**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 SEPTEMBER 30, 2006**

**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  telephone number, including area code: **(212) 968-4100** |

 

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Largeaccelerated filer o             Acceleratedfiler o             Non-acceleratedfiler x

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

Thenumber of shares of registrant’s common stock outstanding on October 31,2006 was 28,600,909.

 

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**Tableof Contents**

| **Part I—Financial  Information** |
|---------------------------------------------|
| Item 1.                                     |   | Financial Statements |   |   |
|                                        |   | Condensed  Consolidated Statements of Financial Condition as of September 30, 2006  (unaudited) and December 31, 2005 |   | 4 |
|                                        |   | Condensed  Consolidated Statements of Income for the three and nine months ended  September 30, 2006 (unaudited) and September 30, 2005 (unaudited) |   | 5 |
|                                        |   | Condensed  Consolidated Statements of Comprehensive Income for the three and nine months  ended September 30, 2006 (unaudited) and September 30, 2005  (unaudited) |   | 6 |
|                                        |   | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2006 (unaudited) and September 30, 2005 (unaudited) |   | 7 |
|                                        |   | Notes  to Condensed Consolidated Financial Statements (unaudited) |   | 8 |
| Item 2.                                     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 24 |
| Item 3.                                     |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 43 |
| Item 4.                                     |   | Controls  and Procedures |   | 43 |
| **Part II—Other  Information**    |
| Item 1.                                     |   | Legal  Proceedings |   | 44 |
| Item 1A.                                    |   | Risk Factors |   | 44 |
| Item 2.                                     |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 44 |
| Item 6.                                     |   | Exhibits |   | 44 |

 

2

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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)**

| ** **                                                                                                                                                                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                 |       |                         |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                  |       |                         | $          | 161,866                     |       |   |   | $ | 144,148 |   |   |
| Deposits with clearing organizations                                                                                                                                                       |       |                         | 7,842      |                        |       |   | 7,824 |   |   |
| Accrued commissions receivable, net of allowance for  doubtful accounts                                                                                                                    |       |                         | 122,718    |                        |       |   | 89,727 |   |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                              |       |                         | 318,509    |                        |       |   | 208,938 |   |   |
| Property, equipment and leasehold improvements, net                                                                                                                                        |       |                         | 36,332     |                        |       |   | 31,674 |   |   |
| Software inventory, net                                                                                                                                                                    |       |                         | 6,685      |                        |       |   | 5,687 |   |   |
| Goodwill                                                                                                                                                                                   |       |                         | 26,713     |                        |       |   | 26,683 |   |   |
| Intangible assets, net                                                                                                                                                                     |       |                         | 1,488      |                        |       |   | 2,355 |   |   |
| Other assets                                                                                                                                                                               |       |                         | 65,991     |                        |       |   | 59,101 |   |   |
| TOTAL ASSETS                                                                                                                                                                               |       |                         | $          | 748,144                     |       |   |   | $ | 576,137 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |                         |       |                        |       |   |   |   |   |
| LIABILITIES                                                                                                                                                                                |       |                         |       |                        |       |   |   |   |   |
| Accrued compensation                                                                                                                                                                       |       |                         | $          | 104,454                     |       |   |   | $ | 88,628 |   |   |
| Accounts payable and accrued expense                                                                                                                                                       |       |                         | 24,978     |                        |       |   | 22,455 |   |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                                                   |       |                         | 241,624    |                        |       |   | 165,766 |   |   |
| Notes payable, net                                                                                                                                                                         |       |                         | 17,681     |                        |       |   | 31,247 |   |   |
| Other liabilities                                                                                                                                                                          |       |                         | 49,266     |                        |       |   | 28,914 |   |   |
| Lease termination costs payable to affiliate                                                                                                                                               |       |                         | 157        |                        |       |   | 875 |   |   |
| Total Liabilities                                                                                                                                                                          |       |                         | $          | 438,160                     |       |   |   | $ | 337,885 |   |   |
| Commitments and  contingencies                                                                                                                                                             |       |                         |       |                        |       |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                  |       |                         |       |                        |       |   |   |   |   |
| Preferred Stock, $0.01 par value; 5,000,000 shares  authorized and none outstanding at September 30, 2006 and  December 31, 2005                                                 |       |                         | —     |                        |       |   | — |   |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized; 28,550,093 and 27,904,568 shares outstanding at  September 30, 2006 and December 31, 2005, respectively |       |                         | 286        |                        |       |   | 279 |   |   |
| Additional paid in capital                                                                                                                                                                 |       |                         | 218,409    |                        |       |   | 195,360 |   |   |
| Retained earnings                                                                                                                                                                          |       |                         | 92,459     |                        |       |   | 44,790 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                       |       |                         | (1,170     | )                           |       |   | (2,177 | ) |   |
| Total Stockholders’ Equity                                                                                                                                                            |       |                         | 309,984    |                        |       |   | 238,252 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                           |       |                         | $          | 748,144                     |       |   |   | $ | 576,137 |   |   |

 

See notes to condensed consolidated financial statements

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

| ** **                                   | ** ** | **Three Months Ended September 30,**                                                             | ** ** | **Nine Months Ended September 30,**                                                              | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| REVENUES:                                    |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                         |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                           |       |                                                                                                                 | $          | 138,961                                                                                                              |       |   |   | $ | 98,559 |   |   |   | $ | 406,005 |   |   |   | $ | 287,248 |   |   |
| Principal transactions                       |       |                                                                                                                 | 34,478     |                                                                                                                 |       |   | 27,420 |   |   |   | 117,330 |   |   |   | 83,167 |   |   |
| Total brokerage revenues                     |       |                                                                                                                 | 173,439    |                                                                                                                 |       |   | 125,979 |   |   |   | 523,335 |   |   |   | 370,415 |   |   |
| Analytics and market data                    |       |                                                                                                                 | 4,954      |                                                                                                                 |       |   | 3,894 |   |   |   | 14,419 |   |   |   | 14,006 |   |   |
| Long-term contract revenue                   |       |                                                                                                                 | —     |                                                                                                                 |       |   | — |   |   |   | 5,881 |   |   |   | — |   |   |
| Interest income                              |       |                                                                                                                 | 2,150      |                                                                                                                 |       |   | 1,236 |   |   |   | 6,778 |   |   |   | 3,179 |   |   |
| Other income (loss)                          |       |                                                                                                                 | (585       | )                                                                                                                    |       |   | (420 | ) |   |   | 2,699 |   |   |   | 5,705 |   |   |
| Total Revenues                               |       |                                                                                                                 | 179,958    |                                                                                                                 |       |   | 130,689 |   |   |   | 553,112 |   |   |   | 393,305 |   |   |
| EXPENSES:                                    |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits           |       |                                                                                                                 | 112,543    |                                                                                                                 |       |   | 81,461 |   |   |   | 343,089 |   |   |   | 237,833 |   |   |
| Communications and quotes                    |       |                                                                                                                 | 9,799      |                                                                                                                 |       |   | 6,656 |   |   |   | 26,755 |   |   |   | 18,795 |   |   |
| Travel and promotion                         |       |                                                                                                                 | 7,069      |                                                                                                                 |       |   | 5,833 |   |   |   | 23,149 |   |   |   | 17,634 |   |   |
| Rent and occupancy                           |       |                                                                                                                 | 4,594      |                                                                                                                 |       |   | 4,662 |   |   |   | 15,048 |   |   |   | 12,003 |   |   |
| Depreciation and amortization                |       |                                                                                                                 | 4,338      |                                                                                                                 |       |   | 3,434 |   |   |   | 12,222 |   |   |   | 11,126 |   |   |
| Professional fees                            |       |                                                                                                                 | 4,391      |                                                                                                                 |       |   | 2,797 |   |   |   | 13,755 |   |   |   | 8,193 |   |   |
| Clearing fees                                |       |                                                                                                                 | 5,884      |                                                                                                                 |       |   | 3,480 |   |   |   | 18,159 |   |   |   | 9,825 |   |   |
| Interest                                     |       |                                                                                                                 | 1,124      |                                                                                                                 |       |   | 778 |   |   |   | 4,648 |   |   |   | 2,619 |   |   |
| Other expenses                               |       |                                                                                                                 | 3,098      |                                                                                                                 |       |   | 2,217 |   |   |   | 10,497 |   |   |   | 12,036 |   |   |
| Cost of long-term contract                   |       |                                                                                                                 | —     |                                                                                                                 |       |   | — |   |   |   | 5,180 |   |   |   | — |   |   |
| Lease termination costs to affiliate         |       |                                                                                                                 | (93        | )                                                                                                                    |       |   | — |   |   |   | (185 | ) |   |   | (2,266 | ) |   |
| Total Expenses                               |       |                                                                                                                 | 152,747    |                                                                                                                 |       |   | 111,318 |   |   |   | 472,317 |   |   |   | 327,798 |   |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES     |       |                                                                                                                 | 27,211     |                                                                                                                 |       |   | 19,371 |   |   |   | 80,795 |   |   |   | 65,507 |   |   |
| PROVISION FOR INCOME TAXES                   |       |                                                                                                                 | 10,621     |                                                                                                                 |       |   | 8,523 |   |   |   | 33,126 |   |   |   | 28,823 |   |   |
| NET INCOME                                   |       |                                                                                                                 | $          | 16,590                                                                                                               |       |   |   | $ | 10,848 |   |   |   | 47,669 |   |   |   | $ | 36,684 |   |   |
| EARNINGS PER  SHARE                          |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                        |       |                                                                                                                 | $          | 0.58                                                                                                                 |       |   |   | $ | 0.40 |   |   |   | $ | 1.69 |   |   |   | $ | 1.39 |   |   |
| Diluted                                      |       |                                                                                                                 | $          | 0.57                                                                                                                 |       |   |   | $ | 0.39 |   |   |   | $ | 1.64 |   |   |   | $ | 1.34 |   |   |
| WEIGHTED AVERAGE  SHARES OUSTANDING BASIC    |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Class A common stock                    |       |                                                                                                                 | —     |                                                                                                                 |       |   | — |   |   |   | — |   |   |   | 647,676 |   |   |
| Common stock                                 |       |                                                                                                                 | 28,441,089 |                                                                                                                 |       |   | 27,177,546 |   |   |   | 28,248,634 |   |   |   | 25,085,118 |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING DILUTED |       |                                                                                                                 | 29,221,795 |                                                                                                                 |       |   | 28,105,318 |   |   |   | 29,104,286 |   |   |   | 27,373,647 |   |   |

 

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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET INCOME                                                            |       | $                                                    | 16,590     |                                                | $          | 10,848 |   | $ | 47,669 |   | $ | 36,684 |   |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized gain on foreign exchange derivative  contracts, net of tax |       | 1,374                                                |       | 862                                                 |       | 861 |   | 3,720 |   |
| Foreign currency translation adjustment, net of tax                   |       | (8                                                   | )          | 402                                                 |       | 146 |   | 220 |   |
| COMPREHENSIVE INCOME                                                  |       | $                                                    | 17,956     |                                                | $          | 12,112 |   | $ | 48,676 |   | $ | 40,624 |   |

 

See notes to condensed consolidated financial statements

6

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

| ** **                                                                         | ** ** | **Nine Months Ended September 30,**                                                                          | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **          2006          ** | ** ** | **          2005           ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                                                                                             |       |   |   |   |   |   |   |
| Net income                                                                         |       |                                                                                                                             | $          | 47,669 |   |   |   | $ | 36,684 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                                                                             |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                                                                                                                             | 12,222     |   |   |   | 11,126 |   |   |
| Amortization of loan fees                                                          |       |                                                                                                                             | 181        |   |   |   | 317 |   |   |
| Provision for allowance  for doubtful accounts                                     |       |                                                                                                                             | 381        |   |   |   | 526 |   |   |
| Loss on disposal of fixed  assets                                                  |       |                                                                                                                             | 122        |   |   |   | — |   |   |
| Deferred compensation                                                              |       |                                                                                                                             | 8,199      |   |   |   | 2,473 |   |   |
| Benefit from deferred  taxes                                                       |       |                                                                                                                             | (3,315     | ) |   |   | 1,881 |   |   |
| Loss on foreign exchange  for notes payable                                        |       |                                                                                                                             | 865        |   |   |   | — |   |   |
| Loss on Fenics purchase  obligation                                                |       |                                                                                                                             | —     |   |   |   | 2,030 |   |   |
| Loss/(gain) on foreign  exchange derivative contracts                              |       |                                                                                                                             | 1,952      |   |   |   | (7,652 | ) |   |
| Lease termination cost to  affiliate                                               |       |                                                                                                                             | (185       | ) |   |   | (2,266 | ) |   |
| (Increase) decrease in operating assets:                                           |       |                                                                                                                             |       |   |   |   |   |   |   |
| Deposits with clearing  organizations                                              |       |                                                                                                                             | (18        | ) |   |   | 752 |   |   |
| Accrued commissions  receivable                                                    |       |                                                                                                                             | (33,372    | ) |   |   | (33,202 | ) |   |
| Receivables from brokers,  dealers and clearing organizations                      |       |                                                                                                                             | (109,571   | ) |   |   | 11,931 |   |   |
| Software inventory                                                                 |       |                                                                                                                             | (1,869     | ) |   |   | (2,056 | ) |   |
| Other assets                                                                       |       |                                                                                                                             | (5,042     | ) |   |   | (11,868 | ) |   |
| Increase (decrease) in operating liabilities:                                      |       |                                                                                                                             |       |   |   |   |   |   |   |
| Accrued compensation                                                               |       |                                                                                                                             | 15,826     |   |   |   | 6,962 |   |   |
| Accounts payable and  accrued expenses                                             |       |                                                                                                                             | 2,381      |   |   |   | 93 |   |   |
| Payables to brokers,  dealers and clearing organizations                           |       |                                                                                                                             | 75,858     |   |   |   | (22,899 | ) |   |
| Income taxes  payable—current                                                 |       |                                                                                                                             | 5,628      |   |   |   | (3,083 | ) |   |
| Other liabilities                                                                  |       |                                                                                                                             | 15,316     |   |   |   | 18,561 |   |   |
| Cash paid to affiliate  for lease termination                                      |       |                                                                                                                             | (467       | ) |   |   | (352 | ) |   |
| Cash provided by  operating activities                                             |       |                                                                                                                             | 32,761     |   |   |   | 9,958 |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                                                                                             |       |   |   |   |   |   |   |
| Cash used for acquisition  of minority interest in Fenics Limited                  |       |                                                                                                                             | (116       | ) |   |   | (4,286 | ) |   |
| Cash used for the  acquisition of assets from Starsupply Petroleum                 |       |                                                                                                                             | —     |   |   |   | (15,150 | ) |   |
| Purchase of property,  equipment and leasehold improvements                        |       |                                                                                                                             | (15,265    | ) |   |   | (8,895 | ) |   |
| (Payments on)/proceeds  from foreign exchange derivative contracts                 |       |                                                                                                                             | (352       | ) |   |   | 2,223 |   |   |
| Cash used in investing  activities                                                 |       |                                                                                                                             | (15,733    | ) |   |   | (26,108 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                                                                                             |       |   |   |   |   |   |   |
| Repayment of notes  payable                                                        |       |                                                                                                                             | (52,000    | ) |   |   | (54,500 | ) |   |
| Proceeds from notes  payable                                                       |       |                                                                                                                             | 38,000     |   |   |   | 18,000 |   |   |
| Repayment of loan notes  payable                                                   |       |                                                                                                                             | —     |   |   |   | (9,250 | ) |   |
| Issuance of common stock                                                           |       |                                                                                                                             | —     |   |   |   | 73,651 |   |   |
| Payment of loan fees                                                               |       |                                                                                                                             | (612       | ) |   |   | — |   |   |
| Proceeds from exercise of  stock options                                           |       |                                                                                                                             | 7,057      |   |   |   | 9,243 |   |   |
| Cash paid for taxes on  vested restricted stock units                              |       |                                                                                                                             | (1,866     | ) |   |   | — |   |   |
| Tax benefit from stock  option exercises                                           |       |                                                                                                                             | 9,965      |   |   |   | — |   |   |
| Cash provided by  financing activities                                             |       |                                                                                                                             | 544        |   |   |   | 37,144 |   |   |
| Effects of foreign  currency translation adjustment                                |       |                                                                                                                             | 146        |   |   |   | 220 |   |   |
| INCREASE IN CASH  AND CASH EQUIVALENTS                                             |       |                                                                                                                             | 17,718     |   |   |   | 21,214 |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                    |       |                                                                                                                             | 144,148    |   |   |   | 105,161 |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                          |       |                                                                                                                             | $          | 161,866 |   |   |   | $ | 126,375 |   |   |
| SUPPLEMENTAL DISLCOSURE:                                                           |       |                                                                                                                             |       |   |   |   |   |   |   |
| Interest paid                                                                      |       |                                                                                                                             | $          | 4,444 |   |   |   | $ | 2,711 |   |   |
| Income taxes paid,  net of refunds                                                 |       |                                                                                                                             | $          | 13,684 |   |   |   | $ | 29,232 |   |   |

 

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, GFIGroup PTE Ltd. and Fenics Limited and its subsidiaries (“Fenics”). As of September 30,2006, Jersey Partners, Inc. (“JPI”) owned approximately 44% of the Company’soutstanding shares of common stock. The Company’s chief executive officer,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 condensed consolidated financial statements. Managementbelieves that the estimates utilized in the preparation of the condensedconsolidated financial statements are reasonable and prudent. Actual resultscould differ materially from 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, 2005 (the “2005 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******—Cash***andcash equivalents consist of cash and highly liquid investments with maturities,when purchased, of three months or less.

***Receivables fromand Payables to Brokers and Dealers******—Receivables***fromand payables to brokers and dealers primarily represent securities transactionswhich have not settled as of their stated settlement dates. These transactionsrelate primarily to the simultaneous purchase and sale of securities byGFI Securities Limited and GFI Securities LLC to facilitate principalbrokerage transactions. Securities transactions executed by GFI Securities LLCand cleared through a clearing broker on a fully-disclosed basis are presentednet.

***Accrued CommissionsReceivable******—Accrued***commissionsreceivable represents amounts due from brokers, dealers, banks and otherfinancial and nonfinancial institutions for the execution of securities,commodities, foreign exchange and derivative brokerage transactions. Accruedcommissions receivable are presented net of allowance for doubtful accounts ofapproximately $3,244 and $3,202 as of September 30, 2006 and December 31,2005, respectively. The allowance is based on management’s 

8

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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)**

estimate and is reviewedon 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.

***Agency Commissions******—In***agencytransactions, the Company charges commissions for executing transactionsbetween buyers and sellers. Agency commission revenues and related expenses arerecognized 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 very limited number ofbrokerage desks are allowed to enter into unmatched principal transactions tofacilitate a customer’s execution needs for transactions initiated by suchcustomers or for the purpose of proprietary trading to arbitrage the valuebetween an exchange traded fund and its component securities. These unmatchedpositions are intended to be held short term. The Company earns revenue fromprincipal transactions on the spread between the buy and sell price of thesecurity that is brokered.

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

***Analytics andMarket Data Revenue Recognition******—Analytics***revenueconsists mostly of fees for licenses of analytical 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 implementationobligations remain, the fee is fixed and determinable, and collectibility isprobable. Fees for future updates of software products are considered separatearrangements and related revenues are recognized when the customer acknowledgesparticipation in the update and delivery occurs. Market data revenue fromsubscription fees is recognized over the term of the subscription period, whichis generally two years. Market data revenue from customized one-time sales isrecognized upon delivery of the data.

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

***Goodwill andIntangible Assets******—In***accordancewith Statement of Financial AccountingStandards (“SFAS”) No. 142 *Goodwilland Intangible Assets* (“SFAS 142”), goodwill and intangibleassets with indefinite lives are no longer amortized, but instead are testedfor impairment annually or more frequently if circumstances indicate impairmentmay have occurred. 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. Certain of 

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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)**

these foreign exchangederivative contracts are designated and qualify as foreign currency cash flowhedges under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended (“SFAS 133”).The Company reclassifies gains and losses on the designated foreign exchangederivative contracts included in other comprehensive income into earnings atthe time the hedged transactions are recognized. The Company measureseffectiveness by assessing the changes in the expected future cash flows of thehedged items. The ineffective portion of the hedges, if any, is included inother income. There is no portion of the derivative instruments’ gains orlosses that has been excluded from the assessment of effectiveness. For foreignexchange derivative contracts that do not qualify for hedge accounting underSFAS 133, the Company records these contracts at fair value and all realizedand unrealized gains and losses are included in other income in the CondensedConsolidated Statement of Income.

***Foreign CurrencyTranslation Adjustments and Transactions******—Assets***andliabilities of foreign subsidiaries having non-U.S. dollar functionalcurrencies are translated at the 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 analytics and market dataoperations. This segment operates across domestic and international markets.Substantially all of the Company’s identifiable assets are in the United Statesand the United Kingdom.

***Long-Term Construction-TypeContract******—The***Companyis a party to a long-term construction-type contract pursuant to which theCompany developed an online currency trading system and customized it for acustomer. The contract was accounted for using the completed-contract method inaccordance with the Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts,*and with the applicable guidance provided by the Statement of Position No. 81-1,*Accounting for Performance of Construction Type andCertain Production Type Contracts*(“SOP 81-1”)*.*Under the completed contract method, therevenues and expenses are deferred and netted on the balance sheet until suchtime as the project is substantially complete. SOP 81-1 states that acontract is considered substantially complete when only inconsequential actionsremain incomplete, the remaining costs in comparison to the total costs to beincurred are immaterial and the potential risk is insignificant in amount.During second quarter of 2006, the contract was considered to be substantiallycomplete and the related revenues and expenses were recognized.

***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 

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

the 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 awards issued prior to the adoption ofSFAS 123(R), the Company followed the fair value recognition provisions of SFASNo. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), as amended by SFAS No. 148, *Accounting for Stock-Based Compensation Transitionand Disclosure*, prospectively to all awards granted, modified, orsettled after January 1, 2003. Pursuant to this method, the Companyexpensed the grant-date fair value of options issued to employees on or after January 1,2003 over the related vesting period and the compensation expense related tomodifications of outstanding options was calculated as the difference betweenfair value of the existing and modified options on the date of modification.Prior to January 1, 2003, the Company used the intrinsic method asprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*,as permitted by SFAS 123. For RSUs, the fair value at the date of grant isrecorded as deferred compensation and is amortized to compensation expense overthe vesting period of the grants.

Thefollowing pro forma financial information shows the effect, net of tax, on netincome as if the fair value method had been applied.

| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net income—as  reported                                                             |       |                             | $          | 10,848                           |       |   |   | $ | 36,684 |   |   |
| Add:                                                                                     |       |                             |       |                             |       |   |   |   |   |
| Effect of stock-based  employee compensation included in reported net income, net of tax |       |                             | 390        |                             |       |   | 1,470 |   |   |
| Deduct:                                                                                  |       |                             |       |                             |       |   |   |   |   |
| Total stock-based  employee compensation determined under fair value method, net of tax  |       |                             | (390       | )                                |       |   | (1,536 | ) |   |
| Net income—pro  forma                                                               |       |                             | $          | 10,848                           |       |   |   | $ | 36,555 |   |   |
| Basic earnings  per share—as reported                                               |       |                             | $          | 0.40                             |       |   |   | $ | 1.39 |   |   |
| Basic earnings  per share—pro forma                                                 |       |                             | $          | 0.40                             |       |   |   | $ | 1.39 |   |   |
| Diluted earnings  per share—as reported                                             |       |                             | $          | 0.39                             |       |   |   | $ | 1.34 |   |   |
| Diluted earnings per  share—pro forma                                               |       |                             | $          | 0.39                             |       |   |   | $ | 1.34 |   |   |

 

***Recent AccountingPronouncements******—In***June 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—anInterpretation of FASB No. 109*(“FIN 48”). FIN 48 clarifies theaccounting for uncertain tax positions in accordance with SFAS No. 109, *Accounting for Income Taxes*. The Companywill be required to recognize in its financial statements the largest tax benefitof a tax position that is “more-likely-than-not” to be sustained on audit basedsolely on the technical merits of the position as of the reporting date. FIN 48also provides guidance on new disclosure requirements, reporting and accrual ofinterest and penalties, accounting in interim periods and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. The Companyis currently evaluating the impact of adopting FIN 48 on its consolidatedfinancial statements.

In Septembers 2006, the SEC staff issued StaffAccounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides guidance on how prior year misstatements should be taken into 

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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)**

consideration whenquantifying misstatements in current year financial statements for purposes ofdetermining whether the current year’s financial statements are materiallymisstated. The SEC Staff believes registrants should quantify errors using botha balance sheet and income statement approach and evaluate whether eitherapproach results in quantifying a misstatement that, when all relativequantitative and qualitative factors are considered, is material. SAB 108 iseffective for the first fiscal year ending after November 15, 2006. TheCompany is currently evaluating the impact of adopting SAB 108 on itsconsolidated financial statements and does not anticipate it will be material.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value and requires enhanceddisclosures about fair value measurements. SFAS 157 requires companies todisclose the fair value of its financial instruments according to a fair valuehierarchy, as defined. Additionally, companies are required to provide enhanceddisclosure for certain financial instruments within the hierarchy, including areconciliation of the beginning and ending balances separately for each majorcategory of assets and liabilities. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany is currently evaluating the impact of adopting SFAS 157 on itsconsolidated financial statements.

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

| ** **                                                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables from  brokers, dealers and clearing organizations: |       |                         |       |                        |       |   |   |   |   |
| Contract value of fails to deliver                             |       |                         | $          | 306,586                     |       |   |   | $ | 161,069 |   |   |
| Balance receivable from clearing organizations                 |       |                         | 11,923     |                        |       |   | 47,869 |   |   |
| Total                                                          |       |                         | $          | 318,509                     |       |   |   | $ | 208,938 |   |   |
| Payables to  brokers, dealers and clearing organizations:      |       |                         |       |                        |       |   |   |   |   |
| Contract value of fails to receive                             |       |                         | $          | 230,284                     |       |   |   | $ | 148,971 |   |   |
| Balance payable to clearing organizations                      |       |                         | 993        |                        |       |   | 466 |   |   |
| Payable to financial institutions                              |       |                         | 10,347     |                        |       |   | 16,329 |   |   |
| Total                                                          |       |                         | $          | 241,624                     |       |   |   | $ | 165,766 |   |   |

 

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

**4.**                 INTANGIBLEASSETS

Intangibleassets consisted of the following:

| ** **                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Gross intangible  assets       |       |                         |       |                        |       |   |   |   |   |
| Customer base/relationships    |       |                         | $          | 2,490                       |       |   |   | $ | 2,490 |   |   |
| Trade name                     |       |                         | 1,750      |                        |       |   | 1,750 |   |   |
| Core technology                |       |                         | 3,230      |                        |       |   | 3,230 |   |   |
| Covenants not to compete       |       |                         | 550        |                        |       |   | 550 |   |   |
| Patent                         |       |                         | 34         |                        |       |   | 34 |   |   |
| Total gross  intangible assets |       |                         | 8,054      |                        |       |   | 8,054 |   |   |
| Accumulated amortization       |       |                         | (6,566     | )                           |       |   | (5,699 | ) |   |
| Net intangible assets          |       |                         | $          | 1,488                       |       |   |   | $ | 2,355 |   |   |

 

Amortization was $245 and $201 for the three monthsended September 30, 2006 and 2005, respectively, and $867 and $605 for thenine months ended September 30, 2006 and 2005, respectively.

At September 30,2006, expected amortization expense for the definite lived intangible assets isas follows:

| 2006 (remaining  three months) |   | $   | 166    |   |
|--------------------------------|--------|-----|--------|--------|
| 2007                           |   | 361 |   |
| 2008                           |   | 260 |   |
| 2009                           |   | 260 |   |
| 2010                           |   | 255 |   |
| Total                          |   | $   | 1,302  |   |

 

**5.**                 NOTESPAYABLE

In February 2006,the Company amended and restated the terms of its credit agreement with Bank ofAmerica N.A. and certain other lenders (the “2004 Credit Agreement”). Theamended and restated credit agreement (the “2006 Credit Agreement”) providedfor maximum borrowings of $135,000 and has an expiration date of February 24,2011. In September 2006, the Company entered into an agreement thatincreased the maximum permitted borrowings under the 2006 Credit Agreement to$160,000. The Company had outstanding borrowings under its 2006 CreditAgreement as of September 30, 2006 and under its 2004 Credit Agreement asof December 31, 2005 as follows:

| ** **                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Loan Available(1)              |       |                         | $          | 160,000                     |       |   |   | $ | 80,000 |   |   |
| Loans Outstanding              |       |                         | 18,670     |                        |       |   | 31,805 |   |   |
| Letters of Credit  Outstanding |       |                         | 6,500      |                        |       |   | 6,500 |   |   |

----

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

The outstanding loans bore interest rates ranging from3.97% to 8.25% at September 30, 2006 and 5.39% at December 31, 2005.At September 30, 2006 and December 31, 2005, notes payable wererecorded net of unamortized loan fees of $989 and $558, respectively.

Subsequent toSeptember 30, 2006, the Company borrowed $86,000 under the 2006 CreditAgreement to fund the acquisition of substantially all of the North Americanbrokerage operations and assets of Amerex Energy. See Note 15 for furtherdiscussion.

**6.**                 EARNINGSPER SHARE

Basicand diluted earnings per share for the three and nine months ended September 30,2006 and 2005 were as follows:

| ** **                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic earnings per share**                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  applicable to stockholders                                         |       | $                                                    | 16,590     |                                                | $          | 10,848 |   | $ | 47,669 |   | $ | 36,684 |   |
| Income allocated  to participating preferred stockholders                      |       | —                                               |       | —                                              |       | — |   | (903 | ) |
| Income available  to common stockholders                                       |       | $                                                    | 16,590     |                                                | $          | 10,848 |   | $ | 47,669 |   | $ | 35,781 |   |
| Weighted average common  shares outstanding:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Class A common stock                                                      |       | —                                               |       | —                                              |       | — |   | 647,676 |   |
| Common stock                                                                   |       | 28,441,089                                           |       | 27,177,546                                          |       | 28,248,634 |   | 25,085,118 |   |
| Weighted average  common shares outstanding                                    |       | 28,441,089                                           |       | 27,177,546                                          |       | 28,248,634 |   | 25,732,794 |   |
| Basic earnings  per share—Class A common stock and Common stock |       | $                                                    | 0.58       |                                                | $          | 0.40 |   | $ | 1.69 |   | $ | 1.39 |   |
| **Diluted  earnings per share**                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  applicable to stockholders                                         |       | $                                                    | 16,590     |                                                | $          | 10,848 |   | $ | 47,669 |   | $ | 36,684 |   |
| Weighted average  common shares outstanding                                    |       | 28,441,089                                           |       | 27,177,546                                          |       | 28,248,634 |   | 25,732,794 |   |
| Effect of dilutive  shares:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Options and warrant                                                            |       | 780,706                                              |       | 927,772                                             |       | 855,652 |   | 899,690 |   |
| Convertible preferred shares                                                   |       | —                                               |       | —                                              |       | — |   | 331,982 |   |
| Redeemable convertible preferred shares                                        |       | —                                               |       | —                                              |       | — |   | 409,181 |   |
| Weighted average shares outstanding and common stock  equivalents              |       | 29,221,795                                           |       | 28,105,318                                          |       | 29,104,286 |   | 27,373,647 |   |
| Diluted earnings per  share                                                    |       | $                                                    | 0.57       |                                                | $          | 0.39 |   | $ | 1.64 |   | $ | 1.34 |   |

 

Outstanding options topurchase 32,967 shares were excluded from the computation of diluted earningsper share for the nine months ended September 30, 2005 because theireffect would be anti-dilutive. In addition, 167,208 and 109,690 RSUs forthe three months ended September 30, 2006 and 2005, respectively, and130,674 and 119,952 RSUs for the nine months ended September 30, 2006 and2005, respectively, were also excluded from the computation of diluted earningsper share because their effect would be anti-dilutive.

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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)**

**7.**                 SHARE-BASEDCOMPENSATION

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

Thefollowing is a summary of RSU transactions under the 2004 Equity Incentive Planduring the nine months ended September 30, 2006:

| ** **                           | ** ** | **RSUs** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|----------|------------|--------------------------------------------------------|------------|
| Outstanding  December 31, 2005  |       | 599,225  |       |                                                   | $          | 32.03 |   |   |
| Granted                              |       | 414,419  |       |                                                   | 54.81      |   |   |
| Vested                               |       | (133,337 | )          |                                                   | 31.44      |   |   |
| Cancelled                            |       | (36,125  | )          |                                                   | 33.31      |   |   |
| Outstanding September 30,  2006 |       | 844,182  |       |                                                   | 43.25      |   |   |

 

Theweighted average grant-date fair value of RSUs granted for the nine monthsended September 30, 2006 was $54.81 per unit, compared with $27.27 perunit for the same period in the prior year. Total compensation expense andrelated income tax benefits recognized in relation to RSUs is as follows:

| ** **            | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| Compensation  expense |       |                                                     | $          | 2,817                                                    |       |   |   | $ | 636 |   |   |   | $ | 7,951 |   |   |   | $ | 1,220 |   |   |
| Income tax benefits   |       |                                                     | 1,813      |                                                     |       |   | 251 |   |   |   | 3,029 |   |   |   | 486 |   |   |

 

At September 30, 2006, total unrecognizedcompensation cost related to the RSUs prior to the consideration of expectedforfeitures was approximately $29,831 and is expected to be recognized over aweighted-average period of 2.19 years. The total fair value of RSUs vestedduring the nine months ended September 30, 2006 and 2005 was $4,192 and$108, respectively.

As of September 30, 2006, 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.

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

Thefollowing is a summary of stock option transactions during the nine monthsended September 30, 2006:

| ** **                           | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2005  |       | 953,437                                |       |                                       | $          | 13.75 |   |   | 658,662 |   |   | $ | 11.88 |   |   |
| Exercised                            |       | (252,505                               | )          |                                       | 13.37      |   |   | (315,895 | ) |   | 11.69 |   |   |
| Terminated                           |       | (3,685                                 | )          |                                       | 14.49      |   |   | (526 | ) |   | 9.50 |   |   |
| Outstanding September 30,  2006 |       | 697,247                                |       |                                       | 13.89      |   |   | 342,241 |   |   | 12.06 |   |   |

 

Thefollowing table summarizes information about options outstanding under the GFIGroup 2002 Plan as of September 30, 2006:

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | **Stock Options Exercisable** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding**                | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   Exercisable ** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $11.88                  |       |                                    | 543,663    |                                    |       |   | 7.49 |   |   |   | $ | 11.88 |   |   |   | 448,397 |   |   |   | $ | 11.88 |   |   |
|   21.00       |       |                                    | 153,584    |                                    |       |   | 7.74 |   |   |   | 21.00 |   |   |   | 56,607 |   |   |   | 21.00 |   |   |
|                         |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes information about options outstanding under theGFInet 2000 Plan as of September 30, 2006:

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | ** **               | ** ** | **Stock Options  Exercisable**       | ** ** |
|-------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number   Exercisable ** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $9.50                   |       |                                    | 225,999    |                     |       |                                                | 3.70       |   |   |   | $ | 9.50 |   |   |   | 225,999 |   |   |   | $ | 9.50 |   |   |
|   11.88       |       |                                    | 34,843     |                     |       |                                                | 6.47       |   |   |   | 11.88 |   |   |   | 34,843 |   |   |   | 11.88 |   |   |
|   14.25       |       |                                    | 12,723     |                     |       |                                                | 4.26       |   |   |   | 14.25 |   |   |   | 12,723 |   |   |   | 14.25 |   |   |
|   19.00       |       |                                    | 51,603     |                     |       |                                                | 4.42       |   |   |   | 19.00 |   |   |   | 51,603 |   |   |   | 19.00 |   |   |
|   23.75       |       |                                    | 17,073     |                     |       |                                                | 3.74       |   |   |   | 23.75 |   |   |   | 17,073 |   |   |   | 23.75 |   |   |
|                         |            |                                         |            |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Totalcompensation expense and related income tax benefit recognized in relation tothe stock options is as follows:

| ** **            | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **            | ** ** | **    2006    ** | ** ** | **    2005    **  | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Compensation  expense |       |                                                     | $          | 61                                                        |       |   |   | $ | 140 |   |   |   | $ | 248 |   |   |   | $ | 1,253 |   |   |
| Income tax benefit    |       |                                                     | 51         |                                                      |       |   | 97 |   |   |   | 102 |   |   |   | 542 |   |   |

 

At September 30, 2006, total unrecognizedcompensation cost related to unvested stock option awards prior to theconsideration of expected forfeitures was approximately $350 and is expected tobe recognized over the weighted average period of 0.5 years.

16

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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)**

For the nine months ended September 30,2006 and 2005, the total fair value of vested options was $340 and $401,respectively. The total intrinsic value of options exercised for the ninemonths ended September 30, 2006 and 2005 was $23,499 and $16,358, respectively.Additionally, the total intrinsic value of options outstanding and exercisableat September 30, 2006 was $43,661 and $36,200, respectively.

**8.**                 COMMITMENTSAND CONTINGENCIES

*PurchaseObligations**—The*Company has variousunconditional purchase obligations. Certain of these obligations include thepurchase of quotes from a number of information service providers during thenormal course of business. As of September 30, 2006, the Company had totalpurchase commitments for quotes of approximately $13,522, with $11,086 duewithin the next twelve months and $2,436 due between one to two years.

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

The Company is subject to regular examinations 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. Tax reserves have been established, which the Companycurrently believes to be adequate in relation to the potential for additionaltax assessments. Once established, reserves may be adjusted based on newinformation or events. The imposition of additional tax assessments, penaltiesor fines by a tax authority could have a material impact on the Company’seffective tax rate.

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

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

*Risksand Uncertainties**—The*Company primarily 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.

17

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

*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 18—FinancialInstruments with Off-Balance Sheet Risk” contained in the Company’s 2005 Form 10-K.There have been no material changes to our off-balance sheet risk during thenine months ended September 30, 2006.

**10.**          FINANCIALINSTRUMENTS

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

For the three and nine months ended September 30,2006 and 2005, there was no hedge ineffectiveness. Additionally, at September 30,2006, the Company estimates that $967 of net derivative losses included inaccumulated other comprehensive loss will be reclassified into earnings overthe next twelve months. Unrealized gains before tax totaling $1,963 and $1,329for the three months ended September 30, 2006 and 2005, respectively, and$1,230 and $5,578 for the nine months ended September 30, 2006 and 2005,respectively, were recorded as other comprehensive income (loss). There hasbeen no discontinuance of cash flow hedges that would require a reclassificationof gains into earnings. Management does not anticipate any events ortransactions that would result in the reclassification into earnings of gainsand losses that are reported in accumulated other comprehensive income due tohedge discontinuance.

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 September 30, 2006 and December 31, 2005 as follows:

| **Asset/(Liabilities)**                 | ** ** | ** ** | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| Foreign exchange  derivative contracts: |       |       |       |                         |       |                        |       |   |   |
| Assets                                  |       |       | $          | 2,223                        |       |                        |       | $ | 2,196 |   |   |
| Liabilities                             |       |       | (476       | )                            |       |                        | (79        | ) |   |
| Fenics purchase  obligation             |       |       | (58        | )                            |       |                        | (144       | ) |   |
|                                         |            |            |            |                              |            |                             |            |  |  |  |  |  |  |

 

18

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

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

Included in other assetsin the Condensed Consolidated Statements of Financial Condition as ofSeptember 30, 2006 were $2,688 of assets primarily relating to exchangetraded equity instruments held by the Company and recorded at current marketvalue.

**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 $385. 

Thefollowing table sets forth the minimum capital, as defined, that certain of theCompany’s subsidiaries must be maintained as of September 30, 2006:

| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers   Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       |                         | $          | 35,486                              |       |                             |       | $                                      | 22,609     |   |   |   | $ | 23,169 |   |   |   | $ | 1,734 |   |   |
| Minimum Net  Capital required |       |                         | 250        |                                |       |                             | 9,068      |                                   |       |   | 15,652 |   |   |   | 385 |   |   |
| Excess Net Capital            |       |                         | $          | 35,236                              |       |                             |       | $                                      | 13,541     |   |   |   | $ | 7,517 |   |   |   | $ | 1,349 |   |   |

 

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

GFI Securities Limited’s Japanese branch is subject tocertain licensing requirements established by the Foreign Securities Firms Law(the “FSFL”) in Japan. In July 2006, GFI Securities Limited’s Japanesebranch obtained a full securities license with the FSFL. As part of thelicensing requirements, GFI Securities Limited’s Japanese branch is required tomaintain “brought-in” capital, as defined under the FSFL, of 50,000 JapaneseYen (approximately $424). In addition, GFI Securities Limited is required tomaintain a capital base of 1,000,000 Japanese Yen (approximately $8,471). GFISecurities Limited’s 

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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)**

Japanese branch is alsosubject to the net capital rule promulgated by the FSFL, which requires thatnet worth, including “brought-in” capital, exceed a ratio of 120.0% of relevantexpenditure. At September 30, 2006, GFI Securities Limited and itsJapanese branch were in compliance with these capital requirements andmaintained 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. This branch commenced operation on February 1, 2006.The establishment of the branch was approved by FSA and acknowledged by Banquede France in France. The branch will be subject to the conduct of business rules ofthe Autorite Des Marches Financiers when dealing with resident customers ofFrance and will be regulated, in part, by the FSA.

GFI Brokers Limited’s Sydney branch is registered as aforeign corporation in Australia and is conditionally exempt from 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. was registered with the HongKong Monetary Authority during the third quarter of 2006. As part of thisregistration, GFI (HK) Brokers Ltd. is required to maintain stockholders’equity of 5,000 Hong Kong dollars (or approximately $642). At September 30,2006, GFI (HK) Brokers Ltd. had stockholders’ equity of 6,625 Hong Kong dollars(or approximately $850), which exceeded the minimum requirement by 1,625 HongKong dollars (or approximately $208).

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 September 30, 2006.

**12.**          GEOGRAPHICINFORMATION

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

Informationregarding revenue for the three and nine months ended September 30, 2006and 2005, and information regarding long-lived assets (defined as property,equipment, leasehold improvements and software inventory) in geographic areasas of September 30, 2006 and December 31, 2005 is as follows:

| ** **    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:     |       |                                                 |       |                                                |       |   |   |   |   |
| North America |       | $                                                    | 76,469     |                                                | $          | 66,733 |   | $ | 249,328 |   | $ | 196,662 |   |
| Europe        |       | 86,757                                               |       | 53,758                                              |       | 258,347 |   | 166,626 |   |
| Asia-Pacific  |       | 16,732                                               |       | 10,198                                              |       | 45,437 |   | 30,017 |   |
| Total         |       | $                                                    | 179,958    |                                                | $          | 130,689 |   | $ | 553,112 |   | $ | 393,305 |   |

 

20

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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)**

 

| ** **                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived  Assets, as defined: |       |                         |       |                        |       |   |   |   |   |
| North America                   |       |                         | $          | 28,079                      |       |   |   | $ | 25,200 |   |   |
| Europe                          |       |                         | 13,201     |                        |       |   | 10,645 |   |   |
| Asia-Pacific                    |       |                         | 1,737      |                        |       |   | 1,516 |   |   |
| Total                           |       |                         | $          | 43,017                      |       |   |   | $ | 37,361 |   |   |

 

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

**13.**          OTHERCOMPREHENSIVE INCOME (LOSS)

| ** **                                                           | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| **Unrealized  gain (loss) on foreign exchange derivative contracts** | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Period Change:                                               |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                                     | $          | 1,963                                                    |       |   |   | $ | 1,329 |   |   |   | $ | 1,230 |   |   |   | $ | 5,578 |   |   |
| Tax (Expense) Benefit                                                |       |                                                     | (589       | )                                                        |       |   | (467 | ) |   |   | (369 | ) |   |   | (1,858 | ) |   |
| After Tax Amount                                                     |       |                                                     | $          | 1,374                                                    |       |   |   | $ | 862 |   |   |   | $ | 861 |   |   |   | $ | 3,720 |   |   |
| **Foreign  currency translation adjustment**                         | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Before Tax Amount                                                    |       |                                                     | $          | (81                                                      | )          |   |   | $ | 717 |   |   |   | $ | 197 |   |   |   | $ | 383 |   |   |
| Tax (Expense) Benefit                                                |       |                                                     | 73         |                                                     |       |   | (315 | ) |   |   | (51 | ) |   |   | (163 | ) |   |
| After Tax Amount                                                     |       |                                                     | $          | (8                                                       | )          |   |   | $ | 402 |   |   |   | 146 |   |   |   | $ | 220 |   |   |

 

TheCompany reclassified the following out of other comprehensive income into otherincome for each period noted:

| ** ** | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Gross loss |       |                                                     | $          | 710                                                      |       |   |   | $ | 728 |   |   |   | $ | 3,401 |   |   |   | $ | 1,169 |   |   |
| Net of tax |       |                                                     | 497        |                                                     |       |   | 509 |   |   |   | 2,381 |   |   |   | 818 |   |   |

 

**14.**          RELATEDPARTY TRANSACTION

**Office LeaseTermination with an Affiliate**

In the fourth quarter of2005, the Company ceased use of the premises it had leased from an affiliateand recorded a liability for the remaining rent plus other charges at thattime. During the third quarter of 2006, the Company reduced its estimate forrelated termination charges by £50(or $93). Of the remaining accrual balanceof $157, approximately $62 and $95 will be paid to the affiliate and thirdparties, respectively. Such payments are expected to be paid in the fourthquarter of 2006.

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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)**

**15.**          SUBSEQUENTEVENT

On October 1, 2006, the Company completed anacquisition of substantially all of the North American brokerage operations andassets of the following Texas limited partnerships (collectively, “AmerexEnergy”): Amerex Natural Gas I, Ltd., Amerex Power Ltd., Amerex Emissions, Ltd.and Amerex Retail Energy Services, Ltd. Amerex Energy operated as a leadinginterdealer broker of electric power, natural gas and emissions products andrelated derivative and option contracts in North America. The purchase pricewas $86,000 plus direct transaction costs related to the acquisition, such aslegal and other professional fees. The Company utilized borrowings under its2006 Credit Agreement to fund this acquisition. The acquisition will beaccounted for as a purchase business combination. The acquired assets, resultsof operations and cash flows of Amerex Energy are not included in theaccompanying condensed consolidated financial statements because theacquisition occurred subsequent to the third quarter of 2006.

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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 September 30, 2006, and the relatedcondensed consolidated statements of income and comprehensive income for thethree-month and nine-month periods ended September 30, 2006 and 2005, andthe condensed consolidated statements of cash flows for the nine-month periodsended September 30, 2006 and 2005. These interim financial statements arethe responsibility of the Company’s management.

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 audit conductedin accordance with the standards of the Public Company Accounting OversightBoard (United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress 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.

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated statement of financialcondition of GFI Group Inc. and subsidiaries as of December 31, 2005, andthe related consolidated statements of income, comprehensive income,stockholders’ equity, and cash flows for the year then ended (not presentedherein); and in our report dated March 22, 2006, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated statementof financial condition as of December 31, 2005 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financial conditionfrom which it has been derived.

| /s/ DELOITTE & TOUCHE  LLP |   |
|-------------------------------------|--------|
| New York, New York                  |   |
| November 10, 2006              |   |

 

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

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

·       the risks and other factorsdescribed under the heading “Risk Factors” and elsewhere in our 2005 Form 10-K;

·       expansion and growth of ouroperations generally or of specific products or services;

·       our ability to attract andretain key personnel, including highly qualified brokerage personnel;

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

·       competition from currentand new competitors;

·       future results ofoperations and financial condition;

·       the success of our businessstrategies;

·       economic, political andmarket factors affecting trading volumes, securities prices or demand for theCompany’s brokerage services;

·       financial difficultiesexperienced by the Company’s customers or key participants in the markets inwhich the Company focuses its brokerage services;

·       risks associated withpotential acquisitions by us of businesses or technologies;

·       our ability to manage ourinternational operations;

·       uncertainties associatedwith currency fluctuations;

·       our failure to protect orenforce our intellectual property rights;

·       our ability to keep up withrapid technological change;

·       changes in laws andregulations governing our business and operations or permissible activities andour ability to comply with such laws and regulations;

·       uncertainties relating tolitigation; and

·       changes in the availabilityof 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 ‘‘Item3—Quantitative and Qualitative Disclosures About Market Risk’’ and elsewhere inthis Quarterly Report, may cause actual results to differ materially from theforward-looking statements. The information included herein is given as of thefiling date of this Form 10-Q with the SEC and future events orcircumstances could differ significantly from these forward-looking statements.The Company does not undertake to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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**BusinessEnvironment**

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

During the third quarterof 2006, the global business environment was generally positive for ourbusiness, with satisfactory trading volume levels and modest volatility in thecredit, financial and equity markets and more pronounced volatility in certaincommodity markets. The U.S. Federal Reserve halted its two-year program ofincreasing short-term interest rates in the third quarter of 2006. While thethird quarter of 2005 included the market effects from hurricanes Katrina andRita, as well as from the terrorist bombings in London, global markets in thethird quarter of 2006 were impacted by the Israel/Lebanon crisis, and tensionssurrounding the Iranian and North Korean nuclear programs.

**Credit:**

The credit markets experienced moderate volatility inthe third quarter of 2006. Volatility in the global credit markets in the thirdquarter of 2006 was generally in-line with that of the third quarter of 2005,as evidenced by the volatility levels on the Dow Jones CDX North AmericanInvestment Grade, North American High Yield and Itraxx Europe indices.

The bond market rallied inthe third quarter of 2006 as inflation concerns abated and bond yields decreased.This was reflected, in part, by the fact that the Lehman Brothers AggregateBond Total Return Index rose 4.1% in the quarter. The credit derivatives marketin the first half of 2006 continued its significant growth according to surveyspublished by both the International Swaps and Derivatives Association (ISDA)and the British Bankers Association in September. The ISDA report indicatedtotal credit derivatives notional amounts outstanding at $26.0 trillion at June 30,2006, up 109% from $12.4 trillion the prior year. We believe that thisstrong year-over-year growth in the notional value of the underlying creditderivatives market has resulted in a higher volume of transactions in the overthe counter market in the third quarter of 2006.

**Financial:**

The foreign exchange andinterest rate markets remained active in the third quarter as the U.S. Dollarremained strong despite the Federal Reserve halting its program of raisingshort-term interest rates. The U.S. Dollar strengthened versus the Euro andJapanese Yen in the quarter, but lost value to the British Pound Sterling. Emergingmarket currencies were mixed over the quarter with the Mexican Pesostrengthening and the Brazilian Real decreasing versus the U.S. Dollar. Boththe Chicago Mercantile Exchange and the Chicago Board of Trade reported foreignexchange and/or interest rate volume statistics indicating double-digit growthin futures volume during the third quarter of 2006.

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**Equity:**

The equity marketsexperienced moderate volatility in the third quarter of 2006 as stock marketsworldwide generally were active due to U.S. short term interest rates remainingunchanged, continued economic growth, and lower energy costs. The Dow JonesWorld Stock Index, excluding the U.S., rose 3.2% in the quarter, and the DowJones Industrial Average increased 4.7%. The Dow Jones Stoxx 600 Index, anindex of the largest publicly traded European companies, rose 6.5% in the thirdquarter after a 4.1% decline in the second quarter. Equity market performancein Latin America and Asia was mixed in the quarter, as slowing U.S. economicgrowth weighed heavily on these markets. The Chicago Board Options ExchangeStandard and Poor’s 500 Volatility Index indicated a lower volatility level forthe third quarter of 2006, as compared to the third quarter of 2005. The ISDAMid-Year Market Survey reported total notional amounts outstanding for equityderivatives at $6.4 trillion as of June 30, 2006, up approximately 32%from the prior year.

**Commodity:**

The energy marketsremained volatile in the third quarter of 2006, as rapid price increases werefollowed by significant price declines. Crude-oil futures hit an intradayrecord $78.40 a barrel in July following the outbreak of hostilitiesbetween Israel and Lebanon. In addition, expectations for an active hurricaneseason and the potential disruption of production also contributed to highercrude oil and natural gas prices. The cooling of tensions in the Mideastconflict along with the lack of significant storm activity led to pricesdeflating by quarter end. Oil prices on the New York Mercantile Exchange (“NYMEX”)were down 15% in the quarter, while natural gas futures saw large fluctuationswith prices peaking during the summer followed by a rapid decrease resulting ina loss of 8.0% for the quarter. NYMEX and the InterContinentalExchange bothreported record energy contract volume in September.

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**Results ofOperations**

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

| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Brokerage revenues:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Agency commissions                        |       | $                                                    | 138,961    |                                                | $          | 98,559 |   | $ | 406,005 |   | $ | 287,248 |   |
| Principal transactions                    |       | 34,478                                               |       | 27,420                                              |       | 117,330 |   | 83,167 |   |
| Total brokerage revenues                  |       | 173,439                                              |       | 125,979                                             |       | 523,335 |   | 370,415 |   |
| Analytics and market data                 |       | 4,954                                                |       | 3,894                                               |       | 14,419 |   | 14,006 |   |
| Long-term contract revenue                |       | —                                               |       | —                                              |       | 5,881 |   | — |   |
| Interest income                           |       | 2,150                                                |       | 1,236                                               |       | 6,778 |   | 3,179 |   |
| Other income (loss)                       |       | (585                                                 | )          | (420                                                | )          | 2,699 |   | 5,705 |   |
| Total revenues                            |       | 179,958                                              |       | 130,689                                             |       | 553,112 |   | 393,305 |   |
| EXPENSES:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Compensation and employee benefits        |       | 112,543                                              |       | 81,461                                              |       | 343,089 |   | 237,833 |   |
| Communications and quotes                 |       | 9,799                                                |       | 6,656                                               |       | 26,755 |   | 18,795 |   |
| Travel and promotion                      |       | 7,069                                                |       | 5,833                                               |       | 23,149 |   | 17,634 |   |
| Rent and occupancy                        |       | 4,594                                                |       | 4,662                                               |       | 15,048 |   | 12,003 |   |
| Depreciation and amortization             |       | 4,338                                                |       | 3,434                                               |       | 12,222 |   | 11,126 |   |
| Professional fees                         |       | 4,391                                                |       | 2,797                                               |       | 13,755 |   | 8,193 |   |
| Clearing fees                             |       | 5,884                                                |       | 3,480                                               |       | 18,159 |   | 9,825 |   |
| Interest                                  |       | 1,124                                                |       | 778                                                 |       | 4,648 |   | 2,619 |   |
| Other expenses                            |       | 3,098                                                |       | 2,217                                               |       | 10,497 |   | 12,036 |   |
| Cost of long-term contract                |       | —                                               |       | —                                              |       | 5,180 |   | — |   |
| Lease termination costs to affiliate      |       | (93                                                  | )          | —                                              |       | (185 | ) | (2,266 | ) |
| Total Expenses                            |       | 152,747                                              |       | 111,318                                             |       | 472,317 |   | 327,798 |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 27,211                                               |       | 19,371                                              |       | 80,795 |   | 65,507 |   |
| PROVISION FOR  INCOME TAXES               |       | 10,621                                               |       | 8,523                                               |       | 33,126 |   | 28,823 |   |
| NET INCOME                                |       | $                                                    | 16,590     |                                                | $          | 10,848 |   | $ | 47,669 |   | $ | 36,684 |   |

 

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

| ** **                                | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| REVENUES:                                 |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage  revenues:                      |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                        |       |                                                     | 77.2       | %                                                        |       |   | 75.4 | % |   |   | 73.4 | % |   |   | 73.0 | % |   |
| Principal transactions                    |       |                                                     | 19.2       |                                                     |       |   | 21.0 |   |   |   | 21.2 |   |   |   | 21.2 |   |   |
| Total brokerage revenues                  |       |                                                     | 96.4       |                                                     |       |   | 96.4 |   |   |   | 94.6 |   |   |   | 94.2 |   |   |
| Analytics and market data                 |       |                                                     | 2.8        |                                                     |       |   | 3.0 |   |   |   | 2.6 |   |   |   | 3.6 |   |   |
| Long-term contract revenue                |       |                                                     | 0.0        |                                                     |       |   | — |   |   |   | 1.1 |   |   |   | — |   |   |
| Interest income                           |       |                                                     | 1.2        |                                                     |       |   | 0.9 |   |   |   | 1.2 |   |   |   | 0.8 |   |   |
| Other income (loss)                       |       |                                                     | (0.4       | )                                                        |       |   | (0.3 | ) |   |   | 0.5 |   |   |   | 1.4 |   |   |
| Total revenues                            |       |                                                     | 100.0      | %                                                        |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| EXPENSES:                                 |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits        |       |                                                     | 62.5       | %                                                        |       |   | 62.3 | % |   |   | 62.0 | % |   |   | 60.5 | % |   |
| Communications and quotes                 |       |                                                     | 5.4        |                                                     |       |   | 5.1 |   |   |   | 4.8 |   |   |   | 4.8 |   |   |
| Travel and promotion                      |       |                                                     | 3.9        |                                                     |       |   | 4.5 |   |   |   | 4.2 |   |   |   | 4.5 |   |   |
| Rent and occupancy                        |       |                                                     | 2.6        |                                                     |       |   | 3.6 |   |   |   | 2.7 |   |   |   | 3.0 |   |   |
| Depreciation and amortization             |       |                                                     | 2.4        |                                                     |       |   | 2.6 |   |   |   | 2.2 |   |   |   | 2.8 |   |   |
| Professional fees                         |       |                                                     | 2.4        |                                                     |       |   | 2.1 |   |   |   | 2.5 |   |   |   | 2.1 |   |   |
| Clearing fees                             |       |                                                     | 3.3        |                                                     |       |   | 2.7 |   |   |   | 3.3 |   |   |   | 2.5 |   |   |
| Interest                                  |       |                                                     | 0.6        |                                                     |       |   | 0.6 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |
| Other expenses                            |       |                                                     | 1.7        |                                                     |       |   | 1.7 |   |   |   | 1.9 |   |   |   | 3.0 |   |   |
| Cost of long-term contract                |       |                                                     | 0.0        |                                                     |       |   | 0.0 |   |   |   | 0.9 |   |   |   | 0.0 |   |   |
| Lease termination to affiliate            |       |                                                     | (0.1       | )                                                        |       |   | 0.0 |   |   |   | 0.0 |   |   |   | (0.6 | ) |   |
| Total Expenses                            |       |                                                     | 84.7       | %                                                        |       |   | 85.2 | % |   |   | 85.3 | % |   |   | 83.3 | % |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       |                                                     | 15.3       |                                                     |       |   | 14.8 |   |   |   | 14.7 |   |   |   | 16.7 |   |   |
| PROVISION FOR  INCOME TAXES               |       |                                                     | 5.9        |                                                     |       |   | 6.5 |   |   |   | 6.0 |   |   |   | 7.4 |   |   |
| NET INCOME                                |       |                                                     | 9.4        | %                                                        |       |   | 8.3 | % |   |   | 8.7 | % |   |   | 9.3 | % |   |

 

**Three Months Ended September 30,2006 Compared to the Three Months Ended September 30, 2005**

Net income for the three months ended September 30,2006 was $16.6 million as compared to net income of $10.8 million for the threemonths ended September 30, 2005, an increase of $5.8 million orapproximately 53.7%. Total revenues increased by $49.3 million, or 37.7 %, to$180.0 million for the three months ended September 30, 2006 from$130.7 million for the same period from the prior year. Our increased revenueswere primarily due to increased brokerage revenues across our credit,financial, equity and commodity product categories. Our total brokeragepersonnel headcount increased by 163 to a total of 827 employees at September 30,2006 from 664 employees at September 30, 2005. Total expenses increased by$41.4 million, or 37.2%, to $152.7 million for the three months ended September 30,2006 from $111.3 million for the same period from the prior year. Expensesincreased primarily due to a higher number of brokerage personnel as comparedwith the corresponding period in 2005 and the resulting increase in performancerelated 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  September 30,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **BROKERAGE REVENUES:**   |       |                                                 |       |   |   |
| Credit                    |       | $                                                    | 60,654     |   | $ | 51,472 |   |
| Financial                 |       | 38,605                                               |       | 30,804 |   |
| Equity                    |       | 41,426                                               |       | 25,993 |   |
| Commodity                 |       | 32,754                                               |       | 17,710 |   |
| Total brokerage revenues  |       | $                                                    | 173,439    |   | $ | 125,979 |   |
| **BROKERAGE  REVENUES:**  |       |                                                 |       |   |   |
| Credit                    |       | 35.0                                                 | %          | 40.8 | % |
| Financial                 |       | 22.2                                                 |       | 24.5 |   |
| Equity                    |       | 23.9                                                 |       | 20.6 |   |
| Commodity                 |       | 18.9                                                 |       | 14.1 |   |
| Total brokerage  revenues |       | 100.0                                                | %          | 100.0 | % |

 

Total brokerage revenues increased by $47.4 million,or 37.6%, to $173.4 million for the three months ended September 30,2006, as compared to $126.0 million for the three months ended September 30,2005. Agency commissions increased by $40.3 million, or 40.9%, to $138.9million for the three months ended September 30, 2006, as compared to$98.6 million for the three months ended September 30, 2005. Principaltransactions increased by $7.1 million, or 25.9%, to $34.5 million for thethree months ended September 30, 2006 from $27.4 million for the threemonths ended September 30, 2005. Broker productivity (defined as totalbrokerage revenues during the period divided by average monthly brokeragepersonnel headcount for the period) increased by approximately 6.2% for thethree months ended September 30, 2006, as compared to the same period fromthe prior year.

The increase in credit product brokerage revenues of$9.2 million in the third quarter of 2006 as compared with the third quarter of2005 was due to a number of factors, including continued overall growth in thecredit derivatives market, the development of new credit products and thefurther sectorization of credit products and the continuing rollout ofCreditMatch, our credit derivatives trading platform, in Europe. Our existingcredit product desks contributed $6.9 million of the total increase in thecredit product brokerage revenues. The remaining $2.3 million increase wasgenerated by the addition of eight new or restructured desks since September 30,2005. Our investment in and development of credit products was highlightedby a credit product brokerage personnel increase of 28 to a total of 227 employeesat September 30, 2006 from 199 employees at September 30, 2005.

The increase in financial product brokerage revenuesof $7.8 million in the third quarter of 2006 as compared with the third quarterof 2005 was primarily attributable to the build up of our Asian operations andthe development of new products, as well as the growth of existing emergingmarket products. Our existing financial product desks contributed $3.7 millionof the total increase in financial product brokerage revenues. The remaining$4.1 million increase in financial product brokerage revenues was attributableto the addition of seventeen new or restructured financial product desks since September 30, 2005.This investment in and development of financial products was highlighted by a 

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financial productbrokerage personnel increase of 49 to a total of 259 employees at September 30,2006 from 210 employees at September 30, 2005.

The increase in equity product brokerage revenues of$15.4 million in the third quarter of 2006 as compared with the third quarterof 2005 was primarily due to our new Paris office contributing $12.4 millionin brokerage revenues in the quarter and investment in other equity products.New or restructured equity product desks, including desks in our Paris office,contributed $13.4 million of the total increase in equity product brokeragerevenues. The remaining $2.0 million increase in equity product brokeragerevenues was attributable to existing equity product desks. Our investment inand development of equity products was highlighted by an equity productbrokerage personnel increase of 45 to a total of 171 employees at September 30,2006 from 126 employees at September 30, 2005.

The increase in commodityproduct brokerage revenues of $15.0 million in the third quarter of 2006 ascompared with the third quarter of 2005 was primarily attributable to theaddition of our Starsupply oil product brokerage business, which generated approximately$6.9 million in brokerage revenues in the third quarter of 2006, significantvolatility in oil and natural gas markets and investment in new desks. Inaddition, our European brokerage business in electricity, coal, dry freight andgold markets continued to perform well. Our existing commodity desks, includingthe desks acquired from Starsupply, contributed $13.6 million of the totalincrease in commodity product brokerage revenue. The remaining $1.4 million incommodity product brokerage revenues was attributable our new or restructuredcommodity product desks. Our investment in and development of commodityproducts was highlighted by a commodity product brokerage personnel increase of41 to a total of 170 employees at September 30, 2006 from 129 employeesat September 30, 2005.

*Analytics andMarket Data*

Revenues from ouranalytics and market data products increased by $1.0 million, or 25.6%, to$4.9 million for the three months ended September 30, 2006 ascompared to $3.9 million for the three months ended September 30, 2005.The increase was primarily due to an increase in subscription fees associatedwith the licensing of analytical software, including Fenics Foreign Exchangeand market data products.

*Interest Income*

Interest income increasedby $1.0 million, or 83.3%, to $2.2 million for the three months ended September 30,2006, as compared to $1.2 million for the three months ended September 30,2005. The increase is mainly attributable to the higher level of average cashbalances in the U.S. and the increase in interest income on clearingaccounts related primarily to our equity and corporate bond brokerage operations.

*Other Income (Loss)*

Other income (loss)decreased by $0.2 million, or 50.0 %, to a loss of $0.6 million for the threemonths ended September 30, 2006 from a loss of $0.4 million for the threemonths ended September 30, 2005. Other income (loss) for the three monthsended September 30, 2006 and 2005 mainly consisted of transactional gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.

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***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits increased by $31.0million, or 38.0%, to $112.5 million for the three months ended September 30,2006 from $81.5 million for the three months ended September 30, 2005.The increase was primarily due to an increase in the number of brokeragepersonnel from 664 employees at September 30, 2005 to 827 employees at September 30,2006 and an increase in brokerage personnel performance bonuses of $14.6million resulting in large part from our overall higher brokerage revenues.

Total compensation andemployee benefits as a percentage of total revenues increased slightly to 62.5%at September 30, 2006 from 62.3% at September 30, 2005. Bonus expenserepresented 51.7% and 50.1% of total compensation and employee benefits expensefor the three months ended September 30, 2006 and 2005, respectively.A significant 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 5.1% and 4.6% of total compensation and employee benefits forthe three months ended September 30, 2006 and 2005, respectively.

*Communications andQuotes*

Communications and quotesincreased by $3.1 million, or 46.3%, to $9.8 million for the three months endedSeptember 30, 2006 from $6.7 million from the three months ended September 30,2005. The increase was primarily attributable to the increase in brokeragedesks and brokerage personnel.

*Travel andPromotion*

Travel and promotionincreased by $1.3 million, or 22.4%, to $7.1 million for the three months endedSeptember 30, 2006 from $5.8 million for the three months ended September 30,2005. This expense, as a percentage of our total brokerage revenues for thethree months ended September 30, 2006 decreased to 4.1% from 4.6% for thesame period from the prior year. This decrease was primarily due to ourcontinuing efforts to lower these costs relative to our total brokeragerevenues.

*Rent and Occupancy*

Rent and occupancydecreased slightly by $0.1 million, or 2.1%, to $4.6 million for the threemonths ended September 30, 2006 from $4.7 million for the three monthsended September 30, 2005. The decrease was primarily due to the decreasein repairs and maintenance and moving costs, offset by the increase ininsurance and utilities resulting from the lease of additional office space inthe U.S., London and Paris.

*Depreciation andAmortization*

Depreciation andamortization increased by $0.9 million, or 26.5%, to $4.3 million for the threemonths ended September 30, 2006 from $3.4 million for the three monthsended September 30, 2005. The increase was primarily due to the increasein capitalized property and equipment costs, including software developmentcosts.

*Professional Fees*

Professional feesincreased by $1.5 million, or 53.6% to $4.3 million for the three months ended September 30,2006 from $2.8 million for the three months ended September 30, 2005. Theincrease was primarily due to an increase in professional fees related to ourcontinuing initial preparation to satisfy the 

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requirementsof the Sarbanes-Oxley Act of 2002 that are or will be applicable to us. Theincrease was also attributable to an increase in audit, tax and otherconsulting fees.

*Clearing Fees*

Clearing fees increased by$2.4 million, or 68.6%, to $5.9 million for the three months endedSeptember 30, 2006 from $3.5 million for the three months endedSeptember 30, 2005. The increase was due to a higher volume of principaltransactions executed during the three months ended September 30, 2006,as compared to the same period in the prior year. This increase was partiallydue to the commencement and rapid growth of our equities business in our Parisoffice, which was included in the results for the three months ended September30, 2006. Clearing fees, as a percentage of our total revenues from principaltransactions increased to 17.0% for the three months ended September 30, 2006from 13.6% for the comparable period in the prior year. This increase waspartially due to the high cost of clearing fees as a result of the highernumber of trades executed in our Paris office. Excluding transactions from ourParis office, clearing fees, as a percentage of our total revenues fromprincipal transactions was 15.5% and 13.6% for the three months ended September30, 2006 and 2005, respectively. Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. We also use the services of floor brokers on certain stock exchangesto assist in the execution of transactions. Fees paid to floor brokers in thesecircumstances are included in clearing fees. 

*Interest Expense*

Interest expense increasedby $0.3 million, or 37.5%, to $1.1 million for the three months endedSeptember 30, 2006 from $0.8 million for the three months endedSeptember 30, 2005. The increase was primarily due to higher interest chargeson clearing accounts related primarily to our equity and corporate bondbrokerage operations and an increase in interest expense under our creditfacility mainly due to the higher level of outstanding net borrowings duringthe third quarter of 2006 as compared to the comparable period in the prioryear. We expect interest expense will increase in future periods due toborrowings under our 2006 Credit Agreement subsequent to quarter end. See Note5 to the Condensed Consolidated Financial Statements for further discussion.

*Other Expenses*

Other expenses increasedby $0.9 million, or 40.9%, to $3.1 million for the three months endedSeptember 30, 2006 from $2.2 million for the three months endedSeptember 30, 2005. The increase was primarily due to an increase inirrecoverable Value Added Tax related to increased purchases in communicationsand quotes in the U.K. and other general office expenses, which was partiallyoffset by a decrease in miscellaneous expenses, such as office supplies andsoftware equipment expenses.

*Lease TerminationCosts to Affiliate*

Lease termination costs toaffiliate represent the estimated lease termination costs we incurred inconnection with premises that we had leased in the U.K. from an affiliate. InApril 2005, we and the affiliate executed an amendment to the leasetermination agreement we entered into in December 2004. The amendmentaccelerated termination of the lease to April 2005 and required us to paya termination charge. As a result of the amendment, in the second quarter of2005, we reduced our lease termination liability by approximately £1.2 million(or $2.3 million). Further, we signed a new eighteen-month sublease agreementwith the affiliate with rent of £0.5 million (or $0.9 million) per annum plusother related charges. However, in November 2005, we vacated the premiseand accrued £0.5 million (or $0.9 million) for the remaining rent plus otherrelated charges during the fourth quarter of 2005. During the third quarter of2006, we reduced our estimate for related termination charges by £0.1 million (or $0.1 million). See Note 14 to theCondensed Consolidated Financial Statements for further discussion.

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*Provision forIncome Taxes*

Our provision for incometaxes totaled $10.6 million for the three months ended September 30, 2006and $8.5 million for the three months ended September 30, 2005. Oureffective tax rate was approximately 39.0% for the three months endedSeptember 30, 2006 as compared to 44.0% for the comparable period in 2005.The reduction in the effective tax rate was primarily due to a reduction innon-deductible expenses and a decrease in taxes related to foreign operations,which was partially offset by a reduction in business tax credits.

**Nine Months EndedSeptember 30, 2006 Compared to the Nine Months Ended September 30,2005**

Net income for the ninemonths ended September 30, 2006 was $47.7 million as compared to netincome of $36.7 million for the nine months ended September 30, 2005, anincrease of $11.0 million or approximately 30.0%. Total revenues increased by$159.8 million, or 40.6%, to $553.1 million for the nine months endedSeptember 30, 2006 from $393.3 million compared to the same period fromthe prior year. Our increased revenues were partially due to the continuedgrowth in our brokerage personnel headcount in each of our product categoriesand organic growth in existing businesses. In addition, our increased revenueswere also attributable to the acquisition of companies or desks, or the openingof desks in developing product areas. Our total brokerage personnel headcountincreased by 163 to 827 employees at September 30, 2006 from 664 employeesat September 30, 2005. Total expenses increased by $144.5 million, or44.1% to $472.3 million for the nine months ended September 30, 2006 from$327.8 million for the same period from the prior year. Expenses increasedprimarily due to a higher number of brokerage personnel as compared with thecorresponding period in 2005 and the resulting increase in performance relatedbrokerage bonuses.

***Revenues***

*Brokerage Revenues*

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

| ** **                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **BROKERAGE REVENUES:**   |       |                                                |       |   |   |
| Credit                    |       | $                                                   | 191,765    |   | $ | 163,874 |   |
| Financial                 |       | 117,035                                             |       | 86,924 |   |
| Equity                    |       | 128,994                                             |       | 68,864 |   |
| Commodity                 |       | 85,541                                              |       | 50,753 |   |
| Total brokerage revenues  |       | $                                                   | 523,335    |   | $ | 370,415 |   |
| **BROKERAGE  REVENUES:**  |       |                                                |       |   |   |
| Credit                    |       | 36.6                                                | %          | 44.2 | % |
| Financial                 |       | 22.4                                                |       | 23.5 |   |
| Equity                    |       | 24.6                                                |       | 18.6 |   |
| Commodity                 |       | 16.4                                                |       | 13.7 |   |
| Total brokerage  revenues |       | 100.0                                               | %          | 100.0 | % |

 

Total brokerage revenues increased by $152.9 million,or 41.3 %, to $523.3 million for the nine months ended September 30,2006, as compared to $370.4 million for the nine months endedSeptember 30, 2005. Agency commissions increased by $118.8 million, or41.4%, to $406.0 million for the 

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nine months endedSeptember 30, 2006, as compared to $287.2 million for the nine monthsended September 30, 2005. Principal transactions increased by $34.1million, or 41.0%, to $117.3 million for the nine months endedSeptember 30, 2006 from $83.2 million for the nine months endedSeptember 30, 2005. Broker productivity (defined as total brokeragerevenues during the period divided by average monthly brokerage personnelheadcount for the period) increased by approximately 6.2% for the nine monthsended September 30, 2006 as compared to the same period from the prioryear.

The increase in credit product brokerage revenues of$27.9 million in the nine months ended September 30, 2006 as compared to thesame period in 2005 was due to a number of factors, including continued overallgrowth in the credit derivatives market, the development of new creditproducts, the sectorization of credit products and the continuing rollout ofCreditMatch in Europe. Our existing credit product desks contributed $24.0million of the total increase in credit product brokerage revenues. Theremaining $3.9 million increase was generated by the addition of eight new orrestructured credit product desks since September 30, 2005. Our investmentin and development of credit products was highlighted by a credit productbrokerage personnel increase of 28 to a total of 227 employees atSeptember 30, 2006 from 199 employees at September 30, 2005.

The increase in financial product brokerage revenuesof $30.1 million in the nine months ended September 30, 2006 as compared to thesame period in 2005 was primarily attributable to the build up of our Asianoperations, global interest rate volatility resulting from economic growth andinflation concerns, and the development of new products and existing emergingmarket products. The increase in our financial product brokerage revenues wasgenerated primarily from our existing financial product desks, whichcontributed $19.1 million of the increase in financial product brokeragerevenues. The remaining $11.0 million increase in financial productbrokerage revenues was attributable to the addition of eleven new orrestructured financial product desks since September 30, 2005. Ourinvestment in and development of financial products was highlighted by afinancial product brokerage personnel increase of 49 to a total of 259employees at September 30, 2006 from 210 employees at September 30,2005.

The increase in equity product brokerage revenues of$60.1 million in the nine months ended September 30, 2006 as compared to thesame period in 2005 was primarily attributable to our new Paris office, whichcontributed $35.7 million in brokerage revenues during the first nine months of2006 and the development of other equity products and increased business fromour hedge fund customers. Global equity markets experienced considerablevolatility in the first nine months due to global economic growth, risinginterest rates and inflation concerns. New or restructured equity productdesks, including desks in our Paris office, contributed $38.2 million of thetotal increase in equity product brokerage revenues. The remaining $21.9million increase in equity product brokerage revenues was attributable toexisting equity product desks. Our investment in and development of equityproducts was highlighted by an equity product brokerage personnel increase of45 to total of 171 employees at September 30, 2006 from 126 employees atSeptember 30, 2005.

The increase in commodityproduct brokerage revenues of $34.8 million in the nine months ended September30, 2006 as compared to the same period in 2005 was primarily attributable tothe addition of our Starsupply oil product brokerage business that generatedapproximately $20.3 million in brokerage revenues in the first nine months of2006, considerable price volatility in certain commodity markets and ourinvestment in new desks. Our existing commodity product desks, including thedesks acquired from Starsupply, contributed $31.9 million of the increase incommodity product brokerage revenues. Our new or restructured commodity deskscontributed $2.9 million of the total increase in commodity product brokeragerevenue. Our investment in and development of commodity products washighlighted by a commodity product brokerage personnel increase of 41 to atotal of 170 employees at September 30, 2006 from 129 employees atSeptember 30, 2005.

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*Analytics andMarket Data*

Revenues from ouranalytics and market data products increased slightly by $0.4 million, or 2.9%,to $14.4 million for the nine months ended September 30, 2006 as comparedto $14.0 million for the nine months ended September 30, 2005. Theincrease was primarily due to an increase in subscription fees associated withthe licensing of analytical software, including Fenics Foreign Exchange andmarket data products. 

*Long-Term ContractRevenue*

Long-term contract revenueconsists of revenues recognized under a contract pursuant to which we developedan online currency trading system and customized it for a customer. During thesecond quarter of 2006, the project was substantially completed andconsequently, we recorded $5.9 million in long-term contract revenues. See Costof Long-Term Contract below for further discussion relating to the costs. SeeNote 2 to the Condensed Consolidated Financial Statements for further discussion.

*Interest Income*

Interest income increasedby $3.6 million, or 112.5%, to $6.8 million for the nine months endedSeptember 30, 2006, as compared to $3.2 million for the nine months endedSeptember 30, 2005. The increase is mainly attributable to the higherlevel of average cash balances in the U.S. and the increase in interestincome on clearing accounts related primarily to our equity and corporate bondbrokerage operations.

*Other Income*

Other income decreased$3.0 million, or 52.6%, to $2.7 million for the nine months endedSeptember 30, 2006 from an increase of $5.7 million for the nine monthsended September 30, 2005. The decrease was primarily attributable to a netgain of $7.6 million relating to our foreign exchange derivative contractsrecorded during the second quarter of 2005. During the first quarter of 2005,we discontinued hedge accounting for a foreign exchange derivative contract,which resulted in a termination of the contract and the execution of a newcontract. The new contract did not qualify for hedge accounting and allunrealized gains and losses on the contract were recorded directly to earnings.The new contract was settled on June 30, 2005. Consequently, we recorded $8.4million of gains from a new foreign exchange derivative contract, net of $0.8million reclassified from accumulated other comprehensive loss into earnings onthe original contract. Other income for the nine months endedSeptember 30, 2006 mainly consisted of transactional net 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 $105.3million, or 44.3%, to $343.1 million for the nine months endedSeptember 30, 2006 from $237.8 million for the nine months endedSeptember 30, 2005. The increase was primarily due to an increase inthe number of brokerage personnel from 664 at September 30, 2005 to 827 atSeptember 30, 2006 and an increase in brokerage personnel performancebonuses of $60.1 million resulting in large part from our overall higherbrokerage revenues.

Total compensation andemployee benefits as a percentage of total revenues increased to 62.0% atSeptember 30, 2006 from 60.5% from September 30, 2005. Bonus expenserepresented 53.4% and 49.7% of total compensation and employee benefits expensefor the nine months ended September 30, 2006 and 2005, respectively. Asignificant portion of our bonus expense is subject to contractual guaranteesthat may 

35

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requireus to make bonus payments to brokers regardless of their performance in anyparticular period. Additionally, sign-on bonus expense represented 5.4% and3.6% of total compensation and employee benefits for the nine months endedSeptember 30, 2006 and 2005, respectively.

*Communications andQuotes*

Communications and quotesincreased by $8.0 million, or 42.6%, to $26.8 million for the nine months endedSeptember 30, 2006 from $18.8 million from the nine months endedSeptember 30, 2005. The increase was primarily attributable to theincrease in brokerage desks and brokerage personnel.

*Travel andPromotion*

Travel and promotionincreased by $5.6 million, or 31.8%, to $23.2 million for the nine months endedSeptember 30, 2006 from $17.6 million for the nine months endedSeptember 30, 2005. This expense, as a percentage of our total brokeragerevenues for the nine months ended September 30, 2006 decreased to 4.4%from 4.8% for the same period from the prior year. This decrease was primarilydue to our continuing efforts to lower these costs relative to our totalbrokerage revenues.

*Rent and Occupancy*

Rent and occupancyincreased by $3.0 million, or 25.0%, to $15.0 million for the nine months endedSeptember 30, 2006 from $12.0 million for the nine months ended September 30,2005. The increase was primarily due to the increase in rent expenses resultingfrom the lease of additional office space in the U.S., London and Paris and therelated increase in repairs and maintenance, utilities and insurance.

*Depreciation and Amortization*

Depreciation andamortization increased by $1.1 million, or 9.9%, to $12.2 million for the ninemonths ended September 30, 2006 from $11.1 million for the nine monthsended September 30, 2005. The increase was primarily due to the increasein capitalized property and equipment costs, including software developmentcosts.

*Professional Fees*

Professional fees increased by $5.6 million, or 68.3%,to $13.8 million for the nine months ended September 30, 2006 from $8.2million for the nine months ended September 30, 2005. The increase wasprimarily due to an increase in professional fees related to our continuinginitial preparation to satisfy the requirements of the Sarbanes-Oxley Act of2002 that are or will be applicable to us. The increase was also attributableto an increase in audit, tax and consulting fees.

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*Clearing Fees*

Clearing fees increased by$8.4 million, or 85.7%, to $18.2 million for the nine months ended September 30,2006 from $9.8 million for the nine months ended September 30, 2005. Theincrease was due to a higher volume of principal transactions executed duringthe nine months ended September 30, 2006 as compared to the sameperiod in the prior year. This was partially due to the commencement and rapidgrowth of our equities business in our Paris office, which was included in theresults for the nine months ended September 30, 2006. Clearing fees, as apercentage of our total revenues from principal transactions increased to 15.5%for the nine months ended September 30, 2006 from 12.4% for the comparableperiod in the prior year. This increase was partially due to the high cost ofclearing fees as a result of the higher number of trades executed in our Parisoffice. Excluding transactions from our Paris office, clearing fees, as apercentage of our total revenues from principal transactions was 13.8% and12.4% for the nine months ended September 30, 2006 and 2005, respectively.Principal transactions are generally settled through third party clearingorganizations that charge us a fee for their services. We also use the servicesof floor brokers on certain stock exchanges to assist in the execution oftransactions. Fees paid to floor brokers in these circumstances are included inclearing fees.

*Interest Expense*

Interest expense increasedby $2.0 million, or 76.9%, to $4.6 million for the nine months ended September 30,2006 from $2.6 million for the nine months ended September 30, 2005. Theincrease was primarily due to higher interest charges on clearing accountsrelated to our equity and corporate bond brokerage operations, which wereoffset by the lower interest expense under our credit facility mainly due tothe lower level of outstanding net borrowings during the nine months ended September 30,2006 as compared to the comparable period in the prior year. We expect interestexpense will increase in future periods due to borrowings under our 2006 CreditAgreement subsequent to quarter end. See Note 5 to the Condensed ConsolidatedFinancial Statements for further discussion.

*Other Expenses*

Other expenses decreasedby $1.5 million, or 12.5%, to $10.5 million for the nine months ended September 30,2006 from $12.0 million for the nine months ended September 30, 2005. Thedecrease was primarily due to a charge of $3.2 million made during the secondquarter of 2005 in connection with newly-hired brokerage personnel inSingapore to buy-out their employment contracts with their former employers, aswell as a charge of $2.0 million for an increase in the fair value of theFenics purchase obligation due to our initial public offering. There were nocomparable charges in the nine months ended September 30, 2006. Thisdecrease was partially offset by increases in irrecoverable Value Added Taxrelated to increased purchases in communications and quotes in the U.K.,litigation reserves and other general office and miscellaneous expenses, suchas office supplies and computer equipment expenses.

*Cost of Long-TermContract*

Cost of long-term contractrepresents the development and customization costs we incurred under a contractpursuant to which we developed an online currency trading system and customizedit for a customer. During the second quarter of 2006, the contract wassubstantially completed and we recorded $5.2 million in long-term contractcosts. See Long-Term Contract Revenue above for further discussion relating tothe revenues. See Note 2 to the Condensed Consolidated Financial Statements forfurther discussion.

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*Lease TerminationCosts to Affiliate*

Lease termination costsdecreased by $2.1 million, or 91.3%, to a gain of $0.2 million for the ninemonths ended September 30, 2006 from a gain of $2.3 million for the ninemonths ended September 30, 2005. In April 2005, we and anaffiliate executed an amendment to the lease termination agreement we hadentered into in December 2004. The amendment accelerated termination ofthe lease to April 2005 and required us to pay a termination charge. As aresult of the amendment, in the second quarter of 2005, we reduced our leasetermination liability by approximately £1.2 million (or $2.3 million). Further,we signed a new eighteen-month sublease agreement with the affiliate with rentof £0.5 million (or $0.9 million) per annum plus other related charges.However, in November 2005, we vacated the premise and accrued £0.5 million(or $0.9 million) for the remaining rent plus other related charges during thefourth quarter of 2005. During the second and third quarters of 2006, wereduced our estimate for related termination changes by £0.1 million (or $0.2million). See Note 14 to the Condensed Consolidated Financial Statementsfor further discussion.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $33.1 million for the nine months ended September 30, 2006and $28.8 million for the nine months ended September 30, 2005. Oureffective tax rate was approximately 41.0% for the nine months ended September 30,2006 as compared to 44.0% for the comparable period in 2005. The reduction inthe effective tax rate was primarily due to a decrease in state and localincome taxes, decreased taxes related to foreign operations and a reduction innon-deductible expenses.

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**Quarterly Resultsof Operations**

Thefollowing table sets forth, by quarter, our unaudited statement of income datafor the period from January 1, 2005 to September 30, 2006. Results ofany period are not necessarily indicative of results for a full year and may,in certain periods, be affected by seasonal fluctuations in our business.

| ** **                           | ** ** | **Quarter Ended**               | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **September 30,  2006**         | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**                         | ** ** |                                 | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Brokerage  revenues:                 |       |                                 |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       |                                 | $          | 138,961 |   |   | $ | 130,134 |   |   | $ | 136,910 | ** ** |   |   | $ | 104,335 |   |   |   | $ | 98,559 |   |   | $ | 100,718 |   |   | $ | 87,971 |   |   |
| Principal transactions               |       |                                 | 34,478     |   |   | 41,792 |   |   | 41,060 | ** ** |   |   | 31,250 |   |   |   | 27,420 |   |   | 27,635 |   |   | 28,112 |   |   |
| Total brokerage revenues             |       |                                 | 173,439    |   |   | 171,926 |   |   | 177,970 | ** ** |   |   | 135,585 |   |   |   | 125,979 |   |   | 128,353 |   |   | 116,083 |   |   |
| Analytics and market data            |       |                                 | 4,954      |   |   | 4,271 |   |   | 5,194 | ** ** |   |   | 3,388 |   |   |   | 3,894 |   |   | 4,711 |   |   | 5,402 |   |   |
| Long-term contract revenue           |       |                                 | —     |   |   | 5,881 |   |   | — | ** ** |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |
| Interest income                      |       |                                 | 2,150      |   |   | 2,395 |   |   | 2,233 | ** ** |   |   | 1,458 |   |   |   | 1,236 |   |   | 883 |   |   | 1,060 |   |   |
| Other income (loss)                  |       |                                 | (585       | ) |   | 3,093 |   |   | 191 | ** ** |   |   | (145 | ) |   |   | (420 | ) |   | 6,376 |   |   | (251 | ) |   |
| Total revenues                       |       |                                 | 179,958    |   |   | 187,566 |   |   | 185,588 | ** ** |   |   | 140,286 |   |   |   | 130,689 |   |   | 140,323 |   |   | 122,294 |   |   |
| **Expenses**                         |       |                                 |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits   |       |                                 | 112,543    |   |   | 113,701 |   |   | 116,845 | ** ** |   |   | 89,511 |   |   |   | 81,461 |   |   | 80,896 |   |   | 75,477 |   |   |
| Communications and quotes            |       |                                 | 9,799      |   |   | 9,303 |   |   | 7,653 | ** ** |   |   | 7,064 |   |   |   | 6,656 |   |   | 6,341 |   |   | 5,799 |   |   |
| Travel and promotion                 |       |                                 | 7,069      |   |   | 8,549 |   |   | 7,531 | ** ** |   |   | 7,017 |   |   |   | 5,833 |   |   | 6,041 |   |   | 5,761 |   |   |
| Rent and occupancy                   |       |                                 | 4,594      |   |   | 4,841 |   |   | 5,613 | ** ** |   |   | 3,447 |   |   |   | 4,662 |   |   | 3,913 |   |   | 3,428 |   |   |
| Depreciation and amortization        |       |                                 | 4,338      |   |   | 4,048 |   |   | 3,836 | ** ** |   |   | 4,159 |   |   |   | 3,434 |   |   | 3,599 |   |   | 4,092 |   |   |
| Professional fees                    |       |                                 | 4,391      |   |   | 5,320 |   |   | 4,044 | ** ** |   |   | 2,507 |   |   |   | 2,797 |   |   | 2,927 |   |   | 2,469 |   |   |
| Clearing fees                        |       |                                 | 5,884      |   |   | 6,798 |   |   | 5,477 | ** ** |   |   | 3,858 |   |   |   | 3,480 |   |   | 2,974 |   |   | 3,371 |   |   |
| Interest                             |       |                                 | 1,124      |   |   | 1,772 |   |   | 1,752 | ** ** |   |   | 1,016 |   |   |   | 778 |   |   | 597 |   |   | 1,244 |   |   |
| Other expenses                       |       |                                 | 3,098      |   |   | 3,843 |   |   | 3,556 | ** ** |   |   | 1,855 |   |   |   | 2,217 |   |   | 5,809 |   |   | 4,009 |   |   |
| Cost of long-term contract           |       |                                 | —     |   |   | 5,180 |   |   | — | ** ** |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |
| Lease termination costs to affiliate |       |                                 | (93        | ) |   | (92 | ) |   | — | ** ** |   |   | 1,070 |   |   |   | — |   |   | (2,266 | ) |   | — |   |   |
| Total expenses                       |       |                                 | 152,747    |   |   | 163,263 |   |   | 156,307 | ** ** |   |   | 121,504 |   |   |   | 111,318 |   |   | 110,831 |   |   | 105,650 |   |   |
| Income before provision for taxes    |       |                                 | 27,211     |   |   | 24,303 |   |   | 29,281 | ** ** |   |   | 18,782 |   |   |   | 19,371 |   |   | 29,492 |   |   | 16,644 |   |   |
| Provision for income taxes           |       |                                 | 10,621     |   |   | 10,207 |   |   | 12,298 | ** ** |   |   | 7,363 |   |   |   | 8,523 |   |   | 12,810 |   |   | 7,490 |   |   |
| Net income                           |       |                                 | $          | 16,590 |   |   | $ | 14,096 |   |   | $ | 16,983 | ** ** |   |   | $ | 11,419 |   |   |   | $ | 10,848 |   |   | $ | 16,682 |   |   | $ | 9,154 |   |   |

 

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

| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                           | ** ** | **2006**               | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| **Revenues**                         | ** ** |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage  revenues:                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                   |       |                   | 77.2       | % |   |   | 69.4 | % |   |   | 73.8 | % |   |   | 74.4 | % |   |   | 75.4 | % |   |   | 71.8 | % |   |   | 72.0 | % |   |
| Principal transactions               |       |                   | 19.2       |   |   |   | 22.3 |   |   |   | 22.1 |   |   |   | 22.3 |   |   |   | 21.0 |   |   |   | 19.7 |   |   |   | 23.0 |   |   |
| Total brokerage revenues             |       |                   | 96.4       |   |   |   | 91.7 |   |   |   | 95.9 |   |   |   | 96.7 |   |   |   | 96.4 |   |   |   | 91.5 |   |   |   | 95.0 |   |   |
| Analytics and market data            |       |                   | 2.8        |   |   |   | 2.3 |   |   |   | 2.8 |   |   |   | 2.4 |   |   |   | 3.0 |   |   |   | 3.4 |   |   |   | 4.4 |   |   |
| Long-term contract revenue           |       |                   | —     |   |   |   | 3.1 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Interest income                      |       |                   | 1.2        |   |   |   | 1.3 |   |   |   | 1.2 |   |   |   | 1.0 |   |   |   | 0.9 |   |   |   | 0.6 |   |   |   | 0.8 |   |   |
| Other income (loss)                  |       |                   | (0.4       | ) |   |   | 1.6 |   |   |   | 0.1 |   |   |   | (0.1 | ) |   |   | (0.3 | ) |   |   | 4.5 |   |   |   | (0.2 | ) |   |
| Total revenues                       |       |                   | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **Expenses**                         | ** ** |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Compensation and employee benefits   |       |                   | 62.5       | % |   |   | 60.6 | % |   |   | 63.0 | % |   |   | 63.8 | % |   |   | 62.3 | % |   |   | 57.6 | % |   |   | 61.7 | % |   |
| Communications and quotes            |       |                   | 5.4        |   |   |   | 5.0 |   |   |   | 4.1 |   |   |   | 5.0 |   |   |   | 5.1 |   |   |   | 4.6 |   |   |   | 4.8 |   |   |
| Travel and promotion                 |       |                   | 3.9        |   |   |   | 4.6 |   |   |   | 4.1 |   |   |   | 5.0 |   |   |   | 4.5 |   |   |   | 4.3 |   |   |   | 4.7 |   |   |
| Rent and occupancy                   |       |                   | 2.6        |   |   |   | 2.6 |   |   |   | 3.0 |   |   |   | 2.5 |   |   |   | 3.6 |   |   |   | 2.8 |   |   |   | 2.8 |   |   |
| Depreciation and  amortization       |       |                   | 2.4        |   |   |   | 2.2 |   |   |   | 2.1 |   |   |   | 3.0 |   |   |   | 2.6 |   |   |   | 2.6 |   |   |   | 3.3 |   |   |
| Professional fees                    |       |                   | 2.4        |   |   |   | 2.8 |   |   |   | 2.2 |   |   |   | 1.8 |   |   |   | 2.1 |   |   |   | 2.1 |   |   |   | 2.0 |   |   |
| Clearing fees                        |       |                   | 3.3        |   |   |   | 3.6 |   |   |   | 3.0 |   |   |   | 2.8 |   |   |   | 2.7 |   |   |   | 2.1 |   |   |   | 2.8 |   |   |
| Interest                             |       |                   | 0.6        |   |   |   | 0.9 |   |   |   | 0.9 |   |   |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |   | 1.0 |   |   |
| Other expenses                       |       |                   | 1.7        |   |   |   | 2.0 |   |   |   | 1.9 |   |   |   | 1.3 |   |   |   | 1.7 |   |   |   | 4.1 |   |   |   | 3.3 |   |   |
| Cost of long-term contract           |       |                   | —     |   |   |   | 2.8 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Lease termination costs to affiliate |       |                   | (0.1       | ) |   |   | — |   |   |   | — |   |   |   | 0.8 |   |   |   | — |   |   |   | (1.6 | ) |   |   | — |   |   |
| Total expenses                       |       |                   | 84.7       | % |   |   | 87.1 | % |   |   | 84.3 | % |   |   | 86.7 | % |   |   | 85.2 | % |   |   | 79.0 | % |   |   | 86.4 | % |   |
| Income before provision for taxes    |       |                   | 15.3       |   |   |   | 12.9 |   |   |   | 15.7 |   |   |   | 13.3 |   |   |   | 14.8 |   |   |   | 21.0 |   |   |   | 13.6 |   |   |
| Provision for income taxes           |       |                   | 5.9        |   |   |   | 5.4 |   |   |   | 6.6 |   |   |   | 5.2 |   |   |   | 6.5 |   |   |   | 9.1 |   |   |   | 6.1 |   |   |
| Net income                           |       |                   | 9.4        | % |   |   | 7.5 | % |   |   | 9.1 | % |   |   | 8.1 | % |   |   | 8.3 | % |   |   | 11.9 | % |   |   | 7.5 | % |   |

 

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

| ** **               | ** ** | **Quarter Ended**               | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **September 30,  2006**         | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage Revenues:**  | ** ** |                                 | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Credit                   |       |                                 | $          | 60,654 |   |   | $ | 59,838 |   |   | $ | 71,273 |   |   |   | $ | 55,443 |   |   |   | $ | 51,472 |   |   | $ | 60,749 |   |   | $ | 51,653 |   |   |
| Financial                |       |                                 | 38,605     |   |   | 38,942 |   |   | 39,488 |   |   |   | 29,213 |   |   |   | 30,804 |   |   | 29,835 |   |   | 26,285 |   |   |
| Equity                   |       |                                 | 41,426     |   |   | 46,109 |   |   | 41,459 |   |   |   | 29,931 |   |   |   | 25,993 |   |   | 21,869 |   |   | 21,002 |   |   |
| Commodity                |       |                                 | 32,754     |   |   | 27,037 |   |   | 25,750 |   |   |   | 20,998 |   |   |   | 17,710 |   |   | 15,900 |   |   | 17,143 |   |   |
| Total brokerage revenues |       |                                 | $          | 173,439 |   |   | $ | 171,926 |   |   | $ | 177,970 |   |   |   | $ | 135,585 |   |   |   | $ | 125,979 |   |   | $ | 128,353 |   |   | $ | 116,083 |   |   |
| **Brokerage Revenues:**  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                   |       |                                 | 35.0       | % |   | 34.8 | % |   | 40.0 | % |   |   | 40.9 | % |   |   | 40.8 | % |   | 47.3 | % |   | 44.5 | % |   |
| Financial                |       |                                 | 22.2       |   |   | 22.7 |   |   | 22.2 |   |   |   | 21.5 |   |   |   | 24.5 |   |   | 23.2 |   |   | 22.6 |   |   |
| Equity                   |       |                                 | 23.9       |   |   | 26.8 |   |   | 23.3 |   |   |   | 22.1 |   |   |   | 20.6 |   |   | 17.0 |   |   | 18.1 |   |   |
| Commodity                |       |                                 | 18.9       |   |   | 15.7 |   |   | 14.5 |   |   |   | 15.5 |   |   |   | 14.1 |   |   | 12.4 |   |   | 14.8 |   |   |
| Total brokerage revenues |       |                                 | 100.0      | % |   | 100.0 | % |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |   |

 

40

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**Liquidity andCapital Resources**

Net cash provided by operations increased to $32.8million for the nine months ended September 30, 2006, compared with$10.0 million for the nine months ended September 30, 2005. Theimprovement is primarily related to our increased net income, positivelyadjusted by certain non-cash items such as deferred compensation expense andnet losses on foreign exchange derivative contracts and offset primarily by thenegative impact of the non-cash item relating to deferred taxes.

Net cash used in investing activities for the ninemonths ended September 30, 2006 was $15.7 million compared to $26.1million used in the nine months ended September 30, 2005. The decrease incash used for investing activities was primarily due to the cash used for theStarsupply Petroleum acquisition in 2005, offset by an increase in capital expenditurethat was primarily due to our continued investment in the development ofsoftware for internal use and an increase in the purchase of computer equipmentand payments on foreign exchange derivative contracts.

Net cash provided by financing activities for the ninemonths ended September 30, 2006 was $0.5 million compared to $37.1million generated for the nine months ended September 30, 2005. Cashprovided by financing activities for the nine months ended September 30,2005 consisted of net proceeds received from our initial public offering,offset by the repayments of the notes payable to Jersey Partners Inc. in January 2005and the outstanding principal balance under our 2004 Credit Agreement in February 2005.In the first nine months of 2006, cash provided by financing activitiesconsisted of net cash paid on borrowings under our 2006 Credit Agreement,offset by the cash proceeds received and tax benefits realized from theexercise of stock options.

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 and GFI Group Pte Ltd. GFI Securities LLC issubject to regulatory capital requirements under the Exchange Act and theCommodity Exchange Act. GFI Securities Limited and GFI Brokers Limited aresubject to the regulated capital requirements of the FSA. GFI (HK) SecuritiesLLC is subject to the regulated capital requirements of the Securities andFutures Commission in Hong Kong. GFI (HK) Brokers Ltd. is subject toregulatory compliance requirements under the Monetary Authority of Hong Kong. GFIGroup PTE Ltd. is subject to the regulatory compliance requirements with theMonetary Authority of Singapore. At September 30, 2006, GFI SecuritiesLLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFIBrokers Ltd.****and GFI Group PTELtd. were in compliance with their respective regulatory capital requirements.In addition to these regulatory capital requirements, our liquidity may beimpacted by the amount of capital that we maintain in clearing accounts andwith exchanges to support our principal transactions business. See Note 11 toour condensed consolidated financial statements for a further discussion ofthese regulatory requirements.

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. In September 2006, we entered into an agreementthat increased the maximum permitted borrowings under the 2006 Credit Agreementby $25.0 million to $160.0 million. Subsequent to September 30, 2006, weborrowed $86.0 million under the 2006 Credit Agreement to fund the acquisitionof substantially all of the North American brokerage operations and assets ofAmerex Energy. See Note 15 to the Condensed Consolidated Financial Statementsfor further discussion on the Amerex Energy Acquisition. Poor 

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financialresults, unanticipated expenses, unanticipated acquisitions or unanticipatedstrategic investments could give rise to additional financing requirementssooner than we expect. There can be no assurance that equity or debt financingwill be available when needed or, if available, that the financing will be onterms satisfactory to us and not dilutive to our then-current stockholders.

**ContractualObligations and Commitments**

Our contractual obligations and off-balance sheetentities are described in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contained in our 2005 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those obligations or arrangements during the nine monthsended September 30, 2006. Subsequent to September 30, 2006, weborrowed $86.0 million under the 2006 Credit Agreement to fund the acquisitionof substantially all of the North American brokerage operations and assets ofAmerex Energy.

We have variousunconditional purchase obligations. Certain of these obligations are for thepurchase of quotes from a number of information service providers during thenormal course of business. As of September 30, 2006, we had total purchasecommitments for quotes of approximately $13.5 million, with $11.1 million duewithin the next twelve months and $2.4 million due between one to two years.

**Off-Balance SheetArrangements**

The Company did not haveany off-balance sheet arrangements at September 30, 2006.

**Critical AccountingPolicies and Estimates**

We have disclosed inNote 2 to our condensed consolidated financial statements and in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in our 2005 Form 10-K those accounting policies that weconsider to be significant in determining our results of operations andfinancial condition. There have been no material changes to those policies thatwe consider to be significant since our 2005 Form 10-K. Theaccounting principles utilized by us in preparing our condensed consolidatedfinancial statements conform in all material respects to generally acceptedaccounting principles in the United States of America.

**Recent AccountingPronouncement**

***In***June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—anInterpretation of FASB No. 109*(“FIN 48”). FIN 48 clarifies theaccounting for uncertain tax positions in accordance with SFAS No. 109, *Accounting for Income Taxes*. The Companywill be required to recognize in its financial statements the largest taxbenefit of a tax position that is “more-likely-than-not” to be sustained onaudit based solely on the technical merits of the position as of the reportingdate. FIN 48 also provides guidance on new disclosure requirements, reportingand accrual of interest and penalties, accounting in interim periods andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. The Company is currently evaluating the impact of adopting FIN 48 on itsconsolidated financial statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides guidance on how prior year misstatements should be taken intoconsideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. The SEC Staff believes registrants shouldquantify errors using both a balance sheet and income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relative quantitative and qualitative factors are considered, ismaterial. SAB 108 is effective for the first fiscal year ending after 

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November 15, 2006. TheCompany is currently evaluating the impact of adopting SAB 108 on itsconsolidated financial statements and does not anticipate it will be material.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value and requires enhanceddisclosures about fair value measurements. SFAS 157 requires companies todisclose the fair value of its financial instruments according to a fair valuehierarchy, as defined. Additionally, companies are required to provide enhanceddisclosure for certain financial instruments within the hierarchy, including areconciliation of the beginning and ending balances separately for each majorcategory of assets and liabilities. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany is currently evaluating the impact of adopting SFAS 157 on itsconsolidated 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 2005 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those market risks during the nine months ended September 30,2006.

**Foreign CurrencyExposure Risk**

We are exposed to market riskassociated with movements in foreign currency exchange rates. There havebeen no material changes to our risk management policy during the nine monthsended September 30, 2006.

At September 30, 2006, we had outstanding foreignexchange derivative contracts to purchase and sell foreign currency thatqualified as foreign currency cash flow hedges under SFAS 133 with notionalamounts translated into U.S. Dollars of $35.4 million. At September 30,2006, the net fair value of these contracts was minimal. At September 30,2006, if the Euro strengthened by 10% against the U.S. Dollar and the U.S.Dollar strengthened by 10% against the British Pound, it would decrease thefair value of these contracts and, as a result, accumulated other comprehensiveincome would decrease by approximately $0.8 million, net of tax.

While our internationalresults of operations, as measured in U.S. dollars, are subject to foreignexchange rate fluctuations, we do not consider the related risk to be materialto our results of operations. If the U.S. Dollar strengthened by 10% against theBritish Pound and the Euro strengthened by 10% against the U.S. Dollar, the netimpact to our net income would have been a reduction of approximately $2.4million.

**ITEM 4.**                CONTROLSAND PROCEDURES

As of the end of the period covered by this report,the Company’s management carried out an evaluation, under the supervision andwith the participation of our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on the foregoing, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this Form 10-Qin providing a reasonable level of assurance that information we are requiredto disclose in reports we file or furnish under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

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In addition, the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the Company’s internal controls over financial reportingand determined that there have been no changes in our internal controls overfinancial reporting during the most recent fiscal quarter of 2006 that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

**PART II—OTHERINFORMATION**

**ITEM1.**                LEGAL PROCEEDINGS

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

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.

**ITEM1A.**        RISK FACTORS

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

**ITEM2.**                UNREGISTERED SALESOF 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 September 30, 2006, we withheldshares of common stock to satisfy tax withholding obligations as follows:

| **Date**  | ** ** | ** ** | ** ** | **No. of Shares** | ** ** | **Average Market Price** | ** ** |
|-----------|------------|------------|------------|-----------------------------|------------|------------------------------------|------------|
| July      |       |       | 196        |                        |       |                               | $          | 57.36 |   |   |
| August    |       |       | 5,383      |                        |       |                               | $          | 46.50 |   |   |
| September |       |       | 5,418      |                        |       |                               | $          | 50.88 |   |   |

 

**ITEM6.**                EXHIBITS

Exhibits:
| Exhibit No. | ** ** | **Description**                                                                                                                                                           |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1.1      |       | Lender Joinder Agreement, dated September 21,  2006, to the Credit Agreement among GFI Group Inc., GFI Holdings Limited,  Bank of Montreal and Bank of America, N.A. |
| 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 endedSeptember 30, 2006 to be signed on its behalf by the undersigned,thereunto duly authorized, on the 13th day of November, 2006.
|        | GFI GROUP INC. |
|--------|---------------------|
|   | By:                 | /s/ JAMES  A. PEERS |
|   |                | Name: | James A. Peers |
|   |                | Title: | *Chief Financial Officer* |
|   | * *            | * * | *(principal financial and accounting officer)* |

 

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**Exhibit Index**
| Exhibit No. | ** ** | ** **                                                                                                                                                                | ** ** | **Description** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.1.1           |       | Lender Joinder  Agreement, dated September 21, 2006, to the Credit Agreement among GFI  Group Inc., GFI Holdings Limited, Bank of Montreal and Bank of America, N.A. |
| 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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