**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2007**

**OR**

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

**FORTHE TRANSITION PERIOD FROM                TO                    **

**CommissionFile No: 000-51103**

**GFI GROUP INC.**

(Exact name of registrantas specified in its charter)

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

 

Registrant’s 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 checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated  filer x | Accelerated  filer o | Non-accelerated filer o |
|---------------------------------|---------------------------|------------------------------|

 

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

The number of shares of registrant’s common stockoutstanding on April 30, 2007 was 28,927,639.

 

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**Tableof Contents**
| **Part I—Financial  Information** |
|---------------------------------------------|
| Item 1.                                     |   | Financial  Statements |   |   |
|                                        |   | Condensed  Consolidated Statements of Financial Condition as of March 31, 2007  (unaudited) and December 31, 2006 |   | 4 |
|                                        |   | Condensed  Consolidated Statements of Income for the three months ended March 31,  2007 (unaudited) and March 31, 2006 (unaudited) |   | 5 |
|                                        |   | Condensed  Consolidated Statements of Comprehensive Income for the three months ended  March 31, 2007 (unaudited) and March 31, 2006 (unaudited) |   | 6 |
|                                        |   | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 (unaudited) and March 2006 (unaudited) |   | 7 |
|                                        |   | Notes  to Condensed Consolidated Financial Statements (unaudited) |   | 8 |
| Item 2.                                     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 23 |
| Item 3.                                     |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 34 |
| Item 4.                                     |   | Controls  and Procedures |   | 35 |
| **Part II—Other  Information**    |
| Item 1.                                     |   | Legal  Proceedings |   | 36 |
| Item 1A.                                    |   | Risk Factors |   | 36 |
| Item 2.                                     |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 36 |
| Item 6.                                     |   | Exhibits |   | 37 |

 

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**AvailableInformation**

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

Information relating to the corporate governance ofthe Company is also available on our website, including information concerningour directors, board committees, including committee charters, our code ofbusiness conduct and ethics for all employees and for senior financial officersand our compliance procedures for accounting and auditing matters. In addition,the Investor Relations page of our website includes supplemental financialinformation that we make available from time to time.

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

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

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

| ** **                                                                                                                                                                             | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                             | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Cash and cash equivalents                                                                                                                                                              |       |                     | $          | 168,543                     |       |   |   | $ | 181,484 |   |   |
| Deposits with clearing organizations                                                                                                                                                   |       |                     | 8,047      |                        |       |   | 7,973 |   |   |
| Accrued commissions receivable, net of allowance for  doubtful accounts                                                                                                                |       |                     | 159,907    |                        |       |   | 120,731 |   |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                          |       |                     | 328,570    |                        |       |   | 174,693 |   |   |
| Property, equipment and leasehold improvements, net                                                                                                                                    |       |                     | 43,826     |                        |       |   | 41,396 |   |   |
| Software inventory, net                                                                                                                                                                |       |                     | 5,605      |                        |       |   | 5,770 |   |   |
| Goodwill                                                                                                                                                                               |       |                     | 93,685     |                        |       |   | 91,891 |   |   |
| Intangible assets, net                                                                                                                                                                 |       |                     | 14,289     |                        |       |   | 14,833 |   |   |
| Other assets                                                                                                                                                                           |       |                     | 56,706     |                        |       |   | 60,838 |   |   |
| TOTAL ASSETS                                                                                                                                                                           |       |                     | $          | 879,178                     |       |   |   | $ | 699,609 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                         | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| LIABILITIES                                                                                                                                                                            |       |                     |       |                        |       |   |   |   |   |
| Accrued compensation                                                                                                                                                                   |       |                     | $          | 106,264                     |       |   |   | $ | 128,047 |   |   |
| Accounts payable and accrued expense                                                                                                                                                   |       |                     | 30,725     |                        |       |   | 31,336 |   |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                                               |       |                     | 243,434    |                        |       |   | 84,995 |   |   |
| Notes payable, net                                                                                                                                                                     |       |                     | 75,430     |                        |       |   | 90,253 |   |   |
| Other liabilities                                                                                                                                                                      |       |                     | 65,667     |                        |       |   | 34,509 |   |   |
| Total Liabilities                                                                                                                                                                      |       |                     | $          | 521,520                     |       |   |   | $ | 369,140 |   |   |
| Commitments and  contingencies                                                                                                                                                         |       |                     |       |                        |       |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                              |       |                     |       |                        |       |   |   |   |   |
| Preferred Stock, $0.01 par value; 5,000,000 shares  authorized and none outstanding at March 31, 2007 and December 31,  2006                                                 |       |                     | —     |                        |       |   | — |   |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized; 28,886,376 and 28,698,505 shares outstanding at  March 31, 2007 and December 31, 2006, respectively |       |                     | 289        |                        |       |   | 287 |   |   |
| Additional paid in capital                                                                                                                                                             |       |                     | 231,427    |                        |       |   | 224,442 |   |   |
| Retained earnings                                                                                                                                                                      |       |                     | 126,106    |                        |       |   | 105,868 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                   |       |                     | (164       | )                           |       |   | (128 | ) |   |
| Total Stockholders’ Equity                                                                                                                                                        |       |                     | 357,658    |                        |       |   | 330,469 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                       |       |                     | 879,178    |                        |       |   | 699,609 |   |   |

 

See notes to condensed consolidated financial statements

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

| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| REVENUES:                                |       |                                                 |       |   |   |
| Brokerage  revenues:                     |       |                                                 |       |   |   |
| Agency commissions                       |       | $                                                    | 184,525    |   | $ | 136,910 |   |
| Principal transactions                   |       | 48,377                                               |       | 41,060 |   |
| Total brokerage revenues                 |       | 232,902                                              |       | 177,970 |   |
| Analytics and market data                |       | 5,326                                                |       | 5,194 |   |
| Interest income                          |       | 2,102                                                |       | 2,233 |   |
| Other income (loss)                      |       | (13                                                  | )          | 191 |   |
| Total Revenues                           |       | 240,317                                              |       | 185,588 |   |
| EXPENSES:                                |       |                                                 |       |   |   |
| Compensation and employee benefits       |       | 151,508                                              |       | 116,845 |   |
| Communications and market data           |       | 10,456                                               |       | 7,653 |   |
| Travel and promotion                     |       | 8,836                                                |       | 7,531 |   |
| Rent and occupancy                       |       | 5,561                                                |       | 5,613 |   |
| Depreciation and amortization            |       | 5,227                                                |       | 3,836 |   |
| Professional fees                        |       | 3,569                                                |       | 4,044 |   |
| Clearing fees                            |       | 7,529                                                |       | 5,477 |   |
| Interest                                 |       | 1,849                                                |       | 1,752 |   |
| Other expenses                           |       | 4,649                                                |       | 3,556 |   |
| Total Expenses                           |       | 199,184                                              |       | 156,307 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 41,133                                               |       | 29,281 |   |
| PROVISION FOR INCOME TAXES               |       | 16,453                                               |       | 12,298 |   |
| NET INCOME                               |       | 24,680                                               |       | $ | 16,983 |   |
| EARNINGS PER  SHARE                      |       |                                                 |       |   |   |
| Basic                                    |       | $                                                    | 0.86       |   | $ | 0.61 |   |
| Diluted                                  |       | 0.84                                                 |       | $ | 0.59 |   |
| WEIGHTED AVERAGE  SHARES OUSTANDING:     |       |                                                 |       |   |   |
| Basic                                    |       | 28,794,199                                           |       | 28,041,598 |   |
| Diluted                                  |       | 29,527,813                                           |       | 28,957,497 |   |

 

See notes to condensed consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)(In thousands)**

| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| NET INCOME                                                            |       | $                                                | 24,680     |   | $ | 16,983 |   |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                   |       |                                             |       |   |   |
| Unrealized gain on foreign exchange derivative  contracts, net of tax |       | —                                           |       | (393 | ) |
| Foreign currency translation adjustment, net of tax                   |       | (36                                              | )          | 62 |   |
| COMPREHENSIVE INCOME                                                  |       | $                                                | 24,644     |   | $ | 16,652 |   |

 

See notes to condensed consolidated financial statements

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

| ** **                                                                         | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                                                                     |       |   |   |   |   |   |   |
| Net income                                                                         |       |                                                                                                     | $          | 24,680 |   |   |   | $ | 16,983 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                                                     |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                                                                                                     | 5,227      |   |   |   | 3,836 |   |   |
| Amortization of loan  fees                                                         |       |                                                                                                     | 56         |   |   |   | 74 |   |   |
| Provision for allowance  for doubtful accounts                                     |       |                                                                                                     | 638        |   |   |   | 324 |   |   |
| Deferred compensation                                                              |       |                                                                                                     | 4,064      |   |   |   | 1,943 |   |   |
| (Benefit from) provision  for deferred taxes                                       |       |                                                                                                     | 410        |   |   |   | (1,012 | ) |   |
| Loss on foreign exchange  for notes payable                                        |       |                                                                                                     | 121        |   |   |   | 296 |   |   |
| Loss on foreign exchange  derivative contracts                                     |       |                                                                                                     | 870        |   |   |   | 1,911 |   |   |
| (Increase) decrease in operating assets:                                           |       |                                                                                                     |       |   |   |   |   |   |   |
| Deposits with clearing  organizations                                              |       |                                                                                                     | (73        | ) |   |   | (21 | ) |   |
| Accrued commissions  receivable                                                    |       |                                                                                                     | (39,215    | ) |   |   | (22,659 | ) |   |
| Receivables from  brokers, dealers and clearing organizations                      |       |                                                                                                     | (153,877   | ) |   |   | (207,978 | ) |   |
| Software inventory                                                                 |       |                                                                                                     | (472       | ) |   |   | (813 | ) |   |
| Other assets                                                                       |       |                                                                                                     | 4,402      |   |   |   | (2,375 | ) |   |
| Increase (decrease) in operating liabilities:                                      |       |                                                                                                     |       |   |   |   |   |   |   |
| Accrued compensation                                                               |       |                                                                                                     | (21,783    | ) |   |   | (2,205 | ) |   |
| Accounts payable and  accrued expenses                                             |       |                                                                                                     | (674       | ) |   |   | 3,750 |   |   |
| Payables to brokers,  dealers and clearing organizations                           |       |                                                                                                     | 158,439    |   |   |   | 191,890 |   |   |
| Other liabilities                                                                  |       |                                                                                                     | 24,979     |   |   |   | 6,445 |   |   |
| Cash provided by/(used  in) operating activities                                   |       |                                                                                                     | 7,792      |   |   |   | (9,611 | ) |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                                                                     |       |   |   |   |   |   |   |
| Net cash used for  business acquisitions                                           |       |                                                                                                     | (2,756     | ) |   |   | (87 | ) |   |
| Purchase of property,  equipment and leasehold improvements                        |       |                                                                                                     | (5,980     | ) |   |   | (5,051 | ) |   |
| Payments on foreign  exchange derivative contracts                                 |       |                                                                                                     | (626       | ) |   |   | (529 | ) |   |
| Cash used in investing  activities                                                 |       |                                                                                                     | (9,362     | ) |   |   | (5,667 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                                                                     |       |   |   |   |   |   |   |
| Repayment of notes  payable                                                        |       |                                                                                                     | (30,000    | ) |   |   | (23,000 | ) |   |
| Proceeds from notes  payable                                                       |       |                                                                                                     | 15,000     |   |   |   | 17,000 |   |   |
| Payment of loan fees                                                               |       |                                                                                                     | —     |   |   |   | (507 | ) |   |
| Proceeds from exercise  of stock options                                           |       |                                                                                                     | 1,953      |   |   |   | 2,756 |   |   |
| Cash paid for taxes on  vested restricted stock units                              |       |                                                                                                     | (1,267     | ) |   |   | (455 | ) |   |
| Tax benefit related to  share-based compensation                                   |       |                                                                                                     | 2,979      |   |   |   | 3,721 |   |   |
| Cash used by financing  activities                                                 |       |                                                                                                     | (11,335    | ) |   |   | (485 | ) |   |
| Effects of foreign  currency translation adjustment                                |       |                                                                                                     | (36        | ) |   |   | 62 |   |   |
| DECREASE IN CASH AND  CASH EQUIVALENTS                                             |       |                                                                                                     | (12,941    | ) |   |   | (15,701 | ) |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                    |       |                                                                                                     | 181,484    |   |   |   | 144,148 |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                          |       |                                                                                                     | $          | 168,543 |   |   |   | $ | 128,447 |   |   |
| SUPPLEMENTAL DISLCOSURE:                                                           |       |                                                                                                     |       |   |   |   |   |   |   |
| Interest paid                                                                      |       |                                                                                                     | 2,021      |   |   |   | 1,690 |   |   |
| Income taxes paid, net of refunds                                                  |       |                                                                                                     | 5,761      |   |   |   | 2,133 |   |   |

 

See notes to condensed consolidated financial statements

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

**1.**                 ORGANIZATIONAND BUSINESS

The condensed consolidatedfinancial statements include the accounts of GFI Group Inc. and itssubsidiaries (collectively the “Company”). The Company, through its solewholly-owned subsidiary GFInet Inc. (“GFInet”), provides brokerageservices, market data and analytics software products to institutional clientsin markets for a range of credit, financial, equity and commodity instruments.The Company complements its brokerage capabilities with value-added services,such as data and analytics products for decision support, which it licenses tothe financial services industry and other corporations. The Company’s principaloperating subsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI GroupLLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK) Securities LLC,GFI (HK) Brokers Ltd., GFI Group PTE Ltd., Amerex Brokers LLC, GFIKorea Money Brokerage Limited and Fenics Limited and subsidiaries (“Fenics”).As of March 31, 2007, Jersey Partners, Inc. owns approximately 44% ofthe Company’s outstanding shares of common stock. The Company’s chief executiveofficer, Michael Gooch, is the controlling shareholder of JPI.

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Basis ofPresentation—******The***Company’scondensed consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America, whichrequire management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, revenues and expenses, and the disclosure ofcontingencies in the consolidated financial statements. Management believesthat the estimates utilized in the preparation of the consolidated financialstatements are reasonable and prudent. Actual results could differ materiallyfrom these estimates.

All material intercompany transactions and balanceshave been eliminated.

The condensed consolidated financial statements shouldbe read in conjunction with the Company’s consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006 (the “2006 Form 10-K”).The condensed consolidated financial statements reflect all adjustments thatare, in the opinion of management, necessary for the fair statement of theresults for the interim period. The results of operations for interim periodsare not necessarily indicative of results for the entire year.

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

***Accrued CommissionsReceivable—******Accrued***commissionsreceivable represents amounts due from brokers, dealers, banks and otherfinancial and nonfinancial institutions for the execution of brokerage transactions.Accrued commissions receivable are presented net of allowance for doubtfulaccounts of approximately $4,191 and $3,547 as of March 31, 2007 and December 31,2006, respectively. The allowance is based on management’s estimate and isreviewed on a periodic basis based on the aging of outstanding receivables andcounterparty exposure.

***BrokerageTransactions—******The***Companyprovides brokerage services to its clients in the form of either agency orprincipal transactions.

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

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

***PrincipalTransactions—******Principal***transactionrevenue is primarily derived from matched principal transactions. In matchedprincipal transactions, the Company simultaneously agrees to buy instrumentsfrom one customer and sell them to another customer. A limited number ofbrokerage desks are allowed to enter into unmatched principal transactions inthe ordinary course of business for the purpose of facilitating clients’execution needs for transactions initiated by such clients, adding liquidity toa market or attracting additional order flow. These unmatched positions areintended to be held short term. The Company earns revenue from principaltransactions on the spread between the buy and sell price of the security thatis brokered.

Additionally, from time to time, under thecircumstances described above, 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 andMarket Data—******Analytics***revenueconsists mostly of fees for licenses of software products as well asmaintenance, installation, customer training and technical support of thoseproducts. Market data revenue primarily consists of subscription fees and feesfrom customized one-time sales. Analytics revenue is recognized when all of thefollowing criteria are met: persuasive evidence of an arrangement exists,delivery of the product has occurred and no significant implementation obligationsremain, the fee is fixed and determinable, and collectibility is probable. Feesfor future updates of software products are considered separate arrangementsand related revenues are recognized when the customer acknowledgesparticipation in the update and delivery occurs. Market data revenue fromsubscription fees is recognized over the term of the subscription period, whichis generally two years. Market data revenue from customized one-time sales isrecognized upon delivery of the data.

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

***Property, Equipmentand Leasehold Improvements—******Property,***equipmentand leasehold improvements are stated at cost, less accumulated depreciationand amortization. Depreciation and amortization are calculated using thestraight-line method generally over three to seven years. Property andequipment are depreciated over their estimated useful lives. Leaseholdimprovements are amortized over the shorter of the remaining term of therespective lease to which they relate or the remaining useful life of theleasehold improvement. Internal and external costs incurred in developing orobtaining computer software for internal use are capitalized in accordance withStatement of Position (“SOP”) 98-1,*Accounting for the Costs of Computer Software Developed or Obtained forInternal Use*, and are amortized on a straight-line basis over theestimated useful life of the software, generally three years. General andadministrative costs related to developing or obtaining such software areexpensed as incurred. Property, equipment and leasehold improvements arepresented net of accumulated depreciation and amortization of $65,303 and$61,742 at March 31, 2007 and December 31, 2006, respectively.

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

***Goodwill andIntangible Assets—******Goodwill***representsthe excess of the purchase price allocation over the fair value of tangible andidentifiable intangible net assets acquired. In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142*Goodwill and Intangible Assets* (“SFAS 142”), goodwilland intangible assets with indefinite lives are no longer amortized, butinstead are tested for impairment annually or more frequently if circumstancesindicate impairment may have occurred. In the event the Company determines thatthe value of goodwill has become impaired, it will incur a charge for theamount of impairment during the fiscal quarter in which such determination ismade. The Company has selected January 1st asthe date to perform the annual impairment test. Intangible assets with definitelives are amortized on a straight-line basis over their estimated useful lives.

***DerivativeFinancial Instruments—******The***Companyuses foreign exchange derivative contracts to reduce the effects offluctuations in certain receivables and payables denominated in foreigncurrencies. During 2006, certain of these contracts were designated and qualifiedas foreign currency cash flow hedges under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended (“SFAS No. 133”). The Companyreclassified gains and losses on the foreign exchange derivative contractsincluded in accumulated other comprehensive loss into earnings at the time thehedged transactions were recognized. The Company measured effectiveness byassessing the changes in the expected future cash flows of the hedged items.The ineffective portion of the hedges, if any, was included in other income.There was no portion of the derivative instruments’ gains or losses excludedfrom the assessment of effectiveness. As of and for the three months ended March 31,2007, the Company had no foreign exchange derivative contracts that weredesignated as foreign currency cash flow hedges. For foreign exchangederivative contracts that do not qualify for hedge accounting under SFAS No. 133,the Company records these contracts at fair value and all realized andunrealized gains and losses are included in other income in the CondensedConsolidated Statement of Income.

***Income Taxes—******In***accordancewith SFAS No. 109,*Accounting forIncome Taxes*(“SFAS 109”),the Company provides for income taxes using the asset and liability methodunder which deferred income taxes are recognized for the estimated future taxeffects attributable to temporary differences and carry-forwards that resultfrom events that have been recognized either in the financial statements or theincome tax returns, but not both. The measurement of current and deferredincome tax liabilities and assets is based on provisions of enacted tax laws.Valuation allowances are recognized if, based on the weight of availableevidence, it is more likely than not that some portion of the deferred taxassets will not be realized.

***Foreign CurrencyTranslation Adjustments and Transactions—******Assets***andliabilities of foreign subsidiaries having non-U.S. dollar functionalcurrencies are translated at the period end rates of 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.

***Segment andGeographic Information—******The***Company’sonly operating segment consists of its brokerage and analytic and market dataoperations. This segment operates across domestic and international markets.Substantially all of the Company’s identifiable assets are in North America andEurope.

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

***Share-BasedCompensation—******The***Company’sshare-based compensation consists of stock options and restricted stock units(the “RSUs”). The Company adopted SFAS No. 123(R), *Share-Based Payment*(“SFAS 123(R)”) duringthe first quarter of 2006, using the modified prospective approach.SFAS 123(R) revised the fair value-based method of accounting forshare-based payment liabilities, forfeitures and modifications of stock-basedawards and clarified guidance in several areas, including measuring fair value,classifying an award as equity or as a liability and attributing compensationcost to service periods. Additionally, under SFAS 123(R), actual tax benefitsrecognized in excess of tax benefits previously established upon grant arereported as a financing cash flow, as opposed to operating cash flows. Uponadoption, the Company recognized a $142 ($90 after-tax) gain to recordforfeitures at the date of grant. This was reported as an offset to thecompensation and employee benefits expense line item in the Condensed ConsolidatedStatements of Income. This adjustment was not reflected as a cumulative effectadjustment because the amount was not material to the Company.

For share based awardsissued prior to the adoption of SFAS 123(R), the Company followed the fairvalue recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”), asamended by SFAS No. 148, *Accounting forStock-Based Compensation Transition and Disclosure*, prospectively toall awards granted, modified, or settled after January 1, 2003. Pursuantto this method, the Company expensed the grant-date fair value of optionsissued to employees on or after January 1, 2003 over the related vestingperiod and the compensation expense related to modifications of outstandingoptions was calculated as the difference between fair value of the existing andmodified options on the date of modification. For RSUs, the fair value at thedate of grant is recorded as deferred compensation and is amortized tocompensation expense over the vesting period of the grants.

***Recent Accounting Pronouncements***

Effective January 1, 2007, the Company adoptedFinancial Accounting Standards Board Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), aninterpretation of SFAS No. 109. Upon adoption, the Company recognizeda $4,442 increase to the accrual for uncertain tax positions. This increase wasaccounted for as an adjustment to the beginning balance of retained earnings onthe Condensed Consolidated Statement of Financial Condition. After recognizingthe impact of the adoption of FIN 48, the total unrecognized tax benefits (netof the federal benefit on state issues) were approximately $7,727, all of whichcould affect the effective income tax rate in any future periods. In a foreignjurisdiction, the Company is in discussion with tax authorities regardingwhether certain compensation expenses were deductible by the Company in prioryears. A portion of the compensation payment is held by a trustee and it is theCompany’s intent to use this money to offset the cost to the Company of thepotential tax liability, if any, arising from the disallowance of thededuction.

The Company is subject to U.S. federal income tax,foreign income tax as well as state income tax in the states in which we havesignificant business operations. The Company has substantially concluded allU.S. federal income tax matters for years through 2004, state and local tax mattersthrough 2000 and foreign income tax matters through 2002 with all relevant taxauthorities. The Company recognizes interest and penalties related to incometax matters in interest expense and other expense, respectively. As of March 31,2007, there were no material changes to the accrual for uncertain taxpositions.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuringfair value and requires enhanced 

11

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

disclosures about fairvalue measurements. SFAS 157 requires companies to disclose the fair value ofits financial instruments according to a fair value hierarchy, as defined. Additionally,companies are required to provide enhanced disclosure for certain financialinstruments within the hierarchy, including a reconciliation of the beginningand ending balances separately for each major category of assets andliabilities. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the impact of adopting SFAS No. 157 on its consolidatedfinancial statements.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS No. 159 provides a “FairValue Option” under which a company may irrevocably elect fair value as theinitial and subsequent measurement attribute for certain financial assets andliabilities. This Fair Value Option will be available on a contract-by-contractbasis with changes in fair value recognized in earnings as those changes occur.SFAS No. 159 is effective for financial statements for fiscal yearsbeginning after November 15, 2007. The Company is currently evaluating theimpact of adopting SFAS No. 159 on its consolidated financial statements.

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

| ** **                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Receivables from brokers, dealers and clearing organizations: |       |                     |       |                        |       |   |   |
| Contract value of  fails to deliver                           |       | $                        | 276,138    |                        |       | $ | 80,837 |   |   |
| Balance  receivable from clearing organizations               |       | 52,432                   |       |                        | 93,856     |   |   |
| Total                                                         |       | $                        | 328,570    |                        |       | $ | 174,693 |   |   |
| Payables to brokers, dealers and clearing  organizations:     |       |                     |       |                        |       |   |   |
| Contract value of  fails to receive                           |       | $                        | 223,504    |                        |       | $ | 72,394 |   |   |
| Payable to  financial institutions                            |       | 18,804                   |       |                        | 12,035     |   |   |
| Balance payable  to clearing organizations                    |       | 1,526                    |       |                        | 566        |   |   |
| Total                                                         |       | $                        | 243,434    |                        |       | $ | 84,995 |   |   |

 

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

**4.**                 GOODWILLAND INTANGIBLE ASSET

During the first quarter of 2007, the Company completedthe annual goodwill impairment test that is required by SFAS 142. The resultsof the testing did not indicate any goodwill impairment.

Changes in the carryingamount of the Company’s goodwill for the three months ended March 31, 2007were as follows:

| Balance as of  December 31, 2006 |   | $     | 91,891 |   |
|---------------------------------------|--------|-------|--------|--------|
| Goodwill acquired during  the period  |   | 1,794 |   |
| Balance as of  March 31, 2007    |   | $     | 93,685 |   |

 

Intangibleassets consisted of the following:

| ** **                     | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Gross intangible assets        |       |                         |       |                            |       |   |   |   |   |
| Customer base/relationships    |       |                         | $          | 13,038                          |       |   |   | $ | 12,690 |   |   |
| Trade name                     |       |                         | 4,113      |                            |       |   | 4,070 |   |   |
| Core technology                |       |                         | 3,230      |                            |       |   | 3,230 |   |   |
| Covenants not to compete       |       |                         | 2,345      |                            |       |   | 2,256 |   |   |
| Favorable lease agreements     |       |                         | 620        |                            |       |   | 620 |   |   |
| Propriety knowledge            |       |                         | 110        |                            |       |   | 110 |   |   |
| Patent                         |       |                         | 34         |                            |       |   | 34 |   |   |
| Total gross  intangible assets |       |                         | 23,490     |                            |       |   | 23,010 |   |   |
| Accumulated amortization       |       |                         | (9,201     | )                               |       |   | (8,177 | ) |   |
| Net intangible assets          |       |                         | $          | 14,289                          |       |   |   | $ | 14,833 |   |   |

 

Amortization was $1,024 and $361 for the three monthsended March 31, 2007 and 2006, respectively.

At March 31, 2007expected amortization expense for the definite lived intangible assets is asfollows:

| 2007 (remaining  nine months) |   | $     | 2,308  |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 2,698 |   |
| 2009                          |   | 2,639 |   |
| 2010                          |   | 2,590 |   |
| 2011                          |   | 2,383 |   |
| Total                         |   | $     | 12,618 |   |

 

On March 23,2007, the Company completed the acquisition of all of the outstanding shares ofCentury Chartering (UK) Limited for approximately £2,306 (or approximately $4,517),including cash acquired of $1,762 and $21 of direct transaction costs relatedto the acquisition. Included as part of the purchase price is £1,000 (orapproximately $1,960) that was deposited into an escrow account with athird-party escrow agent and £145(or approximately $283) to be paid to the sellers, which amounts represent, inthe aggregate, the net asset value of the acquired entity. The escrowed amount,as well as the additional purchase price, will be paid to the sellers upon finaldetermination of the net asset value of the acquired entity. The final 

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

determination of the net asset value may result in additionaladjustments to the purchase price in the second quarter. The Company does notexpect these additional adjustments to be material to the consolidatedfinancial statements. Thisacquisition was accounted for as a purchase business combination. Assetsacquired were recorded at their fair value as of March 23, 2007. Theresults of the acquired company have been included in the consolidatedfinancial statements since acquisition. Management determined the fair value ofthe identifiable intangible assets acquired based upon an independent valuationmodel. The purchase price was allocated as follows:

| ** **                                  | ** ** | ** ** | ** ** | **Useful Life** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|
| *Assets:*                                   | * *   | * *   | * *   |                 | * *   | * * |   |
| Cash                                        |       | $          | 1,762      |                 |       |   | * * |   |
| Intangible assets  subject to amortization- |       |       |       |                 |       | * * |   |
| Trademark and trade name                    |       | 44         |       |                 | 2 Years    | * * |   |
| Customer relationships                      |       | 349        |       |                 | 6 Years    | * * |   |
| Covenants not to compete                    |       | 89         |       |                 | 2 Years    | * * |   |
| Other assets                                |       | 798        |       |                 |       | * * |   |
| Goodwill                                    |       | 1,794      |       |                 |       | * * |   |
| Total assets  acquired                      |       | $          | 4,836      |                 |       |   | * * |   |
| *Liabilities:*                              | * *   | * *   | * *   |                 | * *   | * * |   |
| Accounts payable  and accrued expense       |       | 255        |       |                 |       | * * |   |
| Other liabilities                           |       | 64         |       |                 |       | * * |   |
| Total liabilities  assumed                  |       | 319        |       |                 |       | * * |   |
| Net Assets  Acquired                        |       | $          | 4,517      |                 |       |   | * * |   |

 

**5.**                 NOTESPAYABLE

TheCompany had outstanding borrowings under its 2006 Credit Agreement as of March 31,2007 and December 31, 2006 as follows:

| ** **                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Loan Available(1)              |       | $                        | 160,000    |                        |       | $ | 160,000 |   |   |
| Loans Outstanding              |       | $                        | 76,307     |                        |       | $ | 91,186 |   |   |
| Letters of Credit  Outstanding |       | $                        | 6,500      |                        |       | $ | 6,500 |   |   |

----

(1)          Amounts availableinclude up to $50,000 for letters of credit as of March 31, 2007 and December 31,2006, respectively.

The outstanding loans bore interest rates ranging from4.86% to 6.32% at March 31, 2007 and from 4.42% to 6.11% at December 31,2006. The weighted average interest rate of the outstanding loans atMarch 31, 2007 was 6.07%. At March 31, 2007 and December 31,2006, notes payable were recorded net of unamortized loan fees of $877 and$933, repectively.

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

**6.**                 EARNINGSPER SHARE

Basicand diluted earnings per share for the three months ended March 31, 2007and 2006 were as follows:

| ** **                                                        | ** ** | **Three Months Ended  March 31** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| **Basic earnings per share**                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                               | 24,680     |   | $ | 16,983 |   |
| Weighted average  common shares outstanding                       |       | 28,794,199                                      |       | 28,041,598 |   |
| Basic earnings  per share                                         |       | $                                               | 0.86       |   | $ | 0.61 |   |
| **Diluted  earnings per share**                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Net income  applicable to stockholders                            |       | $                                               | 24,680     |   | $ | 16,983 |   |
| Weighted average  common shares outstanding                       |       | 28,794,199                                      |       | 28,041,598 |   |
| Effect of dilutive  shares:                                       |       |                                            |       |   |   |
| Options and RSUs                                                  |       | 733,614                                         |       | 915,899 |   |
| Weighted average shares outstanding and common stock  equivalents |       | 29,527,813                                      |       | 28,957,497 |   |
| Diluted earnings per  share                                       |       | $                                               | 0.84       |   | $ | 0.59 |   |

 

No outstanding options topurchase shares were excluded from the computation of diluted earnings pershare for the three months ended March 31, 2007 and 2006 because theireffect would be anti-dilutive. In addition, 278,591 and 208,067 RSUs forthe three months ended March 31, 2007 and 2006, respectively, wereexcluded from the computation of diluted earnings per share because theireffect would be anti-dilutive.

**7.**                 SHARE-BASEDCOMPENSATION

The Company issues RSUs to its employees under the GFIGroup Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”).

Thefollowing is a summary of RSU transactions under the 2004 Equity Incentive Planduring the three months ended March 31, 2007:

|                                     | ** ** | **RSUs**  | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|-----------|------------|----------------------------------------------------------|------------|
| Outstanding  December 31, 2006 |       | 872,853   |       |                                                     | $          | 45.63 |   |   |
| Granted                             |       | 278,757   |       |                                                     | 66.98      |   |   |
| Vested                              |       | (116,379  | )          |                                                     | 41.49      |   |   |
| Cancelled                           |       | (11,561   | )          |                                                     | 27.67      |   |   |
| Outstanding  March 31, 2007    |       | 1,023,670 |       |                                                     | $          | 52.12 |   |   |

 

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

Theweighted average grant-date fair value of RSUs granted for the three monthsended March 31, 2007 was $66.98 per unit, compared with $54.32 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,**         | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** |
| Compensation  expense |       |                                                     | $          | 4,039 |   |   |   | $ | 1,863 |   |   |
| Income tax benefits   |       |                                                     | 1,450      |   |   |   | 700 |   |   |

 

At March 31, 2007, total unrecognizedcompensation cost related to the RSUs prior to the consideration of expectedforfeitures was approximately $46,578 and is expected to be recognized over aweighted-average period of 2.17 years. The total fair value of RSUs vestedduring the three months ended March 31, 2007 and 2006 was $4,829 and$1,023, respectively.

As of March 31, 2007, the Company had stockoptions outstanding under the GFI Group Inc. 2002 Stock Option Plan (the “GFIGroup 2002 Plan”) and the GFInet inc. 2000 Stock Option Plan (the “GFInet 2000Plan”). No additional grants will be made under these plans. For stock optionspreviously granted or modified, the fair value was estimated on the date ofgrant or modification using the Black-Scholes option pricing model.

Thefollowing is a summary of stock option transactions during the three monthsended March 31, 2007:

| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2006 |       | 621,661                                |       |                                       | $          | 13.83 |   |   | 323,034 |   |   | $ | 12.13 |   |   |
| Exercised                           |       | (92,170                                | )          |                                       | 15.73      |   |   | (33,438 | ) |   | 15.06 |   |   |
| Terminated                          |       | (13,158                                | )          |                                       | 21.00      |   |   | — |   |   | — |   |   |
| Outstanding  March 31, 2007    |       | 516,333                                |       |                                       | $          | 13.30 |   |   | 289,596 |   |   | $ | 11.80 |   |   |

 

**8.**                 COMMITMENTSAND CONTINGENCIES

*PurchaseObligations**—The*Company has variousunconditional purchase obligations. Certain of these obligations include thepurchase of market data from a number of information service providers duringthe normal course of business. As of March 31, 2007, the Company had totalpurchase commitments for market data services of approximately $13,401, with$11, 458 due within the next twelve months and $1,943 due between one to twoyears. In addition, the Company has purchase commitments for capitalexpenditures related to the purchase of certain software and office build-outin Europe of $1,251. All of these purchase commitments are due within the nexttwelve months.

*Contingencies**—In*the normal courseof business, the Company and certain subsidiaries included in the condensedconsolidated financial statements are, and have been in the past, named asdefendants in various lawsuits and proceedings and are, and have been in thepast, involved in certain regulatory examinations. Additional actions,investigations or proceedings may be brought from time to time in the future.The Company is subject to the possibility of losses from these variouscontingencies. Considerable 

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

judgment is necessary toestimate the probability and amount of any loss from such contingencies. Anaccrual is made when it is probable 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 orsettlement of asserted and unasserted claims existing as of the reporting period.

The Company is subject to regular examinations byvarious tax authorities in jurisdictions in which the Company has significantbusiness operations. The Company regularly assesses the likelihood ofadditional tax assessments that may result from these examinations in each ofthe tax jurisdictions. A tax accrual has been established, which the Companycurrently believes to be adequate in relation to the potential for additionaltax assessments. Once established, the accrual may be adjusted based on new informationor events. The imposition of additional tax assessments, penalties or fines bya tax authority could have a material impact on the Company’s effective taxrate.

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

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

*Risksand Uncertainties**—The*Company primarily generatesits revenues by executing and facilitating transactions for its customers.Revenues for these services are transaction based. As a result, the Company’srevenues could vary based upon the transaction volume of certain securities,commodities, foreign exchange and derivative markets.

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

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

Disclosure regarding theCompany’s financial instruments with off-balance sheet risk is described in “Note 17—FinancialInstruments with Off-Balance Sheet Risk” of the Notes to the ConsolidatedFinancial Statements contained in the Company’s 2006 Form 10-K.There have been no material changes to our off-balance sheet risk during thethree months ended March 31, 2007.

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

**10.**          FINANCIALINSTRUMENTS

The Company is exposed to market risk associated withmovements in foreign currency exchange rates. There have been no materialchanges to our risk management policy as described in “Note 18—FinancialInstruments” of the Notes to the Consolidated Financial Statements contained inthe Company’s 2006 Form 10-K.

As of and for the three months ended March 31,2007, the Company had no foreign exchange derivative contracts that weredesignated as foreign currency cash flow hedges. For the three months ended March 31,2006 there was no hedge ineffectiveness. Unrealized losses before tax of $562for the three months ended March 31, 2006, were recorded as othercomprehensive income (loss).

TheCompany’s derivatives are summarized below, showing the fair value of therelated assets and liabilities that are included in other assets or otherliabilities in the Condensed Consolidated Statements of Financial Condition asof March 31, 2007 and December 31, 2006 as follows:

| **Asset/(Liabilities)**                 | ** ** | ** ** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|
| Foreign exchange  derivative contracts: |       |       |       |                     |       |                        |       |   |   |
| Assets                                  |       |       | $          | 280                      |       |                        |       | $ | 649 |   |   |
| Liabilities                             |       |       | (14        | )                        |       |                        | (139       | ) |   |
| Fenics purchase  obligation             |       |       | (53        | )                        |       |                        | (53        | ) |   |
|                                         |            |            |            |                          |            |                             |            |  |  |  |  |  |  |

 

The fair values of theCompany’s foreign exchange derivative contracts were estimated based on quotedmarket prices of comparable instruments. The fair value of the Fenics purchaseobligation was estimated using an exchange option model that includedassumptions of management’s estimate of the fair value of the common stock ofthe Company and the common stock of Fenics, as well as assumptions regardingthe volatility, correlation and the expected life of the obligation.

**11.**          REGULATORYREQUIREMENTS

GFI Securities LLC is a registered broker-dealerwith the SEC and the National Association of Securities Dealers, Inc. GFISecurities LLC is also a registered introducing broker with the NationalFutures Association and the Commodity Futures Trading Commission. Accordingly,GFI Securities LLC is subject to the net capital rules under the ExchangeAct and the Commodity Exchange Act. Under these rules, GFI Securities LLC isrequired to maintain minimum Net Capital, as defined, of not less than thegreater of $250 or 2% of aggregate debits, as defined. GFI Brokers Limited andGFI Securities Limited are subject to the capital requirements of the FinancialServices Authority in the United Kingdom (“FSA”). GFI (HK) Securities LLC issubject to the capital requirements of the Securities and Futures Commission inHong Kong, which require that GFI (HK) Securities LLC maintain minimum capital,as defined, of approximately $384.

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

Thefollowing table sets forth the minimum capital, as defined, that certain of theCompany’s subsidiaries must be maintained as of March 31, 2007:

| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers   Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       |                         | $          | 34,036                              |       |                             |       | $                                      | 40,188     |   |   |   | $ | 22,614 |   |   |   | $ | 1,683 |   |   |
| Minimum Net  Capital required |       |                         | 250        |                                |       |                             | 10,626     |                                   |       |   | 16,050 |   |   |   | 384 |   |   |
| Excess Net Capital            |       |                         | $          | 33,786                              |       |                             |       | $                                      | 29,562     |   |   |   | $ | 6,564 |   |   |   | $ | 1,299 |   |   |

 

In addition to the minimum net capital requirementsoutlined above, certain of the Company’s subsidiaries are subject to additionalregulatory requirements.

GFI Group PTE Ltd is subject to the compliance requirementsof the Monetary Authority of Singapore (“MAS”), which require that GFI GroupPTE Ltd, among other things, maintain stockholders’ equity of 3,000 Singaporedollars, measured annually. At December 31, 2006, the required measurementdate, GFI Group PTE Ltd. had stockholders’ equity of 4,071 Singapore dollars(or approximately $2,651), which exceeded the minimum requirement byapproximately 1,071 Singapore dollars (or approximately $697).

GFI Securities Limited’s Japanese branch is subject tocertain licensing requirements established by the Foreign Securities Firms Law(the “FSFL”) in Japan. As part of the licensing requirements, GFI SecuritiesLimited’s Japanese branch is required to maintain “brought-in” capital, asdefined under the FSFL, of 50,000 Japanese Yen (approximately $423). Inaddition, GFI Securities Limited is required to maintain a capital base of1,000,000 Japanese Yen (approximately $8,464). GFI Securities Limited’sJapanese branch is also subject to the net capital rule promulgated by theFSFL, which requires that net worth, including “brought-in” capital, exceed aratio of 120.0% of relevant expenditure. At March 31, 2007,GFI Securities Limited and its Japanese branch were in compliance withthese capital requirements and maintained a ratio in excess of 120.0%.

GFI Securities Limited’s Paris branch was establishedthrough the exercise of its passport right to open a branch in a EuropeanEconomic Area state.The establishment of the branch was approved by FSA andacknowledged by Banque de France in France. The branch will be subject to theconduct of business rules of the Autorite Des Marches Financiers whendealing with resident customers of France and will be regulated, in part, bythe FSA.

GFI Brokers Limited’s Sydney branch is registered as aforeign corporation in Australia and is conditionally exempt from therequirement to hold an Australian financial services license under theAustralian Securities and Investments Commission Corporations Act of 2001 inrespect of the financial services it provides in Australia. This exemptionapplies to foreign companies regulated by the FSA in accordance with U.K.regulatory standards.

GFI (HK) Brokers Ltd. is registered with and regulatedby the Hong Kong Monetary Authority. As part of this registration, GFI (HK)Brokers Ltd. is required to maintain stockholders’ equity of 5,000 Hong Kongdollars (or approximately $640). At March 31, 2007, GFI (HK) Brokers Ltd.had stockholders’ equity of 5,554 Hong Kong dollars (or approximately $711),which exceeded the minimum requirement by 554 Hong Kong dollars (orapproximately $71).

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

GFI Korea Money Brokerage Limited is licensed andregulated by the Ministry of Finance and Economy to engage in foreign exchangebrokerage business, and is subject to certain regulatory requirements under theForeign Exchange Transaction Act and regulations thereunder. As a licensedforeign exchange brokerage company, GFI Korea Money Brokerage Limited isrequired to maintain minimum paid-in capital of 5,000,000 Korean won. At March31, 2007, GFI Korea Money Brokerage Limited had paid-in capital of 5,000,000Korean won (or approximately $5,336).

These regulatory rules mayrestrict the Company’s ability to withdraw capital from its regulatedsubsidiaries. The Company’s regulated subsidiaries were in compliance with allminimum net capital requirements as of March 31, 2007.

**12.**          GEOGRAPHICINFORMATION

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

Informationregarding revenue for the three months ended March 31, 2007 and 2006,respectively, and information regarding long-lived assets (defined as property,equipment, leasehold improvements and software inventory) in geographic areasas of March 31, 2007 and December 31, 2006, respectively, are asfollows:

| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Revenues:     |       |                                             |       |   |   |
| North America |       | $                                                | 109,378    |   | $ | 84,617 |   |
| Europe        |       | 110,470                                          |       | 86,855 |   |
| Asia-Pacific  |       | 20,469                                           |       | 14,116 |   |
| Total         |       | $                                                | 240,317    |   | $ | 185,588 |   |

 

| ** **                      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Long-lived Assets,  as defined: |       |                     |       |                        |       |   |   |   |   |
| North America                   |       |                     | $          | 33,546                      |       |   |   | $ | 32,158 |   |   |
| Europe                          |       |                     | 13,201     |                        |       |   | 12,753 |   |   |
| Asia-Pacific                    |       |                     | 2,684      |                        |       |   | 2,255 |   |   |
| Total                           |       |                     | $          | 49,431                      |       |   |   | $ | 47,166 |   |   |

 

Revenues are attributed to geographic areas based onthe location of the relevant legal entities.

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

**13.**          OTHERCOMPREHENSIVE INCOME (LOSS)

| ** **                                                           | ** ** | **Three Months Ended  March 31,**         | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** |
| **Unrealized gain (loss) on  foreign exchange derivative contracts** | ** ** |                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Period  Change:                                              |       |                                                     |       |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                                     | —     |   |   |   | $ | (562 | ) |   |
| Tax (Expense) Benefit                                                |       |                                                     | —     |   |   |   | 169 |   |   |
| After Tax Amount                                                     |       |                                                     | —     |   |   |   | $ | (393 | ) |   |
| **Foreign currency translation  adjustment**                         | ** ** |                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Before Tax Amount                                                    |       |                                                     | $          | (65 | ) |   |   | $ | 112 |   |   |
| Tax (Expense) Benefit                                                |       |                                                     | 29         |   |   |   | (50 | ) |   |
| After Tax Amount                                                     |       |                                                     | $          | (36 | ) |   |   | $ | 62 |   |   |

 

The Companyreclassified the following out of other comprehensive income into other incomefor the three months ended March 31, 2006:

| ** ** | ** ** | **Three Months  Ended** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **March 31,**           | ** ** |
| ** ** | ** ** | **2006**                     | ** ** |
| Gross loss |       |                         | $          | 1,499 |   |   |
| Net of tax |       |                         | 1,050      |   |   |

 

**14.**          SUBSEQUENTEVENT

On April 26, 2007, the Company agreed to acquirethe assets of the retail energy procurement and consulting business of GSEConsulting L.P., an affiliate of Gulf States Energy, a privately-held, fullservice energy commodities firm. The transaction is expected to close in thesecond quarter of 2007, subject to standard closing conditions.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have reviewed the accompanying condensedconsolidated statement of financial condition of GFI Group Inc. andsubsidiaries (the “Company”) as of March 31, 2007, and the relatedcondensed consolidated statements of income, comprehensive income and cashflows for the three-month periods ended March 31, 2007 and 2006. Theseinterim financial statements are the responsibility of the Company’smanagement.

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

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

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statement offinancial condition of GFI Group Inc. and subsidiaries as of December 31,2006, and the related consolidated statements of income, comprehensive income,stockholders’ equity, and cash flows for the year then ended (not presentedherein); and in our report dated February 28, 2007, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated statementof financial condition as of December 31, 2006 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financialcondition from which it has been derived.

| /s/ DELOITTE &  TOUCHE |   |   |
|---------------------------------|--------|--------|
| New York, New York              |   |
| May 9, 2007                |   |

 

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

ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains‘‘forward-looking statements’’ within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements include, withoutlimitation, any statement that may predict, forecast, indicate or imply futureresults, performance or achievements, and may contain the words ‘‘believe,’’‘‘anticipate,’’ ‘‘expect,’’ ‘‘estimate,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘will be,’’‘‘will likely continue,’’ ‘‘will likely result,’’ or words or phrases ofsimilar meaning. These forward-looking statements are based largely on theexpectations of management and are subject to a number of risks and uncertaintiesincluding, but not limited to, the following:

·       therisks and other factors described under the heading “Risk Factors” andelsewhere in our 2006 Form 10-K;

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

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

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

·       competitionfrom current and new competitors;

·       ourability to keep up with rapid technological change and to continue to developand support our electronic brokerage systems in a cost effective manner.

·       futureresults of operations and financial condition;

·       thesuccess of 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;

·       thematurity of key markets and any resulting contracting in commissions;

·       ourability to manage our international operations;

·       uncertaintiesassociated with currency fluctuations;

·       ourfailure to protect or enforce our intellectual property rights;

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

·       uncertaintiesrelating to litigation; and

·       changesin the availability of capital.

The foregoing risks anduncertainties, as well as those risks discussed under the headings ‘‘Item 2—Management’sDiscussion and Analysis of Financial Condition and Results of Operations’’ and‘‘Item 3—Quantitative and Qualitative Disclosures About Market Risk’’ andelsewhere in this Quarterly Report, may cause actual results to differmaterially from the forward-looking statements. The information included hereinis given as of the filing date of this Form 10-Q with the SEC andfuture events or circumstances could differ significantly from theseforward-looking statements. The Company does not undertake to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

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**Business Environment**

Our business generallybenefits when there is robust trading volume and volatility in the markets weserve. Market volatility is driven by a range of factors, some of which aremarket specific and some of which are correlated to macro-economic conditions.In many of the over the counter markets in which we provide inter-dealerbrokerage services, objective and easily identifiable third party reporting ofvolume levels is not available. As a result, we look to broader marketinformation and specific volatility events in our key markets, as indicators oflikely trading volume levels. We also monitor market-specific developments ineach of our markets. Trading volume in many of our inter-dealer markets isdriven by the trading activity of our dealer clients that, in turn, areresponsive to the trading activity and demand of their “buy-side” clients.Those “buy-side” clients include smaller banks, insurance companies andfinancial institutions, investment funds, trading firms and, increasingly,hedge funds.

During the first quarterof 2007, the global business environment was generally positive for ourbusiness, with satisfactory trading volume levels and instances of morepronounced volatility in all of our product categories. Some external factorscontributing to volatility in the markets included global economic andinflationary concerns, divergent global monetary policy, concerns regarding thesubprime mortgage market in the U.S. and geopolitical issues in the MiddleEast.

**Credit**

The credit marketsexperienced substantial volatility in the first quarter due to concernsregarding the U.S. subprime lending market, as well as a global sell-off ofmore risky bond and emerging market investments in February. Volatility in theglobal credit markets was highlighted by price movement on the Dow Jones (DJ)CDX North American Investment Grade, DJ CDX North American High Yield andiTraxx Europe indices in the first quarter 2007 as compared with the first quarterof 2006 and the fourth quarter of 2006.

The investment grade bondmarket experienced growth in the quarter with the Lehman Brothers AggregateBond Index up 1.5% from the start of the year, as compared with a 0.65% loss inthe first quarter of 2006. Investment grade corporate bond issuance in thequarter increased 13% to $272.4 billion versus the first quarter of 2006. Additionally,credit spreads widened in the quarter for lower grade and junk bonds,indicating reduced investor appetite for risk. The widening of credit spreadsand the uncertainty in the direction of U.S. interest rates all contributed tovolatility which was positive for our credit business.

**Financial**

The financial markets wereactive in the quarter with economic, inflationary and monetary policy concernsleading investors to rebalance their portfolios and hedge currency exposure.The U.S. dollar generally weakened in the quarter, depreciating versus theEuro, the British Pound Sterling, the Japanese Yen and certain emerging marketcurrencies. Short-term interest rates remained unchanged in the U.S., whileEuropean interest rates continued to increase. This divergent monetary policy,global inflationary concerns and uncertainties in the future direction of U.S.interest rates all led to volatility in relative currency prices. In addition,emerging market economies in Latin America, Eastern Europe and Asia havecontinued, in many cases, to experience growth that has outpaced that of theU.S. This growth has, in some cases, led to the strengthening of various localcurrencies versus the U.S. dollar. The uncertainties regarding economic,inflationary and monetary policy direction were all beneficial to our financialbusiness.

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**Equity**

Equity markets experiencedconsiderable volatility in the first quarter with global markets experiencing alarge sell-off in February in the face of a slowing U.S. economy and adeteriorating U.S. subprime mortgage market. The global equity marketsexperienced a recovery in March and the Dow Jones World Stock Index, excludingthe U.S., advanced 2.5% in the quarter, beating the Dow Jones IndustrialAverage, which declined 0.9%. Latin American and other emerging market stockswere volatile in the quarter due to the temporary investor flight from theseriskier assets. The Morgan Stanley Emerging Market Index was up 1.0% for thequarter. The Chicago Board Options Exchange’s Standard and Poor’s 500Volatility Index indicated a higher volatility level for the first quarter of2007 compared to the first quarter of 2006, as well as compared to the fourthquarter of 2006. This high level of volatility in the first quarter wasbeneficial to our equity business.

**Commodity**

Oil and petroleum marketsexperienced volatility in the quarter following diplomatic tensions betweenIran and Britain, raising supply concerns. Crude oil, natural gas and heatingoil prices decreased in the beginning of the quarter as mild winter weather inthe northeastern U.S. resulted in higher inventories. These inventories werereduced as cold weather returned late in the quarter, resulting in risingprices. Crude oil prices ended the quarter at $65.87 per barrel, up 7.9% forthe quarter. Emerging markets, especially China, continued to demand increasinglevels of commodities to supply their growing economies. The New YorkMercantile Exchange and Intercontinental Exchange both reported significantvolume growth in energy futures volume for the first quarter of 2007 versus thefirst quarter of 2006. The volatility in the oil and petroleum markets duringthe quarter were beneficial to our commodities business.

**Results of Operations**

Thefollowing table sets forth our condensed consolidated results of operations forthe periods indicated:

| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| REVENUES:                                |       |                                             |       |   |   |
| Brokerage revenues:                      |       |                                             |       |   |   |
| Agency commissions                       |       | $                                                | 184,525    |   | $ | 136,910 |   |
| Principal transactions                   |       | 48,377                                           |       | 41,060 |   |
| Total brokerage revenues                 |       | 232,902                                          |       | 177,970 |   |
| Analytics and market data                |       | 5,326                                            |       | 5,194 |   |
| Interest income                          |       | 2,102                                            |       | 2,233 |   |
| Other income (loss)                      |       | (13                                              | )          | 191 |   |
| Total revenues                           |       | 240,317                                          |       | 185,588 |   |
| EXPENSES:                                |       |                                             |       |   |   |
| Compensation and employee benefits       |       | 151,508                                          |       | 116,845 |   |
| Communications and market data           |       | 10,456                                           |       | 7,653 |   |
| Travel and promotion                     |       | 8,836                                            |       | 7,531 |   |
| Rent and occupancy                       |       | 5,561                                            |       | 5,613 |   |
| Depreciation and amortization            |       | 5,227                                            |       | 3,836 |   |
| Professional fees                        |       | 3,569                                            |       | 4,044 |   |
| Clearing fees                            |       | 7,529                                            |       | 5,477 |   |
| Interest                                 |       | 1,849                                            |       | 1,752 |   |
| Other expenses                           |       | 4,649                                            |       | 3,556 |   |
| Total Expenses                           |       | 199,184                                          |       | 156,307 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 41,133                                           |       | 29,281 |   |
| PROVISION FOR INCOME TAXES               |       | 16,453                                           |       | 12,298 |   |
| NET INCOME                               |       | $                                                | 24,680     |   | $ | 16,983 |   |

 

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The following table setsforth our condensed consolidated results of operations as a percentage of ourtotal revenues for the periods indicated:

| ** **                                | ** ** | **Three Months Ended  March 31,**         | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** |
| REVENUES:                                 |       |                                                     |       |   |   |   |   |   |   |
| Brokerage revenues:                       |       |                                                     |       |   |   |   |   |   |   |
| Agency commissions                        |       |                                                     | 76.8       | % |   |   | 73.8 | % |   |
| Principal transactions                    |       |                                                     | 20.1       |   |   |   | 22.1 |   |   |
| Total brokerage revenues                  |       |                                                     | 96.9       |   |   |   | 95.9 |   |   |
| Analytics and market data                 |       |                                                     | 2.2        |   |   |   | 2.8 |   |   |
| Interest income                           |       |                                                     | 0.9        |   |   |   | 1.2 |   |   |
| Other income (loss)                       |       |                                                     | 0.0        |   |   |   | 0.1 |   |   |
| Total revenues                            |       |                                                     | 100.0      | % |   |   | 100.0 | % |   |
| EXPENSES:                                 |       |                                                     |       |   |   |   |   |   |   |
| Compensation and employee benefits        |       |                                                     | 63.0       | % |   |   | 63.0 | % |   |
| Communications and market data            |       |                                                     | 4.4        |   |   |   | 4.1 |   |   |
| Travel and promotion                      |       |                                                     | 3.7        |   |   |   | 4.1 |   |   |
| Rent and occupancy                        |       |                                                     | 2.3        |   |   |   | 3.0 |   |   |
| Depreciation and amortization             |       |                                                     | 2.2        |   |   |   | 2.1 |   |   |
| Professional fees                         |       |                                                     | 1.5        |   |   |   | 2.2 |   |   |
| Clearing fees                             |       |                                                     | 3.1        |   |   |   | 3.0 |   |   |
| Interest                                  |       |                                                     | 0.8        |   |   |   | 0.9 |   |   |
| Other expenses                            |       |                                                     | 1.9        |   |   |   | 1.9 |   |   |
| Total Expenses                            |       |                                                     | 82.9       | % |   |   | 84.3 | % |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       |                                                     | 17.1       |   |   |   | 15.7 |   |   |
| PROVISION FOR  INCOME TAXES               |       |                                                     | 6.8        |   |   |   | 6.6 |   |   |
| NET INCOME                                |       |                                                     | 10.3       | % |   |   | 9.1 | % |   |

 

**Three Months EndedMarch 31, 2007 Compared to the Three Months Ended March 31, 2006**

Net income for the threemonths ended March 31, 2007 was $24.7 million as compared to net income of$17.0 million for the three months ended March 31, 2006, an increase of$7.7 million or approximately 45.3%. Total revenues increased by $54.7 million,or 29.5%, to $240.3 million for the three months ended March 31, 2007 from$185.6 million for the same period from the prior year. Our increased revenueswere primarily due to increased brokerage revenues across our credit, equityand commodity product categories. Our total brokerage personnel headcountincreased by 182 to a total of 990 employees at March 31, 2007 from 808employees at March 31, 2006. Total expenses increased by$42.9 million, or 27.4%, to $199.2 million for the three months endedMarch 31, 2007 from $156.3 million for the same period from the prioryear. Expenses increased primarily due to a higher number of brokeragepersonnel as compared with the corresponding period in 2006 and the resultingincrease in performance related brokerage bonuses.

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***Revenues***

*Brokerage Revenues*

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

| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **BROKERAGE REVENUES:**   |       |                                             |       |   |   |
| Credit                    |       | $                                                | 84,811     |   | $ | 71,273 |   |
| Financial                 |       | 45,001                                           |       | 39,488 |   |
| Equity                    |       | 56,383                                           |       | 41,459 |   |
| Commodity                 |       | 46,707                                           |       | 25,750 |   |
| Total brokerage revenues  |       | $                                                | 232,902    |   | $ | 177,970 |   |
| **BROKERAGE  REVENUES:**  |       |                                             |       |   |   |
| Credit                    |       | 36.4                                             | %          | 40.0 | % |
| Financial                 |       | 19.3                                             |       | 22.2 |   |
| Equity                    |       | 24.2                                             |       | 23.3 |   |
| Commodity                 |       | 20.1                                             |       | 14.5 |   |
| Total brokerage  revenues |       | 100.0                                            | %          | 100.0 | % |

 

Total brokerage revenues increased by $54.9 million,or 30.8%, to $232.9 million for the three months ended March 31,2007, as compared to $178.0 million for the three months ended March 31,2006. Agency commissions increased by $47.6 million, or 34.8%, to $184.5million for the three months ended March 31, 2007, as compared to $136.9million for the three months ended March 31, 2006. Principal transactionsincreased by $7.3 million, or 17.8%, to $48.4 million for the three monthsended March 31, 2007 from $41.1 million for the three months endedMarch 31, 2006. Broker productivity (defined as total brokerage revenuesduring the period divided by average monthly brokerage personnel headcount forthe period) increased by approximately 6.7% for the three months endedMarch 31, 2007, as compared to the same period from the prior year.

The increase in credit product brokerage revenues of$13.5 million, or 19%, in the first quarter of 2007 as compared with the firstquarter of 2006 was due to a number of factors, including credit marketvolatility related to U.S. subprime mortgage market concerns and the globalequity market sell-off and recovery in the quarter, continued overall growth inthe credit derivatives market, the development of new credit products and thecontinued success of CreditMatch®, our credit derivatives trading platform, inEurope. Our existing credit product desks contributed $8.6 million of the totalincrease in the credit product brokerage revenues. The remaining $4.9 millionincrease was generated by the addition of ten new or restructured desks sinceMarch 31, 2006. Our credit product brokerage personnel increased by 35 toa total of 256 employees at March 31, 2007 from 221 employees atMarch 31, 2006.

The increase in financial product brokerage revenuesof $5.5 million, or 14%, in the first quarter of 2007 as compared with thefirst quarter of 2006 was primarily attributable to the continued build up ofour Asian operations, increased volatility and trading activity in emergingmarket products in Europe and new desks started in 2005 and 2006 in Europe. Ourexisting financial product desks contributed $2.5 million of the total increasein financial product brokerage revenues. The remaining $3.0 million increase infinancial product brokerage revenues was attributable to the addition of eightnew or restructured financial product desks since March 31, 2006. Ourfinancial product brokerage personnel increased by 29 to a total of 277 employeesat March 31, 2007 from 248 employees at March 31, 2006.

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The increase in equity product brokerage revenues of$14.9 million, or 36%, in the first quarter of 2007 as compared with the firstquarter of 2006 was primarily due to the growth of our Paris office, whichspecializes in cash equities and equity derivatives, increased revenues fromour cash equities business in North America and equity derivative brokeragebusiness in the U.K.and Asia. Our existing equity product brokerage deskscontributed $11.9 million of the total increase in equity product brokeragerevenues, including an increase of $8.4 million from the Paris office. Theremaining $3.0 million increase in equity product brokerage revenues wasattributable to the addition of seven new or restructured equity product deskssince March 31, 2006. Our equity product brokerage personnel increased by23 to 190 employees at March 31, 2007 from 167 employees at March 31,2006.

The increase in commodityproduct brokerage revenues of $20.9 million, or 81%, in the first quarter of2007 as compared with the first quarter of 2006 was primarily attributable tothe addition of our Amerex brokerage business, which generated approximately$15.9 million in brokerage revenues in the first quarter of 2007. In addition,significant volatility in oil and petroleum markets and growth in Europeanenergy products, including electricity, coal, dry freight and emissions,contributed to the increase in commodity and brokerage revenues in the quarter.Our commodity product brokerage personnel increased by 96 to a total of 268employees at March 31, 2007 from 172 employees at March 31, 2006.

*Analytics andMarket Data*

Revenues from ouranalytics and market data products increased by $0.1 million, or 1.9%, to$5.3 million for the three months ended March 31, 2007 as compared to$5.2 million for the three months ended March 31, 2006. The increase wasprimarily due to an increase in update fees associated with the licensing ofanalytical software.

*Interest Income*

Interest income decreasedby $0.1 million, or 4.5%, to $2.1 million for the three months endedMarch 31, 2007, as compared to $2.2 million for the three months endedMarch 31, 2006. The decrease was mainly attributable to the decrease ininterest income on clearing accounts, which was partially offset by an increasein interest income attributable to the higher level of cash balances in theU.S.

*Other Income (Loss)*

Other income (loss)decreased by $0.2 million, or 100.0 %, to a loss of $0.01 million for the threemonths ended March 31, 2007 from income of $0.2 million for the threemonths ended March 31, 2006. Other income (loss) for the three months endedMarch 31, 2007 and 2006 mainly consisted of transactional gains (losses)based on foreign currency fluctuations and net gains (losses) on foreignexchange derivative contracts.

***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits increased by $34.7million, or 29.7%, to $151.5 million for the three months ended March 31,2007 from $116.8 million for the three months ended March 31, 2006. Theincrease was primarily due to an increase in the number of brokerage personnelfrom 808 employees at March 31, 2006 to 990 employees at March 31,2007 and an increase in brokerage personnel performance bonuses of $13.8million resulting in large part from the increase in our brokerage revenues.

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Total compensation andemployee benefits as a percentage of total revenues decreased slightly to 62.9%at March 31, 2007 from 63.0% at March 31, 2006. Bonus expenserepresented 53.3% and 57.0% of total compensation and employee benefits expensefor the three months ended March 31, 2007 and 2006, respectively. Asignificant portion of our bonus expense is subject to contractual guaranteesthat may require us to make bonus payments to brokers regardless of theirperformance in any particular period. Additionally, sign-on bonus expenserepresented 4.2% and 4.9% of total compensation and employee benefits for thethree months ended March 31, 2007 and 2006, respectively.

*Communications andMarket Data*

Communications and marketdata increased by $2.8 million, or 36.4%, to $10.5 million for the three monthsended March 31, 2007 from $7.7 million from the three months endedMarch 31, 2006. The increase was primarily attributable to the increase inbrokerage desks and brokerage personnel including in those areas, such asequities, that rely more heavily on market data systems.

*Travel andPromotion*

Travel and promotionincreased by $1.3 million, or 17.3%, to $8.8 million for the three months endedMarch 31, 2007 from $7.5 million for the three months endedMarch 31, 2006. This expense, as a percentage of our total brokeragerevenues for the three months ended March 31, 2007 decreased to 3.7% from4.1% for the same period from the prior year. This decrease was primarily dueto our continuing efforts to lower these costs relative to our total brokeragerevenues.

*Rent and Occupancy*

Rent and occupancyremained relatively flat at $5.6 million for the three months endedMarch 31, 2007 compared to the three months ended March 31, 2006.

*Depreciation andAmortization*

Depreciation andamortization increased by $1.4 million, or 36.8%, to $5.2 million for the threemonths ended March 31, 2007 from $3.8 million for the three months endedMarch 31, 2006. The increase was primarily due to the increase incapitalized equipment costs, including software inventory and amortizationexpense of intangibles resulting from the acquisition of the Amerex brokeragebusiness.

*Professional Fees*

Professional feesdecreased by $0.4 million, or 10.0% to $3.6 million for the three months endedMarch 31, 2007 from $4.0 million for the three months ended March 31,2006. The decrease was primarily due to a decrease in professional fees relatedto our compliance with the requirements of Section 404 of theSarbanes-Oxley Act of 2002.

*Clearing Fees*

Clearing fees increased by$2.0 million, or 36.4%, to $7.5 million for the three months endedMarch 31, 2007 from $5.5 million for the three months ended March 31,2006. The increase was due to a higher volume of principal transactionsexecuted during the three months ended March 31, 2007, as compared to thesame period in the prior year. This increase was partially due to the growth ofbrokerage revenues from our Paris equities business to $18.8 million for thethree months ended March 31, 2007 from $10.4 million for the same periodin the prior year. Clearing fees, as a percentage of our total revenues fromprincipal transactions increased to 15.6% for the three months endedMarch 31, 2007 from 13.3% for the comparable period in the prior year.This increase was partially due to the higher cost of clearing fees as a resultof the higher number and types of transactions executed in our Paris office.Excluding transactions from our Paris office, clearing fees, as a percentage ofour total revenues from principal 

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transactionswas 13.0% and 11.3% for the three months ended March 31, 2007 and 2006,respectively. Principal transactions are generally settled through third partyclearing organizations that charge us a fee for their services. We also use theservices of floor brokers on certain stock exchanges to assist in the executionof transactions. Fees paid to floor brokers in these circumstances are includedin clearing fees. Further, execution fees paid to exchanges are included inclearing fees.

*Interest Expense*

Interest expense remainedrelatively flat at $1.8 million for the three months ended March 31, 2007compared to the three months ended March 31, 2006. This was a result of anincrease in interest expense under our credit facility due to the higher levelof outstanding borrowings during the three months ended March 31, 2007,that was offset by a decrease in interest charges on our clearing accounts forthe three months ended March 31, 2007 compared to the same period lastyear. Included in interest expense for the three months ended March 31,2007 is $0.9 million of interest on outstanding borrowings incurred to purchasethe Amerex brokerage business in October 2006.

*Other Expenses*

Other expenses increasedby $1.0 million, or 27.8%, to $4.6 million for the three months endedMarch 31, 2007 from $3.6 million for the three months ended March 31,2006. The increase was primarily due to an increase in irrecoverable ValueAdded Tax related to increased purchases in communications and market data inthe U.K. as well as an increase in expenses related to promotional items and license fees to third-party software vendors.

*Provision forIncome Taxes*

Our provision for income taxes totaled $16.5 millionfor the three months ended March 31, 2007 compared to $12.3 million forthe three months ended March 31, 2006. Our effective tax rate wasapproximately 40% for the three months ended March 31, 2007 as compared to42% for the comparable period in 2006. The reduction in the effective tax ratewas primarily due to a decrease in state and local income taxes and taxesrelated to foreign operations as well as an increase in business tax credits.

30

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**Quarterly Resultsof Operations**

The following table setsforth, by quarter, our unaudited statement of income data for the period from April 1,2005 to March 31, 2007. 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.

| ** **                           | ** ** | **March 31,  2007** | ** **     | **December 31,  2006** | ** ** | **September 30,  2006** | ** **     | **June 30,  2006** | ** ** | **March 31,  2006** | ** **     | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** **     |
|--------------------------------------|------------|--------------------------|----------------|-----------------------------|------------|------------------------------|----------------|-------------------------|------------|--------------------------|----------------|-----------------------------|------------|------------------------------|------------|-------------------------|----------------|
| **Revenues**                         | ** ** |                     | ** **     | ** **                  |       |                         | ** **     | ** **              |       |                     | ** **     | ** **                  |       | ** **                   | ** ** |                    | ** **     | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Brokerage revenues:                  |       |                     |           |                        |       |                         |           |                    |       |                     |           |                        |       |                         |       |                    |           | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       |                     | $ 184,525 |                        |       |                         | $ 151,890 |                    |       |                     | $ 138,961 |                        |       | $ 130,134               |       |                    | $ 136,910 | ** ** |   |   | $ 104,335 |   |   |   | $ 98,559 |   |   | $ 100,718 |   |
| Principal transactions               |       |                     | 48,377         |                        |       |                         | 33,890         |                    |       |                     | 34,478         |                        |       | 41,792                       |       |                    | 41,060         | ** ** |   |   | 31,250 |   |   |   | 27,420 |   |   | 27,635 |   |
| Total brokerage revenues             |       |                     | 232,902        |                        |       |                         | 185,780        |                    |       |                     | 173,439        |                        |       | 171,926                      |       |                    | 177,970        | ** ** |   |   | 135,585 |   |   |   | 125,979 |   |   | 128,353 |   |
| Analytics and market data            |       |                     | 5,326          |                        |       |                         | 4,232          |                    |       |                     | 4,954          |                        |       | 4,271                        |       |                    | 5,194          | ** ** |   |   | 3,388 |   |   |   | 3,894 |   |   | 4,711 |   |
| Long-term contract revenue           |       |                     | —         |                        |       |                         | 1,092          |                    |       |                     | —         |                        |       | 5,881                        |       |                    | —         | ** ** |   |   | — |   |   |   | — |   |   | — |   |
| Interest income                      |       |                     | 2,102          |                        |       |                         | 2,366          |                    |       |                     | 2,150          |                        |       | 2,395                        |       |                    | 2,233          | ** ** |   |   | 1,458 |   |   |   | 1,236 |   |   | 883 |   |
| Other income (loss)                  |       |                     | (13            | )                           |       |                         | 601            |                    |       |                     | (585           | )                           |       | 3,093                        |       |                    | 191            | ** ** |   |   | (145 | ) |   |   | (420 | ) |   | 6,376 |   |
| Total revenues                       |       |                     | 240,317        |                        |       |                         | 194,071        |                    |       |                     | 179,958        |                        |       | 187,566                      |       |                    | 185,588        | ** ** |   |   | 140,286 |   |   |   | 130,689 |   |   | 140,323 |   |
| **Expenses**                         | ** ** |                     | ** **     | ** **                  |       |                         | ** **     | ** **              |       |                     | ** **     | ** **                  |       | ** **                   | ** ** |                    | ** **     | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Compensation and employee benefits   |       |                     | 151,508        |                        |       |                         | 122,465        |                    |       |                     | 112,543        |                        |       | 113,701                      |       |                    | 116,845        | ** ** |   |   | 89,511 |   |   |   | 81,461 |   |   | 80,896 |   |
| Communications and market data       |       |                     | 10,456         |                        |       |                         | 10,545         |                    |       |                     | 9,799          |                        |       | 9,303                        |       |                    | 7,653          | ** ** |   |   | 7,064 |   |   |   | 6,656 |   |   | 6,341 |   |
| Travel and promotion                 |       |                     | 8,836          |                        |       |                         | 9,242          |                    |       |                     | 7,069          |                        |       | 8,549                        |       |                    | 7,531          | ** ** |   |   | 7,017 |   |   |   | 5,833 |   |   | 6,041 |   |
| Rent and occupancy                   |       |                     | 5,561          |                        |       |                         | 5,511          |                    |       |                     | 4,594          |                        |       | 4,841                        |       |                    | 5,613          | ** ** |   |   | 3,447 |   |   |   | 4,662 |   |   | 3,913 |   |
| Depreciation and amortization        |       |                     | 5,227          |                        |       |                         | 6,799          |                    |       |                     | 4,338          |                        |       | 4,048                        |       |                    | 3,836          | ** ** |   |   | 4,159 |   |   |   | 3,434 |   |   | 3,599 |   |
| Professional fees                    |       |                     | 3,569          |                        |       |                         | 5,397          |                    |       |                     | 4,391          |                        |       | 5,320                        |       |                    | 4,044          | ** ** |   |   | 2,507 |   |   |   | 2,797 |   |   | 2,927 |   |
| Clearing fees                        |       |                     | 7,529          |                        |       |                         | 6,312          |                    |       |                     | 5,884          |                        |       | 6,798                        |       |                    | 5,477          | ** ** |   |   | 3,858 |   |   |   | 3,480 |   |   | 2,974 |   |
| Interest                             |       |                     | 1,849          |                        |       |                         | 2,170          |                    |       |                     | 1,124          |                        |       | 1,772                        |       |                    | 1,752          | ** ** |   |   | 1,016 |   |   |   | 778 |   |   | 597 |   |
| Other expenses                       |       |                     | 4,649          |                        |       |                         | 4,046          |                    |       |                     | 3,098          |                        |       | 3,843                        |       |                    | 3,556          | ** ** |   |   | 1,855 |   |   |   | 2,217 |   |   | 5,809 |   |
| Cost of long-term contract           |       |                     |           |                        |       |                         | 639            |                    |       |                     | —         |                        |       | 5,180                        |       |                    | —         | ** ** |   |   | — |   |   |   | — |   |   | — |   |
| Lease termination costs to affiliate |       |                     | —         |                        |       |                         | (57            | )                       |       |                     | (93            | )                           |       | (92                          | )          |                    | —         | ** ** |   |   | 1,070 |   |   |   | — |   |   | (2,266 | ) |
| Total expenses                       |       |                     | 199,184        |                        |       |                         | 173,069        |                    |       |                     | 152,747        |                        |       | 163,263                      |       |                    | 156,307        | ** ** |   |   | 121,504 |   |   |   | 111,318 |   |   | 110,831 |   |
| Income before provision for taxes    |       |                     | 41,133         |                        |       |                         | 21,002         |                    |       |                     | 27,211         |                        |       | 24,303                       |       |                    | 29,281         | ** ** |   |   | 18,782 |   |   |   | 19,371 |   |   | 29,492 |   |
| Provision for income taxes           |       |                     | 16,453         |                        |       |                         | 7,593          |                    |       |                     | 10,621         |                        |       | 10,207                       |       |                    | 12,298         | ** ** |   |   | 7,363 |   |   |   | 8,523 |   |   | 12,810 |   |
| Net income                           |       |                     | $ 24,680  |                        |       |                         | $ 13,409  |                    |       |                     | $ 16,590  |                        |       | $ 14,096                |       |                    | $ 16,983  | ** ** |   |   | $ 11,419 |   |   |   | $ 10,848 |   |   | $ 16,682 |   |

 

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

| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **2007**           | ** ** | **2006**              | ** ** | **2006**               | ** ** | **2006**          | ** ** | **2006**           | ** ** | **2005**              | ** ** | **2005**               | ** ** | **2005**          | ** ** |
| **Revenues**                         | ** ** |               | ** ** | ** **            |       |                   | ** ** | ** **        |       |               | ** ** | ** **            |       |                   | ** ** | ** **        |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage revenues:                  |       |               |       |                  |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       |               | 76.8       | %                     |       |                   | 78.2       | %                 |       |               | 77.2       | %                     |       |                   | 69.4       | %                 |       |   | 73.8 | % |   |   | 74.4 | % |   |   | 75.4 | % |   |   | 71.8 | % |   |
| Principal transactions               |       |               | 20.1       |                  |       |                   | 17.5       |              |       |               | 19.2       |                  |       |                   | 22.3       |              |       |   | 22.1 |   |   |   | 22.3 |   |   |   | 21.0 |   |   |   | 19.7 |   |   |
| Total brokerage revenues             |       |               | 96.9       |                  |       |                   | 95.7       |              |       |               | 96.4       |                  |       |                   | 91.7       |              |       |   | 95.9 |   |   |   | 96.7 |   |   |   | 96.4 |   |   |   | 91.5 |   |   |
| Analytics and market data            |       |               | 2.2        |                  |       |                   | 2.2        |              |       |               | 2.8        |                  |       |                   | 2.3        |              |       |   | 2.8 |   |   |   | 2.4 |   |   |   | 3.0 |   |   |   | 3.4 |   |   |
| Long-term contract revenue           |       |               | 0.0        |                  |       |                   | 0.6        |              |       |               | —     |                  |       |                   | 3.1        |              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Interest income                      |       |               | 0.9        |                  |       |                   | 1.2        |              |       |               | 1.2        |                  |       |                   | 1.3        |              |       |   | 1.2 |   |   |   | 1.0 |   |   |   | 0.9 |   |   |   | 0.6 |   |   |
| Other income (loss)                  |       |               | 0.0        |                  |       |                   | 0.3        |              |       |               | (0.4       | )                     |       |                   | 1.6        |              |       |   | 0.1 |   |   |   | (0.1 | ) |   |   | (0.3 | ) |   |   | 4.5 |   |   |
| Total revenues                       |       |               | 100.0      |                  |       |                   | 100.0      | %                 |       |               | 100.0      | %                     |       |                   | 100.0      | %                 |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **Expenses**                         | ** ** |               | ** ** | ** **            |       |                   | ** ** | ** **        |       |               | ** ** | ** **            |       |                   | ** ** | ** **        |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Compensation and employee benefits   |       |               | 63.0       | %                     |       |                   | 63.1       | %                 |       |               | 62.5       | %                     |       |                   | 60.6       | %                 |       |   | 63.0 | % |   |   | 63.8 | % |   |   | 62.3 | % |   |   | 57.6 | % |   |
| Communications and market data       |       |               | 4.4        |                  |       |                   | 5.4        |              |       |               | 5.4        |                  |       |                   | 5.0        |              |       |   | 4.1 |   |   |   | 5.0 |   |   |   | 5.1 |   |   |   | 4.6 |   |   |
| Travel and promotion                 |       |               | 3.7        |                  |       |                   | 4.8        |              |       |               | 3.9        |                  |       |                   | 4.6        |              |       |   | 4.1 |   |   |   | 5.0 |   |   |   | 4.5 |   |   |   | 4.3 |   |   |
| Rent and occupancy                   |       |               | 2.3        |                  |       |                   | 2.8        |              |       |               | 2.6        |                  |       |                   | 2.6        |              |       |   | 3.0 |   |   |   | 2.5 |   |   |   | 3.6 |   |   |   | 2.8 |   |   |
| Depreciation and amortization        |       |               | 2.2        |                  |       |                   | 3.5        |              |       |               | 2.4        |                  |       |                   | 2.2        |              |       |   | 2.1 |   |   |   | 3.0 |   |   |   | 2.6 |   |   |   | 2.6 |   |   |
| Professional fees                    |       |               | 1.5        |                  |       |                   | 2.8        |              |       |               | 2.4        |                  |       |                   | 2.8        |              |       |   | 2.2 |   |   |   | 1.8 |   |   |   | 2.1 |   |   |   | 2.1 |   |   |
| Clearing fees                        |       |               | 3.1        |                  |       |                   | 3.3        |              |       |               | 3.3        |                  |       |                   | 3.6        |              |       |   | 3.0 |   |   |   | 2.8 |   |   |   | 2.7 |   |   |   | 2.1 |   |   |
| Interest                             |       |               | 0.8        |                  |       |                   | 1.1        |              |       |               | 0.6        |                  |       |                   | 0.9        |              |       |   | 0.9 |   |   |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |
| Other expenses                       |       |               | 1.9        |                  |       |                   | 2.1        |              |       |               | 1.7        |                  |       |                   | 2.0        |              |       |   | 1.9 |   |   |   | 1.3 |   |   |   | 1.7 |   |   |   | 4.1 |   |   |
| Cost of long-term contract           |       |               | —     |                  |       |                   | 0.3        |              |       |               | —     |                  |       |                   | 2.8        |              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Lease termination costs to affiliate |       |               | —     |                  |       |                   | —     |              |       |               | (0.1       | )                     |       |                   | —     |              |       |   | — |   |   |   | 0.8 |   |   |   | — |   |   |   | (1.6 | ) |   |
| Total expenses                       |       |               | 82.9       | %                     |       |                   | 89.2       | %                 |       |               | 84.7       | %                     |       |                   | 87.1       | %                 |       |   | 84.3 | % |   |   | 86.7 | % |   |   | 85.2 | % |   |   | 79.0 | % |   |
| Income before provision for taxes    |       |               | 17.1       |                  |       |                   | 10.8       |              |       |               | 15.3       |                  |       |                   | 12.9       |              |       |   | 15.7 |   |   |   | 13.3 |   |   |   | 14.8 |   |   |   | 21.0 |   |   |
| Provision for income taxes           |       |               | 6.8        |                  |       |                   | 3.9        |              |       |               | 5.9        |                  |       |                   | 5.4        |              |       |   | 6.6 |   |   |   | 5.2 |   |   |   | 6.5 |   |   |   | 9.1 |   |   |
| Net income                           |       |               | 10.3       | %                     |       |                   | 6.9        | %                 |       |               | 9.4        | %                     |       |                   | 7.5        | %                 |       |   | 9.1 | % |   |   | 8.1 | % |   |   | 8.3 | % |   |   | 11.9 | % |   |

 

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

| ** **                | ** ** | **March 31,  2007** | ** **     | **December 31,  2006** | ** ** | **September 30,  2006** | ** **     | **June 30,  2006** | ** ** | **March 31,  2006** | ** **     | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** **     |
|---------------------------|------------|--------------------------|----------------|-----------------------------|------------|------------------------------|----------------|-------------------------|------------|--------------------------|----------------|-----------------------------|------------|------------------------------|------------|-------------------------|----------------|
| **Brokerage  Revenues:**  | ** ** |                     | ** **     | ** **                  |       |                         | ** **     | ** **              |       |                     | ** **     | ** **                  |       | ** **                   | ** ** |                    | ** **     | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Credit                    |       |                     | $ 84,811  |                        |       |                         | $ 61,032  |                    |       |                     | $ 60,654  |                        |       | $ 59,838                |       |                    | $ 71,273  |   |   |   | $ 55,443 |   |   |   | $ 51,472 |   |   | $ 60,749 |   |
| Financial                 |       |                     | 45,001         |                        |       |                         | 39,232         |                    |       |                     | 38,605         |                        |       | 38,942                       |       |                    | 39,488         |   |   |   | 29,213 |   |   |   | 30,804 |   |   | 29,835 |   |
| Equity                    |       |                     | 56,383         |                        |       |                         | 44,940         |                    |       |                     | 41,426         |                        |       | 46,109                       |       |                    | 41,459         |   |   |   | 29,931 |   |   |   | 25,993 |   |   | 21,869 |   |
| Commodity                 |       |                     | 46,707         |                        |       |                         | 40,576         |                    |       |                     | 32,754         |                        |       | 27,037                       |       |                    | 25,750         |   |   |   | 20,998 |   |   |   | 17,710 |   |   | 15,900 |   |
| Total brokerage revenues  |       |                     | $ 232,902 |                        |       |                         | $ 185,780 |                    |       |                     | $ 173,439 |                        |       | $ 171,926               |       |                    | $ 177,970 |   |   |   | $ 135,585 |   |   |   | $ 125,979 |   |   | $ 128,353 |   |
| **Brokerage Revenues:**   |       |                     |           |                        |       |                         |           |                    |       |                     |           |                        |       |                         |       |                    |           |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                    |       |                     | 36.4           | %                           |       |                         | 32.9           | %                       |       |                     | 35.0           | %                           |       | 34.8                         | %          |                    | 40.0           | % |   |   | 40.9 | % |   |   | 40.8 | % |   | 47.3 | % |
| Financial                 |       |                     | 19.3           |                        |       |                         | 21.1           |                    |       |                     | 22.2           |                        |       | 22.7                         |       |                    | 22.2           |   |   |   | 21.5 |   |   |   | 24.5 |   |   | 23.2 |   |
| Equity                    |       |                     | 24.2           |                        |       |                         | 24.2           |                    |       |                     | 23.9           |                        |       | 26.8                         |       |                    | 23.3           |   |   |   | 22.1 |   |   |   | 20.6 |   |   | 17.0 |   |
| Commodity                 |       |                     | 20.1           |                        |       |                         | 21.8           |                    |       |                     | 18.9           |                        |       | 15.7                         |       |                    | 14.5           |   |   |   | 15.5 |   |   |   | 14.1 |   |   | 12.4 |   |
| Total brokerage  revenues |       |                     | 100.0          | %                           |       |                         | 100.0          | %                       |       |                     | 100.0          | %                           |       | 100.0                        | %          |                    | 100.0          | % |   |   | 100.0 | % |   |   | 100.0 | % |   | 100.0 | % |

 

**Liquidity andCapital Resources**

Net cash provided by operations increased to $7.8million for the three months ended March 31, 2007, compared with $9.6 millionused for operations for the three months ended March 31, 2006. Theimprovement is primarily related to our increased net income, the increase incertain non-cash items such as deferred compensation expense and the benefitfrom deferred taxes and the improvement in certain working capital items suchas other liabilities and the net receivable/payables to brokers, dealers andclearing organizations.

Net cash used in investing activities for the threemonths ended March 31, 2007 was $9.4 million compared to $5.7 million usedin the three months ended March 31, 2006. The increase in cash used forinvesting activities was primarily due to the cash used for the acquisition ofCentury Chartering (U.K.) Limited. See Note 4 to the condensed consolidatedfinancial statements for further information.

Net cash used by financing activities for the threemonths ended March 31, 2007 was $11.3 million compared to $0.5million used for the three months ended March 31, 2006. The increase incash used for financing activities is due to higher net repayments under our2006 Credit Agreement, lower cash received from stock options exercises andhigher taxes paid on vested restricted stock units.

Our liquidity and available cash resources are in partrestricted by the regulatory requirements of our operating subsidiaries,including GFI Securities LLC, GFI Securities Limited, GFI Brokers Limited,GFI (HK) Securities LLC, GFI (HK) Brokers Ltd., GFI Group Pte Ltd and GFIKorea Money Brokerage Limited. GFI Securities LLC is subject to regulatorycapital requirements under the Exchange Act and the Commodity Exchange Act. GFISecurities Limited and GFI Brokers Limited are subject to the regulatedcapital requirements of the FSA. GFI (HK) Securities LLC is subject to theregulated capital requirements of the Securities and Futures Commission inHong Kong. GFI (HK) Brokers Ltd. is subject to regulatory compliancerequirements under the Monetary Authority of Hong Kong. GFI Group PTE Ltd. issubject to the regulatory compliance requirements with the Monetary Authorityof Singapore. GFI Korea Money Brokerage Limited is subject to the regulatedcapital requirements of the Ministry of Finance and Economy of South Korea. At March 31,2007, all of our regulated subsidiaries were in compliance with theirrespective regulatory capital requirements. In addition to these regulatorycapital requirements, our liquidity may be impacted by the amount of capitalthat we maintain in clearing accounts and with exchanges to support ourprincipal transactions business. See Note 11 to our condensed consolidatedfinancial statements for a further discussion of these regulatory requirements.

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

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

**ContractualObligations and Commitments**

Our contractual obligations and off-balance sheetentities are described in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contained in our 2006 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those obligations or arrangements during the three monthsended March 31, 2007. Subsequent to December 31, 2006, our netrepayments were $15.0 million under the 2006 Credit Agreement.

We have variousunconditional purchase obligations. Certain of these obligations are for thepurchase of market data from a number of information service providersduring the normal course of business. As of March 31, 2007, wehad total purchase commitments for market data services of approximately$13.4 million, with $11.5 million due within the next twelve months and$1.9 million due between one to two years. In addition, we have purchasecommitments for capital expenditures related to our European offices of $1.3million, all of which are due within the next twelve months.

**Off-Balance SheetArrangements**

The Company did not haveany off-balance sheet arrangements at March 31, 2007.

**Critical AccountingPolicies and Estimates**

We have disclosed in Note 2to our condensed consolidated financial statements and in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in our 2006 Form 10-K those accounting policies that weconsider to be significant in determining our results of operations andfinancial condition. There have been no material changes to those policies thatwe consider to be significant since our 2006 Form 10-K. Theaccounting principles utilized by us in preparing our condensed consolidatedfinancial statements conform in all material respects to generally acceptedaccounting principles in the United States of America.

**Recent AccountingPronouncement**

Effective January 1, 2007, we adopted FinancialAccounting Standards Board Interpretation No. 48, Accounting forUncertainty in Income Taxes (“FIN 48”) an interpretation of SFAS 109. Uponadoption, we recognized a $4.4 million increase to the accrual for uncertaintax positions. This increase was accounted for as an adjustment to thebeginning balance of retained earnings on the Condensed Consolidated Statementof Financial Condition. After recognizing the impact of the adoption of FIN 48,the total unrecognized tax benefits (net of the federal benefit on state issues)were approximately $7.7 million of, all of which could affect theeffective income tax rate in any future periods. In a foreign jurisdiction, weare in discussion with tax authorities regarding whether certain compensationexpenses 

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were deductible by theCompany in prior years. A portion of the compensation payment is held by atrustee and it is the Company’s intent to use this money to offset the cost tothe Company of the potential tax liability, if any, arising from the disallowanceof the deduction.

We are subject to U.S. federal income tax, foreignincome tax as well as state income tax in the states in which we havesignificant business operations. We have substantially concluded all U.S.federal income tax matters for years through 2004, state and local tax matters through2000 and foreign income tax matters through 2002 with all relevant taxauthorities. We recognize interest and penalties related to income tax matters ininterest expense and other expense respectively. As of March 31, 2007,there have been no material changes to the accrual for uncertain tax positions.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuringfair value and requires enhanced disclosures about fair value measurements. SFAS157 requires companies to disclose the fair value of its financial instrumentsaccording to a fair value hierarchy, as defined. 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 No. 157is effective for financial statements for fiscal years beginning after November 15,2007. We are currentyly evaluating the impact of adopting SFAS No. 157 onour consolidated financial statements.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS No. 159 provides a “FairValue Option” under which a company may irrevocably elect fair value as theinitial and subsequent measurement attribute for certain financial assets andliabilities. This Fair Value Option will be available on a contract-by-contractbasis with changes in fair value recognized in earnings as those changes occur.SFAS No. 159 is effective for financial statements for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactof adopting SFAS No. 159 on our consolidated financial statements.

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

Our quantitative andqualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2006 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those market risks during the three months ended March 31,2007.

**Foreign CurrencyExposure Risk**

We are exposed to market riskassociated with movements in foreign currency exchange rates. There havebeen no material changes to our risk management policy during the three monthsended March 31, 2007.

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 the British Pound and the Eurostrengthened by 10% against the U.S. Dollar, the net impact to our net incomewould have been a reduction of approximately $5.9 million.

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**ITEM 4.**                CONTROLSAND PROCEDURES

As of the end of the period covered by this report,the Company’s management carried out an evaluation, under the supervision andwith the participation of our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis Form 10-Q in providing a reasonable level of assurance thatinformation we are required to disclose in reports we file or furnish under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms.

In addition, the Company’s management, including theCompany’s Chief Executive Officer and Chief Financial Officer, hasevaluated the Company’s internal controls over financial reporting anddetermined that there have been no changes in our internal controls overfinancial reporting during the most recent fiscal quarter of 2007 that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

In the normal course of business, we are and have beenparty to, or otherwise involved in, litigations, claims and arbitrations thatinvolve claims for substantial amounts. These proceedings have generallyinvolved either competitor claims in connection with new employee hires, orclaims from former employees in connection with the termination of theiremployment from us. We believe proceedings of these types are common in theinter-dealer brokerage industry due to its highly competitive nature. There isalso potential for client claims alleging the occurrence of errors in theexecution of brokerage transactions. We are also currently and will, in thefuture, be involved, in examinations, investigations or proceedings bygovernment agencies and self-regulatory organizations. These examinations orinvestigations could result in substantial fines or administrative proceedingsthat could result in censure, the issuance of cease and desist orders, thesuspension or expulsion of a broker dealer and its affiliated persons, officersor employees or other similar consequences.

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

**ITEM 1A.**        RISKFACTORS

There have been nomaterial changes in our risk factors from those disclosed in the 2006 Form 10-K.See “Risk Factors” in Part I, Item 1A of our 2006 Form 10-K.

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

Underour 2004 Equity Incentive Plan, we allow employees to elect to have us withholdshares of common stock to satisfy minimum statutory tax withholdingobligations arising on the vesting and settlement of restricted stock units.When we withhold these shares, we are required to remit to the appropriatetaxing authorities the market price of the shares withheld, which could bedeemed a purchase of the shares of common stock by us on the date ofwithholding. During the quarter ended March 31, 2007, we withheld sharesof common stock to satisfy tax withholding obligations as follows:

| **Date** | ** ** | ** ** | ** ** | **No. of Shares** | ** ** | **Average Market Price** | ** ** |
|----------|------------|------------|------------|-----------------------------|------------|------------------------------------|------------|
| January  |       |       | 21,511     |                        |       |                               | $          | 63.47 |   |   |
| February |       |       | 1,508      |                        |       |                               | $          | 61.55 |   |   |
| March    |       |       | 8,192      |                        |       |                               | $          | 67.97 |   |   |

 

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**ITEM 6.**                EXHIBITS

Exhibits:

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                        | ** ** | **Description** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.16            |       | Employment Agreement,  dated March 26, 2007 between GFI Group Inc. and Scott Pintoff                                                                                                                                         |
| 10.17            |       | Employment Agreement,  dated March 26, 2007 between GFI Group Inc. and J. Christopher Giancarlo                                                                                                                         |
| 10.18            |       | Employment Agreement,  dated April 30, 2007 between GFI Group Inc. and Colin Heffron (Filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  May 2, 2007, File No. 000-51103) |
| 15               |       | Letter re: Unaudited  Interim Financial Information                                                                                                                                                                               |
| 31.1             |       | Certification of  Principal Executive Officer.                                                                                                                                                                                    |
| 31.2             |       | Certification of  Principal Financial Officer.                                                                                                                                                                                    |
| 32.1             |       | Written Statement of  Chief Executive Officer Pursuant to Section 9.06 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350).                                                                                     |
| 32.2             |       | Written Statement of Chief Financial Officer  Pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350).                                                                                     |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2007 to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 10th day of May, 2007.
|        | 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** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.16            |       | Employment Agreement,  dated March 26, 2007 between GFI Group Inc. and Scott Pintoff                                                                                                                                         |
| 10.17            |       | Employment Agreement,  dated March 26, 2007 between GFI Group Inc. and J. Christopher Giancarlo                                                                                                                         |
| 10.18            |       | Employment Agreement,  dated April 30, 2007 between GFI Group Inc. and Colin Heffron (Filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  May 2, 2007, File No. 000-51103) |
| 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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