**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****                             ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2007**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM                TO**

 

**Commission File No: 000-51103**

 

**GFI GROUP INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                                |   | **80-0006224**      |
|-----------------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                             |   | (I.R.S. Employer    |
| incorporation or organization)                                              |   | Identification No.) |
|                                                                        |   |                |
| **100 Wall Street, New York, NY**                                           |   | **10005**           |
| (Address of principal executive offices)                                    |   | (Zip Code)          |
|                                                                        |   |                |
| Registrant’s telephone number, including area code: **(212) 968-4100** |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.    YES x   NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Largeaccelerated filer x             Acceleratedfiler o             Non-acceleratedfiler o

 

Indicateby check mark whether 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 31,2007 was 29,410,253.

 

 

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**Table of Contents**

 
| **Part I—Financial Information** |                                                                                                                                                                        | 4          |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                                                                                                  | ** ** | ** ** |
| Item 1.                                    | Financial Statements                                                                                                                                                        |       | 4 |
|                                       |                                                                                                                                                                        |       |   |
|                                       | Condensed Consolidated Statements of Financial  Condition as of September 30, 2007 (unaudited) and December 31, 2006                                              |       | 4 |
|                                       | Condensed Consolidated Statements of Income for the  three and nine months ended September 30, 2007 (unaudited) and  September 30, 2006 (unaudited)               |       | 5 |
|                                       | Condensed Consolidated Statements of Comprehensive  Income for the three and nine months ended September 30, 2007  (unaudited) and September 30, 2006 (unaudited) |       | 6 |
|                                       | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2007 (unaudited) and  September 30, 2006 (unaudited)                     |       | 7 |
|                                       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                           |       | 8 |
|                                       |                                                                                                                                                                        |       |   |
| Item 2.                                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                 |       | 23 |
|                                       |                                                                                                                                                                        |       |   |
| Item 3.                                    | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                                 |       | 40 |
|                                       |                                                                                                                                                                        |       |   |
| Item 4.                                    | Controls and Procedures                                                                                                                                                     |       | 41 |
|                                       |                                                                                                                                                                        |       |   |
| **Part II—Other  Information**   | ** **                                                                                                                                                                  | 41         |
| ** **                                 | ** **                                                                                                                                                                  | ** ** | ** ** |
| Item  1.                                   | Legal  Proceedings                                                                                                                                                          |       | 41 |
|                                       |                                                                                                                                                                        |       |   |
| Item 1A.                                   | Risk Factors                                                                                                                                                                |       | 41 |
|                                       |                                                                                                                                                                        |       |   |
| Item 2.                                    | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                                                                |       | 41 |
|                                       |                                                                                                                                                                        |       |   |
| Item 6.                                    | Exhibits                                                                                                                                                                    |       | 42 |

 

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**Available Information**

 

OurInternet website address is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the Securities and Exchange Commission (the “SEC”):our annual reports on Form 10-K; our proxy statements for our annualmeetings; our quarterly 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’’).

 

Informationrelating to the corporate governance of the Company is also available on ourwebsite, including information concerning our directors, board committees,including committee charters, our code of business conduct and ethics for allemployees and for senior financial officers and our compliance procedures foraccounting and auditing matters. In addition, the Investor Relations page ofour website includes supplemental financial information that we make availablefrom time to time.

 

OurInternet website and the information contained therein or connected thereto arenot incorporated into this Quarterly Report on Form 10-Q.

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.****     FINANCIAL STATEMENTS**

 

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

 
| ** **                                                                                                                                                                            | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                                                                                                             |       | $                            | 208,867    |                        | $          | 181,484 |   |
| Deposits with clearing organizations                                                                                                                                                  |       | 8,369                        |       | 7,973                       |       |
| Accrued commissions receivable, net of allowance for  doubtful accounts of $4,778 and $3,547 at September 30, 2007 and December 31,  2006, respectively                     |       | 174,054                      |       | 120,731                     |       |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                         |       | 602,437                      |       | 174,693                     |       |
| Property, equipment and leasehold improvements, net  of depreciation and amortization of $74,807 and $61,742 at September 30,  2007 and December 31, 2006, respectively     |       | 47,150                       |       | 41,396                      |       |
| Goodwill                                                                                                                                                                              |       | 93,709                       |       | 91,891                      |       |
| Intangible assets, net                                                                                                                                                                |       | 12,656                       |       | 14,833                      |       |
| Other assets                                                                                                                                                                          |       | 69,432                       |       | 66,608                      |       |
| TOTAL ASSETS                                                                                                                                                                          |       | $                            | 1,216,674  |                        | $          | 699,609 |   |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| LIABILITIES                                                                                                                                                                           |       |                         |       |                        |       |
| Accrued compensation                                                                                                                                                                  |       | $                            | 133,068    |                        | $          | 128,047 |   |
| Accounts payable and accrued expense                                                                                                                                                  |       | 36,580                       |       | 31,336                      |       |
| Payables to brokers, dealers and clearing  organizations                                                                                                                              |       | 491,986                      |       | 84,995                      |       |
| Notes payable, net                                                                                                                                                                    |       | 58,535                       |       | 90,253                      |       |
| Other liabilities                                                                                                                                                                     |       | 76,461                       |       | 34,509                      |       |
| Total Liabilities                                                                                                                                                                     |       | $                            | 796,630    |                        | $          | 369,140 |   |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Commitments and contingencies                                                                                                                                                         |       |                         |       |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                             |       |                         |       |                        |       |
| Preferred Stock, $0.01 par value; 5,000,000 shares  authorized and none outstanding at September 30, 2007 and December 31,  2006                                            |       | —                       |       | —                      |       |
| Common stock, $0.01 par value; 100,000,000 shares  authorized; 29,452,220 and 28,698,505 shares issued at September 30,  2007 and December 31, 2006, respectively |       | 295                          |       | 287                         |       |
| Additional paid in capital                                                                                                                                                            |       | 255,911                      |       | 224,442                     |       |
| Retained earnings                                                                                                                                                                     |       | 171,076                      |       | 105,868                     |       |
| Treasury stock, 100,000 common shares at cost                                                                                                                                         |       | (7,076                       | )          | —                      |       |
| Accumulated other comprehensive loss                                                                                                                                                  |       | (162                         | )          | (128                        | )          |
| Total Stockholders’ Equity                                                                                                                                                       |       | 420,044                      |       | 330,469                     |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                       |       | $                            | 1,216,674  |                        | $          | 699,609 |   |

 

See notes to condensed consolidated financial statements

 

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

 
| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Brokerage revenues:                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Agency commissions                       |       | $                                                        | 198,405    |                                                    | $          | 138,961 |   | $ | 562,396 |   | $ | 406,005 |   |
| Principal transactions                   |       | 46,467                                                   |       | 34,478                                                  |       | 136,888 |   | 117,330 |   |
| Total brokerage revenues                 |       | 244,872                                                  |       | 173,439                                                 |       | 699,284 |   | 523,335 |   |
| Analytics and market data                |       | 4,855                                                    |       | 4,954                                                   |       | 14,672 |   | 14,419 |   |
| Contract revenue                         |       | 11                                                       |       | —                                                  |       | 215 |   | 5,881 |   |
| Interest income                          |       | 2,589                                                    |       | 2,150                                                   |       | 6,988 |   | 6,778 |   |
| Other income (loss)                      |       | 2,416                                                    |       | (585                                                    | )          | 2,023 |   | 2,699 |   |
| Total Revenues                           |       | 254,743                                                  |       | 179,958                                                 |       | 723,182 |   | 553,112 |   |
| EXPENSES:                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation and employee benefits       |       | 158,845                                                  |       | 112,543                                                 |       | 453,827 |   | 343,089 |   |
| Communications and market data           |       | 11,329                                                   |       | 9,799                                                   |       | 33,084 |   | 26,755 |   |
| Travel and promotion                     |       | 9,929                                                    |       | 7,069                                                   |       | 28,935 |   | 23,149 |   |
| Rent and occupancy                       |       | 6,439                                                    |       | 4,594                                                   |       | 17,529 |   | 15,048 |   |
| Depreciation and amortization            |       | 6,747                                                    |       | 4,338                                                   |       | 17,694 |   | 12,222 |   |
| Professional fees                        |       | 4,459                                                    |       | 4,391                                                   |       | 12,360 |   | 13,755 |   |
| Clearing fees                            |       | 8,063                                                    |       | 5,884                                                   |       | 22,532 |   | 18,159 |   |
| Interest                                 |       | 1,703                                                    |       | 1,124                                                   |       | 5,554 |   | 4,648 |   |
| Other expenses                           |       | 4,574                                                    |       | 3,098                                                   |       | 16,132 |   | 10,497 |   |
| Contract costs                           |       | 6                                                        |       | —                                                  |       | 133 |   | 5,180 |   |
| Lease termination costs to affiliate     |       | —                                                   |       | (93                                                     | )          | — |   | (185 | ) |
| Total Expenses                           |       | 212,094                                                  |       | 152,747                                                 |       | 607,780 |   | 472,317 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 42,649                                                   |       | 27,211                                                  |       | 115,402 |   | 80,795 |   |
| PROVISION FOR INCOME TAXES               |       | 16,746                                                   |       | 10,621                                                  |       | 45,752 |   | 33,126 |   |
| NET INCOME                               |       | $                                                        | 25,903     |                                                    | $          | 16,590 |   | 69,650 |   | 47,669 |   |
| EARNINGS PER SHARE                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                    |       | $                                                        | 0.88       |                                                    | $          | 0.58 |   | $ | 2.40 |   | $ | 1.69 |   |
| Diluted                                  |       | $                                                        | 0.87       |                                                    | $          | 0.57 |   | $ | 2.34 |   | $ | 1.64 |   |
| WEIGHTED AVERAGE SHARES OUSTANDING       |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                    |       | 29,335,229                                               |       | 28,441,089                                              |       | 29,071,716 |   | 28,248,634 |   |
| Diluted                                  |       | 29,903,696                                               |       | 29,221,795                                              |       | 29,731,643 |   | 29,104,286 |   |

 

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,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                             | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| NET INCOME                                                            |       | $                                                    | 25,903     |                                     | $          | 16,590 |   | $ | 69,650 |   | $ | 47,669 |   |
| OTHER COMPREHENSIVE INCOME (LOSS):                                    |       |                                                 |       |                                     |       |   |   |   |   |
| Unrealized gain on foreign exchange derivative  contracts, net of tax |       | —                                               |       | 1,374                                    |       | — |   | 861 |   |
| Foreign currency translation adjustment, net of tax                   |       | (76                                                  | )          | (8                                       | )          | (34 | ) | 146 |   |
| COMPREHENSIVE INCOME                                                  |       | $                                                    | 25,827     |                                     | $          | 17,956 |   | $ | 69,616 |   | $ | 48,676 |   |

 

See notes to condensed consolidated financial statements

 

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

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Net income                                                                         |       | $                                                       | 69,650     |   | $ | 47,669 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                      |       | 17,694                                                  |       | 12,222 |   |
| Amortization of loan fees                                                          |       | 168                                                     |       | 181 |   |
| Provision for allowance for doubtful accounts                                      |       | 2,502                                                   |       | 381 |   |
| Loss on disposal of fixed assets                                                   |       | —                                                  |       | 122 |   |
| Deferred compensation                                                              |       | 14,944                                                  |       | 8,199 |   |
| (Benefit from) provision for deferred taxes                                        |       | 1,163                                                   |       | (3,315 | ) |
| Loss on foreign exchange for notes payable                                         |       | —                                                  |       | 865 |   |
| Loss on foreign exchange derivative contracts                                      |       | 6,541                                                   |       | 1,952 |   |
| Lease termination cost to affiliate                                                |       | —                                                  |       | (185 | ) |
| Tax benefit related to share-based compensation                                    |       | (14,471                                                 | )          | (9,965 | ) |
| (Increase) decrease in operating assets:                                           |       |                                                    |       |   |   |
| Deposits with clearing organizations                                               |       | (396                                                    | )          | (18 | ) |
| Accrued commissions receivable                                                     |       | (55,261                                                 | )          | (33,372 | ) |
| Receivables from brokers, dealers and clearing  organizations                      |       | (427,744                                                | )          | (109,571 | ) |
| Other assets                                                                       |       | (2,710                                                  | )          | (6,911 | ) |
| Increase (decrease) in operating liabilities:                                      |       |                                                    |       |   |   |
| Accrued compensation                                                               |       | 5,021                                                   |       | 15,826 |   |
| Accounts payable and accrued expenses                                              |       | 5,183                                                   |       | 2,381 |   |
| Payables to brokers, dealers and clearing  organizations                           |       | 406,991                                                 |       | 75,858 |   |
| Other liabilities                                                                  |       | 45,511                                                  |       | 30,909 |   |
| Cash paid to affiliate for lease termination                                       |       | —                                                  |       | (467 | ) |
| Cash provided by operating activities                                              |       | 74,786                                                  |       | 32,761 |   |
|                                                                               |       |                                                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Cash used for business acquisitions                                                |       | (2,754                                                  | )          | (116 | ) |
| Purchase of property, equipment and leasehold  improvements                        |       | (18,954                                                 | )          | (15,265 | ) |
| Payments on foreign exchange derivative contracts                                  |       | (5,187                                                  | )          | (352 | ) |
| Cash used in investing activities                                                  |       | (26,895                                                 | )          | (15,733 | ) |
|                                                                               |       |                                                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                                                    |       |   |   |
| Repayment of notes payable                                                         |       | (61,186                                                 | )          | (52,000 | ) |
| Proceeds from notes payable                                                        |       | 29,300                                                  |       | 38,000 |   |
| Repurchases of common stock                                                        |       | (7,076                                                  | )          | — |   |
| Payment of loan fees                                                               |       | —                                                  |       | (612 | ) |
| Proceeds from exercise of stock options                                            |       | 7,874                                                   |       | 7,057 |   |
| Cash paid for taxes on vested restricted stock units                               |       | (3,857                                                  | )          | (1,866 | ) |
| Tax benefit related to share-based compensation                                    |       | 14,471                                                  |       | 9,965 |   |
| Cash (used in)/provided by financing activities                                    |       | (20,474                                                 | )          | 544 |   |
| Effects of foreign currency translation adjustment                                 |       | (34                                                     | )          | 146 |   |
|                                                                               |       |                                                    |       |   |   |
| INCREASE IN CASH AND CASH EQUIVALENTS                                              |       | 27,383                                                  |       | 17,718 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 181,484                                                 |       | 144,148 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                                       | 208,867    |   | $ | 161,866 |   |
|                                                                               |       |                                                    |       |   |   |
| SUPPLEMENTAL DISLCOSURE:                                                           |       |                                                    |       |   |   |
| Interest paid                                                                      |       | $                                                       | 5,393      |   | $ | 4,444 |   |
| Income taxes paid, net of refunds                                                  |       | $                                                       | 30,259     |   | $ | 13,684 |   |

 

See notes to condensed consolidated financial statements

 

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

** **

**1.ORGANIZATION AND BUSINESS**

 

The condensedconsolidated financial statements include the accounts of GFI Group Inc.and its subsidiaries (collectively the “Company”). The Company, through itssole wholly-owned subsidiary GFInet Inc. (“GFInet”), provides brokerageservices, market data and analytics software products to institutional clientsin markets for a range of credit, financial, equity and commodity instruments.The Company complements its brokerage capabilities with value-added services,such as data and analytics products for decision support, which it licenses tothe financial services industry and other corporations. The Company’s principaloperating subsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI GroupLLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI(HK) Brokers Ltd., GFI Group PTE Ltd., Amerex Brokers LLC, GFI Korea MoneyBrokerage Limited and Fenics Limited and subsidiaries (“Fenics”). As of September 30,2007, Jersey Partners, Inc. (“JPI”) owns approximately 43% of the Company’soutstanding shares of common stock.  TheCompany’s chief executive officer, Michael Gooch, is the controllingshareholder of JPI.

 

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

 

***Basis of Presentation****—*The Company’s condensed consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require management tomake estimates and assumptions that affect the reported amounts of assets andliabilities, revenues and expenses, and the disclosure of contingencies in theconsolidated financial statements. Management believes that the estimatesutilized in the preparation of the consolidated financial statements arereasonable and prudent. Actual results could differ materially from theseestimates.

 

All material intercompany transactions and balanceshave been eliminated.

 

Thecondensed consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2006 (the “2006 Form 10-K”). The condensed consolidated financialstatements reflect all adjustments that are, in the opinion of management,necessary for the fair statement of the results for the interim period. Theresults of operations for interim periods are not necessarily indicative ofresults for the entire year.

 

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

 

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

 

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***Principal Transactions****—*Principal transactions revenue isprimarily derived from matched principal transactions. In matched principaltransactions, the Company simultaneously agrees to buy instruments from onecustomer and sell them to another customer. A limited number of brokerage desksare allowed to enter into unmatched principal transactions in the ordinarycourse of business for the purpose of facilitating clients’ execution needs fortransactions initiated by such clients, adding liquidity to a market orattracting additional order flow. These unmatched positions are intended to beheld short term. The Company earns revenue from principal transactions on thespread between the buy and sell price of the security that is brokered.

 

Additionally, from timeto time, under the circumstances described above, if a transaction fails tosettle on a timely basis or if a customer defaults on its obligations, theCompany may hold securities positions overnight. These positions are marked tomarket on a daily basis. Principal transactions revenues and related expensesare recognized on a trade date basis.

 

***Analytics and Market Data****—*Analytics revenue consists primarily offees for licenses of Fencis software products either as a one-time up-frontperpetual licensing charge or on a subscription basis, which is generally overtwo years.  Perpetual licensingagreements also give customers the option to participate in future upgrades ofthe product for a fee.  Market datarevenue primarily consists of subscription fees and fees from customizedone-time sales. The Company recognizes the licensing revenues from perpetuallicense agreements when all of the following criteria are met: persuasiveevidence of an arrangement exists, delivery of the product has occurred and nosignificant implementation obligations remain, the fee is fixed anddeterminable, and collectibility is probable. Fees for future updates ofsoftware products are considered separate arrangements and related revenues arerecognized when the customer acknowledges participation in the update and deliveryoccurs. Subscription fees are recognized on a straight-line basis over the termof the subscription period, which is generally two years. Market data revenuefrom customized one-time sales is recognized upon delivery of the data.

 

The Company markets itsanalytics and market data products through its direct sales force andindirectly through resellers. The Company’s license agreements for suchproducts do not provide for a right of return.

 

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

 

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***Derivative Financial Instruments****—*The Company uses foreign exchangederivative contracts to reduce the effects of fluctuations in certain receivablesand payables denominated in foreign currencies. During 2006, certain of thesecontracts were designated and qualified as foreign currency cash flow hedgesunder SFAS No. 133,*Accounting forDerivative Instruments and Hedging Activities*, as amended (“SFAS 133”).The Company reclassified gains and losses on the foreign exchange derivativecontracts included in accumulated other comprehensive loss into earnings at thetime the hedged transactions were recognized. The Company measuredeffectiveness by assessing the changes in the expected future cash flows of thehedged items. The ineffective portion of the hedges, if any, was included inother income. There was no portion of the derivative instruments’ gains orlosses excluded from the assessment of effectiveness. As of and for the threeand nine months ended September 30, 2007, the Company had no foreignexchange derivative contracts that were designated as foreign currency cashflow hedges. 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 Currency Translation Adjustmentsand Transactions****—*Assetsand liabilities of foreign subsidiaries having non-U.S. dollar functional currenciesare translated at the period end rates of exchange, and revenue and expensesare translated at the average rates of exchange for the period. Gains or lossesresulting from translating foreign currency financial statements are reflectedin foreign currency translation adjustments and are reported as a separatecomponent 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 and Geographic Information****—*The Company’s only reportable segmentconsists of its brokerage and analytic and market data operations. This segmentoperates across domestic and international markets. Substantially all of theCompany’s identifiable assets are in the United States and the United Kingdom.

 

***Share-Based Compensation****—****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.   In recent periods, the only share-basedcompensation issued by the Company has been RSUs.  The Company records the fair value of the RSUsat the date of grant as deferred compensation and amortizes it to compensationexpense over the vesting period of the grants.

 

***Recent Accounting Pronouncements***

 

EffectiveJanuary 1, 2007, the Company adopted Financial Accounting Standards Board InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), *an interpretation of SFAS No. 109*.  Upon adoption, the Company recognized a $4,442increase to the accrual for uncertain tax positions. This increase wasaccounted for as an adjustment to the beginning balance of retained earnings onthe Condensed Consolidated Statement of Financial Condition. After recognizingthe impact of the adoption of FIN 48, the total unrecognized tax benefits

 

10

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(net of the federalbenefit on state tax positions) were approximately $7,727, all of which couldaffect the effective income tax rate in any future periods.

 

In aforeign jurisdiction, the Company is in discussion with tax authoritiesregarding whether certain compensation expenses were deductible by the Companyin prior years.  A portion of thecompensation payment is held by a trustee and the Company may request but notcompel the trustee to use the money to offset the cost to the Company of thepotential tax liability, if any, arising from the disallowance of thededuction.

 

TheCompany is subject to U.S. federal income tax, foreign income tax as well as stateincome tax in the states in which we have significant business operations.  The Company has substantially concluded allU.S. federal income tax matters for years through 2004, state and local tax mattersthrough 2000 and foreign income tax matters through 2002.The Company recognizesinterest and penalties related to income tax matters in interest expense andother expense, respectively. As of September 30, 2007, there were nomaterial changes to the accrual for uncertain tax positions.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue and requires enhanced disclosures about fair value measurements.  SFAS 157 requires companies to disclose thefair value of its financial instruments according to a fair value hierarchy, asdefined.  Additionally, companies arerequired to provide enhanced disclosure for certain financial instrumentswithin the hierarchy, including a reconciliation of the beginning and endingbalances separately for each major category of assets and liabilities.  SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact of adopting SFAS No. 157 on its consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS No. 159 provides a “Fair Value Option” under which a companymay irrevocably elect fair value as the initial and subsequent measurementattribute for certain financial assets and liabilities. This Fair Value Optionwill be available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur. SFAS No. 159 is effective forfinancial statements for fiscal years beginning after November 15,2007.  The Company is currentlyevaluating the impact of adopting SFAS No. 159 on its consolidatedfinancial statements.

 

11

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**3.**                 RECEIVABLESFROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

** **
| ** **                                                     | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables from brokers, dealers and clearing  organizations: |       |                         |       |                        |       |
| Contract value of fails to deliver                             |       | $                            | 532,396    |                        | $          | 80,837 |   |
| Balance receivable from clearing organizations                 |       | 70,041                       |       | 93,856                      |       |
| Total                                                          |       | $                            | 602,437    |                        | $          | 174,693 |   |
|                                                           |       |                         |       |                        |       |
| Payables to brokers, dealers and clearing  organizations:      |       |                         |       |                        |       |
| Contract value of fails to receive                             |       | $                            | 478,452    |                        | $          | 72,394 |   |
| Payable to financial institutions                              |       | 12,998                       |       | 12,035                      |       |
| Balance payable to clearing organizations                      |       | 536                          |       | 566                         |       |
| Total                                                          |       | $                            | 491,986    |                        | $          | 84,995 |   |

** **

**4.**                 GOODWILL ANDINTANGIBLE ASSET

** **

**Changes in the carrying amount of the Company’s goodwillfor the nine months ended September 30, 2007 were as follows:**

** **

| Balance as of December 31, 2006  |   | $     | 91,891 |   |
|---------------------------------------|--------|-------|--------|--------|
| Goodwill acquired during the period   |   | 1,818 |   |
| Balance as of September 30, 2007 |   | $     | 93,709 |   |

 

**The goodwill acquired during the period was related to anacquisition completed during the first quarter of 2007.**

** **

TheCompany had the following intangible assets as of September 30, 2007 and December 31,2006:

 
| ** **                    | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Gross intangible assets       |       |                        |       |                            |       |
| Customer base/relationships   |       | $                           | 13,038     |                            | $          | 12,690 |   |
| Trade name                    |       | 4,114                       |       | 4,070                           |       |
| Core technology               |       | 3,230                       |       | 3,230                           |       |
| Covenants not to compete      |       | 2,345                       |       | 2,256                           |       |
| Favorable lease agreements    |       | 620                         |       | 620                             |       |
| Propriety knowledge           |       | 110                         |       | 110                             |       |
| Patent                        |       | 34                          |       | 34                              |       |
| Total gross intangible assets |       | 23,491                      |       | 23,010                          |       |
| Accumulated amortization      |       | (10,835                     | )          | (8,177                          | )          |
| Net intangible assets         |       | $                           | 12,656     |                            | $          | 14,833 |   |

 

Amortizationwas $817 and $245 for the three months ended September 30, 2007 and 2006,respectively and $2,658 and $867 for the nine months ended September 30,2007 and 2006, respectively.  At September 30,2007 expected amortization expense for the definite lived intangible assets isas follows:

 

12

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| 2007 (remaining three months) |   | $     | 674    |   |
|-------------------------------|--------|-------|--------|--------|
| 2008                          |   | 2,698 |   |
| 2009                          |   | 2,639 |   |
| 2010                          |   | 2,590 |   |
| 2011                          |   | 2,383 |   |
| Total                         |   | $     | 10,984 |   |

 

**5.**                 NOTESPAYABLE

 

The Company hadoutstanding borrowings under its 2006 Credit Agreement as of September 30,2007 and December 31, 2006 as follows:

 
| ** **                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Loan Available (1)            |       | $                            | 160,000    |                        | $          | 160,000 |   |
| Loans Outstanding             |       | $                            | 59,300     |                        | $          | 91,186 |   |
| Letters of Credit Outstanding |       | $                            | 7,172      |                        | $          | 6,500 |   |

 

----

(1)             Amounts availableinclude up to $50,000 for letters of credit as of September 30, 2007 and December 31,2006, respectively.

 

The weighted averageinterest rate of the outstanding loans was 6.02% and 5.86% at September 30,2007 and December 31, 2006, respectively. At September 30, 2007 and December 31, 2006, notes payablewere recorded net of unamortized loan fees of $765 and $933, respectively.

 

**6.**                 TREASURYSTOCK

** **

In August 2007,the Company’s Board of Directors (the “Board) authorized the Company toimplement a stock repurchase program to repurchase a limited number of shares of the Company’s common stock. Under therepurchase plan, the Board authorized the Company to repurchase shares of theCompany’s common stock on the open market in an amount not to exceed, duringany calendar year, the number of shares issued upon the exercise of stockoptions plus the number of shares underlying grants of RSUs that are granted orwhich management reasonably anticipates will be granted in such calendaryear.  As of September 30, 2007,pursuant to this authorization, the Company could purchase up to 1,117,650additional shares during the remainder of 2007 subject to certain covenantlimitations under the 2006 Credit Agreement.

 

During the third quarter of 2007, the Companyrepurchased 100,000 shares of common stock on the open market at an averageprice of $70.73 per share and a total cost of $7,076, including salescommissions.

 

13

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Theserepurchased shares were recorded, at cost, as treasury stock in the CondensedConsolidated Statements of Financial Condition.

 

**7.**                 EARNINGS PERSHARE

 

Basicand diluted earnings per share for the three months and nine months ended September 30,2007 and 2006 were as follows:

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Basic earnings per share**                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                                    | 25,903     |                                                | $          | 16,590 |   | $ | 69,650 |   | $ | 47,669 |   |
| Weighted average common shares outstanding                        |       | 29,335,229                                           |       | 28,441,089                                          |       | 29,071,716 |   | 28,248,634 |   |
| Basic earnings per share                                          |       | $                                                    | 0.88       |                                                | $          | 0.58 |   | $ | 2.40 |   | $ | 1.69 |   |
|                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| **Diluted earnings per share**                                    | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income applicable to stockholders                             |       | $                                                    | 25,903     |                                                | $          | 16,590 |   | $ | 69,650 |   | $ | 47,669 |   |
| Weighted average common shares outstanding                        |       | 29,335,229                                           |       | 28,441,089                                          |       | 29,071,716 |   | 28,248,634 |   |
| Effect of dilutive shares:                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Options and RSUs                                                  |       | 568,467                                              |       | 780,706                                             |       | 659,927 |   | 855,652 |   |
| Weighted average shares outstanding and common stock  equivalents |       | 29,903,696                                           |       | 29,221,795                                          |       | 29,731,643 |   | 29,104,286 |   |
| Diluted earnings per share                                        |       | $                                                    | 0.87       |                                                | $          | 0.57 |   | $ | 2.34 |   | $ | 1.64 |   |

 

Forthe three months ended September 30, 2007 and 2006, respectively, 210,697and 167,208 RSUs, and for the nine months ended September 30, 2007 and2006, respectively, 204,940 and 130,674 RSUs, were excluded from thecomputation of diluted earnings per share because their effect would beanti-dilutive.

 

**8.**                 SHARE-BASEDCOMPENSATION

** **

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

 

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

 

Thefollowing is a summary of RSU transactions under the 2004 Equity Incentive Planduring the nine months ended September 30, 2007:

 
| ** **                          | ** ** | **RSUs**  | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|-----------|------------|--------------------------------------------------------|------------|
| Outstanding December 31, 2006  |       | 872,853   |       | $                                                      | 45.63      |   |
| Granted                             |       | 624,375   |       | 70.95                                                  |       |
| Vested                              |       | (254,837  | )          | 43.43                                                  |       |
| Cancelled                           |       | (79,762   | )          | 47.62                                                  |       |
| Outstanding September 30, 2007 |       | 1,162,629 |       | $                                                      | 59.57      |   |

 

14

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Theweighted average grant-date fair value of RSUs granted for the nine monthsended September 30, 2007 was $70.95 per unit, compared with $54.81 perunit for the same period in the prior year. Total compensation expense andrelated income tax benefits recognized in relation to RSUs are as follows:

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2007**                                             | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Compensation expense |       | $                                                    | 5,358      |                                      | $          | 2,817 |   | $ | 14,864 |   | $ | 7,951 |   |
| Income tax benefits  |       | 2,095                                                |       | 1,813                                     |       | 5,674 |   | 3,029 |   |
|                      |            |                                                      |            |                                           |            |  |  |  |  |  |  |  |  |

 

AtSeptember 30, 2007, total unrecognized compensation cost related to theRSUs prior to the consideration of expected forfeitures was approximately$58,295 and is expected to be recognized over a weighted-average period of 1.96years. The total fair value of RSUs vested during the nine months ended September 30,2007 and 2006 was $11,069 and $4,192, respectively.

 

Asof September 30, 2007, the Company had stock options outstanding under theGFI Group Inc. 2002 Stock Option Plan (the “GFI Group 2002 Plan”) and theGFInet inc. 2000 Stock Option Plan (the “GFInet 2000 Plan”). No additionalgrants will be made under these plans. For stock options previously granted ormodified, the fair value was estimated on the date of grant or modificationusing the Black-Scholes option pricing model.

 

Thefollowing is a summary of stock option transactions during the nine monthsended September 30, 2007:

 
| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding December 31, 2006  |       | 621,661                                |       | $                                          | 13.83      |   | 323,034 |   | $ | 12.13 |   |
| Exercised                           |       | (396,233                               | )          | 13.91                                      |       | (205,686 | ) | 11.48 |   |
| Terminated                          |       | (13,158                                | )          | 21.00                                      |       | — |   | — |   |
| Outstanding September 30, 2007 |       | 212,270                                |       | $                                          | 13.22      |   | 117,348 |   | $ | 13.28 |   |

 

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**9.**              COMMITMENTSAND CONTINGENCIES

** **

***Operating leases*** – The Company has non-cancellable operating leases for office spacethat expire on various dates through 2027. At September 30, 2007, the future minimum rental commitments undersuch leases are as follows:

 
| 2007 (remaining three months) |   | $      | 1,460   |   |
|-------------------------------|--------|--------|---------|--------|
| 2008                          |   | 12,682 |    |
| 2009                          |   | 10,390 |    |
| 2010                          |   | 10,808 |    |
| 2011                          |   | 10,962 |    |
| Thereafter                    |   | 94,143 |    |
| Total                         |   | $      | 140,445 |   |

 

**The preceding table reflects a significant increase in theCompany’s future minimum rental commitments since December 31, 2006.  The increase in the future minimum rentalcommitments is related to a twenty year lease that the Company entered into in June 2007for premises which will serve as its primary U.S. office space.  At September 30, 2007, the total minimumrental commitments under this lease totaled $93,775, with $5,754 due within oneto three years, $8,070 due within three to five years and $79,951 due in morethan five years.  See below for furtherdiscussion regarding the new U.S. lease and related lease termination for theleased premises that the Company is currently occupying.**

 

**In June 2007, the Company decided to vacate itscurrent leased office space in New York in order to move to a new facility inthe first half of 2008. The Company signed a new lease for 88,747 square feetin New York for the period from June 2007 through December 2027.**

 

**In addition, in June 2007, the Company accelerated thetermination of certain leases to June 2008 in accordance with theprovisions of the lease agreement that will require the Company to pay atermination charge of $1,684.  As requiredby FASB 146, *Accounting for Costs Associated with Exit orDisposal Activities*, the Company recorded this liability at fairvalue, or $1,591, which will be accreted up to the termination charge of $1,684over the next four quarters.  Thetermination charge of $1,684 is included in the future minimum rentalcommitments above.  The Company alsoaccelerated the depreciable lives of certain assets to be abandoned at itscurrent office space to their estimated useful lives.  Total accelerated depreciation relating tothe fixed assets to be abandoned is $4,899 (or approximately $2,940 net oftax), of which $1,507 (or approximately $904 net of tax) was recorded duringthe nine months ended September 30, 2007 and $1,130 (or approximately $678net of tax) will be recorded each quarter until June 30, 2008.  Subsequent to September 30, 2007, theCompany determined that additional furniture and fixtures at its current officespace will be abandoned and accelerated the depreciable lives to theirestimated useful lives.  Totalaccelerated depreciation related to these fixed assets to be abandoned is $703(or approximately $422 net of tax), of which $234 (or approximately $141 net oftax) will be recorded each quarter until June 30, 2008.**

 

*Purchase Obligations**—The*Company has various unconditionalpurchase obligations. Certain of these obligations include the purchase ofmarket data from a number of information service providers during the normalcourse of business. As of September 30, 2007, the Company had totalpurchase commitments for market data services of approximately $15,586, with$13,065 due within the next twelve months and $2,521 due between one to twoyears. In addition, the Company has purchase commitments for capitalexpenditures related to the purchase of certain software and office build-outsin the U.S. and Europe of $2,890.  Amajority of these purchase commitments are due within the next twelve months.

 

16

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*Contingencies**—In*the normal course of business, the Companyand certain subsidiaries included in the condensed consolidated financialstatements are, and have been in the past, named as defendants in variouslawsuits and proceedings and are, and have been in the past, involved incertain regulatory examinations. Additional actions, investigations orproceedings may be brought from time to time in the future. The Company issubject to the possibility of losses from these various contingencies.Considerable judgment is necessary to estimate the probability and amount ofany loss from such contingencies. An accrual is made when it is probable that aliability has been incurred or an asset has been impaired and the amount ofloss can be reasonably estimated. The Company accrues a liability for theestimated costs of adjudication or settlement of asserted and unasserted claimsexisting as of the reporting period.

 

TheCompany is subject to regular examinations by various tax authorities injurisdictions in which the Company has significant business operations. The Companyregularly assesses the likelihood of additional tax assessments that may resultfrom these examinations in each of the tax jurisdictions. A tax accrual hasbeen established, which the Company currently believes to be adequate inrelation to the potential for additional tax assessments. Once established, theaccrual may be adjusted based on new information or events. The imposition ofadditional tax assessments, penalties or fines by a tax authority could have amaterial impact on the Company’s effective tax rate.

 

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

 

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

 

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

 

*Guarantees**—The*Company, through its subsidiaries, is amember of certain exchanges and clearinghouses. Under the membershipagreements, members are generally required to guarantee certain obligations.Additionally, if a member becomes unable to satisfy its obligations to theclearinghouse, other members may be required to meet shortfalls. To mitigatethese performance risks, the exchanges and clearinghouses often require membersto post collateral, as well as meet certain minimum financial standards. TheCompany’s maximum potential liability under these arrangements cannot bequantified. However, management believes that the potential for the Company tobe required to make payments under these arrangements is unlikely. Accordingly,no contingent liability is recorded in the Condensed Consolidated Statements ofFinancial Condition for these arrangements.

 

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

** **

Disclosureregarding the Company’s financial instruments with off-balance sheet risk isdescribed in “Note 17—Financial Instruments with Off-Balance Sheet Risk”of the Notes to the Consolidated Financial Statements contained in the Company’s2006 Form 10-K. There have been no material changes to our off-balancesheet risk during the nine months ended September 30, 2007.

 

17

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**11.**          FINANCIALINSTRUMENTS

** **

TheCompany is exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our risk managementpolicy as described in “Note 18—Financial Instruments” of the Notes to theConsolidated Financial Statements contained in the Company’s 2006 Form 10-K.

 

Asof and for the three months and nine months ended September 30, 2007, theCompany had no foreign exchange derivative contracts that were designated asforeign currency cash flow hedges. During 2006, certain of the Company’s foreign exchange derivativecontracts were designated and qualified as foreign currency cash flow hedgesunder SFAS No. 133.  For the threeand nine months ended September 30, 2006, there was no hedgeineffectiveness. Unrealized gains before tax of $1,963 and $1,230 for the threeand nine months ended September 30, 2006, respectively, were recorded asother comprehensive income.

 

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, 2007 and December 31, 2006 as follows:

 
| **Asset/(Liabilities)**                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Foreign exchange derivative contracts: |       |                         |       |                        |       |
| Assets                                 |       | $                            | 631        |                        | $          | 649 |   |
| Liabilities                            |       | (1,475                       | )          | (139                        | )          |
| Fenics purchase obligation             |       | (53                          | )          | (53                         | )          |
|                                        |            |                              |            |                             |            |  |  |

 

Thefair values of the Company’s foreign exchange derivative contracts wereestimated based on quoted market prices of comparable instruments. The fairvalue of the Fenics purchase obligation was estimated using an exchange optionmodel that included assumptions of management’s estimate of the fair value ofthe common stock of the Company and the common stock of Fenics, as well asassumptions regarding the volatility, correlation and the expected life of theobligation.

 

Includedin other liabilities in the Condensed Consolidated Statements of FinancialCondition as of September 30, 2007 were $10,817 of liabilities consistingprimarily of Brazil government bonds held by the Company and recorded atcurrent market value.  These liabilitiessettled on October 1, 2007.

 

**12.**          REGULATORYREQUIREMENTS

** **

GFISecurities LLC is a registered broker-dealer with the SEC and the FinancialIndustry Regulatory Authority. GFI Securities LLC is also a registeredintroducing broker with the National Futures Association and the CommodityFutures Trading Commission. Accordingly, GFI Securities LLC is subject to thenet capital rules under the Exchange Act and the Commodity Exchange Act.Under these rules, GFI Securities LLC is required to maintain minimum NetCapital, as defined, of not less than the greater of $250 or 2% of aggregatedebits, as defined. GFI Brokers Limited and GFI Securities Limited are subjectto the capital requirements of the Financial Services Authority in the United Kingdom(“FSA”). GFI (HK) Securities LLC is subject to the capital requirements of theSecurities and Futures Commission in Hong Kong, which require that GFI (HK)Securities LLC maintain minimum capital, as defined, of approximately $386.

 

18

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Thefollowing table sets forth the minimum net capital, as defined, that certain ofthe Company’s subsidiaries were required to maintain as of September 30,2007:

 
| ** **                   | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                  |       | $                            | 60,339     |                          | $          | 38,342                           |       | $                                      | 42,434     |   | $ | 567 |   |
| Minimum Net Capital required |       | 250                          |       | 11,037                        |       | 18,120                           |       | 386                                    |       |
| Excess Net Capital           |       | $                            | 60,089     |                          | $          | 27,305                           |       | $                                      | 24,314     |   | $ | 181 |   |
|                              |            |                              |            |                               |            |                                  |            |                                        |            |  |  |  |  |  |  |

 

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

 

GFIGroup PTE Ltd is subject to the compliance requirements of the MonetaryAuthority of Singapore (“MAS”), which require that GFI Group PTE Ltd, amongother things, maintain stockholders’ equity of 3,000 Singapore dollars,measured annually. At December 31, 2006, the required measurement date,GFI Group PTE Ltd. had stockholders’ equity of 4,071 Singapore dollars (orapproximately $2,651), which exceeded the minimum requirement by approximately1,071 Singapore dollars (or approximately $697).

 

GFISecurities Limited’s Japanese branch is subject to certain licensingrequirements established by the Foreign Securities Firms Law (the “FSFL”) in Japan.As part of the licensing requirements, GFI Securities Limited’s Japanese branchis required to maintain “brought-in” capital, as defined under the FSFL, of50,000 Japanese Yen (approximately $439). In addition, GFI Securities Limitedis required to maintain a capital base of 1,000,000 Japanese Yen (approximately$8,696). GFI Securities Limited’s Japanese branch is also subject to the netcapital rule promulgated by the FSFL, which requires that net worth,including “brought-in” capital, exceed a ratio of 120.0% of relevantexpenditure. At September 30, 2007, GFI Securities Limited and itsJapanese branch were in compliance with these capital requirements.

 

GFISecurities Limited’s Paris branch was established through the exercise of itspassport right to open a branch in a European Economic Area state. Theestablishment of the branch was approved by FSA and acknowledged by Banque deFrance in France. The branch 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.

 

GFIBrokers Limited’s Sydney branch is registered as a foreign corporation inAustralia and is conditionally exempt from the requirement to hold anAustralian financial services license under the Australian Securities andInvestments Commission Corporations Act of 2001 in respect of the financialservices it provides in Australia. This exemption applies to foreign companiesregulated by the FSA in accordance with U.K. regulatory standards.

 

GFI(HK) Brokers Ltd. is registered with and regulated by the Hong Kong MonetaryAuthority. As part of this registration, GFI (HK) Brokers Ltd. is required tomaintain stockholders’ equity of 5,000 Hong Kong dollars (or approximately $644).At September 30, 2007, GFI (HK) Brokers Ltd. had stockholders’ equity of10,082 Hong Kong dollars (or approximately $1,298), which exceeded the minimumrequirement by 5,082 Hong Kong dollars (or approximately $654).

 

****GFI Korea Money Brokerage Limitedis licensed and regulated by the Ministry of Finance and Economy to engage inforeign exchange brokerage business, and is subject to certain regulatoryrequirements under the Foreign Exchange Transaction Act and regulationsthereunder.  As a licensed foreign exchange brokerage company, GFI KoreaMoney Brokerage Limited is required to maintain minimum paid-in capital of5,000,000 Korean Won.****At September 30, 2007, ****GFI Korea Money BrokerageLimited**** met the minimum requirement forpaid-in-capital of 5,000,000 Korean Won (or approximately $5,462).

 

19

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Theseregulatory rules may restrict the Company’s ability to withdraw capitalfrom its regulated subsidiaries. The Company’s regulated subsidiaries were incompliance with all minimum net capital requirements as of September 30,2007.

 

**13.**          GEOGRAPHICINFORMATION

** **

TheCompany offers its products and services in United States, Europe and theAsia-Pacific regions.  At September 30,2007, the United Kingdom is the only individual foreign country that accountsfor more than 10% of total revenues and long-lived assets.

 

Informationregarding revenues for the three and nine months ended September 30, 2007and 2006, respectively, and information regarding long-lived assets (defined asproperty, equipment, leasehold improvements and software inventory) ingeographic areas as of September 30, 2007 and December 31, 2006,respectively, are as follows:

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:      |       |                                                 |       |                                                |       |   |   |   |   |
| United States  |       | $                                                    | 103,211    |                                                | $          | 76,469 |   | $ | 312,652 |   | $ | 246,918 |   |
| United Kingdom |       | 103,317                                              |       | 86,757                                              |       | 280,966 |   | 221,916 |   |
| Other          |       | 48,215                                               |       | 16,732                                              |       | 129,564 |   | 84,278 |   |
| Total          |       | $                                                    | 254,743    |                                                | $          | 179,958 |   | $ | 723,182 |   | $ | 553,112 |   |
|                |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived Assets, as defined: |       |                         |       |                        |       |
| United States                  |       | $                            | 35,569     |                        | $          | 32,158 |   |
| United Kingdom                 |       | 12,473                       |       | 11,953                      |       |
| Other                          |       | 4,876                        |       | 3,055                       |       |
| Total                          |       | $                            | 52,918     |                        | $          | 47,166 |   |

 

Revenuesand long-lived assets are attributed to geographic areas based on the locationof the relevant legal entities or branches.

 

20

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**14.**          OTHERCOMPREHENSIVE INCOME (LOSS)

 
| ** **                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Unrealized gain (loss) on foreign exchange  derivative contracts** | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current Period Change:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Before Tax Amount                                                    |       | $                                                    | —     |                                                | $          | 1,963 |   | $ | — |   | $ | 1,230 |   |
| Tax Expense                                                          |       | —                                               |       | (589                                                | )          | — |   | (369 | ) |
| After Tax Amount                                                     |       | $                                                    | —     |                                                | $          | 1,374 |   | $ | — |   | $ | 861 |   |
| **Foreign currency translation adjustment**                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                                    |       | $                                                    | (178       | )                                                   | $          | (81 | ) | $ | (104 | ) | $ | 197 |   |
| Tax Benefit (Expense)                                                |       | 102                                                  |       | 73                                                  |       | 70 |   | (51 | ) |
| After Tax Amount                                                     |       | $                                                    | (76        | )                                                   | $          | (8 | ) | (34 | ) | 146 |   |
|                                                                      |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany reclassified the following out of other comprehensive income into otherincome for the three and nine months ended September 30, 2006:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **2006**                                  | ** ** | **2006**                                 | ** ** |
| Gross loss |       | $                                         | 710        |                                     | $          | 3,401 |   |
| Net of tax |       | 497                                       |       | 2,381                                    |       |
|            |            |                                           |            |                                          |            |  |  |

 

21

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directorsand Stockholders of

GFI Group Inc.

New York, New York

 

We have reviewed the accompanying condensedconsolidated statement of financial condition of GFI Group Inc. andsubsidiaries (the “Company”) as of September 30, 2007, and the relatedcondensed consolidated statements of income and comprehensive income for thethree-month and nine-month periods ended September 30, 2007 and 2006, andthe condensed consolidated statements of cash flows for the nine-month periodsended September 30, 2007 and 2006.  These interim financialstatements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  A review of interim financial information consists principallyof applying analytical procedures and making inquiries of persons responsiblefor financial and accounting matters.  It is substantially less in scopethan an audit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not express such an opinion.

 

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

 

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated statement of financial condition of GFI Group Inc. andsubsidiaries as of December 31, 2006, and the related consolidatedstatements of income, comprehensive income, stockholders’ equity, and cashflows for the year then ended (not presented herein); and in our report dated February 28,2007, we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying condensed consolidated statement offinancial condition as of December 31, 2006 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financialcondition from which it has been derived.

 

 

/s/ Deloitte &Touche

 

New York, New York

November 8, 2007

 

22

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

** **

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

 

•       the risksand other factors described under the heading “Risk Factors” and elsewhere inour 2006 Form 10-K;

 

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

 

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

 

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

 

•       competitionfrom current and new competitors;

 

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

 

•       futureresults of operations and financial condition;

 

•       the successof our business strategies;

 

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

 

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

 

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

 

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

 

•       our abilityto manage our international operations;

 

•       uncertaintiesassociated with currency fluctuations;

 

•       our failureto protect or enforce our intellectual property rights;

 

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

 

•       uncertaintiesrelating to litigation; and

 

•       changes inthe availability of capital.

 

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

 

**BusinessEnvironment**

 

As aninter-dealer broker, our results of operations are impacted by a number ofexternal market factors including market volatility, organic growth of thederivative and other markets in which we provide

 

23

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our brokerage services,the particular mix of transactional activity in our various products and thecompetitive environment in which we operate.  Outlined below aremanagement’s observations of these external market factors during the mostrecent fiscal period. The factors outlined below are not the only factors thathave impacted our results of operations for the most recent fiscal period, andadditional or other factors may impact, or have different degrees of impact, onour results of operations in future periods.

 

*Market Volatility*

 

As ageneral rule, our business benefits from volatility in the markets that weserve, as periods of increased volatility typically coincide with more robusttrading by our clients and a higher volume of transactions.  Marketvolatility is driven by a range of external factors, some of which are marketspecific and some of which are correlated to general macro-economicconditions.  During the third quarter of 2007, the credit and equity marketsexperienced general heightened volatility as subprime mortgage and housingmarket concerns spread to the broader credit and equity markets.  Inaddition, the Federal Reserve and other central banks injected cash into theglobal financial system towards the end of the quarter and the Federal Reservelowered its short-term lending rate a larger than expected 50 basispoints.  Interest rate, foreign exchange and commodity markets experiencedmoderate volatility during the quarter, resulting from inflationary andeconomic uncertainty and record high oil prices.

 

*Growth in Underlying Markets and New Product Offerings*

 

Ourbusiness has historically benefited from growth in the over-the-counter (“OTC”)derivatives markets due to either the expansion of existing markets, includingincreased notional amounts outstanding or increased transaction volumes, or thedevelopment of new products or classes of products.  The level of growthin these markets is difficult to measure on a quarterly basis as there are onlya few independent, objective measures of growth in the outstanding notionalamount of OTC derivatives, all of which are published retrospectively and donot measure transactional volumes.  Therefore, to help gauge growth in anyparticular quarter, management also looks to the published results of large OTCderivatives dealers and certain futures exchanges as potential indicators oftransactional activity in the related OTC derivative markets.

 

TheInternational Swaps and Derivatives Association released figures in the thirdquarter of 2007 on notional amounts outstanding in global OTC markets forMid-Year 2007.  The figures continued toshow strong growth in the OTC derivative markets, with credit derivativesgrowing 75% from $26.0 trillion in June 2006 to $45.5 trillion in June 2007.  Notional amounts outstanding of interest rateand currency derivatives grew by 38% over the same period from $250.8 trillionto $347.1 trillion, while notional amounts of equity derivatives grew by 57%from $6.4 trillion to $10.0 trillion.

 

Exchangetraded derivatives have for several years exhibited generally similar growthrates to those of related OTC derivative markets.  CME Group Inc., the NewYork Mercantile Exchange and IntercontinentalExchange and InternationalSecurities Exchange all reported double digit growth in transactional volumesduring the third quarter versus the same period in 2006.  These exchangesoffer trading in futures and other products in several categories, includingfinancial, equity and commodity products.  Nevertheless, because there iscurrently little or no exchange-based trading activity in credit futures,exchange-traded volumes are not an indicator of activity levels of creditproducts, our largest product segment.

 

Inaddition, transactions in second generation credit products, such as loancredit derivatives, have recently been experiencing growth and have been adriver of growth in the overall credit

 

24

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derivative market. New products have also recently been developed for certain wet and dry freightand property derivatives.

 

*Competitive Environment*

 

Anothermajor external market factor affecting our business and results of operationsis competition, which may take the form of competitive pressure on thecommissions we charge for our brokerage services or competition for brokeragepersonnel with experience in the specialized markets we serve. Competition for the services of productive brokers has been intense in recentquarters and during any given period it can become even more competitive. Management believes that this increased competition for brokerage personnelcontinued during the third quarter as other inter-dealer brokers sought tobolster their derivative brokerage capabilities.  As a result,compensation and employee benefits as a percentage of revenues will be underpressure, and may increase, in the short term.

 

**Resultsof Operations**

** **

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

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Brokerage revenues:                      |       |                                                 |       |                                                |       |   |   |   |   |
| Agency commissions                       |       | $                                                    | 198,405    |                                                | $          | 138,961 |   | $ | 562,396 |   | $ | 406,005 |   |
| Principal transactions                   |       | 46,467                                               |       | 34,478                                              |       | 136,888 |   | 117,330 |   |
| Total brokerage revenues                 |       | 244,872                                              |       | 173,439                                             |       | 699,284 |   | 523,335 |   |
| Analytics and market data                |       | 4,855                                                |       | 4,954                                               |       | 14,672 |   | 14,419 |   |
| Contract revenue                         |       | 11                                                   |       | —                                              |       | 215 |   | 5,881 |   |
| Interest income                          |       | 2,589                                                |       | 2,150                                               |       | 6,988 |   | 6,778 |   |
| Other income (loss)                      |       | 2,416                                                |       | (585                                                | )          | 2,023 |   | 2,699 |   |
| Total revenues                           |       | 254,743                                              |       | 179,958                                             |       | 723,182 |   | 553,112 |   |
| EXPENSES:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Compensation and employee benefits       |       | 158,845                                              |       | 112,543                                             |       | 453,827 |   | 343,089 |   |
| Communications and market data           |       | 11,329                                               |       | 9,799                                               |       | 33,084 |   | 26,755 |   |
| Travel and promotion                     |       | 9,929                                                |       | 7,069                                               |       | 28,935 |   | 23,149 |   |
| Rent and occupancy                       |       | 6,439                                                |       | 4,594                                               |       | 17,529 |   | 15,048 |   |
| Depreciation and amortization            |       | 6,747                                                |       | 4,338                                               |       | 17,694 |   | 12,222 |   |
| Professional fees                        |       | 4,459                                                |       | 4,391                                               |       | 12,360 |   | 13,755 |   |
| Clearing fees                            |       | 8,063                                                |       | 5,884                                               |       | 22,532 |   | 18,159 |   |
| Interest                                 |       | 1,703                                                |       | 1,124                                               |       | 5,554 |   | 4,648 |   |
| Other expenses                           |       | 4,574                                                |       | 3,098                                               |       | 16,132 |   | 10,497 |   |
| Contract costs                           |       | 6                                                    |       | —                                              |       | 133 |   | 5,180 |   |
| Lease termination costs to affiliate     |       | —                                               |       | (93                                                 | )          | — |   | (185 | ) |
| Total Expenses                           |       | 212,094                                              |       | 152,747                                             |       | 607,780 |   | 472,317 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 42,649                                               |       | 27,211                                              |       | 115,402 |   | 80,795 |   |
| PROVISION FOR INCOME TAXES               |       | 16,746                                               |       | 10,621                                              |       | 45,752 |   | 33,126 |   |
| NET INCOME                               |       | $                                                    | 25,903     |                                                | $          | 16,590 |   | $ | 69,650 |   | $ | 47,669 |   |

 

25

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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,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Brokerage revenues:                      |       |                                                 |       |                                                |       |   |   |   |   |
| Agency commissions                       |       | 77.9                                                 | %          | 77.2                                                | %          | 77.8 | % | 73.4 | % |
| Principal transactions                   |       | 18.2                                                 |       | 19.2                                                |       | 18.9 |   | 21.2 |   |
| Total brokerage revenues                 |       | 96.1                                                 |       | 96.4                                                |       | 96.7 |   | 94.6 |   |
| Analytics and market data                |       | 1.9                                                  |       | 2.8                                                 |       | 2.0 |   | 2.6 |   |
| Contract revenue                         |       | 0.0                                                  |       | 0.0                                                 |       | 0.0 |   | 1.1 |   |
| Interest income                          |       | 1.0                                                  |       | 1.2                                                 |       | 1.1 |   | 1.2 |   |
| Other income (loss)                      |       | 0.9                                                  |       | (0.4                                                | )          | 0.3 |   | 0.5 |   |
| Total revenues                           |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| EXPENSES:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Compensation and employee benefits       |       | 62.4                                                 | %          | 62.5                                                | %          | 62.8 | % | 62.0 | % |
| Communications and market data           |       | 4.4                                                  |       | 5.4                                                 |       | 4.6 |   | 4.8 |   |
| Travel and promotion                     |       | 3.9                                                  |       | 3.9                                                 |       | 4.0 |   | 4.2 |   |
| Rent and occupancy                       |       | 2.5                                                  |       | 2.6                                                 |       | 2.4 |   | 2.7 |   |
| Depreciation and amortization            |       | 2.6                                                  |       | 2.4                                                 |       | 2.4 |   | 2.2 |   |
| Professional fees                        |       | 1.8                                                  |       | 2.4                                                 |       | 1.7 |   | 2.5 |   |
| Clearing fees                            |       | 3.2                                                  |       | 3.3                                                 |       | 3.1 |   | 3.3 |   |
| Interest                                 |       | 0.7                                                  |       | 0.6                                                 |       | 0.8 |   | 0.8 |   |
| Other expenses                           |       | 1.8                                                  |       | 1.7                                                 |       | 2.2 |   | 1.9 |   |
| Contract costs                           |       | 0.0                                                  |       | 0.0                                                 |       | 0.0 |   | 0.9 |   |
| Lease termination to affiliate           |       | 0.0                                                  |       | (0.1                                                | )          | 0.0 |   | 0.0 |   |
| Total Expenses                           |       | 83.3                                                 | %          | 84.7                                                | %          | 84.0 | % | 85.3 | % |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 16.7                                                 |       | 15.3                                                |       | 16.0 |   | 14.7 |   |
| PROVISION FOR INCOME TAXES               |       | 6.6                                                  |       | 5.9                                                 |       | 6.3 |   | 6.0 |   |
| NET INCOME                               |       | 10.2                                                 | %          | 9.4                                                 | %          | 9.6 | % | 8.7 | % |

 

**ThreeMonths Ended September 30, 2007 Compared to the Three Months Ended September 30,2006**

** **

Netincome for the three months ended September 30, 2007 was $25.9 million ascompared to net income of $16.6 million for the three months ended September 30,2006, an increase of $9.3 million or approximately 56.0%.  Total revenues increased by $74.7 million, or41.5%, to $254.7 million for the three months ended September 30, 2007from $180.0 million for the same period from the prior year. Our increasedrevenues were primarily due to increased brokerage revenues across all productcategories, with the most significant dollar increases in credit and equity.This increase in our revenues reflected significant organic growth acrosscredit, financial and equity product categories and significant growth across allgeographic regions.  Our total brokeragepersonnel headcount increased by 194 to a total of 1,021 employees at September 30,2007 from 827 employees at September 30, 2006. Total expenses increased by$59.4 million, or 38.9%, to $212.1 million for the three months ended September 30,2007 from $152.7 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 2006 and an increase in performance relatedbrokerage bonuses resulting in large part from an increase in our brokeragerevenues.

 

26

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***Revenues***

 

*BrokerageRevenues*

* *

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

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** **    |
|--------------------------|------------|------------------------------------------------------|---------------|
| ** **               | ** ** | **2007**                                             | ** **    | **2006** | ** ** |
| **BROKERAGE REVENUES:**  | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| Credit                   |       | $                                                    | 87,845        |   | $ |  60,654 |   |
| Financial                |       | 49,298                                               |          | 38,605 |   |
| Equity                   |       | 59,155                                               |          | 41,426 |   |
| Commodity                |       | 48,574                                               |          | 32,754 |   |
| Total brokerage revenues |       | $                                                    |  244,872 |   | $ |  173,439 |   |
| ** **               | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| **BROKERAGE REVENUES:**  | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| Credit                   |       | 35.9                                                 | %             | 35.0 | % |
| Financial                |       | 20.1                                                 |          | 22.2 |   |
| Equity                   |       | 24.2                                                 |          | 23.9 |   |
| Commodity                |       | 19.8                                                 |          | 18.9 |   |
| Total brokerage revenues |       | 100.0                                                | %             | 100.0 | % |

 

Totalbrokerage revenues increased by $71.4 million, or 41.2%, to $244.9 millionfor the three months ended September 30, 2007, as compared to $173.4million for the three months ended September 30, 2006. Agency commissionsincreased by $59.5 million, or 42.8%, to $198.4 million for the three monthsended September 30, 2007, as compared to $138.9 million for the threemonths ended September 30, 2006. Principal transactions increased by $11.9million, or 34.5%, to $46.4 million for the three months ended September 30,2007 from $34.5 million for the three months ended September 30, 2006.Broker productivity (defined as total brokerage revenues during the perioddivided by average monthly brokerage personnel headcount for the period)increased by approximately 16.7% for the three months ended September 30,2007, as compared to the same period from the prior year.

 

Theincrease in credit product brokerage revenues of $27.2 million in the thirdquarter of 2007 as compared with the same period in 2006 was due to a number offactors, including credit market volatility related to subprime mortgage marketconcerns, increased headcount and the continued overall growth of the creditderivatives market, the development of new credit products and the continuedsuccess in Europe of CreditMatch®, our credit derivatives and investment gradebond trading platform.  Our creditproduct brokerage personnel increased by 48 to a total of 275 employees at September 30,2007, up from 227 employees at September 30, 2006.

 

Theincrease in financial product brokerage revenues of $10.7 million in the thirdquarter of 2007 as compared with the third quarter of 2006 was primarilyattributable to growth in emerging market interest rate and currencyderivatives in Europe and Asia and the continued introduction of ForexMatchTM,our foreign exchange trading platform. Our financial product brokerage personnel increased by 12 to a total of271 employees at September 30, 2007, up from 259 employees at September 30,2006.

 

Theincrease in equity product brokerage revenues of $17.7 million in the thirdquarter of 2007 as compared with the same period in 2006 was primarily due tothe continued growth of our Paris office, which specializes in cash equitiesand equity derivatives, as well as our equity derivatives business in the U.K. andthe U.S., and our cash equities business in the U.S.  Market volatility caused by mortgage marketconcerns also contributed to the increase in equity product brokeragerevenues.  Our equity product brokeragepersonnel increased by 30 to a total of 201 employees at September 30,2007, up from 171 employees at September 30, 2006.

 

27

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Theincrease in commodity product brokerage revenues of $15.8 million in the thirdquarter of 2007 as compared with the third quarter of 2006 was primarilyattributable to the addition of our Amerex brokerage business. In addition,growth in European dry physical freight and dry freight derivatives alsocontributed to the increase in overall commodity revenues. Our commodityproduct brokerage personnel increased by 105 to a total of 275 employees at September 30,2007, up from 170 employees at September 30, 2006.

 

*Analyticsand Market Data*

* *

Revenuesfrom our analytics and market data products remained consistent at $4.9 millionfor each of the three month periods ended September 30, 2007 and 2006.Revenues from analytics and market data for the three months ended September 30,2007 primarily consisted of revenue generated from subscription fees.

 

*InterestIncome*

* *

Interestincome increased by $0.4 million, or 18.2%, to $2.6 million for the threemonths ended September 30, 2007, as compared to $2.2 million for the threemonths ended September 30, 2006. The increase was mainly attributable tothe increase in interest income attributable to the higher level of cashbalances in the U.S. which was partially offset by a decrease in interestincome due to lower balances on the clearing accounts.

 

*OtherIncome (Loss)*

* *

Otherincome increased by $3.0 million, or 513.0 %, to $2.4 million for the threemonths ended September 30, 2007 from a loss of $0.6 million for the threemonths ended September 30, 2006. Other income (loss) for the three monthsended September 30, 2007 and 2006 mainly consisted of transactional gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.

 

***Expenses***

*** ***

*Compensationand Employee Benefits*

* *

Compensationand employee benefits increased by $46.3 million, or 41.2%, to $158.8 millionfor the three months ended September 30, 2007 from $112.5 million for thethree months ended September 30, 2006. The increase was primarily due toan increase in the number of brokerage personnel from 827 employees at September 30,2006 to 1,021 employees at September 30, 2007 and an increase in brokeragepersonnel performance bonuses of $28.1 million resulting in large part from theincrease in our brokerage revenues.

 

Totalcompensation and employee benefits as a percentage of total revenues decreasedslightly to 62.4 % at September 30, 2007 from 62.5% at September 30,2006. Bonus expense represented 56.2 % and 51.7% of total compensation andemployee benefits expense for the three months ended September 30, 2007and 2006, respectively. A portion of our bonus expense is subject tocontractual guarantees that may require us to make bonus payments to brokersregardless of their performance in any particular period. Additionally, sign-onbonus expense, which includes the amortization of sign-on bonuses initiallymade in prior periods, represented 4.0% and 5.1% of total compensation andemployee benefits for the three months ended September 30, 2007 and 2006,respectively.

 

Ourcompensation and employee benefits as a percentage of our revenues arerelatively stable.  However, certain ofour competitors are offering significant compensation packages to attract ourbrokers.  As a result, compensation andemployee benefits as a percentage of revenues will be under pressure, and mayincrease in the short term.   We believethat an increase in the use of our hybrid electronic brokerage systems andpressure on our competitors to rationalize the increase in their compensationexpense should eventually lessen the effect of the competitive pressure on compensationexpense.

 

*Communicationsand Market Data*

* *

Communicationsand market data increased by $1.5 million, or 15.3%, to $11.3 million for thethree months ended September 30, 2007 from $9.8 million from the threemonths ended September 30, 2006. The increase was

 

28

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primarilyattributable to the increase of brokerage personnel in those areas, such asequities, that rely more heavily on market data systems.

 

*Traveland Promotion*

* *

Traveland promotion increased by $2.8 million, or 39.4%, to $9.9 million for thethree months ended September 30, 2007 from $7.1 million for the threemonths ended September 30, 2006. This expense, as a percentage of ourtotal brokerage revenues remained consistent at 4.1% for the three months endedSeptember 30, 2007 and 2006.

 

*Rentand Occupancy*

* *

Rentand occupancy increased by $1.8 million, or 39.1%, to $6.4 million for thethree months ended September 30, 2007 from $4.6 million for the threemonths ended September 30, 2006. The increase was primarily due to the increase in rent expense relatingto the Company’s new primary office lease in New York, as well as an increasein repairs and maintenance expense from our current leased facilities.  We expect rent and occupancy will continue toincrease in the future as a result of new leases for office space, includingthe new lease in New York.  See Note 9 tothe Condensed Consolidated Financial Statements for further discussion of theU.S. lease.

 

*Depreciationand Amortization*

* *

Depreciationand amortization increased by $2.4 million, or 55.8%, to $6.7 million for thethree months ended September 30, 2007 from $4.3 million for the threemonths ended September 30, 2006. The increase was primarily due to the$1.1 million of accelerated depreciation related to certain long-lived assetsto be abandoned at our current office space in New York and amortizationexpense of intangibles resulting from the acquisition of the Amerex brokeragebusiness.  See Note 9 to the CondensedConsolidated Financial Statements for further discussion of the U.S. lease.

 

*ProfessionalFees*

* *

Professionalfees increased by $0.2 million, or 4.7% to $4.5 million for the three monthsended September 30, 2007 from $4.3 million for the three months ended September 30,2006. The increase was partially due to an increase in legal, audit and taxfees, which was partially offset by a decrease in professional fees related toour compliance with the requirements of Section 404 of the Sarbanes-OxleyAct of 2002.

 

*ClearingFees*

* *

Clearingfees increased by $2.2 million, or 37.3%, to $8.1 million for the three monthsended September 30, 2007 from $5.9 million for the three months ended September 30,2006. This increase was partially due to the growth of brokerage revenues fromour Paris equities business.  Clearingfees, as a percentage of our total revenues from principal transactionsincreased slightly to 17.4% for the three months ended September 30, 2007from 17.0% for the comparable period in the prior year.  Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. We also use the services of stock exchanges and floor brokers toassist in the execution of transactions. Fees paid to floor brokers andexecution fees paid to exchanges in these circumstances are included inclearing fees.   In addition, clearingfees also includes fees incurred in certain equity transaction executed on anagency basis.

 

*InterestExpense*

* *

Interestexpense increased by $0.6 million, or 54.5%, to $1.7 million for the threemonths ended September 30, 2007 from $1.1 million for the three monthsended September 30, 2006.  Theincrease was mainly attributable to the increase in interest expense under ourcredit facility due to the higher level of outstanding borrowings during thethree months ended September 30, 2007, which was partially offset by adecrease in interest expense on our clearing accounts for the three monthsended September 30, 2007 compared to the same period from the

 

29

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prioryear.  Included in interest expense forthe three months ended September 30, 2007 is $0.8 million of interest onoutstanding borrowings incurred to purchase the Amerex brokerage business in October 2006.

 

*OtherExpenses*

* *

Otherexpenses increased by $1.5 million, or 48.4%, to $4.6 million for the threemonths ended September 30, 2007 from $3.1 million for the three monthsended September 30, 2006.  Theincrease was primarily due to an increase in irrecoverable Value Added Taxrelated to increased purchases in communications and market data in Europe, anincrease in expense related to license fees to third-party software vendors anda charge in connection with newly hired brokerage personnel to buy-out their employmentcontracts from their former employers.

 

*Provisionfor Income Taxes*

* *

Our provision for incometaxes totaled $16.7 million for the three months ended September 30, 2007compared to $10.6 million for the three months ended September 30, 2006.Our effective tax rate remained consistent at 39% for the three months ended September 30,2007 and 2006. A decrease in state and local income taxes was offset by anincrease in taxes related to foreign operations.  The reduction in state and local taxes was due,in part, to lower state tax rates and the geographic mix of our earnings.

 

**NineMonths Ended September 30, 2007 Compared to the Nine Months Ended September 30,2006**

** **

Netincome for the nine months ended September 30, 2007 was $69.7 million ascompared to net income of $47.7 million for the nine months ended September 30,2006, an increase of $22.0 million or approximately 46.1%.  Total revenues increased by $170.1 million,or 30.8% to $723.2 million for the nine months ended September 30, 2007from $553.1 million for the same period from the prior year. Our increasedrevenues were primarily due to increased brokerage revenues across all productcategories, with the most significant dollar increases in credit andcommodities. Commodities revenues include revenues from the Amerex Energyoperation which we acquired in October 2006.  This increase in our revenues includedsignificant organic growth across all product categories and geographicregions.  Our total brokerage personnelheadcount increased by 194 to a total of 1,021 employees at September 30,2007 from 827 employees at September 30, 2006. Total expenses increased by$135.5 million, or 28.7%, to $607.8 million for the nine months ended September 30,2007 from $472.3 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 2006 and an increase in performance relatedbrokerage bonuses resulting in large part from an increase in our brokerage revenues.

 

30

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***Revenues***

*** ***

*BrokerageRevenues*

* *

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,** | ** **    |
|--------------------------|------------|-----------------------------------------------------|---------------|
| ** **               | ** ** | **2007**                                            | ** **    | **2006** | ** ** |
| **BROKERAGE REVENUES:**  | ** ** | ** **                                          | ** **    | ** ** | ** ** |
| Credit                   |       | $                                                   |  245,092 |   | $ |  191,765 |   |
| Financial                |       | 140,164                                             |          | 117,035 |   |
| Equity                   |       | 168,822                                             |          | 128,994 |   |
| Commodity                |       | 145,206                                             |          | 85,541 |   |
| Total brokerage revenues |       | $                                                   |  699,284 |   | $ |  523,335 |   |
| ** **               | ** ** | ** **                                          | ** **    | ** ** | ** ** |
| **BROKERAGE REVENUES:**  | ** ** | ** **                                          | ** **    | ** ** | ** ** |
| Credit                   |       | 35.1                                                | %             | 36.6 | % |
| Financial                |       | 20.0                                                |          | 22.4 |   |
| Equity                   |       | 24.1                                                |          | 24.6 |   |
| Commodity                |       | 20.8                                                |          | 16.4 |   |
| Total brokerage revenues |       | 100.0                                               | %             | 100.0 | % |

 

Totalbrokerage revenues increased by $175.9 million, or 33.6%, to$699.2 million for the nine months ended September 30, 2007, ascompared to $523.3 million for the nine months ended September 30, 2006.Agency commissions increased by $156.4 million, or 38.5%, to $562.4 million forthe nine months ended September 30, 2007, as compared to $406.0 millionfor the nine months ended September 30, 2006. Principal transactionsincreased by $19.6 million, or 16.7%, to $136.9 million for the nine monthsended September 30, 2007 from $117.3 million for the nine months ended September 30,2006. Broker productivity (defined as total brokerage revenues during theperiod divided by average monthly brokerage personnel headcount for the period)increased by approximately 10.2% for the nine months ended September 30,2007, as compared to the same period from the prior year.

 

Theincrease in credit product brokerage revenues of $53.3 million for the ninemonths ended September 30, 2007 as compared with the same period of 2006was due to a number of factors, including credit and equity market volatilityrelated to subprime mortgage market and global economic concerns, increasedheadcount and the continued overall growth in the credit derivatives market,the development of new credit products and the continued success in Europe ofCreditMatch®.  Our credit productbrokerage personnel increased by 48 to a total of 275 employees at September 30,2007, up from 227 employees at September 30, 2006.

 

Theincrease in financial product brokerage revenues of $23.1 million for the ninemonths ended September 30, 2007 as compared with the same period of 2006was primarily attributable to growth in emerging market interest rate andcurrency derivatives in Europe and Asia. Our financial product brokerage personnel increased by 12 to a total of271 employees at September 30, 2007, up from 259 employees at September 30,2006.

 

Theincrease in equity product brokerage revenues of $39.8 million for the ninemonths ended September 30, 2007 as compared with the same period of 2006was primarily due the growth of our Paris office, which specializes in cashequities and equity derivatives, as well as the growth of our global equityderivatives and U.S. cash equities businesses. Our equity product brokerage personnel increased by 30 to 201 employeesat September 30, 2007, up from 171 employees at September 30, 2006

 

Theincrease in commodity product brokerage revenues of $59.7 million for the ninemonths ended September 30, 2007 as compared with the same period in 2006was primarily attributable to the addition of our Amerex brokeragebusiness.   In addition, significantgrowth in European energy products, including dry freight

 

31

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derivatives,dry physical freight, electricity and emissions, contributed to the increase incommodity and brokerage revenues over the first nine months of 2007.  Our commodity product brokerage personnelincreased by 105 to a total of 275 employees at September 30, 2007, upfrom 170 employees at September 30, 2006.

 

*Analyticsand Market Data*

* *

Revenuesfrom our analytics and market data products increased by $0.3 million, or 2.1%,to $14.7 million for the nine months ended September 30, 2007 as comparedto $14.4 million for the nine months ended September 30, 2006. Theincrease was primarily due to an increase in subscription and maintenance fees,which was partially offset by a decrease in update fees associated with the licensingof analytical software.

 

*Contract Revenue*

 

Forthe nine months ended September 30, 2006, contract revenue consistedprimarily of revenues recognized upon completion of a long-term contractpursuant to which we developed an online foreign exchange currency tradingsystem and customized it for a customer.  For the nine months ended September 30, 2007, contract revenuerepresents additional work provided to the customer on a time and materialbasis.

 

*InterestIncome*

* *

Interestincome increased by $0.2 million, or 2.9%, to $7.0 million for the nine monthsended September 30, 2007, as compared to $6.8 million for the nine monthsended September 30, 2006. The increase was mainly attributable to theincrease in interest income from the higher level of cash balances, which wasoffset by the decrease in interest income due to lower balance on the clearingaccounts.

 

*OtherIncome (Loss)*

* *

Otherincome (loss) decreased by $0.7 million, or 25.9%, to $2.0 million for the ninemonths ended September 30, 2007 from income of $2.7 million for the ninemonths ended September 30, 2006. Other income (loss) for the nine monthsended September 30, 2007 and 2006 mainly consisted of transactional gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.

 

***Expenses***

 

*Compensationand Employee Benefits*

* *

Compensationand employee benefits increased by $110.7 million, or 32.3%, to $453.8 millionfor the nine months ended September 30, 2007 from $343.1 million for thenine months ended September 30, 2006. The increase was primarily due to anincrease in the number of brokerage personnel from 827 employees at September 30,2006 to 1,021 employees at September 30, 2007 and an increase in brokeragepersonnel performance bonuses of $52.9 million resulting in large part from theincrease in our brokerage revenues.

 

Totalcompensation and employee benefits as a percentage of total revenues increasedto 62.8% at September 30, 2007 from 62.0% at September 30, 2006.Bonus expense represented 53.6% and 53.4% of total compensation and employeebenefits expense for the nine months ended September 30, 2007 and 2006,respectively. A portion of our bonus expense is subject to contractualguarantees that may require us to make bonus payments to brokers regardless oftheir performance in any particular period. Additionally, sign-on bonusexpense, which includes the amortization of sign-on bonuses initially made inprior periods, represented 4.1% and 5.4% of total compensation and employeebenefits for the nine months ended September 30, 2007 and 2006,respectively.

 

Ourcompensation and employee benefits are relatively stable as a percentage of ourrevenues.  However, certain of ourcompetitors are offering significant compensation packages to attract ourbrokers.  As a result, compensation andemployee benefits as a percentage of revenues will be under pressure, and mayincrease, in the short term.   We believethat an increase in the use of our hybrid electronic brokerage systems and pressureon

 

32

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ourcompetitors to rationalize the increase in their compensation expense shouldeventually lessen the effect of the competitive pressure on compensationexpense.

 

*Communicationsand Market Data*

* *

Communicationsand market data increased by $6.3 million, or 23.5%, to $33.1 million for thenine months ended September 30, 2007 from $26.8 million from the ninemonths ended September 30, 2006. The increase was primarily attributableto the increase in brokerage personnel including in those areas, such asequities, that rely more heavily on market data systems.

 

*Traveland Promotion*

* *

Traveland promotion increased by $5.7 million, or 24.6%, to $28.9 million for thenine months ended September 30, 2007 from $23.2 million for the ninemonths ended September 30, 2006. This expense, as a percentage of ourtotal brokerage revenues for the nine months ended September 30, 2007decreased to 4.1% from 4.4% for the same period from the prior year. Thisdecrease was primarily due to our continuing efforts to lower these costsrelative to our total brokerage revenues.

 

*Rentand Occupancy*

* *

Rentand occupancy increased by $2.5 million, or 16.7%, to $17.5 million for thenine months ended September 30, 2007 from $15.0 million for the ninemonths ended September 30, 2006. The increase was primarily due to the increase in repairs andmaintenance and an increase in rent expense relating to our new primary officespace in the U.S., which was offset by a decrease in insurance, from ourcurrent leased facilities.  We expect therent and occupancy will continue to increase in the future as a result of newleases for office space, including the new lease in New York.  See Note 9 to the Condensed ConsolidatedFinancial Statements for further discussion of the U.S. lease.

 

*Depreciationand Amortization*

* *

Depreciationand amortization increased by $5.5 million, 45.1%, to $17.7 million for thenine months ended September 30, 2007 from $12.2 million for the ninemonths ended September 30, 2006. The increase was primarily due to the$1.5 million of accelerated depreciation related to certain long-lived assetsto be abandoned at our current offie space in New York and amortization expenseof intangibles resulting from the acquisition of the Amerex brokerage business.  See Note 9 to the Condensed ConsolidatedFinancial Statements for further discussion of the U.S. lease.

 

*ProfessionalFees*

* *

Professionalfees decreased by $1.4 million, or 10.1% to $12.4 million for the nine monthsended September 30, 2007 from $13.8 million for the nine months ended September 30,2006. The decrease was primarily due to a decrease in professional fees relatedto our compliance with the requirements of Section 404 of theSarbanes-Oxley Act of 2002, which was partially offset by an increase in legaland audit fees.

 

*ClearingFees*

* *

Clearingfees increased by $4.3 million, or 23.6%, to $22.5 million for the nine monthsended September 30, 2007 from $18.2 million for the nine months ended September 30,2006. This increase was partially due to the growth of brokerage revenues fromour Paris equities business.  Clearingfees, as a percentage of our total revenues from principal transactionsincreased to 16.5% for the nine months ended September 30, 2007 from 15.5%for the comparable period in the prior year.  This increase was partially due to the high cost of clearing fees as aresult of the higher number and types of transactions executed in our Parisoffice.  Principal transactions aregenerally settled through third party clearing organizations that charge us afee for their services. We also use the services of stock exchanges and floorbrokers, to assist in the execution of transactions. Fees paid to floor

 

33

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brokersand execution fees paid to exchanges in these circumstances are included inclearing fees.   In addition, clearingfees also includes fees incurred in certain equity transaction executed on anagency basis.

 

*InterestExpense*

* *

Interestexpense increased by $1.0 million, or 21.7%, to $5.6 million for the ninemonths ended September 30, 2007 from $4.6 million for the nine monthsended September 30, 2006.  Theincrease was mainly attributable to the increase in interest expense under ourcredit facility due to the higher level of outstanding borrowings during thenine months ended September 30, 2007, which was partially offset by adecrease in interest expense on our clearing accounts for the nine months endedSeptember 30, 2007 compared to the same period from the prior year.  Included in interest expense for the ninemonths ended September 30, 2007 is $2.5 million of interest on outstandingborrowings incurred to purchase the Amerex brokerage business in October 2006.

 

*OtherExpenses*

* *

Otherexpenses increased by $5.6 million, or 53.3%, to $16.1 million for the ninemonths ended September 30, 2007 from $10.5 million for the nine monthsended September 30, 2006. Included in other expenses for the nine monthsended September 30, 2007 is a $1.7 million termination fee that will beincurred due to our decision to terminate our primary office lease in NewYork.  See Note 9 to the CondensedConsolidated Financial Statements for further discussion on the leasetermination.  The remaining increase wasprimarily due to an increase in irrecoverable Value Added Tax related toincreased purchases for communications and market data in Europe and licensefees to third-party software vendors.

 

*Contract Costs*

 

Forthe nine months ended September 30, 2006, contract costs consistedprimarily of costs incurred upon completion of a long-term contract pursuant towhich we developed an online foreign exchange currency trading system andcustomized it for a customer.   For thenine months ended September 30, 2007, contract costs represent additionalcosts incurred from the additional work provided to the customer on a time andmaterial basis.

 

*Provisionfor Income Taxes*

* *

Our provision for incometaxes totaled $45.8 million for the nine months ended September 30, 2007compared to $33.1 million for the nine months ended September 30, 2006.Our effective tax rate was approximately 40% for the nine months ended September 30,2007 as compared to 41% for the comparable period in 2006. The reduction in theeffective tax rate was primarily due to a decrease in state and local incometaxes and an increase in business tax credits. The reduction in state, local and foreign taxes was due, in part, tolower state tax rates and the geographic mix of our earnings.

 

34

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**QuarterlyResults of Operations**

 

Thefollowing table sets forth, by quarter, our unaudited statement of income datafor the period from October 1, 2005 to September 30, 2007. 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.

 
| ** **                           | ** ** | **September 30,  2007** | ** **   | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** **   | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** **    | **December 31,  2005** | ** ** |
|--------------------------------------|------------|------------------------------|--------------|-------------------------|------------|--------------------------|------------|-----------------------------|--------------|------------------------------|------------|-------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **                           | ** ** | **(In thousands)**           | ** **   |
| **Revenues**                         | ** ** | ** **                   | ** **   | ** **              | ** ** | ** **               | ** ** | ** **                  | ** **   | ** **                   | ** ** | ** **              | ** ** | ** **               | ** **    | ** **                  | ** ** |
| Brokerage revenues:                  |       |                         |         |                    |       |                     |       |                        |         |                         |       |                    |       |                     |          |                        |       |
| Agency commissions                   |       | $                            | 198,405      |                    | $          | 179,466                  |       | $                           | 184,525      |                         | $          |  151,890           |       | $                        |  138,961 |                        | $          |  130,134 |   | $ |  136,910 |   | $ |  104,335 |   |
| Principal transactions               |       | 46,467                       |         | 42,044                  |       | 48,377                   |       | 33,890                      |         | 34,478                       |       | 41,792                  |       | 41,060                   |          | 31,250                      |       |
| Total brokerage revenues             |       | 244,872                      |         | 221,510                 |       | 232,902                  |       | 185,780                     |         | 173,439                      |       | 171,926                 |       | 177,970                  |          | 135,585                     |       |
| Analytics and market data            |       | 4,855                        |         | 4,491                   |       | 5,326                    |       | 4,232                       |         | 4,954                        |       | 4,271                   |       | 5,194                    |          | 3,388                       |       |
| Contract revenue                     |       | 11                           |         | 204                     |       | ——             |       | 1,092                       |         | —                       |       | 5,881                   |       | —                   |          | —                      |       |
| Interest income                      |       | 2,589                        |         | 2,297                   |       | 2,102                    |       | 2,366                       |         | 2,150                        |       | 2,395                   |       | 2,233                    |          | 1,458                       |       |
| Other income (loss)                  |       | 2,416                        |         | (380                    | )          | (13                      | )          | 601                         |         | (585                         | )          | 3,093                   |       | 191                      |          | (145                        | )          |
| Total revenues                       |       | 254,743                      |         | 228,122                 |       | 240,317                  |       | 194,071                     |         | 179,958                      |       | 187,566                 |       | 185,588                  |          | 140,286                     |       |
|                                 |       |                         |         |                    |       |                     |       |                        |         |                         |       |                    |       |                     |          |                        |       |
| **Expenses**                         | ** ** | ** **                   | ** **   | ** **              | ** ** | ** **               | ** ** | ** **                  | ** **   | ** **                   | ** ** | ** **              | ** ** | ** **               | ** **    | ** **                  | ** ** |
| Compensation and employee benefits   |       | 158,845                      |         | 143,474                 |       | 151,508                  |       | 122,465                     |         | 112,543                      |       | 113,701                 |       | 116,845                  |          | 89,511                      |       |
| Communications and market data       |       | 11,329                       |         | 11,299                  |       | 10,456                   |       | 10,545                      |         | 9,799                        |       | 9,303                   |       | 7,653                    |          | 7,064                       |       |
| Travel and promotion                 |       | 9,929                        |         | 10,170                  |       | 8,836                    |       | 9,242                       |         | 7,069                        |       | 8,549                   |       | 7,531                    |          | 7,017                       |       |
| Rent and occupancy                   |       | 6,439                        |         | 5,529                   |       | 5,561                    |       | 5,511                       |         | 4,594                        |       | 4,841                   |       | 5,613                    |          | 3,447                       |       |
| Depreciation and amortization        |       | 6,747                        |         | 5,720                   |       | 5,227                    |       | 6,799                       |         | 4,338                        |       | 4,048                   |       | 3,836                    |          | 4,159                       |       |
| Professional fees                    |       | 4,459                        |         | 4,332                   |       | 3,569                    |       | 5,397                       |         | 4,391                        |       | 5,320                   |       | 4,044                    |          | 2,507                       |       |
| Clearing fees                        |       | 8,063                        |         | 6,940                   |       | 7,529                    |       | 6,312                       |         | 5,884                        |       | 6,798                   |       | 5,477                    |          | 3,858                       |       |
| Interest                             |       | 1,703                        |         | 2,002                   |       | 1,849                    |       | 2,170                       |         | 1,124                        |       | 1,772                   |       | 1,752                    |          | 1,016                       |       |
| Other expenses                       |       | 4,574                        |         | 6,909                   |       | 4,649                    |       | 4,046                       |         | 3,098                        |       | 3,843                   |       | 3,556                    |          | 1,855                       |       |
| Contract costs                       |       | 6                            |         | 127                     |       | —                   |       | 639                         |         | —                       |       | 5,180                   |       | —                   |          | —                      |       |
| Lease termination costs to affiliate |       | —                       |         | —                  |       | —                   |       | (57                         | )            | (93                          | )          | (92                     | )          | —                   |          | 1,070                       |       |
| Total expenses                       |       | 212,094                      |         | 196,502                 |       | 199,184                  |       | 173,069                     |         | 152,747                      |       | 163,263                 |       | 156,307                  |          | 121,504                     |       |
| Income before provision for taxes    |       | 42,649                       |         | 31,620                  |       | 41,133                   |       | 21,002                      |         | 27,211                       |       | 24,303                  |       | 29,281                   |          | 18,782                      |       |
|                                 |       |                         |         |                    |       |                     |       |                        |         |                         |       |                    |       |                     |          |                        |       |
| Provision for income taxes           |       | 16,746                       |         | 12,553                  |       | 16,453                   |       | 7,593                       |         | 10,621                       |       | 10,207                  |       | 12,298                   |          | 7,363                       |       |
|                                 |       |                         |         |                    |       |                     |       |                        |         |                         |       |                    |       |                     |          |                        |       |
| Net income                           |       | $                            |  25,903 |                    | $          |  19,067             |       | $                           |  24,680 |                         | $          |  13,409            |       | $                        | 16,590        |                        | $          |  14,096 |   | $ |  16,983 |   | $ |  11,419 |   |

 

35

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

 
| ** **                           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**               | ** ** | **2007**          | ** ** | **2007**           | ** ** | **2006**              | ** ** | **2006**               | ** ** | **2006**          | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **Revenues**                         | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Brokerage revenues:                  |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |                  |       |
| Agency commissions                   |       | 77.9                   | %          | 78.7              | %          | 76.8               | %          | 78.2                  | %          | 77.2                   | %          | 69.4              | %          | 73.8               | %          | 74.4                  | %          |
| Principal transactions               |       | 18.2                   |       | 18.4              |       | 20.1               |       | 17.5                  |       | 19.2                   |       | 22.3              |       | 22.1               |       | 22.3                  |       |
| Total brokerage revenues             |       | 96.1                   |       | 97.1              |       | 96.9               |       | 95.7                  |       | 96.4                   |       | 91.7              |       | 95.9               |       | 96.7                  |       |
| Analytics and market data            |       | 1.9                    |       | 2.0               |       | 2.2                |       | 2.2                   |       | 2.8                    |       | 2.3               |       | 2.8                |       | 2.4                   |       |
| Contract revenue                     |       | 0.0                    |       | 0.1               |       | —             |       | 0.6                   |       | —                 |       | 3.1               |       | —             |       | —                |       |
| Interest income                      |       | 1.0                    |       | 1.0               |       | 0.9                |       | 1.2                   |       | 1.2                    |       | 1.3               |       | 1.2                |       | 1.0                   |       |
| Other income (loss)                  |       | 0.9                    |       | (0.2              | )          | —             |       | 0.3                   |       | (0.4                   | )          | 1.6               |       | 0.1                |       | (0.1                  | )          |
| Total revenues                       |       | 100.0                  | %          | 100.0             | %          | 100.0              | %          | 100.0                 | %          | 100.0                  | %          | 100.0             | %          | 100.0              | %          | 100.0                 | %          |
| **Expenses**                         | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                           | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Compensation and employee benefits   |       | 62.4                   | %          | 62.9              | %          | 63.0               | %          | 62.5                  | %          | 62.5                   | %          | 60.6              | %          | 63.0               | %          | 63.8                  | %          |
| Communications and market data       |       | 4.4                    |       | 5.0               |       | 4.4                |       | 5.4                   |       | 5.4                    |       | 5.0               |       | 4.1                |       | 5.0                   |       |
| Travel and promotion                 |       | 3.9                    |       | 4.5               |       | 3.7                |       | 4.8                   |       | 3.9                    |       | 4.6               |       | 4.1                |       | 5.0                   |       |
| Rent and occupancy                   |       | 2.5                    |       | 2.4               |       | 2.3                |       | 2.8                   |       | 2.6                    |       | 2.6               |       | 3.0                |       | 2.5                   |       |
| Depreciation and amortization        |       | 2.6                    |       | 2.5               |       | 2.2                |       | 3.5                   |       | 2.4                    |       | 2.2               |       | 2.1                |       | 3.0                   |       |
| Professional fees                    |       | 1.8                    |       | 1.9               |       | 1.5                |       | 2.8                   |       | 2.4                    |       | 2.8               |       | 2.2                |       | 1.8                   |       |
| Clearing fees                        |       | 3.2                    |       | 3.0               |       | 3.1                |       | 3.3                   |       | 3.3                    |       | 3.6               |       | 3.0                |       | 2.8                   |       |
| Interest                             |       | 0.7                    |       | 0.9               |       | 0.8                |       | 1.1                   |       | 0.6                    |       | 0.9               |       | 0.9                |       | 0.7                   |       |
| Other expenses                       |       | 1.8                    |       | 3.1               |       | 1.9                |       | 2.1                   |       | 1.7                    |       | 2.0               |       | 1.9                |       | 1.3                   |       |
| Contract costs                       |       | —                 |       | 0.1               |       | —             |       | 0.3                   |       | —                 |       | 2.8               |       | —             |       | —                |       |
|                                 |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |                  |       |
| Lease termination costs to affiliate |       | —                 |       | —            |       | —             |       | —                |       | (0.1                   | )          | —            |       | —             |       | 0.8                   |       |
| Total expenses                       |       | 83.3                   | %          | 86.1              | %          |               | %          | 89.2                  | %          | 84.7                   | %          | 87.1              | %          | 84.3               | %          | 86.7                  | %          |
|                                 |       |                   |       |              |       |               |       |                  |       |                   |       |              |       |               |       |                  |       |
| Income before provision for taxes    |       | 16.7                   |       | 13.9              |       | 17.1               |       | 10.8                  |       | 15.3                   |       | 12.9              |       | 15.7               |       | 13.3                  |       |
| Provision for income taxes           |       | 6.6                    |       | 5.5               |       | 6.8                |       | 3.9                   |       | 5.9                    |       | 5.4               |       | 6.6                |       | 5.2                   |       |
| Net income                           |       | 10.2                   | %          | 8.4               | %          | 10.3               | %          | 6.9                   | %          | 9.4                    | %          | 7.5               | %          | 9.1                | %          | 8.1                   | %          |

 

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

 
| ** **               | ** ** | **September 30,  2007** | ** **    | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** **    | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** **    | **December 31,  2005** | ** ** |
|--------------------------|------------|------------------------------|---------------|-------------------------|------------|--------------------------|------------|-----------------------------|---------------|------------------------------|------------|-------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **               | ** ** | **(in thousands)**           | ** **    |
| **Brokerage Revenues:**  | ** ** | ** **                   | ** **    | ** **              | ** ** | ** **               | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **              | ** ** | ** **               | ** **    | ** **                  | ** ** |
| Credit                   |       | $                            |  87,845  |                    | $          |  72,436             |       | $                           |  84,811  |                         | $          |  61,032            |       | $                        |  60,654  |                        | $          |  59,838 |   | $ |  71,273 |   | $ |  55,443 |   |
| Financial                |       | 49,298                       |          | 45,865                  |       | 45,001                   |       | 39,232                      |          | 38,605                       |       | 38,942                  |       | 39,488                   |          | 29,213                      |       |
| Equity                   |       | 59,155                       |          | 53,284                  |       | 56,383                   |       | 44,940                      |          | 41,426                       |       | 46,109                  |       | 41,459                   |          | 29,931                      |       |
| Commodity                |       | 48,574                       |          | 49,925                  |       | 46,707                   |       | 40,576                      |          | 32,754                       |       | 27,037                  |       | 25,750                   |          | 20,998                      |       |
| Total brokerage revenues |       | $                            |  244,872 |                    | $          |  221,510            |       | $                           |  232,902 |                         | $          |  185,780           |       | $                        |  173,439 |                        | $          |  171,926 |   | $ |  177,970 |   | $ |  135,585 |   |
| **Brokerage Revenues:**  | ** ** | ** **                   | ** **    | ** **              | ** ** | ** **               | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **              | ** ** | ** **               | ** **    | ** **                  | ** ** |
| Credit                   |       | 35.9                         | %             | 32.7                    | %          | 36.4                     | %          | 32.9                        | %             | 35.0                         | %          | 34.8                    | %          | 40.0                     | %             | 40.9                        | %          |
| Financial                |       | 20.1                         |          | 20.7                    |       | 19.3                     |       | 21.1                        |          | 22.2                         |       | 22.7                    |       | 22.2                     |          | 21.5                        |       |
| Equity                   |       | 24.2                         |          | 24.1                    |       | 24.2                     |       | 24.2                        |          | 23.9                         |       | 26.8                    |       | 23.3                     |          | 22.1                        |       |
| Commodity                |       | 19.8                         |          | 22.5                    |       | 20.1                     |       | 21.8                        |          | 18.9                         |       | 15.7                    |       | 14.5                     |          | 15.5                        |       |
| Total brokerage revenues |       | 100.0                        | %             | 100.0                   | %          | 100.0                    | %          | 100.0                       | %             | 100.0                        | %          | 100.0                   | %          | 100.0                    | %             | 100.0                       | %          |

 

36

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**Liquidityand Capital Resources**

** **

Netcash provided by operations increased to $74.8 million for the nine monthsended September 30, 2007, compared with $32.8 million used for operationsfor the nine months ended September 30, 2006. The improvement is primarilyrelated to our increased net income and the increase in certain non-cash itemssuch as deferred compensation expense and the provision for deferredtaxes.  Additionally, the increase ispartially due to the improvement in certain working capital items such as otherliabilities and the net receivable/payables to brokers, dealers and clearingorganizations, which was partially offset by an increase in accrued commissionsreceivable.  The increase in accruedcommissions receivable balance is related to an increase in agency commissionrevenue, which increased by approximately 39% for the nine months ended September 30,2007 as compared to the same period in the prior year.  In addition, there was no change in theaverage number of days to collect receivables over the same period from theprior year.

 

Netcash used in investing activities for the nine months ended September 30,2007 was $26.9 million compared to $15.7 million used in the nine months ended September 30,2006. The increase in cash used for investing activities was primarily due toan increase in payments on foreign exchange derivative contracts and cash usedfor the acquisition of Century Chartering (U.K.) Limited.  Additionally, the increase in cash used ininvesting activities was due to increased capital expenditure resulting from anincrease in the purchase of computer equipment, leasehold improvements,communication equipment and our continued investment in the development oftrading systems and other software for internal use.

 

Netcash used in financing activities for the nine months ended September 30,2007 was $20.5 million compared to $0.5 million provided by for the nine monthsended September 30, 2006. The increase in cash used for financingactivities was due to cash used for repurchases of common stock and higher netrepayments under our 2006 Credit Agreement, which was offset by an increase incash received from stock options exercises and tax benefits related toshare-based compensation.

 

Ourliquidity and available cash resources are in part restricted by the regulatoryrequirements of our operating subsidiaries, including GFI Securities LLC, GFISecurities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK)Brokers Ltd., GFI Group Pte Ltd and GFI Korea Money Brokerage Limited. GFISecurities LLC is subject to regulatory capital requirements under the ExchangeAct and the Commodity Exchange Act. GFI Securities Limited and GFI BrokersLimited are subject to the regulated capital requirements of the FSA. GFI (HK)Securities LLC is subject to the regulated capital requirements of theSecurities and Futures Commission in Hong Kong. GFI (HK) Brokers Ltd. issubject to regulatory compliance requirements under the Monetary Authority ofHong Kong. GFI Group PTE Ltd. is subject to the regulatory compliancerequirements with the Monetary Authority of Singapore. GFI Korea Money BrokerageLimited is subject to the regulated capital requirements of the Ministry ofFinance and Economy of South Korea. At September 30, 2007, all of ourregulated subsidiaries were in compliance with their respective regulatorycapital requirements. In addition to these regulatory capital requirements, ourliquidity may be impacted by the amount of capital that we maintain in clearingaccounts and with exchanges to support our principal transactions business. SeeNote 12 to our Condensed Consolidated Financial Statements for a furtherdiscussion of these regulatory requirements.

 

InJune 2007, we signed a new lease which will serve as our primary U.S.office space.  The new office space is inits early stages of build out.  Weanticipate that the aggregate cost of the build out of the new office space andrelocation costs will be approximately $30.0 million of which $1.3 million waspaid through September 30, 2007.  Inaddition, as of September 30, 2007, we had purchase commitments related tothis build out of approximately $2.7 million which is expected to be paidduring the fourth quarter of 2007 and is included in our ContractualObligations and Commitments below. Further, subsequent to the quarter-end, we have committed an additional$14.9 million, which is expected to be paid over the next year.

 

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

 

Webelieve that, based on current levels of operations and anticipated growth, ourcash from operations, together with cash currently available and the available borrowingsunder our 2006 Credit Agreement, will be

 

37

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sufficientto fund our operations for at least the next twelve months.  Poor financial results, unanticipatedexpenses, unanticipated acquisitions or unanticipated strategic investmentscould give rise to additional financing requirements sooner than we expect.There can be no assurance that equity or debt financing will be available whenneeded or, if available, that the financing will be on terms satisfactory to usand not dilutive to our then-current stockholders.

 

38

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**ContractualObligations and Commitments**

 

The following tablesummarizes certain of our contractual obligations as of September 30,2007:

 
| ** **                  | ** ** | ** **         | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Total**          | ** ** | **Less than  1 year**      | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                  | ** ** | **(in thousands)** | ** ** |
| **Contractual Obligations** |       |               |       |                       |       |   |   |   |   |   |   |
| Operating Leases(1)         |       | $                  | 140,444    |                       | $          | 8,847 |   | $ | 21,331 |   | $ | 21,057 |   | $ | 89,209 |   |
| Notes Payable (2)           |       | 59,300             |       | 59,300                     |       | — |   | — |   | — |   |
| Purchase Obligations(3)     |       | 18,476             |       | 15,955                     |       | 2,521 |   | — |   | — |   |
| **Total**                   |       | $                  | 218,220    |                       | $          | 84,102 |   | $ | 23,852 |   | $ | 21,057 |   | $ | 89,209 |   |

 

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(1)                                  Amountslisted under Operating Leases include the future minimum rental commitmentsrelating to a twenty-year lease that the Company entered into for its currentprimary U.S. office space in June 2007. At September 30, 2007, thetotal minimum rental commitments under this lease total $93,775, with $5,754due within one to three years, $8,070 due within three to five years and$79,951 due in more than five years. Additionally, amounts listed under Operating Leases include $1,684 to bepaid in June 2008 to terminate certain leases for office space in NewYork.  See Note 9 to our CondensedConsolidated Financial Statements for further discussion.

 

(2)                                  Amountlisted under Notes Payable represents outstanding borrowings under our CreditFacility and vary from the notes payable reflected in our financial statementsbecause our financial statements reflect the total debt net of unamortized loanfees.   See Note 5 to the CondensedConsolidated Financial Statements for further information.

 

(3)                                  Amountslisted under Purchase Obligations include agreements for quotes with variousinformation service providers. Additionally, it includes purchase commitmentsof $2,890 for capital expenditures relating to the purchase of certain softwarein Europe and office build-outs in the U.S. and Europe.  See Note 9 to our Condensed ConsolidatedFinancial Statements for further discussion.

 

Asdisclosed in Note 2 of the Condensed Consolidated Financial Statements, we haveunrecognized tax benefits of approximately $7.7 million (net of the federalbenefit on state issues) after recognizing the impact of the adoption of FIN48.  Due to the uncertainty of theamounts to be ultimately paid as well as the timing of such payments, all FIN48 liabilities which have not been paid have been excluded from the ContractualObligations and Commitments table.

 

**Off-BalanceSheet Arrangements**

** **

TheCompany did not have any off-balance sheet arrangements at September 30,2007.

 

**CriticalAccounting Policies and Estimates**

** **

Wehave disclosed in Note 2 to our condensed consolidated financialstatements and in “Item 7—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in our 2006 Form 10-Kthose accounting policies that we consider to be significant in determining ourresults of operations and financial condition. There have been no materialchanges to those policies that we consider to be significant since our 2006 Form 10-K.The accounting principles utilized by us in preparing our CondensedConsolidated

 

39

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FinancialStatements conform in all material respects to generally accepted accountingprinciples in the United States of America.

 

**RecentAccounting Pronouncements**

** **

EffectiveJanuary 1, 2007, we adopted Financial Accounting Standards Board InterpretationNo. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) aninterpretation of SFAS 109.  Uponadoption, we recognized a $4.4 million increase to the accrual for uncertaintax positions. This increase was accounted for as an adjustment to thebeginning balance of retained earnings on the Condensed Consolidated Statementof Financial Condition. After recognizing the impact of the adoption of FIN 48,the total unrecognized tax benefits (net of the federal benefit on state taxpositions) were approximately $7.7 million, all of which could affect theeffective income tax rate in any future periods.

 

In aforeign jurisdiction, we are in discussion with tax authorities regardingwhether certain compensation expenses were deductible by us in prioryears.  A portion of the compensationpayment is held by a trustee and we may request but not compel the trustee touse the money to offset the cost to us of the potential tax liability, if any,arising from the disallowance of the deduction.

 

We aresubject to U.S. federal income tax, foreign income tax as well as state incometax in the states in which we have significant business operations.  We have substantially concluded all U.S.federal income tax matters for years through 2004, state and local tax matters through2000 and foreign income tax matters through 2002. We recognize interest andpenalties related to income tax matters in interest expense and other expenserespectively. As of June 30, 2007, there have been no material changes tothe accrual for uncertain tax positions.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue and requires enhanced disclosures about fair value measurements.  SFAS 157 requires companies to disclose thefair value of its financial instruments according to a fair value hierarchy, asdefined.  Additionally, companies arerequired to provide enhanced disclosure for certain financial instrumentswithin the hierarchy, including a reconciliation of the beginning and endingbalances separately for each major category of assets and liabilities.  SFAS No. 157 is effective for financialstatements for fiscal years beginning after November 15, 2007.  We are currently evaluating the impact ofadopting SFAS No. 157 on our consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115 (“SFAS 159”)*. SFAS No. 159 provides a “Fair Value Option” under which a companymay irrevocably elect fair value as the initial and subsequent measurementattribute for certain financial assets and liabilities. This Fair Value Optionwill be available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur. SFAS No. 159 is effectivefor financial statements for fiscal years beginning after November 15,2007.  We are currently evaluating theimpact of adopting SFAS No. 159 on our consolidated financial statements.

 

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

** **

Ourquantitative and qualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2006 Form 10-K.Except as described below in this Form 10-Q, there have been no materialchanges to those market risks during the nine months ended September 30,2007.

 

**ForeignCurrency Exposure Risk**

** **

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our risk managementpolicy during the nine months ended September 30, 2007.

 

40

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Whileour international results of operations, as measured in U.S. dollars, aresubject to foreign exchange rate fluctuations, we do not consider the relatedrisk to be material to our results of operations. If the Euro strengthened by10% against the U.S. Dollar and the U.S. Dollar strengthened by 10% against theBritish Pound, the net impact to our net income would have been a reduction ofapproximately $1.6 million.

 

**ITEM 4.**                    CONTROLS ANDPROCEDURES

** **

Asof the end of the period covered by this report, the Company’s managementcarried out an evaluation, under the supervision and with the participation ofour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures. Based on the foregoing, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures (asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) were effective as of the end of the periodcovered by this Form 10-Q.

 

Inaddition, the Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the Company’s internalcontrols over financial reporting (as defined in Rule 13a-15(f) ofthe Exchange Act) and determined that there have been no changes in ourinternal controls over financial reporting during the most recent fiscalquarter of 2007 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

 

**PART II—OTHERINFORMATION**

** **

**ITEM 1.**                    LEGALPROCEEDINGS

** **

Inthe normal course of business, we are and have been party to, or otherwiseinvolved in, litigations, claims and arbitrations that involve claims forsubstantial amounts. These proceedings have generally involved eithercompetitor claims in connection with new employee hires, or claims from formeremployees in connection with the termination of their employment from us. Webelieve proceedings of these types are common in the inter-dealer brokerageindustry due to its highly competitive nature. There is also potential forclient claims alleging the occurrence of errors in the execution of brokeragetransactions. We are also currently and will, in the future, be involved, inexaminations, investigations or proceedings by government agencies andself-regulatory organizations. These examinations or investigations couldresult in substantial fines or administrative proceedings that could result incensure, the issuance of cease and desist orders, the suspension or expulsionof a broker dealer and its affiliated persons, officers or employees or othersimilar consequences.

 

Althoughthe ultimate outcome of these proceedings cannot be ascertained at this time,after consultation with counsel, we believe that damages, if any, resultingfrom such proceedings will not, in the aggregate, have a material adverseeffect on our financial condition, but may be material to our operating resultsfor any particular period or may affect our reputation.

 

**ITEM 1A.**           RISK FACTORS

** **

Therehave been no material changes in our risk factors from those disclosed in the2006 Form 10-K. See “Risk Factors” in Part I, Item 1A of our 2006 Form 10-K.

 

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

** **

Thetable below sets forth the information with respect to purchases made by theCompany of its common stock during the quarterly period ended September 30,2007.

 

41

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**IssuerPurchases of Equity Securities**

(dollars in millions, except per share amounts)

 
| **Period**                   | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** **  | **Total Number of  Shares Purchased  As Part of Publicly  Announced Plans  or Programs (C)** | ** ** | **Approximate   Number of Shares  that May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|-------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **July**                     |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| Stock Repurchase Program (a) |       | N/A                                     |       | N/A                                     |        | N/A                                                                                                              |       | 906,709                                                                                                     |       |
| Employee Transactions (b)    |       | 4,556                                   |       | $                                       |  74.52 |                                                                                                             | N/A        |                                                                                                        | N/A        |   |
|                         |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| **August**                   |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| Stock Repurchase Program (a) |       | 100,000                                 |       | $                                       |  70.73 |                                                                                                             | 100,000    |                                                                                                        | 960,977    |   |
| Employee Transactions (b)    |       | 5,550                                   |       | $                                       |  74.00 |                                                                                                             | N/A        |                                                                                                        | N/A        |   |
|                         |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| **September**                |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| Stock Repurchase Program (a) |       | N/A                                     |       | N/A                                     |        | N/A                                                                                                              |       | 1,117,650                                                                                                   |       |
| Employee Transactions (b)    |       | 21,871                                  |       | $                                       |  84.62 |                                                                                                             | N/A        |                                                                                                        | N/A        |   |
|                         |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| **Total**                    |       |                                    |       |                                    |        |                                                                                                             |       |                                                                                                        |       |
| Stock Repurchase Program (a) |       | 100,000                                 |       | $                                       |  70.76 |                                                                                                             | 100,000    |                                                                                                        | 1,117,650  |   |
| Employee Transactions (b)    |       | 31,977                                  |       | $                                       |  81.34 |                                                                                                             | N/A        |                                                                                                        | N/A        |   |

 

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(a) In August 2007, the Board authorized the Company to implement astock repurchase program to repurchase alimited number of shares of the Company’s common stock on the open market.Under the repurchase plan, the Board authorized the Company to repurchaseshares of common shares on the open market in an amount not to exceed, duringany calendar year, the number of shares issued upon the exercise of stockoptions plus the number of shares underlying grants of RSUs that are granted orwhich management reasonably anticipates will be granted in such calendar year.  Any repurchases are also subject tocompliance with certain covenants under the 2006 Credit Agreement.

 

(b)  Under our 2004 Equity Incentive Plan, weallow employees to elect to have us withhold shares of common stock to satisfyminimum statutory tax withholding obligations arising on the vesting andsettlement of restricted stock units. When we withhold these shares, we arerequired to remit to the appropriate taxing authorities the market price of theshares withheld, which could be deemed a purchase of the shares of common stockby us on the date of withholding. During the quarter ended September 30,2007, we withheld shares of common stock to satisfy tax withholdingobligations.

 

**ITEM 6.**                    EXHIBITS

** **

Exhibits:

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

 

42

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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 ended September 30,2007 to be signed on its behalf by the undersigned, thereunto duly authorized,on the 8th day of November, 2007

 

 
|        | GFI  GROUP INC. |
|--------|----------------------|
|   |                 |
|   | By:                  | /s/  JAMES A. PEERS |
|   |                 | Name: | James  A. Peers |
|   |                 | Title: | *Chief  Financial Officer* |
|   | * *             | * * | *(principal  financial and accounting officer)* |

 

43

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**Exhibit Index**

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

 

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