** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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**(MarkOne)**

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**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

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**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2008**

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**OR**

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**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**FORTHE TRANSITION PERIOD FROM                TO**

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**CommissionFile No: 000-51103**

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**GFI GROUP INC.**

(Exact name ofregistrant as 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 telephonenumber, including area code: **(212) 968-4100**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.   YES x     NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large accelerated filer x                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

The number of shares of registrant’s commonstock outstanding on April 30, 2008 was 117,599,384.

 

 

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**Tableof Contents**

 
| **Part I—Financial Information** |
|--------------------------------------------|
|                                       |   |   |   |
| Item 1.                                    | Financial  Statements |   | 4 |
|                                       | Condensed Consolidated Statements of Financial  Condition as of March 31, 2008 (unaudited) and December 31, 2007 |   | 4 |
|                                       | Condensed Consolidated Statements of Income for the  three months ended March 31, 2008 (unaudited) and March 31, 2007  (unaudited) |   | 5 |
|                                       | Condensed Consolidated Statements of Comprehensive  Income for the three months ended March 31, 2008 (unaudited) and  March 31, 2007 (unaudited) |   | 6 |
|                                       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2008 (unaudited) and March 31,  2007 (unaudited) |   | 7 |
|                                       | Notes to  Condensed Consolidated Financial Statements (unaudited) |   | 8 |
| Item 2.                                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 26 |
| Item 3.                                    | Quantitative  and Qualitative Disclosures About Market Risk |   | 41 |
| Item 4.                                    | Controls and  Procedures |   | 42 |
| **Part II—Other  Information**   |
|                                       |   |   |   |
| Item 1.                                    | Legal Proceedings |   | 42 |
| Item 1A.                                   | Risk Factors |   | 43 |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 43 |
| Item 4.                                    | Submission  of Matters to a Vote of Security Holders |   | 44 |
| Item 6.                                    | Exhibits |   | 44 |

 

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** **

**AvailableInformation**

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Our Internet websiteaddress is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the Securities and Exchange Commission (the “SEC”):our annual reports on Form 10-K; our proxy statements for our annual andspecial stockholder meetings; our quarterly reports on Form 10-Q; ourcurrent reports on Form 8-K; Forms 3, 4 and 5 filed on behalf ofdirectors and executive officers; and amendments to those reports filed orfurnished pursuant to Section 13(a) of the Securities Exchange Act of1934, as amended (the ‘‘Exchange Act’’).

 

Information relating tothe corporate governance of the Company is also available on our website,including information concerning our directors, board committees, includingcommittee charters, our code of business conduct and ethics for all employeesand for senior financial officers and our compliance procedures for accountingand auditing matters. In addition, the Investor Relations page of ourwebsite includes supplemental financial information that we make available fromtime to time.

 

Our Internet website andthe information contained therein or connected thereto are not incorporatedinto this Quarterly Report on Form 10-Q.

 

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**PART I—FINANCIALINFORMATION**

** **

**ITEM 1.**                   FINANCIALSTATEMENTS

** **

**GFIGROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(In thousands, exceptshare and per share amounts)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                                     |       | $                  | 268,160    |                  | $          | 240,393 |   |
| Deposits with  clearing organizations                                                                                                                                          |       | 8,820              |       | 8,462                 |       |
| Accrued  commissions receivable, net of allowance for doubtful accounts of $3,289 and  $4,173 at March 31, 2008 and December 31, 2007, respectively                  |       | 213,503            |       | 169,119               |       |
| Receivables from  brokers, dealers and clearing organizations                                                                                                                  |       | 342,197            |       | 317,849               |       |
| Property,  equipment and leasehold improvements, net of depreciation and amortization of  $85,917 and $79,824 at March 31, 2008 and December 31, 2007,  respectively |       | 67,722             |       | 56,142                |       |
| Goodwill                                                                                                                                                                       |       | 200,021            |       | 93,709                |       |
| Intangible  assets, net                                                                                                                                                        |       | 48,556             |       | 11,981                |       |
| Other assets                                                                                                                                                                   |       | 88,545             |       | 78,159                |       |
| TOTAL ASSETS                                                                                                                                                                   |       | $                  | 1,237,524  |                  | $          | 975,814 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                  | ** ** | ** **         | ** ** | ** **            | ** ** |
| LIABILITIES                                                                                                                                                                    |       |               |       |                  |       |
| Accrued  compensation                                                                                                                                                          |       | $                  | 133,774    |                  | $          | 174,472 |   |
| Accounts payable  and accrued expenses                                                                                                                                         |       | 46,769             |       | 40,287                |       |
| Payables to  brokers, dealers and clearing organizations                                                                                                                       |       | 225,326            |       | 194,736               |       |
| Long-term  obligations, net                                                                                                                                                    |       | 59,403             |       | —                |       |
| Notes payable,  net                                                                                                                                                            |       | 187,095            |       | 55,291                |       |
| Other  liabilities                                                                                                                                                             |       | 117,597            |       | 58,835                |       |
| Total  Liabilities                                                                                                                                                             |       | $                  | 769,964    |                  | $          | 523,621 |   |
| Commitments and contingencies                                                                                                                                                  |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                      |       |               |       |                  |       |
| Preferred stock,  $0.01 par value; 5,000,000 shares authorized, none outstanding at  March 31, 2008 and December 31, 2007                                            |       | —             |       | —                |       |
| Common stock,  $0.01 par value; 400,000,000 shares authorized; 118,592,783 and 118,190,376  shares issued at March 31, 2008 and December 31, 2007,  respectively(1)  |       | 1,186              |       | 1,182                 |       |
| Additional paid  in capital (1)                                                                                                                                                |       | 267,339            |       | 262,006               |       |
| Retained  earnings                                                                                                                                                             |       | 217,573            |       | 196,284               |       |
| Treasury stock,  996,236 and 400,000 common shares at cost, at March 31, 2008 and  December 31, 2007, respectively (1)                                               |       | (18,476            | )          | (7,076                | )          |
| Accumulated other  comprehensive loss                                                                                                                                          |       | (62                | )          | (203                  | )          |
| Total  Stockholders’ Equity                                                                                                                                               |       | 467,560            |       | 452,193               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                |       | $                  | 1,237,524  |                  | $          | 975,814 |   |

 

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(1) Restatedto reflect the four-for-one stock split effected on March 31, 2008.

 

See notes to condensedconsolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(Inthousands except share and per share amounts)**

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| REVENUES:                                 |       |                                                 |       |   |   |
| Brokerage  revenues:                      |       |                                                 |       |   |   |
| Agency  commissions                       |       | $                                                    | 239,089    |   | $ | 184,525 |   |
| Principal  transactions                   |       | 59,094                                               |       | 48,377 |   |
| Total brokerage  revenues                 |       | 298,183                                              |       | 232,902 |   |
| Analytics and  market data                |       | 11,259                                               |       | 5,326 |   |
| Interest income                           |       | 2,683                                                |       | 2,102 |   |
| Other income  (loss)                      |       | 2,475                                                |       | (13 | ) |
| Total Revenues                            |       | 314,600                                              |       | 240,317 |   |
| EXPENSES:                                 |       |                                                 |       |   |   |
| Compensation and  employee benefits       |       | 193,198                                              |       | 151,508 |   |
| Communications  and market data           |       | 11,181                                               |       | 10,456 |   |
| Travel and  promotion                     |       | 11,723                                               |       | 8,836 |   |
| Rent and occupancy                        |       | 6,614                                                |       | 5,561 |   |
| Depreciation and  amortization            |       | 7,922                                                |       | 5,227 |   |
| Professional  fees                        |       | 5,012                                                |       | 3,569 |   |
| Clearing fees                             |       | 11,202                                               |       | 7,529 |   |
| Interest                                  |       | 3,085                                                |       | 1,849 |   |
| Other expenses                            |       | 7,092                                                |       | 4,649 |   |
| Total Expenses                            |       | 257,029                                              |       | 199,184 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 57,571                                               |       | 41,133 |   |
| PROVISION FOR  INCOME TAXES               |       | 21,589                                               |       | 16,453 |   |
| NET INCOME                                |       | $                                                    | 35,982     |   | $ | 24,680 |   |
| EARNINGS PER  SHARE                       |       |                                                 |       |   |   |
| Basic                                     |       | $                                                    | 0.31       |   | $ | 0.21 |   |
| Diluted                                   |       | $                                                    | 0.30       |   | $ | 0.21 |   |
| WEIGHTED AVERAGE  SHARES OUSTANDING:      |       |                                                 |       |   |   |
| Basic                                     |       | 117,736,242                                          |       | 115,176,794 |   |
| Diluted                                   |       | 119,975,020                                          |       | 118,111,251 |   |

 

See notes to condensedconsolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**

**(Inthousands)**

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| NET INCOME                                                    |       | $                                                | 35,982     |   | $ | 24,680 |   |
| OTHER COMPREHENSIVE INCOME (LOSS):                            |       |                                             |       |   |   |
| Foreign currency  translation adjustment, net of tax          |       | (450                                             | )          | (36 | ) |
| Unrealized gain  on available-for-sale securities, net of tax |       | 591                                              |       | — |   |
| COMPREHENSIVE INCOME                                          |       | $                                                | 36,123     |   | $ | 24,644 |   |

 

See notes to condensedconsolidated financial statements

 

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**GFIGROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Inthousands)**

** **
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 35,982     |   | $ | 24,680 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                  |       |   |   |
| Depreciation and  amortization                                                     |       | 7,922                                 |       | 5,227 |   |
| Provision for  doubtful accounts                                                   |       | (744                                  | )          | 638 |   |
| Deferred  compensation                                                             |       | 7,203                                 |       | 4,064 |   |
| (Benefit from)  provision for deferred taxes                                       |       | (173                                  | )          | 410 |   |
| Loss on  derivative contracts                                                      |       | 10,958                                |       | 870 |   |
| Tax benefit  related to share-based compensation                                   |       | (1,162                                | )          | (2,979 | ) |
| Other non-cash  charges, net                                                       |       | 373                                   |       | 370 |   |
| (Increase) decrease in operating assets:                                           |       |                                  |       |   |   |
| Deposits with  clearing organizations                                              |       | (358                                  | )          | (73 | ) |
| Accrued  commissions receivable                                                    |       | (34,936                               | )          | (39,215 | ) |
| Receivables from  brokers, dealers and clearing organizations                      |       | (24,348                               | )          | (153,877 | ) |
| Other assets                                                                       |       | (79                                   | )          | 3,844 |   |
| Increase (decrease) in operating liabilities:                                      |       |                                  |       |   |   |
| Accrued  compensation                                                              |       | (40,698                               | )          | (21,783 | ) |
| Accounts payable  and accrued expenses                                             |       | 876                                   |       | (674 | ) |
| Payables to  brokers, dealers and clearing organizations                           |       | 30,591                                |       | 158,439 |   |
| Other  liabilities                                                                 |       | 50,322                                |       | 27,957 |   |
| Cash provided by  operating activities                                             |       | 41,729                                |       | 7,898 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                  |       |   |   |
| Net cash used  for business acquisitions                                           |       | (149,856                              | )          | (2,756 | ) |
| Purchases of  other investments, net                                               |       | (2,934                                | )          | (106 | ) |
| Purchase of  property, equipment and leasehold improvements                        |       | (17,040                               | )          | (5,980 | ) |
| Disbursements  from foreign exchange derivative contracts                          |       | (8,333                                | )          | (626 | ) |
| Cash used in  investing activities                                                 |       | (178,163                              | )          | (9,468 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                  |       |   |   |
| Repayment of  notes payable                                                        |       | (99,500                               | )          | (30,000 | ) |
| Net proceeds  from notes payable and senior secured notes                          |       | 291,500                               |       | 15,000 |   |
| Payment of loan  fees                                                              |       | (883                                  | )          | — |   |
| Cash dividends  paid                                                               |       | (14,693                               | )          | — |   |
| Repurchases of  common stock                                                       |       | (11,401                               | )          | — |   |
| Proceeds from  exercises of stock options                                          |       | 83                                    |       | 1,953 |   |
| Cash paid for  taxes on vested restricted stock units                              |       | (1,617                                | )          | (1,267 | ) |
| Tax benefit  related to share-based compensation                                   |       | 1,162                                 |       | 2,979 |   |
| Cash provided  by/(used in) financing activities                                   |       | 164,651                               |       | (11,335 | ) |
| Effects of foreign currency translation adjustment                                 |       | (450                                  | )          | (36 | ) |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   |       | 27,767                                |       | (12,941 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 240,393                               |       | 181,484 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                     | 268,160    |   | $ | 168,543 |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                  |       |   |   |
| Interest paid                                                                      |       | $                                     | 2,336      |   | $ | 2,021 |   |
| Income taxes paid, net of refunds                                                  |       | $                                     | 7,942      |   | $ | 5,761 |   |

 

See notes to condensedconsolidated financial statements

 

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**(Inthousands except share and per share amounts)**

 

**1.ORGANIZATION AND BUSINESS**

 

The condensedconsolidated financial statements include the accounts of GFI Group Inc.and its subsidiaries (collectively the “Company”). The Company, through itswholly-owned subsidiary GFInet inc. (“GFInet”), provides brokerage services,market data and analytics software products to institutional clients in marketsfor a range of credit, financial, equity and commodity instruments. The Companycomplements its brokerage capabilities with value-added services, such as dataand analytics 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 (HK)Brokers Ltd., GFI Group PTE Ltd., GFI Korea Money Brokerage Limited, AmerexBrokers LLC, Fenics Limited and subsidiaries (“Fenics”) and Trayport Limited (“Trayport”).As of March 31, 2008, Jersey Partners, Inc. (“JPI”) ownsapproximately 43% of the Company’s outstanding shares of common stock. TheCompany’s chief executive officer, Michael Gooch, is the controllingshareholder of JPI.

 

**2.****   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation****—*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 theconsolidated financial statements. Management believes that the estimatesutilized in the preparation of the consolidated financial statements arereasonable and prudent. Actual results could differ materially from theseestimates.

 

All material intercompany transactions and balanceshave been eliminated.

 

Thecondensed consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2007 (the “2007 Form 10-K”). The condensed consolidated financialstatements reflect all adjustments that are, in the opinion of management,necessary for the fair statement of the results for the interim period. Theresults of operations for interim periods are not necessarily indicative ofresults for the entire year.

 

***Brokerage Transactions****—*The Company provides brokerage servicesto its clients in the form of either agency or principal transactions.

 

***Agency Commissions****—*In agency transactions, the Companycharges commissions for executing transactions between buyers and sellers.Agency commissions revenues and related expenses are recognized on a trade datebasis.

 

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

 

***Principal Transactions****—*Principal transactions 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 limited number of brokerage desksare allowed to enter into unmatched principal transactions in the ordinary courseof business for the purpose of facilitating clients’ execution needs fortransactions initiated by such clients, adding liquidity to a market orattracting additional order flow. These unmatched positions are intended to beheld short term. The Company earns revenue from principal transactions on thespread between the buy and sell price of the security that is brokered.

 

Additionally, from time to time, under thecircumstances described above, if a transaction fails to settle on a timelybasis or if a customer defaults on its obligations, the Company may holdsecurities positions overnight. These positions are marked to market on a dailybasis. Principal transactions revenues and related expenses are recognized on atrade date basis.

 

***Analytics and Market Data****—* Analytics revenue consists primarily offees for Fenics pricing tools and Trayport electronic trading software productson a subscription basis, which is generally ranging from one to two years.Market data revenue primarily consists of subscription fees and fees fromcustomized one-time sales. Subscription fees are recognized on a straight-linebasis over the term of the subscription period, which ranges from one to twoyears. Market data revenue from customized one-time sales is recognized upon deliveryof the data.

 

The Company markets itsanalytics, market data and software products through its direct sales forceand, in some cases, indirectly through resellers. In general, the Company’slicense agreements for its analytics and data products do not provide for aright of return.

 

***Goodwill and Intangible Assets****—*Goodwill represents the excess of thepurchase price allocation over the fair value of tangible and identifiableintangible net assets acquired. In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142,*Goodwilland Intangible Assets*, goodwill and intangible assets withindefinite lives are no longer amortized, but instead are tested for impairmentannually or more frequently if circumstances indicate impairment may haveoccurred. In the event the Company determines that the value of goodwill hasbecome impaired, it will incur a charge for the amount of impairment during thefiscal quarter in which such determination is made. The Company has selected January 1stas the date to perform the annual impairment test. Intangible assets withdefinite lives are amortized on a straight-line basis over their estimateduseful lives.

 

***Derivative Financial Instruments****—* The Company uses foreign exchangederivative contracts to reduce the effects of fluctuations in certainreceivables and payables denominated in foreign currencies. For the quarterended March 31, 2008 and year ended December 31, 2007, none of thesecontracts were designated as foreign currency cash flow hedges under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended (“SFAS No. 133”). Contracts thatare not designated as foreign currency cash flow hedges are recorded at fairvalue and all realized and unrealized gains and losses are included in otherincome in the Condensed Consolidated Statements of Income.

 

***Foreign Currency Translation Adjustments and Transactions****—*Assets and liabilities of foreignsubsidiaries having non-U.S. dollar functional currencies are translated at theperiod end rates of 

 

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

 

exchange, and revenue andexpenses are translated at the average rates of exchange for the period. Gainsor losses 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.

 

***Income Taxes—***In accordance with SFAS No. 109,*Accounting for Income Taxes*, the Companyprovides for income taxes using the asset and liability method under whichdeferred income taxes are recognized for the estimated future tax effectsattributable to temporary differences and carry-forwards that result from eventsthat have been recognized either in the financial statements or the income taxreturns, but not both. The measurement of current and deferred income taxliabilities and assets is based on provisions of enacted tax laws. Valuationallowances are recognized if, based on the weight of available evidence, it ismore likely than not that some portion of the deferred tax assets will not berealized.  Effective January 1,2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*,*an interpretation of SFAS No. 109*(“FIN48”).  It is the Company’s policy toprovide for uncertain tax positions and the related interest and penaltiesbased upon management’s assessment of whether a tax benefit is more likely thannot to be sustained upon examination by tax authorities.

 

***Share-Based Compensation****—****The***Company’sshare-based compensation consists of stock options and restricted stock units(the “RSUs”). The Company follows SFAS No. 123(R), *Share-Based Payment*(“SFAS 123(R)”) toaccount for its stock-based compensation. SFAS 123(R) revised thefair value-based method of accounting for share-based payment liabilities,forfeitures and modifications of stock-based awards and clarified guidance inseveral areas, including measuring fair value, classifying an award as equityor as a liability and attributing compensation cost to service periods.Additionally, under SFAS 123(R), actual tax benefits recognized in excess oftax benefits previously established upon grant are reported as a financing cashflow, as opposed to operating cash flows.  In recent periods, the only share-based compensation issued by theCompany has been RSUs.  The Companyrecords the fair value of the RSUs at the date of grant as deferred compensationand amortizes it to compensation expense over the vesting period of the grants.

 

***Recent Accounting Pronouncements***

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue and requires enhanced disclosures about fair value measurements.  SFAS 157 requires companies to disclose thefair value of its financial instruments according to a fair value hierarchy, asdefined.  Additionally, companies arerequired to provide enhanced disclosure for certain financial instrumentswithin the hierarchy, including a reconciliation of the beginning and endingbalances separately for each major category of assets and liabilities.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FASBStaff Position No. FAS 157-2 (“FSP 157-2”) which delays the effective dateof SFAS 157 for all nonfinancial assets and liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually) to fiscal years beginning after November 15,2008, and interim periods within those fiscal years for items within the scopeof FSP 157-2. The Company adopted SFAS 157 on January 1, 2008 except as itapplies to those nonfinancial assets and liabilities within the scope of FSP157-2.  The adoption of SFAS 157 as itrelates to the financial assets and liabilities did not have a material impacton the Company’s consolidated financial statements.  See Note 11 for further details.  The Company will adopt SFAS 157 for those 

 

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

 

nonfinancial assets andliabilities as noted in FSP 157-2 on January 1, 2009.  The Company is currently evaluating theimpact of adopting SFAS 157 for nonfinancial assets and liabilities will haveon its consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS 159 provides a “Fair Value Option” under which a company mayirrevocably elect fair value as the initial and subsequent measurementattribute for certain financial assets and liabilities. This Fair Value Optionwill be available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur.  The Company adopted SFAS 159 on January 1, 2008 and did not electto apply the fair value option to any specific financial assets orliabilities.  The adoption of SFAS 159did not have a material impact on the Company’s condensed consolidatedfinancial statements.

 

In December 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No.51*(“SFAS 160”).  SFAS 160 requiresreporting entities to present noncontrolling (minority) interests as equity (asopposed to as a liability or mezzanine equity) and provides guidance on theaccounting for transactions between an entity and noncontrolling interests.  SFAS 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwill be adopted by the Company on January 1, 2009.  The Company is currently evaluating theimpact of adopting SFAS 160 on its consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R), *BusinessCombinations (revised 2007)* (“SFAS 141(R)”).  SFAS 141(R) requires the acquiringentity in a business combination to recognize the full fair value of assetsacquired and liabilities assumed in the transaction (whether a full or partialacquisition); establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; requires theexpensing of most transaction and restructuring costs; and requires theacquirer to disclose to investors and other users all of the information neededto evaluate and understand the nature and financial effect of the businesscombination.  SFAS 141(R) applies toall transactions or other events in which the Company obtains control of one ormore businesses, including those sometimes referred to as “true-mergers” or “mergersof equals” and combinations achieved without the transfer of consideration, forexample, by contract alone or through the lapse of minority veto rights.  SFAS 141(R) is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwill be adopted by the Company on January 1, 2009.  The Company is currently evaluating theimpact of adopting SFAS 141(R) on its consolidated financial statements.

 

In March 2008, the Financial Accounting Standards Board issusedSFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS No. 161”).  SFAS No. 161 amends and expands thedisclosure requirements of SFAS No. 133 and requires entities to provideenhanced qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair values and amounts of gainsand losses on derivative contracts, and disclosures about credit-risk relatedcontingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued forfiscal years and interim period beginning after November 15, 2008 and willbe adopted by the Company on January 1, 2009.  The Company is currently evaluating theimpact of adopting SFAS No. 161 on its consolidated financial statements.

 

11

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

 

**3.            RECEIVABLES FROM AND PAYABLES TOBROKERS, DEALERS AND CLEARING ORGANIZATIONS**

 
| ** **                                                     | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Receivables  from brokers, dealers and clearing organizations: |       |                     |       |                        |       |
| Contract  value of fails to deliver                            |       | $                        | 287,528    |                        | $          | 272,885 |   |
| Balance  receivable from clearing organizations                |       | 54,669                   |       | 44,964                      |       |
| Total                                                          |       | $                        | 342,197    |                        | $          | 317,849 |   |
| Payables  to brokers, dealers and clearing organizations:      |       |                     |       |                        |       |
| Contract  value of fails to receive                            |       | $                        | 212,738    |                        | $          | 185,404 |   |
| Payable  to financial institutions                             |       | 9,640                    |       | 8,882                       |       |
| Balance  payable to clearing organizations                     |       | 2,948                    |       | 450                         |       |
| Total                                                          |       | $                        | 225,326    |                        | $          | 194,736 |   |

 

12

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

 

**Substantially all open fail to deliver and fail to receivetransactions at March 31, 2008 and December 31, 2007 have subsequentlysettled at the contracted amounts.**

** **

**4.**              GOODWILL ANDINTANGIBLE ASSET

** **

**On January 31, 2008, the Company completed theacquisition of substantially all of the outstanding shares of Trayport, aleader provider of real-time electronic trading software for brokers, exchangesand traders in the commodities, fixed income, currencies and equititiesmarkets, for approximately**85,365 (or approximately $169,663), including cash acquired of 7,357 (or approximately $14,621) and 1,323 (or approximately $2,630) of direct transaction costs related tothe acquisition. Additionally, £2,356 (or approximately $4,682) of the purchaseprice was paid in short-term loan notes, payable within one year.  Included as part of the purchase price is£7,287 (or approximately $14,482) that was deposited into an escrow accountwith a third-party escrow agent as collateral for the indemnificationobligations of certain of the former Trayport shareholders.  Any amounts remaining in the escrow accountat March 31, 2009 that are not subject to pending claims will bedistributed to the former Trayport shareholders.  The purchase price is subject to finalworking capital adjustments, which are not expected to be material.  The Company financed the transaction withproceeds of the private placement of senior secured notes and amounts drawnunder its Credit Agreement, as defined in Note 5.  See Note 5 below for further discussion ofthe senior secured notes and credit facility.

** **

**This acquisition was accounted for as a purchase businesscombination.  Assets acquired wererecorded at their fair value as of January 31, 2008.  The results of the acquired company have beenincluded in the condensed consolidated financial statements sinceacquisition.  Management determined thefair value of the identifiable intangible assets acquired based upon anindependent valuation model. The purchase price allocation, as presented below,was translated into U.S. dollars based on the foreign exchange rate on January 31,2008:**

 
| ** **                                  | ** ** | ** ** | ** ** | **Useful Life** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|
| *Assets:*                                   |       |       |       |                 |       |
| Cash                                        |       | $          | 14,621     |                 |       |   |
| Accounts  receivable                        |       | 8,704      |       |                 |       |
| Property and  equipment                     |       | 469        |       |                 |       |
| Software  inventory                         |       | 6,587      |       |                 |       |
| Intangible  assets subject to amortization- |       |       |       |                 |       |
| Trade name                                  |       | 3,657      |       | 10 Years             |       |
| Customer  relationships                     |       | 33,243     |       | 15 Years             |       |
| Non compete agreement                       |       | 839        |       | 4 Years              |       |
| Other assets                                |       | 481        |       |                 |       |
| Goodwill                                    |       | 106,312    |       |                 |       |
| Total assets  acquired                      |       | $          | 174,913    |                 |       |   |
|                                        |       |       |       |                 |       |
| Total  liabilities assumed                  |       | 5,250      |       |                 |       |
|                                        |       |       |       |                 |       |
| Net Assets  Acquired                        |       | $          | 169,663    |                 |       |   |

 

Total acquired intangibleassets that are subject to amortization totaled $37,739 and have aweighted-average useful life of approximately 14 years.

 

13

----

** **

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

 

**Changes in the carrying amount of the Company’s goodwillfor the three months ended March 31, 2008 were as follows:**

 
| ** **                            | ** ** | **Brokerage** | ** ** | **All Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------------|------------|-----------|------------|
| Balance as of  December 31, 2007 |       | $             | 80,816     |               | $          | 12,893    |       | $ | 93,709 |   |
| Goodwill  acquired during the year    |       | —        |       | 106,312            | ** ** | 106,312   | ** ** |
| Balance as of  March 31, 2008    |       | $             | 80,816     |               | $          | 119,205   |       | $ | 200,021 |   |

** **

**During the first quarter of 2008, the Company completed theannual goodwill impairment test that is required by SFAS 142.  The results of the testing did not indicateany goodwill impairment.**

** **

TheCompany had the following intangible assets as of March 31, 2008 and December 31,2007:

 
| ** **                     | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Gross intangible  assets       |       |                         |       |                            |       |
| Customer  base/relationships   |       | $                            | 46,281     |                            | $          | 13,039 |   |
| Trade name                     |       | 7,771                        |       | 4,114                           |       |
| Core technology                |       | 3,230                        |       | 3,230                           |       |
| Covenants not to  compete      |       | 3,184                        |       | 2,345                           |       |
| Favorable lease  agreements    |       | 620                          |       | 620                             |       |
| Propriety  knowledge           |       | 110                          |       | 110                             |       |
| Patent                         |       | 32                           |       | 32                              |       |
| Total gross  intangible assets |       | 61,228                       |       | 23,490                          |       |
| Accumulated  amortization      |       | (12,672                      | )          | (11,509                         | )          |
| Net intangible  assets         |       | $                            | 48,556     |                            | $          | 11,981 |   |

 

Amortizationwas $1,163 and $1,024 for the three months ended March 31, 2008 and 2007,respectively.  At March 31, 2008, theexpected amortization expense for the definite lived intangible assets is asfollows:

 
| 2008 (remaining nine months) |   | $     |  4,118 |   |
|---------------------------------------------|--------|-------|-------------|--------|
| 2009                                        |   | 5,429 |        |
| 2010                                        |   | 5,381 |        |
| 2011                                        |   | 5,175 |        |
| 2012                                        |   | 4,015 |        |
| Total                                       |   | $     | 24,118      |   |

** **

**5.**              LONG-TERMOBLIGATIONS AND NOTES PAYABLE

** **

In January 2008,pursuant to a note purchase agreement with certain institutional investors (the“2008 Note Purchase Agreement”), the Company issued $60,000 in aggregateprincipal amount of senior secured notes due in January 2013 (the “SeniorNotes”) in a private placement.  TheSenior Notes bear interest at 7.17%, payable semi-annually in arrears on the 30thof January and July. The Company’s obligations under the Senior Notes issecured by substantially all of the assets of the Company and certain assets ofthe Company’s subsidiaries.  The 2008Note Purchase Agreement includes operational covenants with which the Companyis required to comply, including among others, maintenance of certain financialratios and 

 

14

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

 

restrictions on additional indebtedness, liens and dispositions.  At March 31, 2008, the Senior Notes wererecorded net of deferred financing costs of $597.

 

InJanuary 2008, the Company amended the terms of its credit agreement withBank of America, N.A. and certain other lenders to increase the maximumpermitted borrowings by $105,000 to $265,000. The credit agreement, as amended(the “Credit Agreement”), modified certain definitions and covenants, includingcertain financial covenants and approved the issuance by the Company of seniorsecured notes in an aggregate principal amount of up to $150,000.  The Credit Agreement provides for such notesto rank pari passu with the commitments under the Credit Agreement, in relationto the security provided.

 

The Company hadoutstanding borrowings under its Credit Agreement as of March 31, 2008 andDecember 31, 2007:

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Loan Available  (1)            |       | $                  | 265,000    |                  | $          | 160,000 |   |
| Loans  Outstanding             |       | $                  | 188,000    |                  | $          | 56,000 |   |
| Letters of  Credit Outstanding |       | $                  | 7,172      |                  | $          | 7,193 |   |

 

----

(1)     Amounts availableinclude up to $50,000 for letters of credit as of March 31, 2008 and December 31,2007.

 

The weighted averageinterest rate of the outstanding loans was 3.47% and 5.84% at March 31,2008 and December 31, 2007, respectively. At March 31, 2008 andDecember 31, 2007, notes payable were recorded net of unamortized loanfees of $904 and $709, respectively.

 

**6.**              STOCKHOLDERS’EQUITY

** **

On January 11, 2008,at a special meeting of stockholders, the stockholders of the Company approvedan amendment to the Company’s Second Amended and Restated Certificate of Incorporation to increase the amountof Authorized Common Stock from 100,000,000 shares to 400,000,000 shares.

 

On March 31, 2008,the Company effected a four-for-one split of the Company’s common stock.  Accordingly, all historical share and pershare data have been retroactively restated in the accompanying condensedconsolidated financial statements. Additionally, the par value of the additional shares resulting from thesplit were reclassified from additional paid-in-capital to common stock.

 

Duringthe first quarter of 2008, the Company repurchased 596,236 shares of its commonstock on the open market at an average price of $19.11 per share and for atotal cost of $11,400, including sales commissions.  These repurchased shares were recorded atcost as treasury stock in the Condensed Consolidated Statements of FinancialCondition.

 

On March 31, 2008,the Company paid a special cash dividendof $0.125 per share, which based on the number of shares outstanding on therecord date for such dividend, totaled $14,693. The dividend was reflected as a reduction of retained earnings in theCondensed Consolidated Statements of Financial Condition.

 

15

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

 

**7.**              EARNINGS PERSHARE

** **

Basic and dilutedearnings per share for the threemonths ended March 31, 2008 and 2007 were as follows:

 
| ** **                                                        | ** ** | **Three Months Ended  March 31** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| **Basic  earnings per share**                                     |       |                                            |       |   |   |
| Net income                                                        |       | $                                               | 35,982     |   | $ | 24,680 |   |
| Weighted average  common shares outstanding                       |       | 117,736,242                                     |       | 115,176,794 |   |
| Basic earnings  per share                                         |       | $                                               | 0.31       |   | $ | 0.21 |   |
| ** **                                                        |       |                                            |       |   |   |
| **Diluted  earnings per share**                                   |       |                                            |       |   |   |
| Net income  applicable to stockholders                            |       | $                                               | 35,982     |   | $ | 24,680 |   |
| Weighted average  common shares outstanding                       |       | 117,736,242                                     |       | 115,176,794 |   |
| Effect of  dilutive shares:                                       |       |                                            |       |   |   |
|                                                              |       |                                            |       |   |   |
| Options and RSUs                                                  |       | 2,238,778                                       |       | 2,934,457 |   |
| Weighted average  shares outstanding and common stock equivalents |       | 119,975,020                                     |       | 118,111,251 |   |
| Diluted earnings  per share                                       |       | $                                               | 0.30       |   | $ | 0.21 |   |

 

Forthe three months ended March 31, 2008 and 2007, respectively, 793,072 RSUsand 1,114,364 RSUs, were excluded from the computation of diluted earnings pershare because their effect would be anti-dilutive.

 

**8.**              SHARE-BASEDCOMPENSATION

** **

TheCompany issues RSUs to its employees under the GFI Group Inc. 2004 EquityIncentive Plan (the “2004 Equity Incentive Plan”).

 

ModifiedRSUs are reflected as cancellations and grants in the summary of RSUs below.

 

Thefollowing is a summary of RSU transactions under the 2004 Equity Incentive Planduring the three months ended March 31, 2008:

 
| ** **                                   | ** ** | **RSUs**  | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** **  |
|----------------------------------------------|------------|-----------|------------|----------------------------------------------------------|-------------|
| Outstanding December 31, 2007 |       | 4,458,452 |       | $                                                        |  15.68 |   |
| Granted                                      |       | 753,815   |       | 16.00                                                    |        |
| Vested                                       |       | (668,768  | )          | 13.31                                                    |        |
| Cancelled                                    |       | (18,739   | )          | 13.68                                                    |        |
| Outstanding  March 31, 2008             |       | 4,524,760 |       | $                                                        | 16.10       |   |

 

16

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

Theweighted average grant-date fair value of RSUs granted for the three monthsended March 31, 2008 was $16.00 per unit, compared with $16.75 per unitfor the same period in the prior year. Total compensation expense andrelated income tax benefits recognized in relation to RSUs are as follows:

 
| ** **            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Compensation  expense |       | $                                                | 7,203      |   | $ | 4,039 |   |
| Income tax  benefits  |       | 2,683                                            |       | 1,450 |   |
|                       |            |                                                  |            |  |  |  |  |

 

AtMarch 31, 2008, total unrecognized compensation cost related to the RSUsprior to the consideration of expected forfeitures was approximately $60,556and is expected to be recognized over a weighted-average period of 1.96 years.The total fair value of RSUs vested during the three months ended March 31,2008 and 2007 was $8,901 and $4,829, respectively.

 

Asof March 31, 2008, the Company had stock options outstanding under the GFIGroup Inc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) and the GFInetinc. 2000 Stock Option Plan (the “GFInet 2000 Plan”). No additional grants willbe made under these plans. For stock options previously granted or modified,the fair value was estimated on the date of grant or modification using theBlack-Scholes option pricing model.

 

Thefollowing is a summary of stock option transactions during the three monthsended March 31, 2008:

 
| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2007 |       | 784,448                                |       | $                                          | 3.30       |   | 382,156 |   | $ | 3.32 |   |
| Exercised                           |       | (4,212                                 | )          | 2.97                                       |       | (18,520 | ) | 3.84 |   |
| Outstanding  March 31, 2008    |       | 780,236                                |       | $                                          | 3.30       |   | 363,636 |   | $ | 3.30 |   |

 

**9.     COMMITMENTS AND CONTINGENCIES**

** **

*Purchase Obligations**—The*Company has various unconditionalpurchase obligations. Certain of these obligations include the purchase ofmarket data from a number of information service providers during the normalcourse of business. As of March 31, 2008, the Company had total purchasecommitments for market data services of approximately $18,776, with $13,974 duewithin the next twelve months and $4,802 due between one to three years.Additionally, the Company has purchase commitments for capital expenditures of$5,885 primarily related to the build-out of the Company’s new office space inNew York. All purchase commitments for capital expenditures are due within thenext twelve months.

 

*Contingencies**—In*the normal course of business, theCompany and certain subsidiaries included in the condensed consolidatedfinancial statements are, and have been in the past, named as defendants invarious lawsuits and proceedings and are, and have been in the past, involvedin certain regulatory examinations. Additional actions, investigations orproceedings may be brought from time to time in the future. The Company issubject to the possibility of losses from these various contingencies.Considerable judgment is necessary to estimate the probability and amount ofany loss from such contingencies. An accrual is made when it is probable 

 

17

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

that a liability has been incurred or anasset has been impaired and the amount of loss can be reasonably estimated. TheCompany accrues a liability for the estimated costs of adjudication or settlementof asserted and unasserted claims existing as of the reporting period.

 

TheCompany is subject to regular examinations by various tax authorities injurisdictions in which the Company has significant business operations. TheCompany regularly assesses the likelihood of additional tax assessments thatmay result from these examinations in each of the tax jurisdictions. A taxaccrual has been established, which the Company currently believes to beadequate in relation to the potential for additional tax assessments. Onceestablished, the accrual may be adjusted based on new information or events.The imposition of additional tax assessments, penalties or fines by a taxauthority could have a material impact on the Company’s effective tax rate.

 

Additionally,the Company has recorded reserves for certain contingencies to which it mayhave exposure, such as reserves for certain litigation contingencies andcontingencies related to the employer portion of National InsuranceContributions in the U.K.

 

In February 2008, the Company’s U.K. subsidiary, GFIHoldings Limited (“Holdings”), applied to the High Court in London, England,for a declaration that it was contractually entitled to terminate theemployment agreements of three senior brokers in September 2007 by reasonof their gross misconduct, repudiatory breaches of contract and breaches offiduciary duty.  Following thetermination of their employment in September 2007, the three formeremployees threatened to bring claims against Holdings in respect of past andfuture bonuses, stock options and restricted stock units in the aggregateamount of approximately $10,000. Holdings is therefore also seeking a declaration that the formeremployees are not entitled to receive any further bonus payments or payments orbenefits of any kind.  The formeremployees have filed a counterclaim but the amount is unquantified. While theCompany cannot predict the outcome of any litigation, it believes that theformer employees were in serious breach of their obligations and are nottherefore entitled to any of the amount claimed.  Based on currently available information,this matter is not expected to have a material adverse impact on the Company’sfinancial position.  However, if thecounterclaim succeeds in respect of the full amount previously threatened, thismatter may be material to the Company’s results of operations or cash flows ina given period.

 

Itis not presently possible to determine the Company’s ultimate exposure to thesematters and there is no assurance that the resolution of these matters will notsignificantly exceed the reserves accrued by the Company.

 

Furtherdisclosure regarding the Company’s contingencies is described in “Note 14—Commitmentsand Contingencies” of the Notes to the Consolidated Financial Statementscontained in the Company’s 2007 Form 10-K. There have been no materialchanges to these contingencies during the three months ended March 31,2008.

 

*Risks and Uncertainties**—The*Company primarily generates its revenuesby executing and facilitating transactions for its customers. Revenues forthese services are transaction based. As a result, the Company’s revenues couldvary based upon the transaction volume of certain securities, commodities,foreign exchange and derivative markets.

 

*Guarantees**—The*Company, through its subsidiaries, is amember of certain exchanges and clearinghouses. Under the membershipagreements, members are generally required to guarantee certain obligations.Additionally, if a member becomes unable to satisfy its obligations to theclearinghouse, other members may be required to meet shortfalls. To mitigatethese performance risks, the exchanges and clearinghouses often require membersto post collateral, as well as meet certain minimum financial standards. TheCompany’s maximum 

 

18

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

potential liability under these arrangementscannot be quantified. However, management believes that the potential for theCompany to be required to make payments under these arrangements is unlikely.Accordingly, no contingent liability is recorded in the Condensed ConsolidatedStatements of Financial Condition for these arrangements.

 

**10.**       FINANCIALINSTRUMENTS WITH MARKET AND CREDIT RISKS

** **

Disclosureregarding the Company’s financial instruments with off-balance sheet risk isdescribed in “Note 16—Financial Instruments with Market and Credit Risks”of the Notes to the Consolidated Financial Statements contained in the Company’s2007 Form 10-K. There have been no material changes to our off-balancesheet risk during the three months ended March 31, 2008.

 

**11.**       FINANCIALINSTRUMENTS

** **

TheCompany is exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our risk managementpolicy as described in “Note 17—Financial Instruments” of the Notes to theConsolidated Financial Statements contained in the Company’s 2007 Form 10-K.

 

Asof and for the three months ended March 31, 2008 and 2007, the Company hadno foreign exchange derivative contracts that were designated as foreigncurrency cash flow hedges.

 

TheCompany’s financial assets and liabilities recorded at fair value have beencategorized based upon a fair value hierarchy in accordance with SFAS 157.  In accordance with SFAS 157, the Company hascategorized its financial assets and liabilities, based on the priority of theinputs to the valuation technique, into a a three-level fair value hierarchy asset forth below.

 

Financialassets and liabilities recorded on the Condensed Consolidated Statements ofFinancial Condition are categorized based on the inputs to the valuationtechniques as follows:

 

*Level 1 –* Financialassets and liabilities whose values are based on unadjusted quoted prices foridentifical assets or liabilities in an active market that the company has theability to access at the measurement date (examples include activeexchange-traded equity securities, listed derivatives, and most U.S. Governmentand agency securities).

 

*Level 2 –* Financialassets and liabilities whose values are based on quoted prices in markets wheretrading occurs infrequently or whose values are based on quoted prices ofinstruments with similar attributes in active markets.  Level 2 inputs include the following:

 

·                  Quotedprices for identifical or similar assets or liabilities in non-active markets(examples include corporate and municipal bonds which trade infrequently);

 

·                  Inputs otherthan quoted prices that are observable or substantially the full term of the assetor liability (examples include interest rate and currency swaps), and

 

*Level 3* – Financialassets and liabilities whose value are based on prices or valuation techniquesthat require inputs that are both unobservable and significant to the overallfair value measurement.  These inputsreflect 

 

19

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

management’s ownassumptions about the assumptions a market participant would use in pricing theasset or liability.  The Companycurrently does not have any Level 3 financial assets or liabilities.

 

**Valuation Techniques**

** **

**The Company uses the following valuation techniques invaluing the financial instruments at March 31, 2008:**

** **

**The Company evaluates its marketable securites inaccordance with SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and has determinedcertain of its investments in marketable securities should be classified astrading securities or available-for-sale and reported at fair value.  The fair value of the Company’s trading andavailable-for-sale marketable securities are based on quoted marketprices.  The Company’s marketablesecurities have been designed as Level 1 measurement in the SFAS 157 hierarchy.**

** **

**The Company uses foreign exchange derivative contracts,including forward contracts and foreign currency swaps, to reduce the effectsof fluctuations in certain receivables and payables denominated in foreigncurrencies.  Fair value of the Company’sforeign exchange derivative contracts is based on the indicative pricesobtained from the banks that are counter-parties to these foreign exchangederivative contracts.  The Company’sforeign exchange derivative contracts have been designated as Level 2measurement in the SFAS 157 hierarchy.**

** **

Financial Assets andLiabilities Measured at Fair Value on a Recurring Basis as of March 31,2008:

 
| ** **         | ** ** | **Quoted Prices in**                          | ** **  | **Significant Other** | ** ** | ** **                          | ** ** |
|--------------------|------------|---------------------------------------------------------|-------------|----------------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **Active Markets for  Identical Assets** | ** **  | **Observable  Inputs**     | ** ** | **Balance at  March 31,** | ** ** |
| ** **         | ** ** | **(Level 1)**                                      | ** **  | **(Level 2)**         | ** ** | **2008**                            | ** ** |
| Other assets  |       | $                                                       |  7,101 |                       |       |                                | $          |  7,101 |   |
|               |       |                                                    |        |                       |       |                                |       |
| Other  liabilities |       |                                                    |        | $                          | 7,010      |                                | $          | 7,010 |   |
|                    |            |                                                         |             |                            |            |                                     |            |  |  |  |

** **

**Other assets includes marketable securities that areaccounted for either as trading or available-for-sale securities.  Other liabilities includes foreign exchangederivative contracts.**

 

**12.**       REGULATORYREQUIREMENTS

** **

GFISecurities LLC is a registered broker-dealer with the SEC and the FinancialIndustry Regulatory Authority. GFI Securities LLC is also a registeredintroducing broker with the National Futures Association and the CommodityFutures Trading Commission. Accordingly, GFI Securities LLC is subject to thenet capital 

 

20

----

 

**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

rules under theExchange Act and the Commodity Exchange Act. Under these rules, GFI SecuritiesLLC is required to maintain minimum Net Capital, as defined, of not less thanthe greater of $250 or 2% of aggregate debits, as defined. GFI Brokers Limitedand GFI Securities Limited are subject to the capital requirements of theFinancial Services Authority in the United Kingdom (“FSA”). GFI (HK) SecuritiesLLC is subject to the capital requirements of the Securities and FuturesCommission in Hong Kong, which require that GFI (HK) Securities LLC maintainminimum capital, as defined, of approximately $441.

 

Thefollowing table sets forth the minimum net capital, as defined, that certain ofthe Company’s subsidiaries were required to maintain as of March 31, 2008:

 
| ** **                    | ** ** | **GFI Securities   LLC** | ** ** | **GFI Brokers   Limited** | ** ** | **GFI Securities   Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       | $                                  | 44,399     |                                | $          | 75,850                                 |       | $                                      | 41,161     |   | $ | 600 |   |
| Minimum Net  Capital required |       | 250                                |       | 13,247                              |       | 23,976                                 |       | 441                                    |       |
| Excess Net  Capital           |       | $                                  | 44,149     |                                | $          | 62,603                                 |       | $                                      | 17,185     |   | $ | 159 |   |

 

Inaddition to the minimum net capital requirements outlined above, certain of theCompany’s subsidiaries are subject to additional regulatory requirements.

 

GFIGroup PTE Ltd is subject to the compliance requirements of the MonetaryAuthority of Singapore (“MAS”), which require that GFI Group PTE Ltd, amongother things, maintain stockholders’ equity of 3,000 Singapore dollars,measured annually. At December 31, 2007 the required measurement date, GFIGroup PTE Ltd. had stockholders’ equity of 6,988 Singapore dollars (orapproximately $4,838), which exceeded the minimum requirement by approximately3,988 Singapore dollars (or approximately $2,761).

 

GFISecurities Limited’s Japanese branch is subject to certain licensingrequirements established by the Financial Instruments and Exchange Law (the “FIEL”)in Japan. As part of the licensing requirements, GFI Securities Limited’sJapanese branch is required to maintain minimum “brought-in” capital andstockholders’ equity of 50,000 Japanese Yen each (approximately $500), asdefined under the FIEL.  In addition, GFISecurities Limited’s Japanese branch is also subject to the net capital rule promulgatedby the FIEL, which requires that net worth, including “brought-in” capital,exceed a ratio of 140.0% of the risk equivalent amount including relevantexpenditure. At March 31, 2008, GFI Securities Limited’s Japanesebranch was in compliance with these capital requirements.

 

GFISecurities Limited’s Dubai branch is registered with the Dubai FinancialInternational Centre and is authorized by the Dubai Financial ServicesAuthority (“DFSA”) to provide financial service activities. The branch issubject to the conduct of business rules of the DFSA and has been granteda waiver from prudential regulation.

 

GFISecurities Limited’s Paris branch was established through the exercise of itspassport right to open a branch in a European Economic Area state. Theestablishment of the branch was approved by FSA and acknowledged by Banque deFrance in France. The branch is subject to the conduct of business rules ofthe Autorite Des Marches Financiers when dealing with resident customers ofFrance and is regulated, in part, by the FSA.

 

GFISecurities Limited’s Tel Aviv branch is registered as a foreign corporation inIsrael and is conditionally exempt from the requirement to hold a SecuritiesLicense in accordance with the Israeli Securities law. The branch is thereforenot subject to any capital requirements.

 

21

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 

GFIBrokers Limited’s Sydney branch is registered as a foreign corporation inAustralia and is conditionally exempt from the requirement to hold an Australianfinancial services license under the Australian Securities and InvestmentsCommission Corporations Act of 2001 in respect of the financial services itprovides in Australia. This exemption applies to foreign companies regulated bythe FSA in accordance with U.K. regulatory standards.

 

GFI(HK) Brokers Ltd. is registered with and regulated by the Hong Kong MonetaryAuthority. As part of this registration, GFI (HK) Brokers Ltd. is required tomaintain stockholders’ equity of 5,000 Hong Kong dollars (or approximately$643). At March 31, 2008, GFI (HK) Brokers Ltd. had stockholders’ equityof  13,231 Hong Kong dollars (orapproximately $1,700), which exceeded the minimum requirement by 8,231 HongKong dollars (or approximately $1,057).

 

****GFI Korea Money Brokerage Limitedis licensed****and****regulated by the Ministryof Finance and Economy to engage in foreign exchange brokerage business, and issubject to certain regulatory requirements under the Foreign ExchangeTransaction Act and regulations thereunder.  As a licensed foreignexchange brokerage company, GFI Korea Money Brokerage Limited is required tomaintain minimum paid-in capital of 5,000,000 Korean Won.****At March 31,2008, ****GFI Korea Money Brokerage Limited**** met theminimum requirement for paid-in-capital of 5,000,000 Korean Won (orapproximately $5,000).

 

Theseregulatory rules may restrict the Company’s ability to withdraw capitalfrom its regulated subsidiaries. The Company’s regulated subsidiaries were incompliance with all minimum net capital requirements as of March 31, 2008.

 

**13.**       SEGMENT ANDGEOGRAPHIC INFORMATION

** **

TheCompany has three operating segments: North America Brokerage, Europe Brokerageand Asia Brokerage.  Additionally, theCompany aggregated its operating segments into two reportable segments:Brokerage and “All Other”.  The Brokeragesegment includes operations from North America and Europe.  The All Other segment captures costs that arenot directly assignable to one of the operating business segments, primarilyconsisting of the Company’s corporate business activities and operations fromanalytics and market data.  In addition,the All Other segment includes the Company’s Asia Brokerage operations as itdoes not meet the quantitative threshold for separate disclosure.

 

Selectedfinancial information for the Company’s reportable segments is presented belowfor periods indicated:

 
| ** **                            | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| **Revenues:**                         |       |                                                               |       |   |   |
| Brokerage                             |       | $                                                                  | 268,571    |   | $ | 214,916 |   |
| All Other                             |       | 46,029                                                             |       | 25,401 |   |
| Total  Consolidated Revenues          |       | $                                                                  | 314,600    |   | $ | 240,317 |   |
|                                  |       |                                                               |       |   |   |
| **Interest  Revenue:**                |       |                                                               |       |   |   |
| Brokerage                             |       | $                                                                  | 13         |   | $ | (6 | ) |
| All Other                             |       | 2,670                                                              |       | 2,108 |   |
| Total  Consolidated Interest Revenues |       | $                                                                  | 2,683      |   | $ | 2,102 |   |

 

22

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 
| **Interest  Expense:**                                       |   |    |   |    |   |
|--------------------------------------------------------------|--------|---------|--------|---------|--------|
| Brokerage                                                    |   | $       | 478    |    | $      | 226 |   |
| All Other                                                    |   | 2,607   |   | 1,623   |   |
| Total  Consolidated Interest Expense                         |   | $       | 3,085  |    | $      | 1,849 |   |
|                                                         |   |    |   |    |   |
| **Depreciation  and Amortization:**                          |   |    |   |    |   |
| Brokerage                                                    |   | $       | — |    | $      | — |   |
| All Other                                                    |   | 7,922   |   | 5,227   |   |
| Total  Consolidated Depreciation and Amortization            |   | $       | 7,922  |    | $      | 5,227 |   |
|                                                         |   |    |   |    |   |
| **Income  before Provision for Income Taxes:**               |   |    |   |    |   |
| Brokerage                                                    |   | $       | 91,484 |    | $      | 70,510 |   |
| All Other                                                    |   | (33,913 | )      | (29,377 | )      |
| Total  Consolidated Income before Provision for Income taxes |   | $       | 57,571 |    | $      | 41,133 |   |

 

Inaddition, with the exception of goodwill, the Company does not identify orallocate assets by operating segment, nor does its chief operating decisionmaker evaluate operating segments using discrete asset information.  See Note 4 for goodwill by reportablesegment.

 

TheCompany offers its products and services in the North America, Europe and theAsia-Pacific region.

 

For thethree months ended March 31, 2008 and 2007, the United Kingdom is the onlyindividual foreign country that accounts for more than 10% of total revenuesand long-lived assets.  Informationregarding revenues for the three months ended March 31, 2008 and 2007,respectively, and information regarding long-lived assets (defined as property,equipment, leasehold improvements and software inventory) in geographic areasas of March 31, 2008 and December 31, 2007, respectively, are asfollows:

 
| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenues:      |       |                                             |       |   |   |
| United States  |       | $                                                | 117,780    |   | $ | 109,378 |   |
| United Kingdom |       | 135,062                                          |       | 90,916 |   |
| Other          |       | 61,758                                           |       | 40,023 |   |
| Total          |       | $                                                | 314,600    |   | $ | 240,317 |   |

 

23

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**GFI GROUPINC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)**

**(Inthousands except share and per share amounts)**

 
| ** **                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Long-lived  Assets, as defined: |       |                     |       |                        |       |
| United States                   |       | $                        | 56,864     |                        | $          | 45,126 |   |
| United Kingdom                  |       | 18,160                   |       | 11,810                      |       |
| Other                           |       | 5,228                    |       | 5,029                       |       |
| Total                           |       | $                        | 80,252     |                        | $          | 61,965 |   |

 

Revenues are attributedto geographic areas based on the location of the relevant legal entities.Certain reclassifications have been made to the 2007 geographic revenues andlong-lived assets to conform to current presentations.

 

**14.**       OTHERCOMPREHENSIVE INCOME (LOSS)

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Unrealized  gain on available-for-sale securities** |       |                                             |       |   |   |
| Current Period  Change:                               |       |                                             |       |   |   |
| Before Tax  Amount                                    |       | $                                                | 845        |   | $ | — |   |
| Tax Expense                                           |       | (254                                             | )          | — |   |
| After Tax Amount                                      |       | $                                                | 591        |   | $ | — |   |
| **Foreign  currency translation adjustment**          |       |                                             |       |   |   |
| Before Tax  Amount                                    |       | $                                                | (800       | ) | $ | (65 | ) |
| Tax Benefit                                           |       | 350                                              |       | 29 |   |
| After Tax Amount                                      |       | $                                                | (450       | ) | $ | (36 | ) |

 

**15.**       SUBSEQUENTEVENT

** **

**In April 2008, the Board of Directors declared aquarterly cash dividend of $0.03 per share payable on May 15, 2008 toshareholders of record on May 1, 2008.**

 

24

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directorsand Stockholders of

GFI Group Inc.

New York, New York

 

We have reviewed the accompanying condensed consolidated statement offinancial condition of GFI Group Inc. and subsidiaries (the “Company”) as of March 31,2008, and the related condensed consolidated statements of income,comprehensive income and cash flows for the three-month periods ended March 31,2008 and 2007.  These interim financial statements are the responsibilityof the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters.  It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole.  Accordingly, we donot express such an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed consolidated interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedstatement of financial condition of GFI Group Inc. and subsidiaries as of December 31,2007, 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 February 28, 2008, we expressedan unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated statement of financial condition as of December 31,2007 is fairly stated, in all material respects, in relation to theconsolidated statement of financial condition from which it has been derived.

 

 

/s/ Deloitte & Touche

 

 

New York, New York

May 9, 2008

 

25

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| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

** **

ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains ‘‘forward-lookingstatements’’ within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include, without limitation, any statementthat may predict, 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:

 

·  the risksand other factors described under the heading “Risk Factors” and elsewhere inour 2007 Form 10-K;

 

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

 

·  our abilityto attract and retain key personnel, including highly qualified brokeragepersonnel;

 

·  our entranceinto new brokerage markets, including investments in establishing new brokeragedesks;

 

·  competitionfrom current and new competitors;

 

·  our abilityto keep up with rapid technological change and to continue to develop andsupport our electronic brokerage systems in a cost effective manner.

 

·  futureresults of operations and financial condition;

 

·  the successof our business strategies;

 

·  economic,political and market factors affecting trading volumes, securities prices ordemand for our brokerage services;

 

·  financialdifficulties experienced by our customers or key participants in the markets inwhich we focuses our brokerage services;

 

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

 

·  the maturityof key markets and any resulting contraction of commissions;

 

·  our abilityto manage our international operations;

 

·  uncertaintiesassociated with currency fluctuations;

 

·  our failureto protect or enforce our intellectual property rights;

 

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

 

·  uncertaintiesrelating to litigation; and

 

·  changes inthe availability of capital.

 

Theforegoing risks and uncertainties, as well as those risks discussed under theheadings ‘‘Item 2—Management’s Discussion and Analysis of Financial Conditionand Results of Operations’’ and ‘‘Item 3—Quantitative and QualitativeDisclosures About Market Risk’’ and elsewhere in this Quarterly Report, maycause actual results to differ materially from the forward-looking statements.The information included herein is given as of the filing date of this Form 10-Qwith the SEC and future events or circumstances could differ significantly fromthese forward-looking statements. The Company does not undertake to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Business Environment**

 

As an inter-dealerbroker, our results of operations are impacted by a number of external marketfactors, including market volatility, organic growth of the derivative andother markets in which we provide 

 

26

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our brokerage services, the particular mix of transactional activity inour various products and the competitive environment in which we operate. Outlined below are management’s observations of these external market factorsduring the most recent fiscal period. The factors outlined below are not theonly factors that have impacted our results of operations for the most recentfiscal period, and additional or other factors may impact, or have differentdegrees of impact, on our results of operations in future periods.

 

*MarketVolatility*

 

As a general rule, ourbusiness benefits from volatility in the markets that we serve, as periods of increasedvolatility typically coincide with more robust trading by our clients and ahigher volume of transactions.  Market volatility is driven by a range ofexternal factors, some of which are market specific and some of which arecorrelated to general macro-economic conditions.  During the first quarterof 2008 the credit and equity markets experienced heightened volatility due tothe continuing credit crisis, further writedowns of debt instruments byfinancial firms, and global economic and inflation concerns.

 

The credit marketexperienced significant volatility in the first quarter of 2008 as U.S.economic concerns increased with credit markets remained tight, Bear Stearnsnearly collapsed and energy and commodity prices adding to inflationary pressures.  The reduced liquidity in many credit marketsled many banks to writedown additional mortgage backed and collateralized debtobligations in the first quarter.  Creditspreads, which were at near historical lows at the beginning of 2007, continuedto widen as investors became more cautious in the quarter.

 

The global equity marketsexperienced considerable volatility throughout the quarter as demonstrated byhistorical price volatility on the Chicago Board Options Exchange SPX and DowJones Industrial Average (“DJIA”) volatility indices.  Global equity markets were down significantlyin the quarter with the DJIA down 7.6% for the year, while the Dow Jones WorldIndex, excluding the U.S., fell 8.7%. The declines in equity values were broad-based with the pan-European DowJones Stoxx 600 Index down 16%, Japanese Nikkei Index down 18% and the MorganStanley Capital Emerging Markets Index down 11.3%.

 

Interest rate and foreignexchange markets experienced moderate to heightened volatility resulting fromglobal economic and inflation concerns, as well as the Federal Reserve cuttingshort-term interest rates 75 basis points while European Central Banks keptsimilar rates level, in the quarter.  TheU.S. Dollar Index, which measures the performance of the U.S. dollar against abasket of currencies, fell 3.2% in the quarter. The Euro rose 7.5% while the Japanese Yen rose 10.5%, versus the dollarin the first quarter.

 

Commodity marketscontinued to be strong as emerging market demand, particularly from China, pushedup commodity prices to record levels in the first quarter, with crude oilfutures on the New York Mercantile Exchange ending the quarter at $101.58 abarrel, up over 5.8% since the beginning of the year.  Crude prices rose above $110 per barrel inthe quarter topping the inflation adjusted high set in 1980, while gold pricesrose above $1,000 per ounce for the first time.

 

*Growthin Underlying Markets and New Product Offerings*

 

Our business hashistorically benefited from growth in the OTC derivatives markets due to eitherthe expansion of existing markets, including increased notional amountsoutstanding or increased transaction volumes, or the development of newproducts or classes of products.  The level of growth in these markets isdifficult to measure on a quarterly basis as there are only a few independent,objective measures of growth in outstanding notional amount of OTC derivatives,all of which are published retrospectively and do not measure transactionalvolumes.  Therefore, to help gauge growth in any particular quarter, 

 

27

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management also looks to the published results of large OTC derivativesdealers and certain futures exchanges as potential indicators of transactionalactivity in the related OTC derivative markets.

 

The ISDA released theresults of a survey in April 2008 of notional amounts outstanding inglobal OTC markets as of December 31, 2007.  The survey results showed that the OTCderivative markets continued to experience strong growth in notional amountsoutstanding with credit derivatives growing 81% from $34.5 trillion in December 2006to $62.2 trillion in December 2007. Notional amounts outstanding of interest rate and currency derivativesgrew by 34% over the same period from $285.7 trillion to $382.3 trillion, whilenotional amounts outstanding of equity derivatives grew to 39% from $7.2trillion to $10.0 trillion.

 

For several years,exchange traded derivatives have exhibited generally similar growth rates tothose of related OTC derivative markets.  CME Group Inc., the New YorkMercantile Exchange, IntercontinentalExchange and International SecuritiesExchange all reported solid growth in transactional volumes during the firstquarter.  These exchanges offer trading in futures and other products inseveral categories, including financial, equity and commodity products. Nevertheless, because there is currently minimal or no exchange-based tradingactivity of credit futures, exchange-traded volumes are not necessarily an indicatorof activity levels of credit products, our largest product segment.

 

In addition, newerproducts and our expansion into growing markets have also contributed to thegrowth in our brokerage revenues in the first quarter.  Transactions in later generation creditproducts, such as exotic and index credit derivatives have been a driver ofgrowth in the overall credit derivative market.  New products have alsodeveloped in certain wet and dry freight and property derivative markets, whilethe currency and interest rate derivative markets have grown, in part, due tothe growth of emerging markets in Eastern Europe, Asia and Latin America.  Our recent opening of new offices in Calgary,Dubai and Tel Aviv is intended to capitalize on regional growth opportunities.

 

*CompetitiveEnvironment*

 

Another major externalmarket factor affecting our business and results of operations is competition,which may take the form of competitive pressure on the commissions we chargefor our brokerage services or competition for brokerage personnel withextensive experience in the specialized markets we serve.  Competition forthe services of productive brokers remained intense in the first quarter asother inter-dealer brokers sought to bolster their derivative brokerage capabilitiesby hiring, or attempting to hire key brokerage personnel.  In addition, inApril 2008, almost two dozen of our credit division personnel in New Yorkdefected to a competitor, notwithstanding that many of them did so in breach ofcontractual obligations.  As a result,compensation and employee benefits and professional fees as a percentage ofrevenues will be under pressure, and may increase, in the short term.

 

**Financial Overview**

 

As more fully discussed below, our results ofoperations are significantly impacted by our revenue growth and the amount ofcompensation and benefits we provide to our employees.  The following factors had a significantimpact on our revenues and employee costs during the three year period ended March 31,2008:

 

·      Our revenues have grown30.9% from $240.3 million for the three months ended March 31, 2007to $314.6 million for the three months ended March 31, 2008. The mainfactors contributing to our revenue growth were:

 

·      the increase in ourbrokerage personnel (consisting of brokers, trainees and clerks) from 990 at

 

28

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March 31, 2007 to1,048 at  March 31, 2008;

·      a continued focus on, andinvestment in, growing and higher margin product areas;

·      overall volume growth in themarkets in which we provide brokerage services;

·      the continued developmentand expansion of our hybrid brokerage capabilities, including CreditMatch® inEurope, ForexMatchTM globally and EnergyMatch® in Europe;

·      gains in our estimatedmarket share in certain key products, such as European credit derivatives;

·      the continued development,marketing and sale of our data and analytical products; and

·      the acquisition of TrayportLimited in January 2008.

 

·      The most significant component of our cost structure is employeecompensation and benefits, which includes salaries, sign-on bonuses, incentivecompensation and related employee benefits and taxes.  Our employee compensation and benefits havegrown from $151.5 million for the three months ended March 31, 2007 to $193.2million for the three months ended March 31, 2008.  The main factors contributing to the growthin employee compensation and benefits were an increase in performance bonusesfor brokerage personnel and and increase in sign-on bonuses for certain newly-hiredbrokers and certain existing brokers who, in each case, sign long-termemployment agreements with the Company.

 

Our compensation and employee benefits for allemployees have both a fixed and variable component.  Base salaries and benefit costs are primarilyfixed for all employees while bonuses constitute the variable portion of ourcompensation and employee benefits. Within this overall compensation and employee benefits, employment costsof our brokerage personnel are the key component.  Bonuses for brokerage personnel are primarilybased on the operating results of their related brokerage desk as well as theirindividual performance.  For many of ourbrokerage employees, their bonus constitutes a significant component of theiroverall compensation.  Broker performancebonuses increased from $77.4 million for the three months ended March 31,2007 to $102.6 million for the three months ended March 31, 2008.  Additionally, a portion of our bonus expenseis subject to contractual guarantees that may require us to make bonus paymentsto brokers regardless of their performance in any particular period.

 

Further, we grant sign-on bonuses for certainnewly-hired brokers or for certain of our existing brokers who agree tolong-term employment agreements.  Expensesrelating to sign-on bonuses increased from $6.5 million for the three monthsended March 31, 2007 to $7.2 million for the three months ended March 31,2008.  These sign-on bonuses may be paidin the form of cash, restricted stock units (“RSUs”) or forgivable loans andare typically amortized over the term of the related employment agreement,which is generally two to four years. These employment agreements typically contain repayment or forfeitureprovisions for unvested RSUs or all or a portion of the sign-on bonus andforgivable loan should the employee voluntarily terminate his or her employmentor if the employee’s employment is terminated for cause during the initial termof the agreement.

 

29

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**Resultsof Consolidated Operations**

 

The following table setsforth our condensed consolidated results of operations for the periodsindicated:

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                      |       | **(dollars  in thousands)**                      |       |
| REVENUES:                                 |       |                                             |       |   |   |
| Brokerage  revenues:                      |       |                                             |       |   |   |
| Agency  commissions                       |       | $                                                | 239,089    |   | $ | 184,525 |   |
| Principal  transactions                   |       | 59,094                                           |       | 48,377 |   |
| Total brokerage  revenues                 |       | 298,183                                          |       | 232,902 |   |
| Analytics and  market data                |       | 11,259                                           |       | 5,326 |   |
| Interest income                           |       | 2,683                                            |       | 2,102 |   |
| Other income  (loss)                      |       | 2,475                                            |       | (13 | ) |
| Total Revenues                            |       | 314,600                                          |       | 240,317 |   |
| EXPENSES:                                 |       |                                             |       |   |   |
| Compensation and  employee benefits       |       | 193,198                                          |       | 151,508 |   |
| Communications  and market data           |       | 11,181                                           |       | 10,456 |   |
| Travel and  promotion                     |       | 11,723                                           |       | 8,836 |   |
| Rent and  occupancy                       |       | 6,614                                            |       | 5,561 |   |
| Depreciation and  amortization            |       | 7,922                                            |       | 5,227 |   |
| Professional  fees                        |       | 5,012                                            |       | 3,569 |   |
| Clearing fees                             |       | 11,202                                           |       | 7,529 |   |
| Interest                                  |       | 3,085                                            |       | 1,849 |   |
| Other expenses                            |       | 7,092                                            |       | 4,649 |   |
| Total Expenses                            |       | 257,029                                          |       | 199,184 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 57,571                                           |       | 41,133 |   |
| PROVISION FOR  INCOME TAXES               |       | 21,589                                           |       | 16,453 |   |
| NET INCOME                                |       | $                                                | 35,982     |   | $ | 24,680 |   |

 

30

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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,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| REVENUES:                                 |       |                                             |       |   |   |
| Brokerage  revenues:                      |       |                                             |       |   |   |
| Agency  commissions                       |       | 76.0                                             | %          | 76.8 | % |
| Principal  transactions                   |       | 18.8                                             |       | 20.1 |   |
| Total brokerage  revenues                 |       | 94.8                                             |       | 96.9 |   |
| Analytics and  market data                |       | 3.6                                              |       | 2.2 |   |
| Interest income                           |       | 0.9                                              |       | 0.9 |   |
| Other income  (loss)                      |       | 0.8                                              |       | — |   |
| Total Revenues                            |       | 100.0                                            | %          | 100.0 | % |
| EXPENSES:                                 |       |                                             |       |   |   |
| Compensation and  employee benefits       |       | 61.4                                             | %          | 63.0 | % |
| Communications  and market data           |       | 3.6                                              |       | 4.4 |   |
| Travel and  promotion                     |       | 3.7                                              |       | 3.7 |   |
| Rent and  occupancy                       |       | 2.1                                              |       | 2.3 |   |
| Depreciation and  amortization            |       | 2.5                                              |       | 2.2 |   |
| Professional  fees                        |       | 1.6                                              |       | 1.5 |   |
| Clearing fees                             |       | 3.6                                              |       | 3.1 |   |
| Interest                                  |       | 1.0                                              |       | 0.8 |   |
| Other expenses                            |       | 2.3                                              |       | 1.9 |   |
| Total Expenses                            |       | 81.7                                             | %          | 82.9 | % |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 18.3                                             |       | 17.1 |   |
| PROVISION FOR  INCOME TAXES               |       | 6.9                                              |       | 6.8 |   |
| NET INCOME                                |       | 11.4                                             | %          | 10.3 | % |

 

Net income for the threemonths ended March 31, 2008 was $36.0 million as compared to netincome of $24.7 million for the three months ended March 31, 2007, anincrease of $11.3 million or approximately 45.8%. Total revenues increased by$74.3 million, or 30.9%, to $314.6 million for the three months ended March 31,2008 from $240.3 million for the prior year. Our increased revenues wereprimarily due to increased brokerage revenues across each of our productcategories. Total expenses increased by $57.8 million, or 29.0%, to $257.0 forthe three months ended March 31, 2008 from $199.2 million for theprior year. Expenses increased primarily because of increased compensationexpense for the months ended March 31, 2008, which was attributable to anincrease in performance-based bonus expense as a result of higher revenues, aswell as higher sign-on bonus expense.

 

The following table setsforth the changes in revenues for the three months ended March 31, 2008 ascompared to the same period in 2007 (dollars in thousands, except percentagedata):

 
| ** **                | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **2008**                                                               | ** ** | **%*** | ** ** | **2007** | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Revenues**              |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:      |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Credit                    |       | $                                                                      | 110,695    |   | 35.2 | % | $ | 84,811 |   | 35.3 | % | $ | 25,884 |   | 30.5 | % |
| Equity                    |       | 78,716                                                                 |       | 25.0 |   | 56,383 |   | 23.5 |   | 22,333 |   | 39.6 |   |
| Financial                 |       | 52,020                                                                 |       | 16.5 |   | 45,001 |   | 18.7 |   | 7,019 |   | 15.6 |   |
| Commodity                 |       | 56,752                                                                 |       | 18.0 |   | 46,707 |   | 19.4 |   | 10,045 |   | 21.5 |   |
| Total brokerage  revenues |       | 298,183                                                                |       | 94.8 |   | 232,902 |   | 96.9 |   | 65,281 |   | 28.0 |   |
| Other revenues            |       | 16,417                                                                 |       | 5.2 |   | 7,415 |   | 3.1 |   | 9,002 |   | 121.4 |   |
| Total Revenues            |       | $                                                                      | 314,600    |   | 100.0 | % | $ | 240,317 |   | 100.0 | % | $ | 74,283 |   | 30.9 | % |

 

31

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----

*    Denotes % of total revenues

**  Denotes % change in 2008 ascompared to 2007

 

·      **Brokerage Revenues** – We offer our brokerage services in four broad product categories:credit, equity, financial and commodity. Below is a discussion on our brokerage revenues by product category.

 

·      Brokerproductivity (defined as total brokerage revenues during the period divided byaverage monthly brokerage personnel headcount for the period) increased byapproximately 19.2% for the first quarter of 2008 compared to the comparable period in 2007.

 

·      Theincrease in credit product brokerage revenues of $25.9 million in 2008 was dueto a number of factors, including credit market volatility related to subprimeand collateralized debt  market turmoil,inflationary and economic concerns, the continued overall growth in the creditderivatives market, the continued success of our credit derivative and cashbond trading platform, CreditMatch®, in Europe at helping sustain and growmarket share,  and increased headcount.Our credit product brokerage personnel headcount increased by 14 to 270employees at March 31, 2008 from 256 employees at March 31, 2007.

 

·      Theincrease in equity product brokerage revenues of $22.3 million in 2008 wasprimarily due to equity market volatility related to credit market turmoil,inflationary and economic concerns, strength in our equity derivatives and cashequities businesses in Europe and North America,  and increased headcount  Our equity product brokerage personnelheadcount increased by 42 to 232 employees at March 31, 2008 from 190employees at March 31, 2007.

 

·      Theincrease in financial product brokerage revenues of $7.0 million in 2008 wasprimarily attributable to the growth in emerging market currency and interestrate derivatives in Asia, and European and emerging market interest ratederivatives in Europe. In March 2007, we opened an office in Korea whichcontributed to the growth of our financial product brokerage business in Asia.

 

·      Theincrease in commodity product brokerage revenues of $10.0 million in 2008 wasprimarily attributable to the growth in dry physical freight and dry freightderivatives in Europe and Asia, metals in Europe, and power and natural gas inNorth America.  Our commodity productbrokerage personnel headcount increased by 22 to 290 employees at March 31,2008 from 268 employees at March 31, 2007.

 

·      **Other Revenues**

 

Theincrease in other revenues in 2008 to $16.4 million from $7.4 million in 2007was primarily related to an increase in analytics and market data revenues of$5.9 million and an increase in other income of $2.5 million.  The increase in analytics and market data 

 

32

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revenuewas primarily attributable to the January 31, 2008 acquisition of TrayportLimited, a provider of electronic trading software to the OTC energyderivatives marketplace, which provided revenue of $5.5 million in the firstquarter of 2008.  The $2.5 million inother income (loss) consists of net transactional gains based on foreigncurrency flutuations and net gains on foreign exchange derivative contracts.

 

**Expenses**

 

The following table setsforth the changes in expenses for the three months ended March 31, 2008 ascompared to the same period in 2007 (dollars in thousands, except percentagedata):

 
| ** **                          | ** ** | **For the Three Month Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **March 31,**                                | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2008**                                          | ** ** | **%***       | ** ** | **2007**   | ** ** | **%*** | ** ** | **(Decrease)** | ** ** | **%**** | ** ** |
| **Expenses**                        |       |                                              |       |         |       |       |       |   |   |   |   |   |   |
| Compensation and  employee benefits |       | $                                                 | 193,198    |         | 61.4       | %          | $          | 151,508 |   | 63.0 | % | $ | 41,690 |   | 27.5 | % |
| Communications  and market data     |       | 11,181                                            |       | 3.6          |       | 10,456     |       | 4.4 |   | 725 |   | 6.9 |   |
| Travel and  promotion               |       | 11,723                                            |       | 3.7          |       | 8,836      |       | 3.7 |   | 2,887 |   | 32.7 |   |
| Rent and  occupancy                 |       | 6,614                                             |       | 2.1          |       | 5,561      |       | 2.3 |   | 1,053 |   | 18.9 |   |
| Depreciation and  amortization      |       | 7,922                                             |       | 2.5          |       | 5,227      |       | 2.2 |   | 2,695 |   | 51.6 |   |
| Professional  fees                  |       | 5,012                                             |       | 1.6          |       | 3,569      |       | 1.5 |   | 1,443 |   | 40.4 |   |
| Clearing fees                       |       | 11,202                                            |       | 3.6          |       | 7,529      |       | 3.1 |   | 3,673 |   | 48.8 |   |
| Interest                            |       | 3,085                                             |       | 1.0          |       | 1,849      |       | 0.8 |   | 1,236 |   | 66.8 |   |
| Other expenses                      |       | 7,092                                             |       | 2.3          |       | 4,649      |       | 1.9 |   | 2,443 |   | 52.5 |   |
| **Total  Expenses**                 |       | $                                                 | 257,029    |         | 81.7       | %          | $          | 199,184 |   | 82.9 | % | $ | 57,845 |   | 29.0 | % |

 

----

*    Denotes % of total revenues

**  Denotes % change in 2008 ascompared to 2007

 

·      **Compensation and EmployeeBenefits**

 

·      Theincrease in compensation and employee benefits expenses of $41.7 million in thefirst quarter of 2008 was primarily attributable to an increase in the numberof brokerage personnel from 990 at March 31, 2007 to 1,048 at March 31,2008 and an increase in brokerage personnel performance bonuses of $25.3million. The increased performance bonuses were due, in large part, to ouroverall higher total brokerage revenues.

 

·      Totalcompensation and employee benefits as a percentage of total revenues decreasedto 61.4% for the three months ended March 31, 2008 as compared to 63.0%for the same period in the prior year. Certain of our competitors have beenoffering significant compensation packages to attract our brokers.  In addition, in April 2008, almost twodozen of our credit division personnel in New York defected to a competitor,notwithstanding that many of them did so in breach of contractualobligations.  As a result, compensationand employee benefits as a percentage of revenues will be under pressure, andmay increase, in the short term. We believe that an increase in the use of 

 

33

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our hybrid electronictechnology brokerage systems and pressure on our competitors to rationalize theincrease in their compensation expense should eventually lessen the effect ofthe competitive pressure on compensation expense.

 

·      Bonusexpense represented 58.7% and 53.1% of total compensation and employee benefitsexpense for the three months ended March 31, 2008 and 2007, respectively.A portion of our bonus expense is subject to contractual guarantees that mayrequire us to make bonus payments to brokers regardless of their performance inany particular period. Additionally, sign-on bonus expense represented 3.9% and4.2% of total compensation and employee benefits for the three months ended March 31,2008 and 2007, respectively.

 

·      **All OtherExpenses**

 

·      Theincrease in travel and promotion was primarily attributable to the increase inbrokerage personnel.  Travel andpromotion, as a percentage of our total brokerage revenues for the three monthsended March 31, 2008, increased slightly to 3.9% from 3.8% for the sameperiod from the prior year.

 

·      Theincrease in depreciation and amortization was primarily due to the increase incapitalized equipment costs and amortization expense of intangibles resultingfrom the acquisition of Trayport Limited.  See Note 4 to the Condensed Consolidated Financial Statements forfurther discussion on the acquisition of Trayport Limited.  We expect that depreciation and amortizationwill continue to increase in the future as a result of capital expendituresrelated to our new office space in New York, as well as our continuedinvestment in software development.

 

·      Theincrease in clearing fees was partially due to the growth of matched principalbrokerage revenues from our Paris equities business.  Clearing fees, as a percentage of our totalrevenues from principal transactions increased to 19.0% for the three monthsended March 31, 2008, from 15.6% for the same period from the prioryear.  This increase was partially due tothe high cost of clearing fees as a result of the higher number and types ofmatched principal transactions executed in our Paris office.  Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices.  We also use the services ofstock exchanges and floor brokers, to assist in the execution oftransactions.  Fees paid to floor brokersand execution fees paid to exchanges in these circumstances are included inclearing fees.  In addition, clearingfees also includes fees incurred in certain equity transaction executed on anagency basis.

 

·      Theincrease in other expenses was primarily due to an increase in litigationexpenses.

 

·      Our effectivetax rate was 38% for the three months ended March 31, 2008 as compared to40% for the same period in the prior year. The reduction in the effective taxrate was primarily due to decreases in state and local taxes, as well as adecrease in taxes related to our foreign operations.  The reduction in state and local taxes wasdue, in part, to lower state tax rates and the geographic mix of our earnings

 

34

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**Results of Segment Operations**

 

Our operations aremanaged along three operating segments: North America Brokerage, Europe Brokerage and Asia Brokerage.  Our brokerage operations provide brokerageservices in four broad product categories: credit, financial, equity andcommodity.  We aggregated our operatingsegments into two reportable segments: “Brokerage” and “All Other”.  The Brokerage segment includes operationsfrom North America and Europe.  The AllOther segment captures costs that are not directly assignable to the Brokeragesegment, primarily consisting of our corporate business activities andoperations from analytics and market data. Additionally, the All Other segment includes our Asia brokerage operationsas it does not meet the quantitative threshold for separate disclosure inaccordance with Statement of Financial Accounting Standards 131 No., *Disclosures About Segments of an Enterprise and Related Information*.

 

The following tablessummarize our revenues, expenses and pre-tax income by segment:

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**                 | ** ** |
| **Revenues:**                |       |                                                 |       |   |   |
| Brokerage                    |       | $                                                    | 268,571    |   | $ | 214,916 |   |
| All  Other                   |       | 46,029                                               |       | 25,401 |   |
| Total  Consolidated Revenues |       | $                                                    | 314,600    |   | $ | 240,317 |   |

 
| ** **      | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|
| ** **      | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **      | ** ** | **(dollars in thousands)**                 | ** ** |
| **Expenses:**   |       |                                                 |       |   |   |
| Brokerage       |       | $                                                    | 177,087    |   | $ | 144,406 |   |
| All  Other      |       | 79,942                                               |       | 54,778 |   |
| Total  Expenses |       | $                                                    | 257,029    |   | $ | 199,184 |   |

 
| ** **            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(dollars in thousands)**                 | ** ** |
| **Pre-tax Income:**   |       |                                                 |       |   |   |
| Brokerage             |       | $                                                    | 91,484     |   | $ | 70,510 |   |
| All  Other            |       | (33,913                                              | )          | (29,377 | ) |
| Total  Pre-Tax Income |       | $                                                    | 57,571     |   | $ | 41,133 |   |

 

**Threemonths ended March 31, 2008 Compared to the three months March 31,2007**

 

·                  **Revenues**

 

·                  Revenues forBrokerage represent revenues generated from transactions in North America andEurope.  Total revenues for Brokerageincreased by $53.7 million or 25.0%, to $268.6 million for the three monthsended March 31, 2008 from $214.9 million for the three months ended March 31,2007. The increase in revenues was attributable to an increase in revenuesgenerated from our four product areas. The factors that contributed to the increase in these product areasinclude the credit market volatility related to subprime and collateralizeddebt, market turmoil, inflationary and economic concerns, 

 

35

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the continued overall growth in the credit derivativesmarket, the continued success of CreditMatch® in Europe at helping sustain andgrow market share and the growth in European dry physical freight and dryfright derivatives.

 

·                  Revenues for AllOther primarily consisted of revenues generated from our brokerage operationsin Asia and analytics and market data. Total revenues from All Other increased by $20.6 million or 81.2%, to$46.0 million for the three months ended March 31, 2008 from $25.4 millionfor the three months ended March 31, 2007. Revenues for our Asia brokerage operations increased by $11.0 million or60.4%, to $29.2 million for the three months ended March 31, 2007 from$18.2 million for the three months ended March 31, 2007.  Revenues for our analytics and market dataincreased by $6.0 million or 113.2%, to $11.3 million for the three monthsended March 31, 2008 from $5.3 million for the three months ended March 31,2007.  The increase was primarily relatedto $5.5 million of revenues generated by Trayport Limited.

 

·                  **Expenses**

 

·                  Total expensesfor Brokerage increased by $32.7 million or 22.6%, to $177.1 million for thethree months ended March 31, 2008 from $144.4 million for the three monthsended March 31, 2007.   The increasewas primarily due to an increase in compensation and employee benefits,communications and market data, travel and promotion and clearing fees.

 

The Company recordscertain direct expenses other than compensation and employee benefits to theoperating segments, however, the Company does not allocate certain expenses toits operating segments that are managed separately at the corporate level.  The unallocated costs include rent andoccupancy, depreciation and amortization, professional fees, interest and otherexpenses and are included in the expenses for All Other described below.  Management does not consider the unallocatedcosts in its measurement of segment performance.

 

·                  Total expensesfor All Other increased by $25.2 million or 45.9%, to $79.9 million for thethree months ended March 31, 2008 from $54.8 million for the three monthsended March 31, 2007.  The increasewas primarily due to an increase in compensation and employee benefits, rentand occupancy, depreciation and amortization, interest and other expenses, andoffset by contract costs incurred relating to a long-term contract that wascompleted in the prior year. Additionally, we did not allocate these expenses and the provision forincome taxes to the individual segment for internal reporting purposes, as wedid not believe that allocating these expenses were beneficial in evaluatingsegment performance.

 

**Quarterly Results of Operations**

 

The following table setsforth, by quarter, our unaudited statement of income data for the period from April 1,2006 to March 31, 2008. Results of any period are not necessarilyindicative of results for a full year and may, in certain periods, be affectedby seasonal fluctuations in our business.

 

36

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| ** **                            | ** ** | **Quarter Ended**               | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **March 31,  2008**             | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                   |       | $                                    | 239,089    |   | $ | 186,827 |   | $ | 198,405 |   | $ | 179,466 |   | $ | 184,525 |   | $ | 151,890 |   | $ | 138,961 |   | $ | 130,134 |   |
| Principal  transactions               |       | 59,094                               |       | 51,366 |   | 42,467 |   | 42,044 |   | 48,377 |   | 33,890 |   | 34,478 |   | 41,792 |   |
| Total brokerage  revenues             |       | 298,183                              |       | 238,193 |   | 244,872 |   | 221,510 |   | 232,902 |   | 185,780 |   | 173,439 |   | 171,926 |   |
| Analytics and  market data            |       | 11,259                               |       | 4,850 |   | 4,855 |   | 4,491 |   | 5,326 |   | 4,232 |   | 4,954 |   | 4,271 |   |
| Contract revenue                      |       | 13                                   |       | — |   | 11 |   | 204 |   | — |   | 1,092 |   | — |   | 5,881 |   |
| Interest income                       |       | 2,683                                |       | 2,726 |   | 2,589 |   | 2,297 |   | 2,102 |   | 2,366 |   | 2,150 |   | 2,395 |   |
| Other income  (loss)                  |       | 2,462                                |       | 1,590 |   | 2,416 |   | (380 | ) | (13 | ) | 601 |   | (585 | ) | 3,093 |   |
| Total revenues                        |       | 314,600                              |       | 247,359 |   | 254,743 |   | 228,122 |   | 240,317 |   | 194,071 |   | 179,958 |   | 187,566 |   |
| **Expenses**                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits   |       | 193,198                              |       | 151,020 |   | 158,845 |   | 143,474 |   | 151,508 |   | 122,465 |   | 112,543 |   | 113,701 |   |
| Communications  and market data       |       | 11,181                               |       | 11,538 |   | 11,329 |   | 11,299 |   | 10,456 |   | 10,545 |   | 9,799 |   | 9,303 |   |
| Travel and  promotion                 |       | 11,723                               |       | 13,057 |   | 9,929 |   | 10,170 |   | 8,836 |   | 9,242 |   | 7,069 |   | 8,549 |   |
| Rent and  occupancy                   |       | 6,614                                |       | 6,132 |   | 6,439 |   | 5,529 |   | 5,561 |   | 5,511 |   | 4,594 |   | 4,841 |   |
| Depreciation and  amortization        |       | 7,922                                |       | 6,992 |   | 6,747 |   | 5,720 |   | 5,227 |   | 6,799 |   | 4,338 |   | 4,048 |   |
| Professional fees                     |       | 5,012                                |       | 5,539 |   | 4,459 |   | 4,332 |   | 3,569 |   | 5,397 |   | 4,391 |   | 5,320 |   |
| Clearing fees                         |       | 11,202                               |       | 10,200 |   | 8,063 |   | 6,940 |   | 7,529 |   | 6,312 |   | 5,884 |   | 6,798 |   |
| Interest                              |       | 3,085                                |       | 1,522 |   | 1,703 |   | 2,002 |   | 1,849 |   | 2,170 |   | 1,124 |   | 1,772 |   |
| Other expenses                        |       | 7,086                                |       | 6,023 |   | 4,574 |   | 6,909 |   | 4,649 |   | 4,046 |   | 3,098 |   | 3,843 |   |
| Contract costs                        |       | 6                                    |       | — |   | 6 |   | 127 |   | — |   | 639 |   | — |   | 5,180 |   |
| Lease termination  costs to affiliate |       | —                               |       | — |   | — |   | — |   | — |   | (57 | ) | (93 | ) | (92 | ) |
| Total expenses                        |       | 257,029                              |       | 212,023 |   | 212,094 |   | 196,502 |   | 199,184 |   | 173,069 |   | 152,747 |   | 163,263 |   |
| Income before  provision for taxes    |       | 57,571                               |       | 35,336 |   | 42,649 |   | 31,620 |   | 41,133 |   | 21,002 |   | 27,211 |   | 24,303 |   |
| Provision for  income taxes           |       | 21,589                               |       | 10,128 |   | 16,746 |   | 12,553 |   | 16,453 |   | 7,593 |   | 10,621 |   | 10,207 |   |
| Net income                            |       | $                                    | 35,982     |   | $ | 25,208 |   | $ | 25,903 |   | $ | 19,067 |   | $ | 24,680 |   | $ | 13,409 |   | $ | 16,590 |   | $ | 14,096 |   |

 

The following table setsforth our quarterly results of operations as a percentage of our total revenuesfor the indicated periods:

 
| ** **                            | ** ** | **Quarter Ended**   | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
| **Revenues**                          |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                  |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency  commissions                   |       | 76.0                     | %          | 75.5 | % | 77.9 | % | 78.7 | % | 76.8 | % | 78.2 | % | 77.2 | % | 69.4 | % |
| Principal  transactions               |       | 18.8                     |       | 20.8 |   | 18.2 |   | 18.4 |   | 20.1 |   | 17.5 |   | 19.2 |   | 22.3 |   |
| Total brokerage  revenues             |       | 94.8                     |       | 96.3 |   | 96.1 |   | 97.1 |   | 96.9 |   | 95.7 |   | 96.4 |   | 91.7 |   |
| Analytics and  market data            |       | 3.6                      |       | 2.0 |   | 1.9 |   | 2.0 |   | 2.2 |   | 2.2 |   | 2.8 |   | 2.3 |   |
| Contract revenue                      |       | —                   |       | — |   | 0.0 |   | 0.1 |   | 0.0 |   | 0.6 |   | — |   | 3.1 |   |
| Interest income                       |       | 0.9                      |       | 1.1 |   | 1.0 |   | 1.0 |   | 0.9 |   | 1.2 |   | 1.2 |   | 1.3 |   |
| Other income  (loss)                  |       | 0.8                      |       | 0.6 |   | 0.9 |   | (0.2 | ) | 0.0 |   | 0.3 |   | (0.4 | ) | 1.6 |   |
| Total revenues                        |       | 100.0                    | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| **Expenses**                          |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits   |       | 61.4                     | %          | 61.1 | % | 62.4 | % | 62.9 | % | 63.0 | % | 63.1 | % | 62.5 | % | 60.6 | % |
| Communications  and market data       |       | 3.6                      |       | 4.7 |   | 4.4 |   | 5.0 |   | 4.4 |   | 5.4 |   | 5.4 |   | 5.0 |   |
| Travel and  promotion                 |       | 3.7                      |       | 5.3 |   | 3.9 |   | 4.5 |   | 3.7 |   | 4.8 |   | 3.9 |   | 4.6 |   |
| Rent and  occupancy                   |       | 2.1                      |       | 2.5 |   | 2.5 |   | 2.4 |   | 2.3 |   | 2.8 |   | 2.6 |   | 2.6 |   |
| Depreciation and  amortization        |       | 2.5                      |       | 2.8 |   | 2.6 |   | 2.5 |   | 2.2 |   | 3.5 |   | 2.4 |   | 2.2 |   |
| Professional fees                     |       | 1.6                      |       | 2.2 |   | 1.8 |   | 1.9 |   | 1.5 |   | 2.8 |   | 2.4 |   | 2.8 |   |
| Clearing fees                         |       | 3.6                      |       | 4.1 |   | 3.2 |   | 3.0 |   | 3.1 |   | 3.3 |   | 3.3 |   | 3.6 |   |
| Interest                              |       | 1.0                      |       | 0.6 |   | 0.7 |   | 0.9 |   | 0.8 |   | 1.1 |   | 0.6 |   | 0.9 |   |
| Other expenses                        |       | 2.3                      |       | 2.4 |   | 1.8 |   | 3.0 |   | 1.9 |   | 2.1 |   | 1.7 |   | 2.0 |   |
| Contract costs                        |       | —                   |       | — |   | — |   | 0.1 |   | — |   | 0.3 |   | — |   | 2.8 |   |
| Lease termination  costs to affiliate |       | —                   |       | — |   | — |   | — |   | — |   | 0.0 |   | (0.1 | ) | — |   |
| Total expenses                        |       | 81.7                     | %          | 85.7 | % | 83.3 | % | 86.1 | % | 82.9 | % | 89.2 | % | 84.7 | % | 87.1 | % |
| Income before  provision for taxes    |       | 18.3                     |       | 14.3 |   | 16.7 |   | 13.9 |   | 17.1 |   | 10.8 |   | 15.3 |   | 12.9 |   |
| Provision for  income taxes           |       | 6.9                      |       | 4.1 |   | 6.6 |   | 5.5 |   | 6.8 |   | 3.9 |   | 5.9 |   | 5.4 |   |
| Net income                            |       | 11.4                     | %          | 10.2 | % | 10.2 | % | 8.4 | % | 10.3 | % | 6.9 | % | 9.4 | % | 7.5 | % |

 

37

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The tables below detailour brokerage revenues by product category in dollars and as a percentage ofour total brokerage revenues for the indicated periods.

 
| ** **                | ** ** | **Quarter Ended**               | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **March 31,  2008**             | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage  Revenues:**  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                    |       | $                                    | 110,695    |   | $ | 72,632 |   | $ | 87,845 |   | $ | 72,436 |   | $ | 84,811 |   | $ | 61,032 |   | $ | 60,654 |   | $ | 59,838 |   |
| Financial                 |       | 52,020                               |       | 44,540 |   | 49,298 |   | 45,865 |   | 45,001 |   | 39,232 |   | 38,605 |   | 38,942 |   |
| Equity                    |       | 78,716                               |       | 70,712 |   | 59,155 |   | 53,284 |   | 56,383 |   | 44,940 |   | 41,426 |   | 46,109 |   |
| Commodity                 |       | 56,752                               |       | 50,309 |   | 48,574 |   | 49,925 |   | 46,707 |   | 40,576 |   | 32,754 |   | 27,037 |   |
| Total brokerage  revenues |       | $                                    | 298,183    |   | $ | 238,193 |   | $ | 244,872 |   | $ | 221,510 |   | $ | 232,902 |   | $ | 185,780 |   | $ | 173,439 |   | $ | 171,926 |   |
| **Brokerage  Revenues:**  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                    |       | 37.1                                 | %          | 30.5 | % | 35.9 | % | 32.7 | % | 36.4 | % | 32.9 | % | 35.0 | % | 34.8 | % |
| Financial                 |       | 17.5                                 |       | 18.7 |   | 20.1 |   | 20.7 |   | 19.3 |   | 21.1 |   | 22.2 |   | 22.7 |   |
| Equity                    |       | 26.4                                 |       | 29.7 |   | 24.2 |   | 24.1 |   | 24.2 |   | 24.2 |   | 23.9 |   | 26.8 |   |
| Commodity                 |       | 19.0                                 |       | 21.1 |   | 19.8 |   | 22.5 |   | 20.1 |   | 21.8 |   | 18.9 |   | 15.7 |   |
| Total brokerage  revenues |       | 100.0                                | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |

 

**Liquidity and CapitalResources**

** **

Netcash provided by operations increased to $41.7 million for the three monthsended March 31, 2008, compared with $7.9 million provided by operationsfor the three months ended March 31, 2007. The improvement is primarilyrelated to our increased net income and the increase in certain non-cash itemssuch as deferred compensation expense, loss on foreign exchange derivativecontracts and depreciation and amortization. Additionally, the increase is partially due to the improvement incertain working capital items such as other liabilities and the netreceivable/payables to brokers, dealers and clearing organizations.  The increase in accrued commissionsreceivable balance is related to an increase in agency commission revenue,which increased by approximately 29.6% for the three months ended March 31,2008 as compared to the same period in the prior year.  In addition, the average number of days tocollect receivables increased slightly at March 31, 2008 as compared tothe same period from the prior year.

 

Netcash used in investing activities for the three months ended March 31,2008 was $178.2 million compared to $9.5 million used in the three months endedMarch 31, 2007. The increase in cash used for investing activities wasprimarily attributable to $150.0 in net cash used for the acquisition ofsubstantially all of the outstanding shares of Trayport.  See Note 4 to the Condensed ConsolidatedFinancial Statements for further details of the Trayport acquisition.  Additionally, the increase in cash used ininvesting activities was due to increased capital expenditure resulting from anincrease in the purchase of computer equipment, leasehold 

 

38

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improvements and ourcontinued investment in the development of trading systems and other softwarefor internal use.

 

Netcash provided by financing activities for the three months ended March 31,2008 was $164.7 million compared to $11.3 million used in financing activitiesfor the three months ended March 31, 2007. The cash provided by financingactivities primarily consisted of net borrowings of $132.0 million under theCredit Agreement and the issuance of $60.0 million of Senior Notes, which wasoffset by payments for cash dividends of $14.7 million and $11.4 million inrepurchases of treasury stock.  See Note5 to the Condensed Consolidated Financial Statements for further details on theSenior Notes.

 

Ourliquidity and available cash resources are in part restricted by the regulatoryrequirements of our operating subsidiaries, including GFI Securities LLC, GFISecurities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK)Brokers Ltd., GFI Group Pte Ltd and GFI Korea Money Brokerage Limited. GFISecurities LLC is subject to regulatory capital requirements under the ExchangeAct and the Commodity Exchange Act. GFI Securities Limited and GFI BrokersLimited are subject to the regulated capital requirements of the FSA. GFI (HK)Securities LLC is subject to the regulated capital requirements of theSecurities and Futures Commission in Hong Kong. GFI (HK) Brokers Ltd. issubject to regulatory compliance requirements under the Monetary Authority ofHong Kong. GFI Group PTE Ltd. is subject to the regulatory compliancerequirements with the Monetary Authority of Singapore. GFI Korea MoneyBrokerage Limited is subject to the regulated capital requirements of theMinistry of Finance and Economy of South Korea. At March 31, 2008, all ofour regulated subsidiaries were in compliance with their respective regulatorycapital requirements. In addition to these regulatory capital requirements, ourliquidity may be impacted by the amount of capital that we maintain in clearingaccounts and with exchanges to support our principal transactions business. SeeNote 12 to our Condensed Consolidated Financial Statements for a furtherdiscussion of these regulatory requirements.

 

InJune 2007, we signed a new lease which will serve as our primary U.S. officespace.  The new office space is in itsfinal stages of build out.  We anticipatethat the aggregate cost of the build out of the new office space and relocationcosts will be approximately $30.0 million of which $22.4 million was paidthrough March 31, 2008.  Inaddition, as of March 31, 2008, we had purchase commitments related tothis build out of approximately $5.4 million which is expected to be paidduring the second quarter of 2008 and is included in our purchase obligationsas disclosed in Note 9 to the Condensed Consolidated Financial Statements.

 

Itis our expectation that from time to time we may purchase additional shares ofour common stock on the open market in accordance with a stock repurchaseprogram authorized by the Board.  SeeNote 6 to our Condensed Consolidated Financial Statements for furtherdiscussion of the stock repurchase program.

 

Webelieve that, based on current levels of operations and anticipated growth, ourcash from operations, together with cash currently available and the availableborrowings under our Credit Agreement, will be sufficient to fund ouroperations for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipatedacquisitions or unanticipated strategic investments could give rise toadditional financing requirements sooner than we expect. There can be noassurance 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.

 

**Contractual Obligations and Commitments**

 

The following tablesummarizes certain of our contractual obligations as of March 31, 2008:

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                   | ** ** | **(in thousands)**                   | ** ** |
| **Contractual  Obligations** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases             |       | $                                         | 140,953    |   | $ | 11,704 |   | $ | 23,929 |   | $ | 21,232 |   | $ | 84,088 |   |
| Notes Payable  (1)           |       | 188,090                                   |       | 188,090 |   |   |   | — |   | — |   |
| Long-term  obligations (2)   |       | 60,717                                    |       | 717 |   | — |   | 60,000 |   | — |   |
| Purchase Obligations(3)      |       | 24,661                                    |       | 19,859 |   | 4,802 |   | — |   | — |   |
| **Total**                    |       | $                                         | 414,421    |   | $ | 220,370 |   | $ | 28,731 |   | $ | 81,232 |   | $ | 84,088 |   |

 

39

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(1)                                  Amountlisted under Notes Payable represents outstanding borrowings under our CreditAgreement and vary from the notes payable reflected in our financial statementsbecause our financial statements reflect the total debt net of unamortized loanfees.   Additionally, it includedinterest due of $90 which was paid in April 2008.  See Note 5 to the Condensed ConsolidatedFinancial Statements for further information.

 

(2)                                  Amountlisted under long-term obligations represents the aggregate principal amount ofthe Senior Notes due in January 2013. Additionally, it included interest due of $717 which will be paid in July 2008.  See Note 5 to the Condensed ConsolidatedFinancial Statements for further information.

 

(3)                                  Amountslisted under Purchase Obligations include agreements for quotes with variousinformation service providers. Additionally, such amounts include purchasecommitments for capital expenditures for the build-out of our new office spacein the U.S. and other purchase commitments for capital expenditures.  See Note 9 to our Condensed ConsolidatedFinancial Statements for further discussion.

 

We have unrecognized taxbenefits of approximately $6.2 million after recognizing the impact of theadoption of FIN 48.  Due to theuncertainty of the amounts to be ultimately paid as well as the timing of suchpayments, all FIN 48 liabilities which have not been paid are excluded from theContractual Obligations and Commitments table.

 

**Off-Balance SheetArrangements**

** **

TheCompany did not have any off-balance sheet arrangements at March 31, 2008.

 

**Critical AccountingPolicies and Estimates**

** **

Wehave disclosed in Note 2 to our condensed consolidated financialstatements and in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in our 2007 Form 10-Kthose accounting policies that we consider to be significant in determining ourresults of operations and financial condition. There have been no materialchanges to those policies that we consider to be significant since our 2007 Form 10-K.The accounting principles utilized by us in preparing our CondensedConsolidated Financial Statements conform in all material respects to generallyaccepted accounting principles in the United States of America.

 

***Recent Accounting Pronouncements***

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue and requires enhanced disclosures about fair value measurements.  SFAS 157 requires companies to disclose thefair value of its financial instruments according to a fair value hierarchy, asdefined.  Additionally, companies arerequired to provide enhanced disclosure for certain financial instrumentswithin the hierarchy, including a reconciliation of the beginning and ending balancesseparately for each major category of assets and liabilities.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FASBStaff Position (“FSP”) FAS 157-2 which delays the effective date of SFAS 157for all nonfinancial assets and liabilities, except those that are recognizedor disclosed at fair value in the financial statements on a recurring basis (atleast annually) to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years for items within the scope of thisFSP. The Company adopted SFAS 157 on January 1, 2008 except as it appliesto those nonfinancial assets and liabilities within the scope of FSP FAS157-2.  The adoption of SFAS 157 as itrelates to the financial assets and liabilities did not have a material impacton the Company’s consolidated financial statements.  The Company will adopt SFAS 157 for thosenonfinancial assets and 

 

40

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liabilities as noted in FSP FAS 157-2 on January 1,2009.  The Company is currentlyevaluating the impact of adopting SFAS 157 for nonfinancial assets andliabilities will have on its consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS 159 provides a “Fair Value Option” under which a company mayirrevocably elect fair value as the initial and subsequent measurementattribute for certain financial assets and liabilities. This Fair Value Optionwill be available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur.  The Company adopted SFAS 159 on January 1, 2008 and did not electto apply the fair value option to any specific financial assets orliabilities.  The adoption of SFAS 159did not have a material impact on the Company’s consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements – anamendment of ARB No.51* (“SFAS 160”). SFAS 160 requires reporting entities to present noncontrolling(minority) interests as equity (as opposed to as a liability or mezzanineequity) and provides guidance on the accounting for transactions between anentity and noncontrolling interests. SFAS 160 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and will be adopted by the Company on January 1,2009.  The Company is currentlyevaluating the impact of adopting SFAS 160 on its consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations (revised 2007)* (“SFAS 141(R)”).  SFAS 141(R) requires the acquiringentity in a business combination to recognize the full fair value of assetsacquired and liabilities assumed in the transaction (whether a full or partialacquisition); establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; requires theexpensing of most transaction and restructuring costs; and requires theacquirer to disclose to investors and other users all of the information neededto evaluate and understand the nature and financial effect of the businesscombination.  SFAS 141(R) applies toall transactions or other events in which the Company obtains control of one ormore businesses, including those sometimes referred to as “true-mergers” or “mergersof equals” and combinations achieved without the transfer of consideration, forexample, by contract alone or through the lapse of minority veto rights.  SFAS 141(R) is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andwill be adopted by the Company on January 1, 2009.  The Company is currently evaluating theimpact of adopting SFAS 141(R) on its consolidated financial statements.

 

In March 2008, the Financial AccountingStandards Board issused SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“SFAS No. 161”).  SFAS No. 161 amends and expands thedisclosure requirements of SFAS No. 133 and requires entities to provideenhanced qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair values and amounts of gainsand losses on derivative contracts, and disclosures about credit-risk relatedcontingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued forfiscal years and interim period beginning after November 15, 2008 and will be adopted by the Company on January 1, 2009.  TheCompany is currently evaluating the impact of adopting SFAS No. 161 on itsconsolidated financial statements.

 

**ITEM3.**                    QUANTITATIVEAND QUALITATIVE DISLCOSURES ABOUT MARKET RISK

** **

Ourquantitative and qualitative 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 2007 Form 10-K.Except as described below in this Form 10-Q, there have been no materialchanges to those market risks during the three months ended March 31,2008.

 

41

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** **

**Foreign CurrencyExposure Risk**

** **

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes toour risk management policy during the three months ended March 31, 2008.

 

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 $6.6million.

 

**ITEM 4.**                    CONTROLS ANDPROCEDURES

** **

As of the end of theperiod covered by this report, the Company’s management carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures. Based onthe foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) wereeffective as of the end of the period covered by this Form 10-Q.

 

In addition, the Company’smanagement, including the Company’s Chief Executive Officer andChief Financial Officer, has evaluated the Company’s internal controlsover financial reporting (as defined in Rule 13a-15(f) of the ExchangeAct) and determined that there have been no changes in our internal controlsover financial reporting during the most recent fiscal quarter of 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**PART II—OTHERINFORMATION**

** **

**ITEM 1.**                    LEGALPROCEEDINGS

** **

In the normal course ofbusiness, we are and have been party to, or otherwise involved in, litigations,claims and arbitrations that involve claims for substantial amounts. Theseproceedings have generally involved either competitor claims in connection withnew employee hires, or claims from former employees in connection with thetermination of their employment from us. We believe proceedings of these typesare common in the inter-dealer brokerage industry due to its highly competitivenature. There is also potential for client claims alleging the occurrence oferrors in the execution of brokerage transactions. We are also currently andwill, in the future, be involved, in examinations, investigations orproceedings by government agencies and self-regulatory organizations. Theseexaminations or investigations could result in substantial fines oradministrative proceedings that could result in censure, the issuance of ceaseand desist orders, the suspension or expulsion of a broker dealer and itsaffiliated persons, officers or employees or other similar consequences.

 

In February 2008, the Company’s U.K. subsidiary, GFIHoldings Limited (“Holdings”), applied to the High Court in London, England,for a declaration that it was contractually entitled to terminate theemployment agreements of three senior brokers in September 2007 by reasonof their gross misconduct, repudiatory breaches of contract and breaches offiduciary duty. Following the termination of their employment in September 2007,the three former employees threatened to bring claims against Holdings inrespect of past and future bonuses, stock options and restricted stock units inthe aggregate amount of approximately $10.0 million. Holdings is therefore alsoseeking a declaration that the former employees are not entitled to receive anyfurther bonus payments or payments or benefits of any kind. The formeremployees have filed a counterclaim but the amount is unquantified. While theCompany cannot predict the outcome of any litigation, it believes that theformer employees were in serious breach of their obligations and are nottherefore entitled to any of the amount claimed.

 

42

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Based on currently available information, this matter is notexpected to have a material adverse impact on the Company’s financial position.However, if the counterclaim succeeds in respect of the full amount previouslythreatened, this matter may be material to the Company’s results of operationsor cash flows in a given period.

 

In April 2008, Donald P. Fewer, formerly the headof the Company’s North American credit division resigned. Following Mr. Fewer’sresignation, 22 of the Company’s credit brokerage staff resigned and defectedto a competitor, nothwithstanding various contractual obligations and fiduciaryduties. In connection with these actions, GFI Securities LLC commenced anaction in arbitration before the Financial Industry Regulatory Authority (“FINRA”)Dispute Resolution against Tradition Asiel Securities, Standard CreditSecurities Inc. and certain of the departing employees asserting a number ofclaims, including tortious interference with contract, breach of fiduciaryduty, unfair compeition, misappropriation of confidential and proprietaryinformation and the violation of certain FINRA rules of conduct. Certainof the parties to this action have also filed claims against GFI Securities andthe Company seeking damages for alleged breach of employment agreements anddeclaratory judgements relating to the enforceability of the restrictivecovenants in their employment or other agreements, and the Company hascounter-claimed against Mr. Fewer in a proceeding brought by him in theNew York State Supreme Court. In connection with these various proceedings, theCompany or its affiliates are seeking injunctive relief to prohibit thedeparting employees from violating the terms of their contractual obligations. Inaddition, the Company is seeking an award of damages in an amout to bedetermined in the course of such proceedings.

 

**ITEM 1A.**           RISK FACTORS

** **

There have been nomaterial changes in our risk factors from those disclosed in the 2007 Form 10-K.See “Risk Factors” in Part I, Item 1A of our 2007 Form 10-K.

 

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

** **

The table below sets forth the information withrespect to purchases made by the Company of its common stock during thequarterly period ended March 31, 2008.

 

**Issuer Purchases of Equity Securities**

** **
| **Period**                   | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased  As Part of Publicly  Announced Plans  or Programs (C)** | ** ** | **Approximate  Number of Shares  that May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| **January**                  |       |                                    |       |                                    |       |                                                                                                             |       |                                                                                                  |       |
| Stock Repurchase Program (a) |       | N/A                                     |       | N/A                                     |       | N/A                                                                                                              |       | 116,296                                                                                               |       |
| Employee Transactions (b)    |       | 107,532                                 |       | $                                       | 21.97      |                                                                                                             | N/A        |                                                                                                  | N/A        |   |
|                         |       |                                    |       |                                    |       |                                                                                                             |       |                                                                                                  |       |
| **February**                 |       |                                    |       |                                    |       |                                                                                                             |       |                                                                                                  |       |
| Stock Repurchase Program (a) |       | 116,236                                 |       | $                                       | 20.85      |                                                                                                             | 116,236    |                                                                                                  | 83,900     |   |
| Employee Transactions (b)    |       | 5,152                                   |       | $                                       | 20.18      |                                                                                                             | N/A        |                                                                                                  | N/A        |   |

 

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| **March**                    |   |    |   |   |   |    |    |    |    |
|------------------------------|--------|---------|--------|--------|--------|---------|---------|---------|---------|
| Stock Repurchase Program (a) |   | 480,000 |   | 18.69  |   | 480,000 |    | 175,043 |    |
| Employee Transactions (b)    |   | 112,994 |   | $      | 14.33  |    | N/A     |    | N/A     |   |
|                         |   |    |   |   |   |    |    |    |    |
| **Total**                    |   |    |   |   |   |    |    |    |    |
| Stock Repurchase Program (a) |   | 596,236 |   | $      | 19.11  |    | 596,236 |    | 175,043 |   |
| Employee Transactions (b)    |   | 225,678 |   | $      | 18.10  |    | N/A     |    | N/A     |   |

 

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(a) In August 2007, the Board authorized the Companyto implement a stock repurchase program to repurchase a limited number of shares of the Company’s common stock on the openmarket. Under the repurchase plan, the Board authorized the Company torepurchase stock of common shares on the open market in an amount not toexceed, during any calendar year, the number of shares issued upon the exerciseof stock options plus the number of shares underlying grants of RSUs that aregranted or which management reasonably anticipates will be granted in suchcalendar year. Any repurchases are also subject to compliance with certaincovenants under the Company’s Credit Agreement.

 

(b)  Under our 2004 Equity Incentive Plan, weallow employees to elect to have us withhold shares of common stock to satisfyminimum statutory tax withholding obligations arising on the vesting andsettlement of restricted stock units. When we withhold these shares, we arerequired to remit to the appropriate taxing authorities the market price of theshares withheld, which could be deemed a purchase of the shares of common stockby us on the date of withholding.

 

**ITEM 4.****                  ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Theinformation required pursuant to this Item with respect to the Special Meetingof Stockholders held on January 11, 2008 was contained in Part I,Item 4 in our Annual Report on Form 10-K in the fiscal year endedDecember 31, 2007, which we filed with the SEC on February 29, 2008,and such information is incorporated by reference herein.

 

**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). |

 

44

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended March 31,2008 to be signed on its behalf by the undersigned, thereunto duly authorized,on the 12th day of May, 2008.

 

 
|          | 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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