign exchange and derivative markets.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

*Guarantees—**The* Company, throughits subsidiaries, is a member of certain exchanges and clearinghouses. Underthe membership agreements, members are generally required to guarantee certainobligations. Additionally, if a member becomes unable to satisfy itsobligations to the clearinghouse, other members may be required to meetshortfalls. To mitigate these performance risks, the exchanges andclearinghouses often require members to post collateral as well as meet certainminimum financial standards. The Company’s maximum potential liability underthese arrangements cannot be quantified. However, management believes that thepotential for the Company to be required to make payments under thesearrangements is unlikely. Accordingly, no contingent liability is recorded inthe Condensed Consolidated Statements of Financial Condition for thesearrangements.

**9.**                 FINANCIALINSTRUMENTS WITH OFF-BALANCE SHEET RISK

Disclosure regarding theCompany’s financial instruments with off-balance sheet risk is described in “Note18—Financial Instruments with Off-Balance Sheet Risk” contained in the Company’s2005 Form 10-K. There have been no material changes to ouroff-balance sheet risk during the three months ended March 31, 2006.

**10.**          FINANCIALINSTRUMENTS

The Company is exposed to market risk associated withmovements in foreign currency exchange rates. There have been no materialchanges to our risk management policy as described in “Note 19—FinancialInstruments” contained in the Company’s 2005 Form 10-K.

For the three months ended March 31, 2006 and2005, there was no hedge ineffectiveness. For the three months ended March 31,2006 and 2005, unrealized losses before tax totaling $562 and $1,659,respectively, were recorded as other comprehensive loss. There has been nodiscontinuance of cash flow hedges that would require a reclassification ofgains into earnings. Management does not anticipate any events or transactionsthat would result in the reclassification into earnings of gains and lossesthat are reported in accumulated other comprehensive income due to hedgediscontinuance.

TheCompany’s derivatives are summarized below showing the fair value of therelated assets and liabilities that are included in other assets or otherliabilities in the Condensed Consolidated Statements of Financial Condition asof March 31, 2006 and December 31, 2005 as follows:

| **Asset/(Liabilities)**                 | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------|------------|
| Foreign exchange  derivative contracts: |       |       |       |                         |       |                            |       |   |   |
| Assets                                  |       |       | $          | 749                          |       |                            |       | $ | 2,196 |   |   |
| Liabilities                             |       |       | (575       | )                            |       |                            | (79        | ) |   |
| Fenics purchase obligation              |       |       | (81        | )                            |       |                            | (144       | ) |   |
|                                         |            |            |            |                              |            |                                 |            |  |  |  |  |  |  |

 

The fair values of the Company’s foreign exchangederivative contracts were estimated based on quoted market prices of comparableinstruments. The fair value of the Fenics purchase obligation was estimatedusing an exchange option model that included assumptions of management’sestimate of the fair value of the common stock of the Company and the commonstock of Fenics, volatility, correlation and the expected life of theobligation.

 

17

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

**11.**          REGULATORYREQUIREMENTS

GFISecurities LLC is a registered broker-dealer with the SEC and theNational Association of Securities Dealers, Inc. GFI Securities LLC isalso a registered introducing broker with the National Futures Association andthe Commodity Futures Trading Commission. Accordingly, GFI Securities LLC issubject to the net capital rules under the Exchange Act and the CommodityExchange Act. Under these rules, GFI Securities LLC is required to maintainminimum Net Capital, as defined, of not less than the greater of $250 or 2% ofaggregate debits, as defined. GFI Brokers Limited and GFI Securities Limitedare subject to the capital requirements of the Financial Services Authority inthe United Kingdom (“FSA”). GFI (HK) Securities LLC is subject to the capitalrequirements of the Securities and Futures Commission in Hong Kong, whichrequire that GFI (HK) Securities LLC maintain minimum capital, as defined, ofapproximately $399. At March 31, 2006, under these requirements, minimumcapital, as defined, must be maintained as follows:

| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       |                         | $          | 33,662                        |       |                             |       | $                                      | 23,632     |   |   |   | $ | 26,646 |   |   |   | $ | 1,433 |   |   |
| Minimum Net  Capital required |       |                         | 250        |                          |       |                             | 9,022      |                                   |       |   | 14,586 |   |   |   | 399 |   |   |
| Excess Net Capital            |       |                         | $          | 33,412                        |       |                             |       | $                                      | 14,610     |   |   |   | $ | 12,060 |   |   |   | $ | 1,034 |   |   |

 

GFI Group PTE Ltd is subject to the compliancerequirements of the Monetary Authority of Singapore (“MAS”), which require thatGFI Group PTE Ltd, among other things, maintain stockholders’ equity of 3,000Singapore dollars, measured annually. At December 31, 2005, GFI Group PTELtd. had stockholders’ equity of 4,219 Singapore dollars (or approximately$2,535), which exceeded the minimum requirement by approximately 1,219Singapore dollars (or approximately $733).

GFI Securities Limited’s Japanese branch is subject tocertain licensing requirements established by the Foreign Securities Firms Law(the “FSFL”). As part of their licensing requirements, GFI Securities Limited’sJapanese branch is required to maintain “brought-in” capital, as defined underthe FSFL, of 50,000 Japanese Yen. At March 31, 2006, GFI SecuritiesLimited’s Japanese branch was in compliance with this licensing requirement bymaintaining “brought-in” capital of 50,000 Japanese Yen (approximately $424). GFISecurities Limited is also subject to the Japan Securities Dealers Association’s(“JSDA”) financial requirement that revenue plus “brought-in” capital exceed aratio of 120.0% of relevant expenditure. At March 31, 2006, GFI SecuritiesLimited’s revenue plus “brought-in” capital ratio was 283%, which exceeded theJSDA’s financial requirement by approximately 163%.

GFI Securities Limited’s Paris branch was establishedthrough the exercise of its passport right to open a branch in a EuropeanEconomic Area state. This branch commenced operation on February 1, 2006. Theestablishment of the branch was approved by FSA and acknowledged by Banque deFrance in France. The branch will be subject to the conduct of business rules ofthe Autorite Des Marches Financiers when dealing with resident customers ofFrance and will be regulated, in part, by the FSA.

GFI Brokers Limited’s Sydney branch is registered as aforeign corporation in Australia and is conditionally exempt from the requirementto hold an Australian financial services license under the AustralianSecurities and Investments Commission Corporations Act of 2001 in respect ofthe financial services it provides in Australia. This exemption applies toforeign companies regulated by the FSA in accordance with U.K. regulatorystandards.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

Regulatory rules mayrestrict the Company’s ability to withdraw capital from its regulatedsubsidiaries. The Company’s regulated subsidiaries were in compliance with allminimum net capital requirements as of March 31, 2006.

**12.**          GEOGRAPHICINFORMATION

The Company offers its products and services in theNorth America, Europe and the Asia-Pacific regions.

Informationregarding revenue for the three months ended March 31, 2006 and 2005, andinformation regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in geographic areas as of March 31,2006 and December 31, 2005 is as follows:

| ** **    | ** ** | **Three Months Ended March 31,**                                                                 | ** ** |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| Revenues:     |       |                                                                                                                 |       |   |   |   |   |   |   |
| North America |       |                                                                                                                 | $          | 84,617 |   |   |   | $ | 58,049 |   |   |
| Europe        |       |                                                                                                                 | 86,855     |   |   |   | 55,307 |   |   |
| Asia-Pacific  |       |                                                                                                                 | 14,116     |   |   |   | 8,938 |   |   |
| Total         |       |                                                                                                                 | $          | 185,588 |   |   |   | $ | 122,294 |   |   |

 

| ** **                      | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Long-lived Assets,  as defined: |       |                         |       |                            |       |   |   |   |   |
| North America                   |       |                         | $          | 26,047                          |       |   |   | $ | 25,200 |   |   |
| Europe                          |       |                         | 12,113     |                            |       |   | 10,645 |   |   |
| Asia-Pacific                    |       |                         | 1,590      |                            |       |   | 1,516 |   |   |
| Total                           |       |                         | $          | 39,750                          |       |   |   | $ | 37,361 |   |   |

 

Revenues are attributed togeographic areas based on the location of the relevant legal entities.

**13.**          OtherComprehensive Income (Loss)

| ** **                                                           | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| **Unrealized gain (loss) on  foreign exchange derivative contracts** |       |                                                                                                     |       |   |   |   |   |   |   |
| Current Period  Change:                                              | ** ** |                                                                                                     |       |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                                                                                     | $          | (562 | ) |   |   | $ | (1,659 | ) |   |
| Tax (Expense) Benefit                                                |       |                                                                                                     | 169        |   |   |   | 421 |   |   |
| After Tax Amount                                                     |       |                                                                                                     | $          | (393 | ) |   |   | $ | (1,238 | ) |   |
| **Foreign  currency translation adjustment**                         |       |                                                                                                     |       |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                                                                                     | $          | 112 |   |   |   | $ | (173 | ) |   |
| Tax (Expense) Benefit                                                |       |                                                                                                     | (50        | ) |   |   | 79 |   |   |
| After Tax Amount                                                     |       |                                                                                                     | $          | 62 |   |   |   | $ | (94 | ) |   |

 

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (In thousands except share and per share amounts)**

The Company reclassified$1,499 ($1,050 after tax) and $110 ($77 after tax) out of other comprehensiveincome into earnings for the three months ended March 31, 2006 and 2005,respectively.

**14.**          RELATEDPARTY TRANSACTION

**Office LeaseTermination with an Affiliate**

In the fourth quarter of 2005, the Company ceased useof the premises it had leased from an affiliate and recorded a liability forthe remaining rent plus other charges at that time. There has been no changeexcept for the cash payments of the remaining liability. As of March 31,2006, the remaining accrual balance was expected to be paid within the nextseven months. Included in the remaining balance is approximately $171, whichwill be paid to third parties.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofGFI Group Inc.New York, New York

We have reviewed the accompanying condensedconsolidated statement of financial condition of GFI Group Inc. andsubsidiaries (the “Company”) as of March 31, 2006, and the relatedcondensed consolidated statements of income, comprehensive income and cashflows for the three-month periods ended March 31, 2006 and 2005. Theseinterim financial statements are the responsibility of the Company’smanagement.

We conducted our reviews in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Areview of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters. It is substantially less in scope than an auditconducted in accordance with the standards of the Public Company AccountingOversight Board (United States), the objective of which is the expression of anopinion regarding the financial statements taken as a whole. Accordingly, we donot express such an opinion.

Based on our reviews, we are not aware of any materialmodifications that should be made to such condensed consolidated interimfinancial statements for them to be in conformity with accounting principlesgenerally accepted in the United States of America.

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statement offinancial condition of GFI Group Inc. and subsidiaries as of December 31,2005, and the related consolidated statements of income, comprehensive income,cash flows and changes in stockholders’ equity, for the year then ended (notpresented herein); and in our report dated March 30, 2006, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated statementof financial condition as of December 31, 2005 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financialcondition from which it has been derived.
| /s/ DELOITTE &  TOUCHE LLP |
|-------------------------------------|
| New York, New York                  |
| May 12, 2006                   |

 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This QuarterlyReport on Form 10-Q contains ‘‘forward-looking statements’’ withinthe meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include, without limitation, any statement that maypredict, forecast, indicate or imply future results, performance orachievements, and may contain the words ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’‘‘estimate,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘will be,’’ ‘‘will likely continue,’’ ‘‘willlikely result,’’ or words or phrases of similar meaning. These forward-lookingstatements are based largely on the expectations of management and are subjectto a number of risks and uncertainties including, but not limited to, thefollowing:

·       therisks and other factors described under the heading “Risk Factors” andelsewhere in our 2005 Form 10-K.

·       expansionand growth of our operations generally or of specific products or services;

·       ourability to attract and retain key personnel, including highly qualifiedbrokerage personnel;

·       ourentrance into new brokerage markets or investments in establishing newbrokerage desks;

·       competitionfrom current and new competitors;

·       futureresults of operations and financial condition;

·       thesuccess of our business strategies;

·       economic,political and market factors affecting trading volumes, securities prices ordemand for the Company’s brokerage services;

·       financialdifficulties experienced by the Company’s customers or key participants in themarkets in which the Company focuses its brokerage services;

·       risksassociated with potential acquisitions by us of businesses or technologies;

·       ourability to manage our international operations;

·       uncertaintiesassociated with currency fluctuations;

·       ourfailure to protect or enforce our intellectual property rights;

·       ourability to keep up with rapid technological change;

·       changesin laws and regulations governing our business and operations or permissibleactivities and our ability to comply with such laws and regulations;

·       uncertaintiesrelating to litigation; and

·       changes in the availability of capital.

The foregoing risks anduncertainties, as well as those risks discussed under the headings ‘‘Item 2—ManagementsDiscussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Item3—Quantitative and Qualitative Disclosures About Market Risk’’ and elsewhere inthis Quarterly Report, may cause actual results to differ materially from theforward-looking statements. The information included herein is given as of thefiling date of this Form 10-Q with the SEC and future events orcircumstances could differ significantly from these forward-looking statements.The Company does not undertake to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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**BusinessEnvironment**

Our business generally benefits when there is robusttrading volume and volatility in the markets we serve. Market volatility isdriven by a range of external and internal factors, some of which are marketspecific and some of which are correlated to macro-economic conditions. In manyof the over the counter markets in which we provide inter-dealer brokerageservices, objective and easily identifiable third party reporting of volumelevels is not available. As a result, we look to broader market information,and specific volatility events in our key markets, as indictors of likelytrading volume levels. We also monitor market-specific developments in each ofour markets. Trading volume in many of our inter-dealer markets is driven bythe trading activity of our dealer clients that, in turn, are responsive to thetrading activity and demand of their “buy-side” clients. Those “buy-side”clients include smaller banks, insurance companies and financial institutions,investment funds, trading firms and, increasingly, hedge funds.

During the first quarter2006, the global business environment was generally positive for our business,with satisfactory trading volume levels and generally modest volatility inglobal foreign exchange and equity markets, and instances of more pronouncedvolatility in certain credit and commodity markets.

**Credit**

The credit markets continued to experience markedvolatility events in the first quarter including the bankruptcy filing of DanaCorporation, an auto parts supplier, and continuing concern regarding thehealth of the U.S. auto industry. Volatility in the global credit marketsincreased in the first quarter of 2006 as evidenced by increased volatility onthe Dow Jones CDX North American Investment Grade, North American High Yieldand Emerging Market Diversified indices, as well as the iTraxx Europe index.

During the first quarterof 2006, bonds generally underperformed stocks. The Lehman Brothers AggregateBond Index was down 0.65% from the start of the year, contrasting with the 5.1%increase in the Dow Jones Wilshire 5,000 stock index. In addition, higher thanexpected job creation and other positive economic data released in February andMarch pointed to a strong U.S. economy, raising the possibility ofinflation and additional rate increases. These unexpected results contributedto bond market volatility in the quarter.

**Financial**

The financial markets wereactive in the quarter due to strong global economic and interest rate activity.The U.S. dollar generally weakened in the quarter, depreciating versus theEuro, the British Pound Sterling and certain emerging market currencies, whileremaining relatively flat versus the Japanese Yen. Short-term interest ratesrose in the U.S. and Europe as global economic activity remained strong in thequarter. Emerging market economies in Latin America, Eastern Europe and Asiahave continued, in many cases, to outpace that of the U.S. This growth has, insome cases, led to the strengthening of various local currencies versus theU.S. dollar The Chicago Mercantile Exchange reported increased foreign exchangeand interest rate futures volumes for the first quarter of 2006 as compared tothe first quarter of 2005 and the fourth quarter of 2005.

**Equity**

Despite high energy pricesand a general rising interest rate environment, global equity markets continuedtheir upward momentum in the first quarter of 2006. Both the U.S. FederalReserve and the European Central Bank raised interest rates in the quarter,while the Bank of Japan signaled that it may also start raising rates for thefirst time in five years. Investor concerns over these rate increases weremitigated by strong global growth prospects. The Dow Jones World Stock Index,excluding the U.S., advanced 8.8% in the quarter, beating the Dow JonesIndustrial Average, which increased 3.7%. Asian, European and emerging marketstocks also continued their upward momentum from 2005. The Chicago 

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Board ofOptions Exchange Standard and Poor’s 500 Volatility Index indicated a lowervolatility level for the first quarter of 2006 compared to the first quarter of2005, as well as compared to the previous quarter. Volume levels on the majorglobal equity indices generally increased in the first quarter of 2006 ascompared to the first quarter of 2005, as well as compared to the fourthquarter of 2005.

**Commodity**

Energy markets remainedvolatile in the first quarter of 2006. Natural gas prices plunged almost 36.0%in the first quarter on the New York Mercantile Exchange (“NYMEX”) due to amild winter in the Northeastern U.S. and rising inventories. Crude oil prices,on the other hand, rose over 9.0% on NYMEX due to continued terrorism fears;political issues in the Middle East and continued strong foreign and domesticdemand.

**Results ofOperations**

The following table sets forth our condensedconsolidated results of operations for the periods indicated:

| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
| REVENUES:                                 |       |                             |       |   |   |
| Brokerage revenues:                       |       |                             |       |   |   |
| Agency commissions                        |       | $                                | 136,910    |   | $ | 87,971 |   |
| Principal transactions                    |       | 41,060                           |       | 28,112 |   |
| Total brokerage revenues                  |       | 177,970                          |       | 116,083 |   |
| Analytics and market data                 |       | 5,194                            |       | 5,402 |   |
| Interest income                           |       | 2,233                            |       | 1,060 |   |
| Other income (loss)                       |       | 191                              |       | (251 | ) |
| Total revenues                            |       | 185,588                          |       | 122,294 |   |
| EXPENSES:                                 |       |                             |       |   |   |
| Compensation and employee benefits        |       | 116,845                          |       | 75,477 |   |
| Communications and quotes                 |       | 7,653                            |       | 5,799 |   |
| Travel and promotion                      |       | 7,531                            |       | 5,761 |   |
| Rent and occupancy                        |       | 5,613                            |       | 3,428 |   |
| Depreciation and amortization             |       | 3,836                            |       | 4,092 |   |
| Professional fees                         |       | 4,044                            |       | 2,469 |   |
| Clearing fees                             |       | 5,477                            |       | 3,371 |   |
| Interest expenses                         |       | 1,752                            |       | 1,244 |   |
| Other expenses                            |       | 3,556                            |       | 4,009 |   |
| Total Expenses                            |       | 156,307                          |       | 105,650 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 29,281                           |       | 16,644 |   |
| PROVISION FOR  INCOME TAXES               |       | 12,298                           |       | 7,490 |   |
| NET INCOME                                |       | $                                | 16,983     |   | $ | 9,154 |   |

 

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Thefollowing table sets forth our condensed consolidated results of operations asa percentage of our total revenues for the periods indicated:

| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
| REVENUES:                                 |       |                             |       |   |   |   |   |   |   |
| Brokerage revenues:                       |       |                             |       |   |   |   |   |   |   |
| Agency commissions                        |       |                             | 73.8       | % |   |   | 72.0 | % |   |
| Principal transactions                    |       |                             | 22.1       | % |   |   | 23.0 | % |   |
| Total brokerage revenues                  |       |                             | 95.9       | % |   |   | 95.0 | % |   |
| Analytics and market data                 |       |                             | 2.8        | % |   |   | 4.4 | % |   |
| Interest income                           |       |                             | 1.2        | % |   |   | 0.8 | % |   |
| Other income                              |       |                             | 0.1        | % |   |   | (0.2 | )% |   |
| Total revenues                            |       |                             | 100.0      | % |   |   | 100.0 | % |   |
| EXPENSES:                                 |       |                             |       |   |   |   |   |   |   |
| Compensation and employee benefits        |       |                             | 63.0       | % |   |   | 61.7 | % |   |
| Communications and quotes                 |       |                             | 4.1        | % |   |   | 4.8 | % |   |
| Travel and promotion                      |       |                             | 4.1        | % |   |   | 4.7 | % |   |
| Rent and occupancy                        |       |                             | 3.0        | % |   |   | 2.8 | % |   |
| Depreciation and amortization             |       |                             | 2.1        | % |   |   | 3.3 | % |   |
| Professional fees                         |       |                             | 2.2        | % |   |   | 2.0 | % |   |
| Clearing fees                             |       |                             | 3.0        | % |   |   | 2.8 | % |   |
| Interest expenses                         |       |                             | 0.9        | % |   |   | 1.0 | % |   |
| Other expenses                            |       |                             | 1.9        | % |   |   | 3.3 | % |   |
| Total Expenses                            |       |                             | 84.3       | % |   |   | 86.4 | % |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       |                             | 15.7       | % |   |   | 13.6 | % |   |
| PROVISION FOR  INCOME TAXES               |       |                             | 6.6        | % |   |   | 6.1 | % |   |
| NET INCOME                                |       |                             | 9.1        | % |   |   | 7.5 | % |   |

 

**Three Months Ended March 31,2006 Compared to the Three Months Ended March 31, 2005**

Net income for the threemonths ended March 31, 2006 was $17.0 million as compared to net income of$9.2 million for the three months ended March 31, 2005, an increase of$7.8 million or approximately 84.8%. Total revenues increased by $63.3 million,or 51.8%, to $185.6 million for the three months ended March 31, 2006 from$122.3 million compared to the same period from the prior year. Our increasedrevenues were primarily due to increased brokerage revenues resulting from thecontinued growth in our brokerage personnel headcount in each of our productcategories. Our total brokerage personnel headcount increased by 211 to a totalof 808 at March 31, 2006 from 597 at March 31, 2005. Total expensesincreased by $50.6 million, or 47.9% to $156.3 million for the three monthsended March 31, 2006 from $105.7 million for the same period from theprior year. Expenses increased primarily due to a higher number of brokeragepersonnel as compared with the corresponding period in 2005 and the resultingincrease in performance related brokerage bonuses.

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***Revenues***

*Brokerage Revenues*

Weoffer our brokerage services in four broad product categories: credit,financial, equity and commodity. The charts below detail our brokerage revenuesby product category in dollars and as a percentage of our total brokeragerevenues for the periods indicated.

| ** **                | ** ** | **Three Months Ended,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **March 31,  2006**          | ** ** | **March 31,  2005** | ** ** |
| **BROKERAGE REVENUES:**   |       |                              |       |   |   |
| Credit                    |       | $                                 | 71,273     |   | $ | 51,653 |   |
| Financial                 |       | 39,488                            |       | 26,285 |   |
| Equity                    |       | 41,459                            |       | 21,002 |   |
| Commodity                 |       | 25,750                            |       | 17,143 |   |
| Total brokerage revenues  |       | $                                 | 177,970    |   | $ | 116,083 |   |
| **BROKERAGE  REVENUES:**  |       |                              |       |   |   |
| Credit                    |       | 40.0                              | %          | 44.5 | % |
| Financial                 |       | 22.2                              |       | 22.6 |   |
| Equity                    |       | 23.3                              |       | 18.1 |   |
| Commodity                 |       | 14.5                              |       | 14.8 |   |
| Total brokerage  revenues |       | 100.0                             | %          | 100.0 | % |

 

Total brokerage revenues increased by $61.9 million,or 53.3%, to $178.0 million for the three months ended March 31, 2006, ascompared to $116.1 million for the three months ended March 31, 2005. Agencycommissions increased by $48.9 million, or 55.6%, to $136.9 million for thethree months ended March 31, 2006 as compared to $88.0 million for thethree months ended March 31, 2005. Principal transactions increased by$13.0 million, or 46.3%, to $41.1 million for the three months ended March 31,2006 from $28.1 million for the three months ended March 31, 2005. Brokerproductivity (defined as total brokerage revenues during the period divided byaverage monthly brokerage personnel headcount for the period) increased byapproximately 11.6% for the three months ended March 31, 2006 as comparedto the same period from the prior year.

The increase in credit product brokerage revenues of$19.6 million was due to a number of factors including continued overall growthin the credit derivatives market, the development of new credit products andthe sectorization of credit products. Our existing credit product deskscontributed $16.8 of the total increase in credit product brokerage revenues. Theremaining $2.8 million increase was generated by the addition of fourteen newor restructured credit product desks since March 31, 2005. Our investmentin and development of credit products was highlighted by a credit productbrokerage personnel increase of 37 to a total of 221 employees at March 31,2006 from 184 employees at March 31, 2005.

The increase in financial product brokerage revenuesof $13.2 million was primarily attributable to a combination of increasedrevenues from brokerage desks covering emerging markets, interest ratederivatives and exotic foreign exchange options due to volatility resultingfrom global interest rate movement, inflationary fears from high energy costs,and investment in our foreign exchange and interest rate derivatives business,particularly in Asia. The increase in our financial product brokerage revenueswas generated primarily from our existing financial product desks, whichcontributed $10.4 million of the increase in financial product brokeragerevenues. The remaining $2.8 million increase in financial product brokeragerevenues was attributable to the addition of eleven new or restructuredfinancial product desks since March 31, 2005. Our investment in anddevelopment of financial products was highlighted by a 

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financial productbrokerage personnel increase of 89 to a total of 248 employees at March 31,2006 from 159 employees at March 31, 2005.

The increase in equity product brokerage revenues of$20.5 million was due to our new Paris office that contributed $10.4 million inbrokerage revenues in the first quarter of 2006, other new desks establishedsince March 31, 2005 and increased business from our hedge fund customers.New or restructured equity product desks, including desks in our Paris office,contributed $14.4 million of the total increase in equity product brokeragerevenues. The remaining $6.1 million increase in equity product brokeragerevenues was attributable to existing equity product desks. Our investment inand development of equity products was highlighted by an equity productbrokerage personnel increase of 33 to a total of 167 employees at March 31,2006 from 134 employees at March 31, 2005.

The increase in commodityproduct brokerage revenues of $8.6 million was attributable to the Starsupplyacquisition in September 2005 that generated $6.6 million in brokeragerevenues in the first quarter of 2006, continued volatility in certaincommodity markets and investment in new desks. Our new or restructuredcommodity product desks, including the desks acquired from Starsupply PetroleumLLC, contributed $7.5 million of the increase in commodity product brokeragerevenues. Our existing commodity desks contributed $1.1 million of the totalincrease in commodity product brokerage revenue. Our investment in anddevelopment of commodity products was highlighted by a commodity productbrokerage personnel increase of 52 to a total of 172 employees at March 31,2006 from 120 employees at March 31, 2005.

*Analytics andMarket Data*

Revenues from ouranalytics and market data products decreased slightly by $0.2 million, or 3.7%,to $5.2 million for the three months ended March 31, 2006 as compared to$5.4 million for the three months ended March 31, 2005. The decrease wasprimarily due to a decrease in annual update fees for future upgrades ofsoftware products in the three months ended March 31, 2006 as compared tothe comparable period in 2005 as we continue to reduce the use of annual updatefees in favor of monthly subscription fees.

*Interest Income*

Interest income increasedby $1.1 million, or 100.0%, to $2.2 million for the three months ended March 31,2006 as compared to $1.1 million for the three months ended March 31, 2005.The increase is mainly attributable to the higher level of average cashbalances in the U.S. and the increase in interest income on clearing accountsrelated to our brokerage operations.

*Other Income (Loss)*

Other income (loss)increased $0.5 million, or 166.7%, to $0.2 million for the three months endedMarch 31, 2006 from a loss of $0.3 million for the three months endedMarch 31, 2005. Other income (loss) for the three months endedMarch 31, 2006 and 2005 mainly consisted of transactional net gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.

***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits increased by $41.3million, or 54.7%, to $116.8 million for the three months ended March 31,2006 from $75.5 million for the three months ended March 31, 2005. Theincrease was primarily due to an increase in the number of brokerage personnelfrom 597 at March 31, 2005 to 808 at March 31, 2006 and an increasein brokerage personnel performance bonuses of $28.4 million resulting in largepart from our overall higher brokerage commission revenues.

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Total compensation andemployee benefits as a percentage of total revenues increased slightly to 63.0%at March 31, 2006 from 61.7% from March 31, 2005. Bonus expenserepresented 57.0% and 48.1% of total compensation and employee benefits expensefor the three months ended March 31, 2006 and 2005, respectively. Includedin these amounts are guaranteed bonuses, which represented 6% and 2% of totalbonuses for the three months ended March 31, 2006 and 2005, respectively. Additionally,sign-on bonus expense represented 4.9% and 3.0% of total compensation andemployee benefits for the three months ended March 31, 2006 and 2005,respectively.

*Communications andQuotes*

Communications and quotesincreased by $1.9 million, or 32.8%, to $7.7 million for the three months endedMarch 31, 2006 from $5.8 million from the three months ended March 31,2005. The increase was primarily attributable to the increase in brokeragedesks and brokerage personnel.

*Travel andPromotion*

Travel and promotionincreased by $1.7 million, or 29.3%, to $7.5 million for the three months endedMarch 31, 2006 from $5.8 million for the three months ended March 31,2005. This expense, as a percentage of our total brokerage revenues for thethree months ended March 31, 2006 decreased to 4.2% from 5.0% for the sameperiod from the prior year. This decrease was primarily due to the Company’scontinuing efforts to lower these costs relative to the Company’s totalbrokerage revenues.

*Rent and Occupancy*

Rent and occupancyincreased by $2.2 million, or 64.7%, to $5.6 million for the three months endedMarch 31, 2006 from $3.4 million for the three months ended March 31,2005. The increase was primarily due to the lease of additional office space inthe U.S., London and Paris during 2005 and the accrual of $0.8 million duringthe three months ended March 31, 2006 for the remaining two years of rentplus other charges in connection with vacating our office at Christopher Streetin London. See Note 8 to the Condensed Consolidated Financial Statements forfurther discussion.

*Depreciation andAmortization*

Depreciation andamortization decreased slightly by $0.3 million, or 7.3%, to $3.8 million forthe three months ended March 31, 2006 from $4.1 million for the threemonths ended March 31, 2005. The decrease was primarily due to theaccelerated depreciation of $0.6 million that was recorded during the firstquarter of 2005 related to certain long-lived assets that were abandoned as aresult of the early termination of the lease for our former primary U.K. officepremises, offset by the increase in property and equipment costs, includingsoftware development costs.

*Professional Fees*

Professional feesincreased by $1.5 million, or 60.0%, to $4.0 million for the three months endedMarch 31, 2006 from $2.5 million for the three months ended March 31,2005. The increase was primarily due to an increase in professional feesrelated to our continuing preparation to satisfy the requirements of theSarbanes-Oxley Act of 2002 that are or will be applicable to us.

*Clearing Fees*

Clearing fees increased by$2.1 million, or 61.8%, to $5.5 million for the three months ended March 31,2006 from $3.4 million for the three months ended March 31, 2005. Thisincrease was due to a higher volume in the number of principal transactions executedduring the three months ended March 31, 2006 as compared to the sameperiod in the prior year. Principal transactions are generally settled through 

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thirdparty clearing organizations that charge us a fee for their services. We alsouse the services of floor brokers on certain stock exchanges to assist in theexecution of transactions. Fees paid to floor brokers in these circumstancesare included in clearing fees.

*Interest Expense*

Interest expense increasedby $0.6 million, or 50.0%, to $1.8 million for the three months ended March 31,2006 from $1.2 million for the three months ended March 31, 2005. Theincrease was primarily due to increased interest charges on clearing accountsrelated to our brokerage operations.

*Other Expenses*

Other expenses decreasedby $0.4 million, or 10.0%, to $3.6 million for the three months ended March 31,2006 from $4.0 million for the three months ended March 31, 2005. Thedecrease was a result of a significant charge in the three months ended March 31,2005 for the increase in the fair value of the Fenics purchase obligation dueto our initial public offering, with no comparable charge in the three monthsended March 31, 2006, offset by increases in irrecoverable Value Added Taxrelated to increased purchases in communications and quotes in the U.K.,litigation reserves and other general office and miscellaneous expenses, suchas office supplies and computer equipment expenses.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $12.3 million for the three months ended March 31, 2006 and$7.5 million for the three months ended March 31, 2005. Our effective taxrate was approximately 42.0% for the three months ended March 31, 2006 ascompared to 45.2% for the comparable period in 2005. The reduction in the effectivetax rate was primarily due to income received on tax-exempt investments, and adecrease in state and local income taxes and taxes related to foreignoperations.

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**Quarterly Resultsof Operations**

Thefollowing table sets forth, by quarter, our unaudited statement of income datafor the period from January 1, 2005 to March 31, 2006. Results of anyperiod are not necessarily indicative of results for a full year.

| ** **                           | ** ** | **Quarter Ended**               | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **March 31,  2006**             | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**                         | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Brokerage  revenues:                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       | $                                    | 136,910    |   |   | $ | 104,335 |   |   |   | $ | 98,559 |   |   | $ | 100,718 |   | $ | 87,971 |   |
| Principal Transactions               |       | 41,060                               |       |   | 31,250 |   |   |   | 27,420 |   |   | 27,635 |   | 28,112 |   |
| Total brokerage  Revenues            |       | 177,970                              |       |   | 135,585 |   |   |   | 125,979 |   |   | 128,353 |   | 116,083 |   |
| Analytics and market Data            |       | 5,194                                |       |   | 3,388 |   |   |   | 3,894 |   |   | 4,711 |   | 5,402 |   |
| Interest income                      |       | 2,233                                |       |   | 1,458 |   |   |   | 1,236 |   |   | 883 |   | 1,060 |   |
| Other income (loss)                  |       | 191                                  |       |   | (145 | ) |   |   | (420 | ) |   | 6,376 |   | (251 | ) |
| Total revenues                       |       | 185,588                              |       |   | 140,286 |   |   |   | 130,689 |   |   | 140,323 |   | 122,294 |   |
| **Expenses**                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits   |       | 116,845                              |       |   | 89,511 |   |   |   | 81,461 |   |   | 80,896 |   | 75,477 |   |
| Communications and quotes            |       | 7,653                                |       |   | 7,064 |   |   |   | 6,656 |   |   | 6,341 |   | 5,799 |   |
| Travel and promotion                 |       | 7,531                                |       |   | 7,017 |   |   |   | 5,833 |   |   | 6,041 |   | 5,761 |   |
| Rent and occupancy                   |       | 5,613                                |       |   | 3,447 |   |   |   | 4,662 |   |   | 3,913 |   | 3,428 |   |
| Depreciation and amortization        |       | 3,836                                |       |   | 4,159 |   |   |   | 3,434 |   |   | 3,599 |   | 4,092 |   |
| Professional fees                    |       | 4,044                                |       |   | 2,507 |   |   |   | 2,797 |   |   | 2,927 |   | 2,469 |   |
| Clearing fees                        |       | 5,477                                |       |   | 3,858 |   |   |   | 3,480 |   |   | 2,974 |   | 3,371 |   |
| Interest expenses                    |       | 1,752                                |       |   | 1,016 |   |   |   | 778 |   |   | 597 |   | 1,244 |   |
| Other expenses                       |       | 3,556                                |       |   | 1,855 |   |   |   | 2,217 |   |   | 5,809 |   | 4,009 |   |
| Lease termination costs to affiliate |       | —                               |       |   | 1,070 |   |   |   | — |   |   | (2,266 | ) | — |   |
| Total expenses                       |       | 156,307                              |       |   | 121,504 |   |   |   | 111,318 |   |   | 110,831 |   | 105,650 |   |
| Income before  provision for taxes   |       | 29,281                               |       |   | 18,782 |   |   |   | 19,371 |   |   | 29,492 |   | 16,644 |   |
| Provision for  income taxes          |       | 12,298                               |       |   | 7,363 |   |   |   | 8,523 |   |   | 12,810 |   | 7,490 |   |
| Net income                           |       | $                                    | 16,983     |   |   | $ | 11,419 |   |   |   | $ | 10,848 |   |   | $ | 16,682 |   | $ | 9,154 |   |

 

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Thefollowing table sets forth our quarterly results of operations as a percentageof our total revenues for the indicated periods: 

| ** **                           | ** ** | **Quarter Ended**   | ** ** |
|--------------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| **Revenues**                         | ** ** |                     | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage revenues:                  |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       |                     | 73.8       | % |   |   | 74.4 | % |   |   | 75.4 | % |   |   | 71.8 | % |   |   | 72.0 | % |   |
| Principal transactions               |       |                     | 22.1       |   |   |   | 22.3 |   |   |   | 21.0 |   |   |   | 19.7 |   |   |   | 23.0 |   |   |
| Total brokerage revenues             |       |                     | 95.9       |   |   |   | 96.7 |   |   |   | 96.4 |   |   |   | 91.5 |   |   |   | 95.0 |   |   |
| Analytics and market data            |       |                     | 2.8        |   |   |   | 2.4 |   |   |   | 3.0 |   |   |   | 3.4 |   |   |   | 4.4 |   |   |
| Interest income                      |       |                     | 1.2        |   |   |   | 1.0 |   |   |   | 0.9 |   |   |   | 0.6 |   |   |   | 0.8 |   |   |
| Other income (loss)                  |       |                     | 0.1        |   |   |   | (0.1 | ) |   |   | (0.3 | ) |   |   | 4.5 |   |   |   | (0.2 | ) |   |
| Total revenues                       |       |                     | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **Expenses**                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits   |       |                     | 63.0       | % |   |   | 63.8 | % |   |   | 62.3 | % |   |   | 57.6 | % |   |   | 61.7 | % |   |
| Communications and quotes            |       |                     | 4.1        |   |   |   | 5.0 |   |   |   | 5.1 |   |   |   | 4.6 |   |   |   | 4.8 |   |   |
| Travel and promotion                 |       |                     | 4.1        |   |   |   | 5.0 |   |   |   | 4.5 |   |   |   | 4.3 |   |   |   | 4.7 |   |   |
| Rent and occupancy                   |       |                     | 3.0        |   |   |   | 2.5 |   |   |   | 3.6 |   |   |   | 2.8 |   |   |   | 2.8 |   |   |
| Depreciation and amortization        |       |                     | 2.1        |   |   |   | 3.0 |   |   |   | 2.6 |   |   |   | 2.6 |   |   |   | 3.3 |   |   |
| Professional fees                    |       |                     | 2.2        |   |   |   | 1.8 |   |   |   | 2.1 |   |   |   | 2.1 |   |   |   | 2.0 |   |   |
| Clearing fees                        |       |                     | 3.0        |   |   |   | 2.8 |   |   |   | 2.7 |   |   |   | 2.1 |   |   |   | 2.8 |   |   |
| Interest expenses                    |       |                     | 0.9        |   |   |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |   | 1.0 |   |   |
| Other expenses                       |       |                     | 1.9        |   |   |   | 1.3 |   |   |   | 1.7 |   |   |   | 4.1 |   |   |   | 3.3 |   |   |
| Lease termination costs to affiliate |       |                     | —     |   |   |   | 0.8 |   |   |   | — |   |   |   | (1.6 | ) |   |   | — |   |   |
| Total expenses                       |       |                     | 84.3       | % |   |   | 86.7 | % |   |   | 85.2 | % |   |   | 79.0 | % |   |   | 86.4 | % |   |
| Income before  provision for taxes   |       |                     | 15.7       |   |   |   | 13.3 |   |   |   | 14.8 |   |   |   | 21.0 |   |   |   | 13.6 |   |   |
| Provision for income taxes           |       |                     | 6.6        |   |   |   | 5.2 |   |   |   | 6.5 |   |   |   | 9.1 |   |   |   | 6.1 |   |   |
| Net income                           |       |                     | 9.1        | % |   |   | 8.1 | % |   |   | 8.3 | % |   |   | 11.9 | % |   |   | 7.5 | % |   |

 

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Thetables below detail our brokerage revenues by product category in dollars andas a percentage of our total brokerage revenues for the indicated periods.

| ** **               | ** ** | **Quarter Ended**               | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **March 31,  2006**             | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage Revenues:**  | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Credit                   |       | $                                    | 71,273     |   |   | $ | 55,443 |   |   |   | $ | 51,472 |   |   | $ | 60,749 |   | $ | 51,653 |   |
| Financial                |       | 39,488                               |       |   | 29,213 |   |   |   | 30,804 |   |   | 29,835 |   | 26,285 |   |
| Equity                   |       | 41,459                               |       |   | 29,931 |   |   |   | 25,993 |   |   | 21,869 |   | 21,002 |   |
| Commodity                |       | 25,750                               |       |   | 20,998 |   |   |   | 17,710 |   |   | 15,900 |   | 17,143 |   |
| Total brokerage revenues |       | $                                    | 177,970    |   |   | $ | 135,585 |   |   |   | $ | 125,979 |   |   | $ | 128,353 |   | $ | 116,083 |   |
| **Brokerage Revenues:**  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                   |       | 40.0                                 | %          |   | 40.9 | % |   |   | 40.8 | % |   | 47.3 | % | 44.5 | % |
| Financial                |       | 22.2                                 |       |   | 21.5 |   |   |   | 24.5 |   |   | 23.2 |   | 22.6 |   |
| Equity                   |       | 23.3                                 |       |   | 22.1 |   |   |   | 20.6 |   |   | 17.0 |   | 18.1 |   |
| Commodity                |       | 14.5                                 |       |   | 15.5 |   |   |   | 14.1 |   |   | 12.4 |   | 14.8 |   |
| Total brokerage revenues |       | 100.0                                | %          |   | 100.0 | % |   |   | 100.0 | % |   | 100.0 | % | 100.0 | % |

 

**Liquidity andCapital Resources**

Net cash used by operations decreased to $9.6 millionin the first quarter of 2006, compared with $13.9 million in the first quarterof 2005. The decrease is primarily related to our improved net income, offsetby an increase in working capital changes. A majority of the working capitalchanges are related to the net commission receivable and receivables from thebroker dealers and clearing organizations. The receivables from broker dealersand clearing organizations were substantially settled after March 31, 2006.Cash flow from operations was negatively impacted by an increase in our netcommission receivables due to higher revenues.

Net cash used in investing activities in the firstquarter of 2006 was $5.7 million compared to $1.3 million used in the firstquarter of 2005. The increase in cash used for investing activities was due tosignificantly higher capital expenditures during the first quarter of 2006 thanthe comparable period of 2005. The increase in capital expenditure was due toleasehold improvements for the additional leases we entered into during 2005and our continued investment in the development of software for internal use.

Net cash used in financing activities in the firstquarter of 2006 was $0.5 million compared to $14.3 million generated for thethree months ended March 31, 2005. Cash provided by financing activitiesfor the three months ended March 31, 2005 consisted of net proceedsreceived from our initial public offering, offset by the repayments of thenotes payable to Jersey Partners Inc. in January 2005 and the outstandingprincipal balance under our 2004 Credit Agreement in February 2005. In thefirst quarter of 2006, cash used in financing activities consisted of net cashpaid on borrowings under our 2006 Credit Agreement, offset by the cash proceedsreceived and tax benefits realized from the exercise of stock options.

Our liquidity and available cash resources are in partrestricted by the regulatory requirements of our operating subsidiariesincluding GFI Securities LLC, GFI Securities Limited, GFI Brokers Limited, GFI(HK) Securities LLC and GFI Group Pte Ltd. GFI Securities LLC is subject toregulatory capital requirements under the Exchange Act and the CommodityExchange Act. GFI Securities Limited and GFI Brokers Limited are subject to theregulated capital requirements of the FSA. GFI (HK) Securities LLC is subjectto the regulated capital requirements of the Securities and Futures Commissionin Hong Kong. GFI Group PTE Ltd. is subject to the regulatory compliancerequirements with the Monetary Authority of Singapore. At March 31, 2006,GFI Securities LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK)Securities LLC and GFI Group PTE Ltd. were in compliance with their respectiveregulatory 

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capital requirements. SeeNote 11 to the condensed consolidated financial statements for furtherdiscussion.

Although we have no material commitments for capitalexpenditures, we anticipate that we will experience a substantial increase inour capital expenditures and lease commitments consistent with our anticipatedgrowth in operations, infrastructure and personnel. We currently anticipatethat we will continue to experience significant growth in our operatingexpenses for the foreseeable future and that our operating expenses will be amaterial use of our cash resources.

We believe that, based oncurrent levels of operations and anticipated growth, our cash from operations,together with cash currently available and the available borrowings under our2006 Credit Facility, will be sufficient to fund our operations for at leastthe next twelve months. Poor financial results, unanticipated expenses,unanticipated acquisitions or unanticipated strategic investments could giverise to additional financing requirements sooner than we expect. There can beno assurance that equity or debt financing will be available when needed or, ifavailable, that the financing will be on terms satisfactory to us and notdilutive to our then-current stockholders.

**ContractualObligations and Commitments**

Our contractual obligations and off-balance sheetentities are described in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contained in our 2005 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those obligations or arrangements during the three monthsended March 31, 2006.

In February 2006, we ceased using our leasedoffice located on Christopher Street in the U.K. The lease provides for anearly termination option without penalty in February 2008. Consequently,we recorded the remaining rent plus other charges of £463 (approximately $801)during the first quarter of 2006.

In addition, we havevarious unconditional purchase obligations. Certain of these obligations arefor the purchase of quotes from a number of information service providersduring the normal course of business. As of March 31, 2006, we had totalpurchase commitments for quotes of approximately $14.6 million, with $9.5million due within the next twelve months and $5.1 million due between one totwo years.

**Off-Balance SheetArrangements**

The Company did not haveany off-balance sheet arrangements at March 31, 2006.

**Critical AccountingPolicies and Estimates**

We have disclosed in Note2 to our condensed consolidated financial statements and in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in our 2005 Form 10-K those accounting policies that weconsider to be significant in determining our results of operations andfinancial condition. There have been no material changes to those policies thatwe consider to be significant from our 2005 Form 10-K. Theaccounting principles utilized by us in preparing our condensed consolidatedfinancial statements conform in all material respects to generally acceptedaccounting principles in the United States of America.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISLCOSURES ABOUT MARKET RISK

Our quantitative andqualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2005 

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Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those market risks during the three months ended March 31,2006.

**Foreign CurrencyExposure Risk**

We are exposed to market riskassociated with movements in foreign currency exchange rates. There havebeen no material changes to our risk management policy during the three monthsended March 31, 2006.

At March 31, 2006, we had outstanding foreignexchange derivative contracts to purchase and sell foreign currency thatqualified as foreign currency cash flow hedges under SFAS 133 with notionalamounts translated into U.S. Dollars of $110.9 million. At March 31, 2006,the net fair value of these contracts was minimal. At March 31, 2006, ifthe Euro strengthened by 10% against the U.S. Dollar and the U.S. Dollarstrengthened by 10% against the British Pound, it would decrease the fair valueof these contracts and, as a result, accumulated other comprehensive incomewould decrease by approximately $6.5 million, net of tax.

While our internationalresults of operations, as measured in U.S. dollars, are subject to foreignexchange rate fluctuations, we do not consider the related risk to be materialto our results of operations. If the Euro strengthened by 10% against the U.S.Dollar and the U.S. Dollar strengthened by 10% against the British Pound, thenet impact to our net income would have been a reduction of approximately $2.7million.

**ITEM 4.**                CONTROLSAND PROCEDURES

As of the end of the period covered by this report,the Company’s management carried out an evaluation, under the supervision andwith the participation of our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on the foregoing, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport in providing a reasonable level of assurance that information we arerequired to disclose in reports we file or furnish under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

In addition, the Company’s management, including theCompany’s Chief Executive Officer and Chief Financial Officer, has evaluatedthe Company’s internal controls over financial reporting and determined thatthere have been no changes in our internal controls over financial reportingduring the first quarter of 2006 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

In the normal course of business, we are and have beenparty to, or otherwise involved in, litigations, claims and arbitrations thatinvolve claims for substantial amounts. These proceedings have generallyinvolved either competitor claims in connection with new employee hires, orclaims from former employees in connection with the termination of theiremployment from us. We believe proceedings of these types are common in theinter-dealer brokerage industry due to its highly competitive nature. There isalso potential for client claims alleging the occurrence of errors in theexecution of brokerage transactions. We are also currently and will, in thefuture, be involved, in examinations, investigations or proceedings bygovernment agencies and self-regulatory organizations. These examinations orinvestigations could result in substantial fines or administrative proceedingsthat could result in censure, the issuance of cease and desist orders, thesuspension or expulsion of a broker dealer and its affiliated persons, officersor employees or other similar consequences. Among these examinations andproceedings, we are currently being examined by the NASD for potentialviolations of the NASD’s rules relating to registration of one individualon one of our brokerage desks and the supervision of that individual. We or ouremployees, including our officers, may be subject to censure, fines,suspensions or other sanctions as a result of this examination.

Although the ultimateoutcome of these proceedings cannot be ascertained at this time, afterconsultation with counsel, we believe that damages, if any, resulting from suchproceedings will not, in the aggregate, have a material adverse effect on ourfinancial condition, but may be material to our operating results for anyparticular period or may affect our reputation.

**ITEM 1A.**        RISKFACTORS

There have been nomaterial changes in our risk factors from those disclosed in the 2005 Form 10-K.See “Risk Factors” in Part I, Item 1A of the 2005 Form 10-K.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Underour 2004 Equity Incentive Plan, we allow employees to elect to have us withholdshares of common stock to satisfy minimum statutory tax withholding obligationsarising on the vesting and settlement of restricted stock units. When wewithhold these shares, we are required to remit to the appropriate taxingauthorities the market price of the shares withheld, which could be deemed apurchase of the shares of common stock by us on the date of withholding. Duringthe quarter ended March 31, 2006, we withheld shares of common stock to satisfytax withholding obligations as follows:

| **Date** | ** ** | ** ** | ** ** | **No. of Shares** | ** ** | **Average Market Price** | ** ** |
|----------|------------|------------|------------|-----------------------------|------------|------------------------------------|------------|
| January  |       |       | 15,426     |                        |       |                               | $          | 51.28 |   |   |
| February |       |       | —     |                        |       |                               | —     |   |   |
| March    |       |       | 116        |                        |       |                               | 51.22      |   |   |

 

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**ITEM 6.**                EXHIBITS

Exhibits:

| Exhibit No. | ** ** | ** **                                                                                                                                    | ** ** | **Description** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 15               |       | Letter  re: Unaudited Interim Financial Information                                                                                           |
| 31.1             |       | Certification  of Principal Executive Officer.                                                                                                |
| 31.2             |       | Certification  of Principal Financial Officer.                                                                                                |
| 32.1             |       | Written  Statement of Chief Executive Officer Pursuant to Section 9.06 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
| 32.2             |       | Written Statement of  Chief Financial Officer Pursuant to Section 9.06 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350). |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this Quarterly Report on Form 10-Qfor the three months ended March 31, 2006 to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 15th day of May, 2006.
|        | GFI GROUP INC. |
|--------|---------------------|
|   | By:                 | /s/ JAMES A. PEERS |
|   | Name:               | James A. Peers |
|   | Title:              | *Chief Financial Officer   (principal financial and accounting officer)* |

 

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**Exhibit Index**
| Exhibit No. | ** ** | ** **                                                                                                                                    | ** ** | **Description** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 15               |       | Letter re: Unaudited  Interim Financial Information                                                                                           |
| 31.1             |       | Certification of  Principal Executive Officer.                                                                                                |
| 31.2             |       | Certification of  Principal Financial Officer.                                                                                                |
| 32.1             |       | Written Statement of  Chief Executive Officer Pursuant to Section 9.06 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350). |
| 32.2             |       | Written Statement of Chief Financial Officer  Pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (18  U.S.C. Section 1350). |

 

 

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