**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

| **(Mark One)**                                                                                                                           | ** ** | ** **                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006**                                                                                         |
| **OR**                                                                                                                                   |
| **o**                                                                                                                                    | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **FOR THE TRANSITION PERIOD FROM                    TO** |

**CommissionFile No: 000-51103**

**GFI GROUP INC.**(Exactname 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

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

**Largeaccelerated filer **o             Acceleratedfiler o            Non-acceleratedfiler x

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

Thenumber of shares of registrant’s common stock outstanding on July 31, 2006was 28,398,359.

 

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**Tableof Contents**

| **Part I—Financial  Information** |
|---------------------------------------------|
| Item 1.                                     |   | Financial Statements |   |   |
|                                        |   | Condensed Consolidated Statements of Financial  Condition as of June 30, 2006 (unaudited) and December 31, 2005 |   | 4 |
|                                        |   | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2006 (unaudited) and June 30,  2005 (unaudited) |   | 5 |
|                                        |   | Condensed Consolidated Statements of Comprehensive  Income for the three and six months ended June 30, 2006 (unaudited) and  June 30, 2005 (unaudited) |   | 6 |
|                                        |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2006 (unaudited) and June 30, 2005  (unaudited) |   | 7 |
|                                        |   | Notes  to Condensed Consolidated Financial Statements (unaudited) |   | 8 |
| Item 2.                                     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 23 |
| Item 3.                                     |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 41 |
| Item 4.                                     |   | Controls and  Procedures |   | 41 |
| **Part II—Other Information**     |
| Item 1.                                     |   | Legal Proceedings |   | 42 |
| Item 1A.                                    |   | Risk  Factors |   | 42 |
| Item 2.                                     |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 42 |
| Item 4.                                     |   | Submission of  Matters to a Vote of Security Holders |   | 43 |
| Item 6.                                     |   | Exhibits |   | 43 |

 

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**AvailableInformation**

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

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

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

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

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

| ** **                                                                                                                                                                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                  |       |                    |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                   |       |                    | $          | 131,503                     |       |   |   | $ | 144,148 |   |   |
| Deposits with clearing organizations                                                                                                                                        |       |                    | 7,914      |                        |       |   | 7,824 |   |   |
| Accrued commissions receivable, net of allowance for  doubtful accounts                                                                                                     |       |                    | 118,713    |                        |       |   | 89,727 |   |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                               |       |                    | 370,397    |                        |       |   | 208,938 |   |   |
| Property, equipment and leasehold improvements, net                                                                                                                         |       |                    | 34,905     |                        |       |   | 31,674 |   |   |
| Software inventory, net                                                                                                                                                     |       |                    | 6,937      |                        |       |   | 5,687 |   |   |
| Goodwill                                                                                                                                                                    |       |                    | 26,713     |                        |       |   | 26,683 |   |   |
| Intangible assets, net                                                                                                                                                      |       |                    | 1,733      |                        |       |   | 2,355 |   |   |
| Other assets                                                                                                                                                                |       |                    | 65,270     |                        |       |   | 59,101 |   |   |
| TOTAL ASSETS                                                                                                                                                                |       |                    | $          | 764,085                     |       |   |   | $ | 576,137 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                              |       |                    |       |                        |       |   |   |   |   |
| LIABILITIES                                                                                                                                                                 |       |                    |       |                        |       |   |   |   |   |
| Accrued compensation                                                                                                                                                        |       |                    | $118,777   |                        |       |   | $ | 88,628 |   |   |
| Accounts payable and accrued expense                                                                                                                                        |       |                    | 34,230     |                        |       |   | 22,455 |   |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                                    |       |                    | 281,688    |                        |       |   | 165,766 |   |   |
| Notes payable, net                                                                                                                                                          |       |                    | 16,778     |                        |       |   | 31,247 |   |   |
| Other liabilities                                                                                                                                                           |       |                    | 27,436     |                        |       |   | 28,914 |   |   |
| Lease termination costs payable to affiliate                                                                                                                                |       |                    | 250        |                        |       |   | 875 |   |   |
| Total Liabilities                                                                                                                                                           |       |                    | $          | 479,159                     |       |   |   | $ | 337,885 |   |   |
| Commitments and  contingencies                                                                                                                                              |       |                    |       |                        |       |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                                   |       |                    |       |                        |       |   |   |   |   |
| Preferred Stock, $0.01 par value; 5,000,000 shares  authorized and none outstanding at June 30, 2006 and December 31,  2005                                       |       |                    | —     |                        |       |   | — |   |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized; 28,371,075 and 27,904,568 shares outstanding at June 30,  2006 and December 31, 2005, respectively |       |                    | 284        |                        |       |   | 279 |   |   |
| Additional paid in capital                                                                                                                                                  |       |                    | 211,310    |                        |       |   | 195,360 |   |   |
| Retained earnings                                                                                                                                                           |       |                    | 75,868     |                        |       |   | 44,790 |   |   |
| Accumulated other comprehensive loss                                                                                                                                        |       |                    | (2,536     | )                           |       |   | (2,177 | ) |   |
| Total Stockholders’ Equity                                                                                                                                             |       |                    | 284,926    |                        |       |   | 238,252 |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                            |       |                    | $          | 764,085                     |       |   |   | $ | 576,137 |   |   |

 

See notes to condensed consolidated financial statements

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

| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Brokerage revenues:                          |       |                                                |       |                                              |       |   |   |   |   |
| Agency commissions                           |       | $                                                   | 130,134    |                                              | $          | 100,718 |   | $ | 267,044 |   | $ | 188,689 |   |
| Principal transactions                       |       | 41,792                                              |       | 27,635                                            |       | 82,852 |   | 55,747 |   |
| Total brokerage revenues                     |       | 171,926                                             |       | 128,353                                           |       | 349,896 |   | 244,436 |   |
| Analytics and market data                    |       | 4,271                                               |       | 4,711                                             |       | 9,465 |   | 10,113 |   |
| Long-term contract revenue                   |       | 5,881                                               |       | —                                            |       | 5,881 |   | — |   |
| Interest income                              |       | 2,395                                               |       | 883                                               |       | 4,628 |   | 1,943 |   |
| Other income                                 |       | 3,093                                               |       | 6,376                                             |       | 3,284 |   | 6,125 |   |
| Total Revenues                               |       | 187,566                                             |       | 140,323                                           |       | 373,154 |   | 262,617 |   |
| EXPENSES:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and employee benefits           |       | 113,701                                             |       | 80,896                                            |       | 230,546 |   | 156,373 |   |
| Communications and quotes                    |       | 9,303                                               |       | 6,341                                             |       | 16,956 |   | 12,140 |   |
| Travel and promotion                         |       | 8,549                                               |       | 6,041                                             |       | 16,080 |   | 11,802 |   |
| Rent and occupancy                           |       | 4,841                                               |       | 3,913                                             |       | 10,454 |   | 7,341 |   |
| Depreciation and amortization                |       | 4,048                                               |       | 3,599                                             |       | 7,884 |   | 7,691 |   |
| Professional fees                            |       | 5,320                                               |       | 2,927                                             |       | 9,364 |   | 5,396 |   |
| Clearing fees                                |       | 6,798                                               |       | 2,974                                             |       | 12,275 |   | 6,345 |   |
| Interest                                     |       | 1,772                                               |       | 597                                               |       | 3,524 |   | 1,841 |   |
| Other expenses                               |       | 3,843                                               |       | 5,809                                             |       | 7,399 |   | 9,818 |   |
| Cost of long-term contract                   |       | 5,180                                               |       | —                                            |       | 5,180 |   | — |   |
| Lease termination costs to affiliate         |       | (92                                                 | )          | (2,266                                            | )          | (92 | ) | (2,266 | ) |
| Total Expenses                               |       | 163,263                                             |       | 110,831                                           |       | 319,570 |   | 216,481 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES     |       | 24,303                                              |       | 29,492                                            |       | 53,584 |   | 46,136 |   |
| PROVISION FOR INCOME TAXES                   |       | 10,207                                              |       | 12,810                                            |       | 22,505 |   | 20,300 |   |
| NET INCOME                                   |       | $                                                   | 14,096     |                                              | $          | 16,682 |   | $ | 31,079 |   | $ | 25,836 |   |
| EARNINGS PER  SHARE                          |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                        |       | $                                                   | 0.50       |                                              | $          | 0.62 |   | $ | 1.10 |   | $ | 1.00 |   |
| Diluted                                      |       | $                                                   | 0.48       |                                              | $          | 0.60 |   | $ | 1.07 |   | $ | 0.96 |   |
| WEIGHTED AVERAGE  SHARES OUSTANDING BASIC    |       |                                                |       |                                              |       |   |   |   |   |
| Class A common stock                    |       | —                                              |       | —                                            |       | — |   | 976,881 |   |
| Common stock                                 |       | 28,258,827                                          |       | 26,791,156                                        |       | 28,150,812 |   | 24,021,564 |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING DILUTED |       | 29,130,663                                          |       | 27,726,612                                        |       | 29,044,558 |   | 27,001,747 |   |

 

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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET INCOME                                                                   |       | $                                               | 14,096     |                                          | $          | 16,682 |   | $ | 31,079 |   | $ | 25,836 |   |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                          |       |                                            |       |                                          |       |   |   |   |   |
| Unrealized gain/(loss) on foreign exchange  derivative contracts, net of tax |       | (120                                            | )          | 4,096                                         |       | (514 | ) | 2,858 |   |
| Foreign currency translation adjustment, net of tax                          |       | 92                                              |       | (88                                           | )          | 155 |   | (182 | ) |
| COMPREHENSIVE  INCOME                                                        |       | $                                               | 14,068     |                                          | $          | 20,690 |   | $ | 30,720 |   | $ | 28,512 |   |

 

See notes to condensed consolidated financial statements

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

| ** **                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                         |       |                                              |       |   |   |
| Net income                                                                     |       | $                                                 | 31,079     |   | $ | 25,836 |   |
| Adjustments  to reconcile net income to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                  |       | 7,884                                             |       | 7,691 |   |
| Amortization of loan fees                                                      |       | 128                                               |       | 222 |   |
| Provision for allowance for doubtful accounts                                  |       | 433                                               |       | 122 |   |
| Deferred compensation                                                          |       | 5,322                                             |       | 1,697 |   |
| Benefit from deferred taxes                                                    |       | (1,944                                            | )          | (673 | ) |
| Loss on Fenics purchase obligation                                             |       | —                                            |       | 2,030 |   |
| Loss (gain) on foreign exchange derivative contracts                           |       | 2,763                                             |       | (8,005 | ) |
| Lease termination cost to affiliate                                            |       | (92                                               | )          | (2,266 | ) |
| (Increase)  decrease in operating assets:                                      |       |                                              |       |   |   |
| Deposits with clearing organizations                                           |       | (90                                               | )          | (462 | ) |
| Accrued commissions receivable                                                 |       | (29,419                                           | )          | (28,441 | ) |
| Receivables from brokers, dealers and clearing  organizations                  |       | (161,459                                          | )          | 103,615 |   |
| Software inventory                                                             |       | (1,476                                            | )          | (1,307 | ) |
| Other assets                                                                   |       | (2,895                                            | )          | (7,982 | ) |
| Increase  (decrease) in operating liabilities:                                 |       |                                              |       |   |   |
| Accrued compensation                                                           |       | 30,149                                            |       | 16,598 |   |
| Accounts payable and accrued expenses                                          |       | 5,247                                             |       | 542 |   |
| Payables to brokers, dealers and clearing  organizations                       |       | 115,921                                           |       | (118,442 | ) |
| Income taxes payable—current                                              |       | 3,781                                             |       | 1,827 |   |
| Other liabilities                                                              |       | (5,699                                            | )          | 2,001 |   |
| Cash paid to affiliate for lease termination                                   |       | (462                                              | )          | (358 | ) |
| Cash used in operating activities                                              |       | (829                                              | )          | (5,755 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                         |       |                                              |       |   |   |
| Cash used for acquisition of minority interest in  Fencis Limited              |       | (117                                              | )          | (4,200 | ) |
| Purchase of property, equipment and leasehold  improvements                    |       | (10,267                                           | )          | (3,132 | ) |
| (Payments on)/proceeds from foreign exchange  derivative contracts             |       | (3,045                                            | )          | 2,182 |   |
| Cash used in investing activities                                              |       | (13,429                                           | )          | (5,150 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                         |       |                                              |       |   |   |
| Repayment of notes payable                                                     |       | (40,000                                           | )          | (54,500 | ) |
| Proceeds from notes payable                                                    |       | 25,000                                            |       | 4,000 |   |
| Repayment of loan notes payable                                                |       | —                                            |       | (9,250 | ) |
| Issuance of common stock                                                       |       | —                                            |       | 73,735 |   |
| Payment of loan fees                                                           |       | (575                                              | )          | — |   |
| Proceeds from exercise of stock options                                        |       | 4,841                                             |       | 1,573 |   |
| Cash paid for taxes on vested restricted stock units                           |       | (1,632                                            | )          | — |   |
| Tax benefit from stock option exercises                                        |       | 7,435                                             |       | — |   |
| Bank overdraft                                                                 |       | 6,389                                             |       | — |   |
| Cash provided by financing activities                                          |       | 1,458                                             |       | 15,558 |   |
| Effects of foreign currency translation adjustment                             |       | 155                                               |       | (181 | ) |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               |       | (12,645                                           | )          | 4,472 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 |       | 144,148                                           |       | 105,161 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                       |       | $                                                 | 131,503    |   | $ | 109,633 |   |
| SUPPLEMENTAL  DISLCOSURE:                                                      |       |                                              |       |   |   |
| Interest paid                                                                  |       | $                                                 | 3,559      |   | $ | 2,031 |   |
| Income taxes paid,  net of refunds                                             |       | $                                                 | 5,909      |   | $ | 18,613 |   |

 

 

See notes to condensed consolidated financial statements

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

**1. ORGANIZATION ANDBUSINESS**

The condensed consolidatedfinancial statements include the accounts of GFI Group Inc. and itssubsidiaries (collectively the “Company”). The Company, through its sole wholly-ownedsubsidiary GFInet inc. (“GFInet”), provides brokerage services, market data andanalytics software products to institutional clients in markets for a range ofcredit, financial, equity and commodity instruments. The Company complementsits brokerage capabilities with value-added services, such as data andanalytics products for decision support, which it licenses to the financialservices industry and other corporations. The Company’s principal operatingsubsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI Group LLC, GFISecurities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI Group PTELtd. and Fenics Limited and its subsidiaries (“Fenics”). As of June 30,2006, Jersey Partners, Inc. (“JPI”) owned approximately 45% of the Company’soutstanding common shares. The Company’s chief executive officer, MichaelGooch, is a controlling shareholder of JPI.

**2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

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

All material intercompany transactions and balanceshave been eliminated.

The condensed consolidated financial statements shouldbe read in conjunction with the Company’s consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005 (the “2005 Form 10-K”).The condensed consolidated financial statements reflect all adjustments thatare, in the opinion of management, necessary for the fair statement of theresults for the interim period. The results of operations for interim periodsare not necessarily indicative of results for the entire year.

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

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

***Accrued CommissionsReceivable******—Accrued***commissionsreceivable represents amounts due from brokers, dealers, banks and otherfinancial and nonfinancial institutions for the execution of securities,commodities, foreign exchange and derivative brokerage transactions. Accruedcommissions receivable are presented net of allowance for doubtful accounts ofapproximately $3,319 and $3,202 as of June 30, 2006 

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

and December 31,2005, respectively. The allowance is based on management’s estimate and is reviewedon a periodic basis based on the aging of outstanding receivables andcounterparty exposure.

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

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

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

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

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

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

***Goodwill andIntangible Assets***—In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142 *Goodwill andIntangible Assets* (“SFAS 142”), goodwill and intangible assetswith indefinite lives are no longer amortized, but instead are tested forimpairment annually or more frequently if circumstances indicate impairment mayhave occurred. The Company has selected January 1st asthe date to perform the annual impairment test. Intangible assets with definitelives are amortized on a straight-line basis over their estimated useful lives.

***DerivativeFinancial Instruments******—The***Companyuses foreign exchange derivative contracts to reduce the effects offluctuations in certain receivables and payables denominated in foreigncurrencies. Certain of 

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

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

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

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

***Long-TermConstruction-Type Contract***—The Company was a partyto a long-term construction-type contract pursuant to which the Companydeveloped an online currency trading system and customized it for a customer. Thecontract was accounted for using the completed-contract method in accordancewith the Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts,* and with theapplicable guidance provided by the Statement of Position No. 81-1,*Accounting for Performance of Construction Type andCertain Production Type Contracts*(“SOP 81-1”)*.*Under the completed contract method, therevenues and expenses are deferred and netted on the balance sheet until suchtime as the project is substantially complete. SOP 81-1 states that acontract is considered substantially complete when only inconsequential actionsremain incomplete, the remaining costs in comparison to the total costs to beincurred are immaterial and the potential risk is insignificant in amount. Asof June 30, 2006, the contract is considered to be substantially completein consideration of the above-mentioned requirements. The contract revenues andexpenses of $5,881 and $5,180, respectively, have been recognized during thesecond quarter of 2006.

***Share-BasedCompensation******—The***Company’sshare-based compensation consists of stock options and restricted stock units(the “RSUs”). The Company adopted SFAS No. 123(R), *Share-Based Payment*(“SFAS 123(R)”) duringthe first quarter of 2006, using the modified prospective approach. SFAS 123(R) revisedthe fair value-based method of accounting for share-based payment liabilities,forfeitures and modifications of stock-based awards and clarified guidance inseveral areas, including measuring fair value, classifying an award as equityor as a liability and attributing compensation cost to service periods. Additionally,under SFAS 123(R), actual tax benefits recognized in excess of tax benefitspreviously established upon grant are reported as a financing cash flow, asopposed to operating cash flows. Upon adoption, the Company recognized a $142($90 after-tax) gain to record forfeitures at the date 

10

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

of grant. This wasreported as an offset to the compensation and employee benefits expense lineitem in the Consolidated Statements of Income. This adjustment was notreflected as a cumulative effect adjustment because the amount was not materialto the Company.

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

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

| ** **                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| Net income—as  reported                                                             |       |                             | $          | 16,682                         |       |   |   | $ | 25,836 |   |   |
| Add:                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Effect of stock-based  employee compensation included in reported net income, net of tax |       |                             | 336        |                           |       |   | 1,018 |   |   |
| Deduct:                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Total stock-based  employee compensation determined under fair value method, net of tax  |       |                             | (336       | )                              |       |   | (1,147 | ) |   |
| Net income—pro  forma                                                               |       |                             | $          | 16,682                         |       |   |   | $ | 25,707 |   |   |
| Basic earnings  per share—as reported                                               |       |                             | $          | 0.62                           |       |   |   | $ | 1.00 |   |   |
| Basic earnings  per share—pro forma                                                 |       |                             | $          | 0.62                           |       |   |   | $ | 0.99 |   |   |
| Diluted earnings  per share—as reported                                             |       |                             | $          | 0.60                           |       |   |   | $ | 0.96 |   |   |
| Diluted earnings per  share—pro forma                                               |       |                             | $          | 0.60                           |       |   |   | $ | 0.95 |   |   |

 

***Recent Accounting Pronouncement******—In***June 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—anInterpretation of FASB No. 109*(“FIN 48”). FIN 48 clarifies theaccounting for uncertain tax positions in accordance with SFAS No. 109, *Accounting for Income Taxes*. The Companywill be required to recognize in its financial statements the largest taxbenefit of a tax position that is “more-likely-than-not” to be sustained onaudit based solely on the technical merits of the position as of the reportingdate. FIN 48 also provides guidance on new disclosure requirements, reportingand accrual of interest and penalties, accounting in interim periods andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. Only tax positions that meet the “more-likely-than-not” threshold at thatdate may be recognized. The cumulative effect of initially applying FIN 48 willbe recognized as a change in accounting principle as of the end of the 

11

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

period in which FIN48 is adopted. The Company is currently evaluating the impact of adopting FIN48 on its financial statements.

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

| ** **                                                     | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Receivables from  brokers, dealers and clearing organizations: |       |                        |       |                            |       |   |   |   |   |
| Contract value of fails to deliver                             |       |                        | $          | 303,121                         |       |   |   | $ | 161,069 |   |   |
| Balance receivable from clearing organizations                 |       |                        | 67,276     |                            |       |   | 47,869 |   |   |
| Total                                                          |       |                        | $370,397   |                            |       |   | $ | 208,938 |   |   |
| Payables to  brokers, dealers and clearing organizations:      |       |                        |       |                            |       |   |   |   |   |
| Contract value of fails to receive                             |       |                        | $          | 268,308                         |       |   |   | $ | 148,971 |   |   |
| Balance payable to clearing organizations                      |       |                        | 505        |                            |       |   | 466 |   |   |
| Payable to financial institutions                              |       |                        | 12,875     |                            |       |   | 16,329 |   |   |
| Total                                                          |       |                        | $          | 281,688                         |       |   |   | $ | 165,766 |   |   |

 

**4. INTANGIBLE ASSETS**

Intangibleassets consisted of the following:

| ** **                     | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Gross intangible  assets       |       |                        |       |                            |       |   |   |   |   |
| Customer base/relationships    |       |                        | $          | 2,490                           |       |   |   | $ | 2,490 |   |   |
| Trade name                     |       |                        | 1,750      |                            |       |   | 1,750 |   |   |
| Core technology                |       |                        | 3,230      |                            |       |   | 3,230 |   |   |
| Covenants not to compete       |       |                        | 550        |                            |       |   | 550 |   |   |
| Patent                         |       |                        | 34         |                            |       |   | 34 |   |   |
| Total gross intangible  assets |       |                        | 8,054      |                            |       |   | 8,054 |   |   |
| Accumulated amortization       |       |                        | 6,321      |                            |       |   | 5,699 |   |   |
| Net intangible assets          |       |                        | $          | 1,733                           |       |   |   | $ | 2,355 |   |   |

 

Amortization was $261 and $203 for the three monthsended June 30, 2006 and 2005, respectively, and $622 and $404 for the sixmonths ended June 30, 2006 and 2005, respectively.

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

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

| 2006 (remaining  six months) |   | $   | 411    |   |
|------------------------------|--------|-----|--------|--------|
| 2007                         |   | 361 |   |
| 2008                         |   | 260 |   |
| 2009                         |   | 260 |   |
| 2010                         |   | 255 |   |
| Total                        |   | $   | 1,547  |   |

 

**5. NOTES PAYABLE**

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

| ** **                     | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Loan Available(1)              |       |                        | $          | 135,000                         |       |   |   | $ | 80,000 |   |   |
| Loans Outstanding              |       |                        | 17,784     |                            |       |   | 31,805 |   |   |
| Letters of Credit  Outstanding |       |                        | 6,500      |                            |       |   | 6,500 |   |   |

 

----

       (1) Amounts available include up to $50,000 and $30,000 for letters ofcredit as of June 30, 2006 and December 31, 2005, respectively.

The outstanding loans boreinterest rates ranging from 3.63% to 8.25% at June 30, 2006 and 5.39% at December 31,2005. At June 30, 2006 and December 31, 2005, notes payable wererecorded net of unamortized loan fees of $1,006 and $558, respectively.

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

**6. EARNINGS PER SHARE**

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

| ** **                                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic  earnings per share**                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income  applicable to stockholders                                    |       | $                                                   | 14,096     |                                              | $          | 16,682 |   | $ | 31,079 |   | $ | 25,836 |   |
| Income allocated  to participating preferred stockholders                 |       | —                                              |       | —                                            |       | — |   | (903 | ) |
| Income available  to common stockholders                                  |       | $                                                   | 14,096     |                                              | $          | 16,682 |   | $ | 31,079 |   | $ | 24,933 |   |
| Weighted average  common shares outstanding:                              |       |                                                |       |                                              |       |   |   |   |   |
| Class A common stock                                                 |       | —                                              |       | —                                            |       | — |   | 976,881 |   |
| Common stock                                                              |       | 28,258,827                                          |       | 26,791,156                                        |       | 28,150,812 |   | 24,021,564 |   |
| Weighted average  common shares outstanding                               |       | 28,258,827                                          |       | 26,791,156                                        |       | 28,150,812 |   | 24,998,445 |   |
| Basic earnings  per share—Class A common stock and common Stock |       | $                                                   | 0.50       |                                              | $          | 0.62 |   | $ | 1.10 |   | $ | 1.00 |   |
| **Diluted  earnings per share**                                           |       |                                                |       |                                              |       |   |   |   |   |
| Net income  applicable to stockholders                                    |       | $                                                   | 14,096     |                                              | $          | 16,682 |   | $ | 31,079 |   | $ | 25,836 |   |
| Weighted average  common shares outstanding                               |       | 28,258,827                                          |       | 26,791,156                                        |       | 28,150,812 |   | 24,998,445 |   |
| Effect of  dilutive shares:                                               |       |                                                |       |                                              |       |   |   |   |   |
| Options and warrant                                                       |       | 871,836                                             |       | 935,456                                           |       | 893,746 |   | 885,416 |   |
| Convertible preferred shares                                              |       | —                                              |       | —                                            |       | — |   | 500,724 |   |
| Redeemable convertible preferred shares                                   |       | —                                              |       | —                                            |       | — |   | 617,162 |   |
| Weighted average shares outstanding and common stock  equivalents         |       | 29,130,663                                          |       | 27,726,612                                        |       | 29,044,558 |   | 27,001,747 |   |
| Diluted earnings per  share                                               |       | $                                                   | 0.48       |                                              | $          | 0.60 |   | $ | 1.07 |   | $ | 0.96 |   |

 

Outstanding options topurchase 49,724 shares were excluded from the computation of diluted earningsper share for the six months ended June 30, 2005 because their effectwould be anti-dilutive. In addition, 17,197 and 256,870 RSUs for the threemonths ended June 30, 2006 and 2005, respectively, and 112,105 and 200,492RSUs for the six months ended June 30, 2006 and 2005, respectively, werealso excluded from the computation of diluted earnings per share because theireffect would be anti-dilutive.

**7. SHARE-BASEDCOMPENSATION**

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

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

During the second quarter of 2006, the Companymodified certain RSUs to accelerate their vesting periods. The modified RSUswere measured at the incremental fair value of the RSUs calculated on the dateof modification, in addition to the amount calculated as fair value on the dateof grant. All modified RSUs are reflected as cancellations and grants in thesummary of RSUs below.

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

| ** **                          | ** ** | **RSUs** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|-------------------------------------|------------|----------|------------|------------------------------------------------------------|------------|
| Outstanding  December 31, 2005 |       | 599,225  |       |                                                       | $          | 32.03 |   |   |
| Granted                             |       | 247,907  |       |                                                       | 54.31      |   |   |
| Vested                              |       | (103,943 | )          |                                                       | 29.69      |   |   |
| Cancelled                           |       | (35,952  | )          |                                                       | 33.24      |   |   |
| Outstanding  June 30, 2006     |       | 707,237  |       |                                                       | $          | 40.12 |   |   |

 

Theweighted average grant-date fair value of RSUs granted for the six months endedJune 30, 2006 was $54.31 per unit, compared with $23.50 per unit for thesame period in the prior year. Total compensation expense and related incometax benefits recognized in relation to RSUs is as follows:

| ** **            | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Compensation  expense |       | $                                               | 3,271      |                                          | $          | 398 |   | $ | 5,134 |   | $ | 584 |   |
| Income tax benefits   |       | 516                                             |       | 156                                           |       | 1,216 |   | 235 |   |
|                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

At June 30, 2006, total unrecognized compensationcost related to the RSUs prior to the consideration of expected forfeitures wasapproximately $22,843 and is expected to be recognized over a weighted-averageperiod of 2.26 years. The total fair value of RSUs vested during the six monthsended June 30, 2006 was $3,087. No RSUs vested during the six months endedJune 30, 2005.

As of June 30, 2006, the Company had stockoptions outstanding under the GFI Group Inc. 2002 Stock Option Plan (the “GFIGroup 2002 Plan”) and the GFInet inc. 2000 Stock Option Plan (the “GFInet 2000Plan”). No additional grants will be made under these plans. For stock optionspreviously granted or modified, the fair value was estimated on the date ofgrant or modification using the Black-Scholes option pricing model.

Thefollowing is a summary of stock option transactions during the six months endedJune 30, 2006:

| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  December 31, 2005 |       | 953,437                                |       |                                       | $          | 13.75 |   |   | 658,662 |   |   | $ | 11.88 |   |   |
| Exercised                           |       | (167,223                               | )          |                                       | 13.76      |   |   | (240,552 | ) |   | 11.79 |   |   |
| Terminated                          |       | (3,685                                 | )          |                                       | 14.49      |   |   | (526 | ) |   | 9.50 |   |   |
| Outstanding  June 30, 2006     |       | 782,529                                |       |                                       | $          | 13.75 |   |   | 417,584 |   |   | $ | 11.93 |   |   |

 

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

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

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | ** **               | ** ** | **Stock Options Exercisable**             | ** ** |
|-------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $11.88                  | ** ** |                                    | 622,103    |                     |       |                                                | 7.76       |   |   |   | $ | 11.88 |   |   |   | 450,660 |   |   |   | $ | 11.88 | ** ** |   |
|   21.00       |       |                                    | 160,426    |                     |       |                                                | 8.00       |   |   |   | 21.00 |   |   |   | 54,764 |   |   |   | 21.00 | ** ** |   |
|                         |            |                                         |            |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

| ** **              | ** ** | **Stock Options Outstanding** | ** ** | ** **               | ** ** | **Stock Options  Exercisable**            | ** ** |
|-------------------------|------------|-----------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | ** **                              | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $9.50                   |       |                                    | 277,554    |                     |       |                                                | 3.92       |   |   |   | $ | 9.50 |   |   |   | 277,554 |   |   |   | $ | 9.50 |   |   |
| 11.88                   |       |                                    | 47,659     |                     |       |                                                | 6.24       |   |   |   | 11.88 |   |   |   | 47,659 |   |   |   | 11.88 |   |   |
| 14.25                   |       |                                    | 12,723     |                     |       |                                                | 4.51       |   |   |   | 14.25 |   |   |   | 12,723 |   |   |   | 14.25 |   |   |
| 19.00                   |       |                                    | 61,523     |                     |       |                                                | 4.55       |   |   |   | 19.00 |   |   |   | 61,523 |   |   |   | 19.00 |   |   |
| 23.75                   |       |                                    | 18,125     |                     |       |                                                | 3.98       |   |   |   | 21.00 |   |   |   | 18,125 |   |   |   | 21.00 |   |   |
|                         |            |                                         |            |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

| ** **            | ** ** | **Three Months   Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                              | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Compensation  expense |       | $                                                     | 107        |                                                | $          | 158 |   | $ | 187 |   | $ | 1,113 |   |
| Income tax benefit    |       | 20                                                    |       | 65                                                  |       | 51 |   | 445 |   |
|                       |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |

 

At June 30, 2006, total unrecognized compensationcost related to unvested stock option awards prior to the consideration ofexpected forfeitures was approximately $424 and is expected to be recognizedover the weighted average period of 0.6 years.

For the six months ended June 30,2006 and 2005, the total fair value of vested options was $214 and $249,respectively. The total intrinsic value of options exercised for the six monthsended June 30, 2006 and 2005 was $17,042 and $538, respectively. Additionally,the total intrinsic value of options outstanding and exercisable at June 30,2006 was $49,018 and $38,324, respectively.

**8. COMMITMENTS ANDCONTINGENCIES**

*PurchaseObligations—**The*Company has variousunconditional purchase obligations. Certain of these obligations include thepurchase of quotes from a number of information service providers during thenormal course of business. As of June 30, 2006, the Company had totalpurchase commitments for quotes 

16

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

of approximately $14,721,with $11,698 due within the next twelve months and $3,023 due between one totwo years.

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

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

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

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

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

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

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

**9.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

Disclosure regarding theCompany’s financial instruments with off-balance sheet risk is described in “Note 18—FinancialInstruments with Off-Balance Sheet Risk” contained in the Company’s 2005 Form 10-K.There have been no material changes to our off-balance sheet risk during thesix months ended June 30, 2006.

**10. FINANCIAL INSTRUMENTS**

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

For the three and six months ended June 30, 2006and 2005, there was no hedge ineffectiveness. Additionally, at June 30,2006, the Company estimates that $2,341 of net derivative losses included inaccumulated other comprehensive loss will be reclassified into earnings overthe next twelve months. Unrealized gains (losses) before tax totaling ($172)and $5,907 for the three months ended June 30, 2006 and 2005, respectively,and ($734) and $4,248 for the six months ended June 30, 2006 and 2005,respectively, were recorded as other comprehensive income (loss). There hasbeen no discontinuance of cash flow hedges that would require areclassification of gains into earnings. Management does not anticipate anyevents or transactions that would result in the reclassification into earningsof gains and losses that are reported in accumulated other comprehensive incomedue to hedge discontinuance.

TheCompany’s derivatives are summarized below, showing the fair value of therelated assets and liabilities that are included in other assets or otherliabilities in the Condensed Consolidated Statements of Financial Condition asof June 30, 2006 and December 31, 2005 as follows:

| ** **                              | **Asset/(Liabilities)** | ** ** | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|-------------------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| Foreign exchange  derivative contracts: |                    |       |       |                        |       |                            |       |   |   |
| Assets                                  |                    |       | $          | 4,106                       |       |                            |       | $ | 2,196 |   |   |
| Liabilities                             |                    |       | (1,461     | )                           |       |                            | (79        | ) |   |
| Fenics purchase  obligation             |                    |       | (58        | )                           |       |                            | (144       | ) |   |
|                                         |                         |            |            |                             |            |                                 |            |  |  |  |  |  |  |

 

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

**11. REGULATORYREQUIREMENTS**

GFISecurities LLC is a registered broker-dealer with the SEC and theNational Association of Securities Dealers, Inc. GFI Securities LLC isalso a registered introducing broker with the National Futures Association andthe Commodity Futures Trading Commission. Accordingly, GFI Securities LLC issubject to the net capital rules under the Exchange Act and the CommodityExchange Act. Under these rules, GFI Securities LLC is required to maintainminimum Net Capital, as defined, of not less than the greater of $250 or 2% ofaggregate debits, as defined. GFI Brokers Limited and GFI Securities Limited 

18

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

are subject to the capital requirements of theFinancial Services Authority in the United Kingdom (“FSA”). GFI (HK) SecuritiesLLC is subject to the capital requirements of the Securities and FuturesCommission in Hong Kong, which require that GFI (HK) Securities LLC maintainminimum capital, as defined, of approximately $386. At June 30, 2006,under these requirements, minimum capital, as defined, must be maintained asfollows:

| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers   Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       |                         | $          | 31,480                              |       |                             |       | $                                      | 23,321     |   |   |   | $ | 26,084 |   |   |   | $ | 747 |   |   |
| Minimum Net  Capital required |       |                         | 250        |                                |       |                             | 9,354      |                                   |       |   | 15,058 |   |   |   | 386 |   |   |
| Excess Net Capital            |       |                         | $          | 31,230                              |       |                             |       | $                                      | 13,967     |   |   |   | $ | 11,026 |   |   |   | $ | 361 |   |   |

 

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

GFI Securities Limited’s Japanese branch is subject tocertain licensing requirements established by the Foreign Securities Firms Law(the “FSFL”). As part of their licensing requirements, GFI Securities Limited’sJapanese branch is required to maintain “brought-in” capital, as defined underthe FSFL, of 50,000 Japanese Yen. At June 30, 2006, GFI SecuritiesLimited’s Japanese branch was in compliance with this licensing requirement bymaintaining “brought-in” capital of 50,000 Japanese Yen (approximately $437).GFI Securities Limited is also subject to the Japan Securities DealersAssociation’s (“JSDA”) financial requirement that revenue plus “brought-in”capital exceed a ratio of 120.0% of relevant expenditure. At June 30,2006, GFI Securities Limited’s revenue plus “brought-in” capital ratio was142.6%, which exceeded the JSDA’s financial requirement by approximately 22.6%.

GFI Securities Limited’s Paris branch was establishedthrough the exercise of its passport right to open a branch in a EuropeanEconomic Area state. This branch commenced operation on February 1, 2006.The establishment of the branch was approved by FSA and acknowledged by Banquede France in France. The branch will be subject to the conduct of businessrules of the Autorite Des Marches Financiers when dealing with residentcustomers of France and will be regulated, in part, by the FSA.

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

Regulatory rules mayrestrict the Company’s ability to withdraw capital from its regulatedsubsidiaries. The Company’s regulated subsidiaries were in compliance with allminimum net capital requirements as of June 30, 2006.

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

**12. GEOGRAPHIC INFORMATION**

The Company offers itsproducts and services in North America, Europe and the Asia-Pacific regions.

Informationregarding revenue for the three and six months ended June 30, 2006 and2005, and information regarding long-lived assets (defined as property,equipment, leasehold improvements and software inventory) in geographic areasas of June 30, 2006 and December 31, 2005 is as follows:

| ** **    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:     |       |                                                |       |                                              |       |   |   |   |   |
| North America |       | $                                                   | 88,243     |                                              | $          | 71,880 |   | $ | 172,859 |   | $ | 129,929 |   |
| Europe        |       | 84,735                                              |       | 57,562                                            |       | 171,590 |   | 112,869 |   |
| Asia-Pacific  |       | 14,588                                              |       | 10,881                                            |       | 28,705 |   | 19,819 |   |
| Total         |       | $                                                   | 187,566    |                                              | $          | 140,323 |   | $ | 373,154 |   | $ | 262,617 |   |

 

| ** **                      | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Long-lived Assets,  as defined: |       |                        |       |                            |       |   |   |   |   |
| North America                   |       |                        | $          | 27,222                          |       |   |   | $ | 25,200 |   |   |
| Europe                          |       |                        | 12,902     |                            |       |   | 10,645 |   |   |
| Asia-Pacific                    |       |                        | 1,718      |                            |       |   | 1,516 |   |   |
| Total                           |       |                        | $          | 41,842                          |       |   |   | $ | 37,361 |   |   |

 

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

**13. OtherComprehensive Income (Loss)**

| ** **                                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Unrealized gain (loss) on  foreign exchange derivative contracts** |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current Period  Change:                                              |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                               | $          | (172                                             | )          |   |   | $ | 5,907 |   |   |   | $ | (734 | ) |   |   | $ | 4,248 |   |   |
| Tax (Expense) Benefit                                                |       |                                               | 52         |                                             |       |   | (1,811 | ) |   |   | 220 |   |   |   | (1,390 | ) |   |
| After Tax Amount                                                     |       |                                               | $          | (120                                             | )          |   |   | $ | 4,096 |   |   |   | $ | (514 | ) |   |   | $ | 2,858 |   |   |
| **Foreign currency translation  adjustment**                         |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Before Tax Amount                                                    |       |                                               | $          | 166                                              |       |   |   | $ | (161 | ) |   |   | $ | 279 |   |   |   | $ | (334 | ) |   |
| Tax (Expense) Benefit                                                |       |                                               | (74        | )                                                |       |   | 73 |   |   |   | (124 | ) |   |   | 152 |   |   |
| After Tax Amount                                                     |       |                                               | $          | 92                                               |       |   |   | $ | (88 | ) |   |   | $ | 155 |   |   |   | $ | (182 | ) |   |

 

20

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

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

| ** ** | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gross loss |       |                                                | $          | 1,192                                             |       |   |   | $ | 551 |   |   |   | $ | 2,691 |   |   |   | $ | 441 |   |   |
| Net of tax |       |                                                | 834        |                                              |       |   | 386 |   |   |   | 1,884 |   |   |   | 309 |   |   |

 

**14. RELATED PARTYTRANSACTION**

**Office LeaseTermination with an Affiliate**

In the fourth quarter of 2005, the Company ceased useof the premises it had leased from an affiliate and recorded a liability forthe remaining rent plus other charges at that time. During the second quarterof 2006, the Company reduced the liability by £172(or approximately $318) due to payments of rent on the sublease and otherrelated charges. Additionally, the Company reduced its estimate forrelated termination charges by £50 (or $92).The remaining accrual balance is expected to be paid within the next fourmonths. The remaining balance includes approximately $95 which will be paid tothird parties.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have reviewed the accompanying condensedconsolidated statement of financial condition of GFI Group Inc. and subsidiaries(the “Company”) as of June 30, 2006, and the related condensedconsolidated statements of income and comprehensive income for the three-monthand six-month periods ended June 30, 2006 and 2005, and the condensedconsolidated statements of cash flows for the six-month periods ended June 30,2006 and 2005. These interim financial statements are the responsibility of theCompany’s management.

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

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

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

/s/ DELOITTE & TOUCHE LLPNew York, New YorkAugust 10, 2006

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

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

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

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

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

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

·       competitionfrom current and new competitors;

·       futureresults of operations and financial condition;

·       thesuccess of our business strategies;

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

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

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

·       ourability to manage our international operations;

·       uncertaintiesassociated with currency fluctuations;

·       ourfailure to protect or enforce our intellectual property rights;

·       ourability to keep up with rapid technological change;

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

·       uncertaintiesrelating to litigation; and

·       changesin the availability ofcapital.

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

**Business Environment**

Our business generallybenefits when there is robust trading volume and volatility in the markets weserve. Market volatility is driven by a range of external and internal factors,some of which are market 

23

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specificand some of which are correlated to macro-economic conditions. In many of theover the counter markets in which we provide inter-dealer brokerage services,objective and easily identifiable third party reporting of volume levels is notavailable. As a result, we look to broader market information and specificvolatility events in our key markets, as indictors of likely trading volumelevels. We also monitor market-specific developments in each of our markets. Tradingvolume in many of our inter-dealer markets is driven by the trading activity ofour dealer clients that, in turn, are responsive to the trading activity anddemand of their “buy-side” clients. Those “buy-side” clients include smallerbanks, insurance companies and financial institutions, investment funds,trading firms and, increasingly, hedge funds.

During the second quarter2006, the global business environment was generally positive for our business,with satisfactory trading volume levels and modest volatility in the creditmarkets, and more pronounced volatility in certain global foreign exchange,equity and commodity markets. We continued to benefit from our strategicdiversity across product classes and our revenues grew across all geographicregions.

**Credit:**

Credit markets experiencedmodest volatility in the second quarter due to inflation, interest rate,general economic and credit quality concerns. Despite mixed economic indicatorsin the U.S., interest rates continued to rise as the Federal Reserve and globalcentral banks battled inflationary concerns. The markets’ inflation concernsnegatively affected emerging market and high yield bonds as the returns onthese instruments became less attractive to investors. The health of the U.S.automotive industry remained in question as indicated by Ford’s credit ratingbeing lowered by Standard & Poor’s to single B from BB late in thequarter, while Europe saw its first significant corporate bond default in overa year with France’s Global Automotive Logistics filing for bankruptcyprotection in May. Volatility in the global credit markets decreased in thesecond quarter of 2006 from the second quarter of 2005, as evidenced bydecreased volatility on the Dow Jones CDX North American Investment Grade,North American High Yield and iTraxx Europe indices. In comparison to thesecond quarter of 2005, which included the unexpected credit downgrades ofGeneral Motors and Ford, the second quarter of 2006 was not as volatile.

**Financial:**

The foreign exchange andinterest rate markets were relatively volatile in the second quarter of 2006due to uncertainty in the direction of short-term U.S. interest rates affectingthe price of the U.S. dollar relative to other currencies. The Federal Reserveindicated in April that it was close to the end of its program of steadyinterest rate increases, only to reverse course a few weeks later. Thisuncertainty about the direction of U.S. interest rates added to the volatilityin the markets. The U.S. dollar generally weakened in the quarter, depreciatingversus the Euro, the British Pound Sterling and the Japanese Yen. The U.S.Dollar Index, which measures the dollar’s performance against a trade weightedbasket of six major currencies, fell 5.1% in the quarter. Short-term interestrates rose in the U.S. and Europe as global economic activity remained strongin the quarter. The Chicago Mercantile Exchange and the Chicago Board of Tradereported record volume levels in the second quarter for interest rate futurescontracts.

**Equity:**

Global equity marketsexperienced considerable volatility in the second quarter as stock marketsgenerally declined due to inflation and interest rate concerns and their affecton future economic growth and corporate profits. Both the U.S. Federal Reserveand the European Central Bank raised short-term interest rates in the quarter. TheDow Jones World Stock Index, excluding the U.S., fell nearly 0.9% in thequarter, below the Dow Jones Industrial Average, which increased 0.4%. The DowJones Stoxx 600 Index of the largest publicly traded European companiesdeclined 4.1% in the second quarter after six straight quarters of increases.  Emerging equity markets in Latin America andAsia lost much of their gains from the first quarter 2006. The Chicago Board ofOptions Exchange Standard and Poor’s 500 Volatility Index 

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indicateda higher volatility level for the second quarter of 2006 compared to the secondquarter of 2005, as well as compared to the previous quarter. The NYSE GroupInc., Nasdaq Stock Market Inc. and the International Securities Exchange allreported volume increases in the second quarter.

**Commodity:**

The majority of ourbrokerage desks in the commodity product category focus on energy relatedproducts. The energy sector of the commodity markets remained volatile in thesecond quarter of 2006. Natural gas prices continued their downward trend forthe year, decreasing 15.3% in the second quarter, and 45.6% year-to-date on theNew York Mercantile Exchange (“NYMEX”) following a mild winter in the Northeastthat led to higher inventories. Crude oil prices, on the other hand, rose over11.0% on NYMEX due to political issues in the Middle East, Asia and LatinAmerica, and continued strong domestic and foreign demand. Other energymarkets, such as coal and electricity, were also affected by concerns regardingsupply and demand of energy resources. InterContinentalExchange, an electronicenergy marketplace, reported record volume levels in the second quarter of 2006,while NYMEX has reported futures and options daily volumes through June 2006that are significantly ahead of annual numbers for previous years.

**Results of Operations**

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

| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Brokerage revenues:                       |       |                                                |       |                                              |       |   |   |   |   |
| Agency commissions                        |       | $                                                   | 130,134    |                                              | $          | 100,718 |   | $ | 267,044 |   | $ | 188,689 |   |
| Principal transactions                    |       | 41,792                                              |       | 27,635                                            |       | 82,852 |   | 55,747 |   |
| Total brokerage revenues                  |       | 171,926                                             |       | 128,353                                           |       | 349,896 |   | 244,436 |   |
| Analytics and market data                 |       | 4,271                                               |       | 4,711                                             |       | 9,465 |   | 10,113 |   |
| Long-term contract revenue                |       | 5,881                                               |       | —                                            |       | 5,881 |   | — |   |
| Interest income                           |       | 2,395                                               |       | 883                                               |       | 4,628 |   | 1,943 |   |
| Other income                              |       | 3,093                                               |       | 6,376                                             |       | 3,284 |   | 6,125 |   |
| Total revenues                            |       | 187,566                                             |       | 140,323                                           |       | 373,154 |   | 262,617 |   |
| EXPENSES:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and employee benefits        |       | 113,701                                             |       | 80,896                                            |       | 230,546 |   | 156,373 |   |
| Communications and quotes                 |       | 9,303                                               |       | 6,341                                             |       | 16,956 |   | 12,140 |   |
| Travel and promotion                      |       | 8,549                                               |       | 6,041                                             |       | 16,080 |   | 11,802 |   |
| Rent and occupancy                        |       | 4,841                                               |       | 3,913                                             |       | 10,454 |   | 7,341 |   |
| Depreciation and amortization             |       | 4,048                                               |       | 3,599                                             |       | 7,884 |   | 7,691 |   |
| Professional fees                         |       | 5,320                                               |       | 2,927                                             |       | 9,364 |   | 5,396 |   |
| Clearing fees                             |       | 6,798                                               |       | 2,974                                             |       | 12,275 |   | 6,345 |   |
| Interest                                  |       | 1,772                                               |       | 597                                               |       | 3,524 |   | 1,841 |   |
| Other expenses                            |       | 3,843                                               |       | 5,809                                             |       | 7,399 |   | 9,818 |   |
| Cost of long-term contract                |       | 5,180                                               |       | —                                            |       | 5,180 |   | — |   |
| Lease termination costs to affiliate      |       | (92                                                 | )          | (2,266                                            | )          | (92 | ) | (2,266 | ) |
| Total Expenses                            |       | 163,263                                             |       | 110,831                                           |       | 319,570 |   | 216,481 |   |
| INCOME BEFORE PROVISION  FOR INCOME TAXES |       | 24,303                                              |       | 29,492                                            |       | 53,584 |   | 46,136 |   |
| PROVISION FOR  INCOME TAXES               |       | 10,207                                              |       | 12,810                                            |       | 22,505 |   | 20,300 |   |
| NET INCOME                                |       | $                                                   | 14,096     |                                              | $          | 16,682 |   | $ | 31,079 |   | $ | 25,836 |   |

 

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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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Brokerage  revenues:                      |       |                                            |       |                                          |       |   |   |   |   |
| Agency commissions                        |       | 69.4                                            | %          | 71.8                                          | %          | 71.6 | % | 71.9 | % |
| Principal transactions                    |       | 22.3                                            |       | 19.7                                          |       | 22.2 |   | 21.3 |   |
| Total brokerage revenues                  |       | 91.7                                            |       | 91.5                                          |       | 93.8 |   | 93.2 |   |
| Analytics and market data                 |       | 2.3                                             |       | 3.4                                           |       | 2.5 |   | 3.9 |   |
| Long-term contract revenue                |       | 3.1                                             |       | —                                        |       | 1.6 |   | — |   |
| Interest income                           |       | 1.3                                             |       | 0.6                                           |       | 1.2 |   | 0.6 |   |
| Other income                              |       | 1.6                                             |       | 4.5                                           |       | 0.9 |   | 2.3 |   |
| Total revenues                            |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| EXPENSES:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Compensation and employee benefits        |       | 60.6                                            | %          | 57.6                                          | %          | 61.8 | % | 59.5 | % |
| Communications and quotes                 |       | 5.0                                             |       | 4.6                                           |       | 4.5 |   | 4.7 |   |
| Travel and promotion                      |       | 4.6                                             |       | 4.3                                           |       | 4.3 |   | 4.5 |   |
| Rent and occupancy                        |       | 2.6                                             |       | 2.8                                           |       | 2.8 |   | 2.8 |   |
| Depreciation and amortization             |       | 2.2                                             |       | 2.6                                           |       | 2.1 |   | 2.9 |   |
| Professional fees                         |       | 2.8                                             |       | 2.1                                           |       | 2.5 |   | 2.1 |   |
| Clearing fees                             |       | 3.6                                             |       | 2.1                                           |       | 3.3 |   | 2.4 |   |
| Interest                                  |       | 0.9                                             |       | 0.4                                           |       | 0.9 |   | 0.7 |   |
| Other expenses                            |       | 2.0                                             |       | 4.1                                           |       | 2.0 |   | 3.7 |   |
| Cost of long-term contract                |       | 2.8                                             |       | —                                        |       | 1.4 |   | — |   |
| Lease termination to affiliate            |       | —                                          |       | (1.6                                          | )          | — |   | (0.9 | ) |
| Total Expenses                            |       | 87.1                                            | %          | 79.0                                          | %          | 85.6 | % | 82.4 | % |
| INCOME BEFORE  PROVISION FOR INCOME TAXES |       | 12.9                                            |       | 21.0                                          |       | 14.4 |   | 17.6 |   |
| PROVISION FOR  INCOME TAXES               |       | 5.4                                             |       | 9.1                                           |       | 6.0 |   | 7.7 |   |
| NET INCOME                                |       | 7.5                                             | %          | 11.9                                          | %          | 8.4 | % | 9.9 | % |

 

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

Net income for the threemonths ended June 30, 2006 was $14.1 million as compared to netincome of $16.7 million for the three months ended June 30, 2005, adecrease of $2.6 million or approximately 15.6%. Total revenues increasedby $47.3 million, or 33.7%, to $187.6 million for the three monthsended June 30, 2006 from $140.3 million for the same period from theprior year. Our increased revenues were primarily due to increased brokeragerevenues across our financial, equity and commodity product categories. Ourtotal brokerage personnel headcount increased by 199 to a total of 828 at June 30,2006 from 629 at June 30, 2005. Total expenses increased by $52.5 million,or 47.4%, to $163.3 million for the three months ended June 30, 2006from $110.8 million for the same period from the prior year. Expensesincreased primarily due to a higher number of brokerage personnel as comparedwith the corresponding period in 2005 and the resulting increase in performancerelated brokerage bonuses.

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***Revenues***

*Brokerage Revenues*

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

| ** **                | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **BROKERAGE  REVENUES:**  |       |                                                |       |   |   |
| Credit                    |       | $                                                   | 59,838     |   | $ | 60,749 |   |
| Financial                 |       | 38,942                                              |       | 29,835 |   |
| Equity                    |       | 46,109                                              |       | 21,869 |   |
| Commodity                 |       | 27,037                                              |       | 15,900 |   |
| Total brokerage revenues  |       | $                                                   | 171,926    |   | $ | 128,353 |   |
| **BROKERAGE  REVENUES:**  |       |                                                |       |   |   |
| Credit                    |       | 34.8                                                | %          | 47.3 | % |
| Financial                 |       | 22.7                                                |       | 23.3 |   |
| Equity                    |       | 26.8                                                |       | 17.0 |   |
| Commodity                 |       | 15.7                                                |       | 12.4 |   |
| Total brokerage  revenues |       | 100.0                                               | %          | 100.0 | % |

 

Total brokerage revenues increased by$43.5 million, or 33.9%, to $171.9 million for the three months endedJune 30, 2006, as compared to $128.4 million for the three monthsended June 30, 2005. Agency commissions increased by $29.4 million,or 29.2%, to $130.1 million for the three months ended June 30, 2006as compared to $100.7 million for the three months ended June 30,2005. Principal transactions increased by $14.1 million, or 50.9%, to$41.8 million for the three months ended June 30, 2006 from$27.7 million for the three months ended June 30, 2005. Brokerproductivity (defined as total brokerage revenues during the period divided byaverage monthly brokerage personnel headcount for the period) decreasedslightly for the three months ended June 30, 2006 as compared to the sameperiod from the prior year.

Credit product brokerage revenues decreased slightlyfor the three months ended June 30, 2006 as compared to the correspondingperiod in 2005, primarily the result of lower volumes in certain sectors of theU.S. corporate bond markets. Although our total credit product brokeragerevenue decreased slightly in the second quarter of 2006, revenues from certainof our credit derivatives brokerage desks in our credit product category werehigher in the second quarter of 2006 compared to the second quarter of 2005. Volatilityin the second quarter of 2005 was higher compared to the second quarter of 2006due to credit downgrades in U.S. corporate bond sectors, such as the automotiveindustry, which led to increased trading activity in the second quarter of 2005.We continued to invest in the development of credit products by increasing ourcredit product brokerage personnel, which increased by 38 to a total of 223employees at June 30, 2006 from 185 employees at June 30, 2005.

The increase in financial product brokerage revenuesof $9.1 million was primarily attributable to brokerage desks covering emergingmarkets, interest rate derivatives and exotic foreign exchange options all ofwhich benefited from global interest rate movements caused by economic growth,high energy costs and inflationary fears. During the second quarter of 2006, wecontinued to invest in our foreign exchange and interest rate derivativesbusinesses, particularly in Asia. The increase in our financial productbrokerage revenues was generated primarily from our existing financial productdesks, which contributed $5.3 million of the increase in financial productbrokerage revenues. The remaining $3.8 million increase in financial productbrokerage revenues was attributable to the addition of eleven new orrestructured 

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financial product deskssince June 30, 2005. This investment in and development of financialproducts was highlighted by a financial product brokerage personnel increase of70 to a total of 257 employees at June 30, 2006 from 187 employees at June 30,2005, including the addition of 54 brokerage personnel in Asia.

The increase in equity product brokerage revenues of$24.2 million in the second quarter of 2006 was primarily due to our new Parisoffice contributing $13.0 million in brokerage revenues, revenues from ourinvestment in other equity products in 2005 and increased business from ourhedge fund customers. Global equity markets experienced considerable volatilityin the quarter due to economic and inflation concerns and higher interest rates.New or restructured equity product desks, including desks in our Paris office,contributed $18.1 million of the total increase in equity productbrokerage revenues. The remaining $6.1 million increase in equity productbrokerage revenues was attributable to existing equity product desks. Ourinvestment in and development of equity products was highlighted by an equityproduct brokerage personnel increase of 40 to a total of 171 employees at June 30,2006 from 131 employees at June 30, 2005.

The increase in commodityproduct brokerage revenues of $11.1 million was primarily attributable toour Starsupply brokerage business that generated approximately $6.8 millionin brokerage revenues in the second quarter of 2006, significant volatility inoil and gas markets and investment in new desks. In addition, in the secondquarter of 2006, our European brokerage business in electricity, coal,emissions, dry freight and gold markets continued to perform well. Our new orrestructured commodity product desks, including the desks acquired fromStarsupply, contributed $8.7 million of the increase in commodity productbrokerage revenues. Our existing commodity desks contributed $2.4 million of thetotal increase in commodity product brokerage revenue. Our investment in anddevelopment of commodity products was highlighted by a commodity productbrokerage personnel increase of 51 to a total of 177 employees at June 30,2006 from 126 employees at June 30, 2005.

*Analytics andMarket Data*

Revenues from our analytics and market data productsdecreased by $0.4 million, or 8.5%, to $4.3 million for the threemonths ended June 30, 2006 as compared to $4.7 million for the threemonths ended June 30, 2005. The decrease was primarily due to a decreasein annual update fees for upgrades of software products in the three monthsended June 30, 2006 as compared to the comparable period in 2005, as wecontinue to reduce the use of annual update fees in favor of monthlysubscription fees.

*Long-Term ContractRevenue*

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

*Interest Income*

Interest income increasedby $1.5 million, or 166.7%, to $2.4 million for the three monthsended June 30, 2006 as compared to $0.9 million for the three monthsended June 30, 2005. The increase is mainly attributable to the higherlevel of average cash balances in the U.S. and the increase in interest incomeon clearing accounts related primarily to our equity and corporate bondbrokerage operations.

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*Other Income*

Other income decreased$3.3 million, or 51.6%, to $3.1 million for the three months ended June 30,2006 from $6.4 million for the three months ended June 30, 2005. Thedecrease was primarily attributable to a net gain of $7.6 million relating toour foreign exchange derivative contracts recorded during the second quarter of2005, which was offset by the transactional net gains (losses) based on foreigncurrency fluctuations and net gains (losses) on foreign exchange derivativecontracts. During the first quarter of 2005, we discontinued hedge accountingfor a foreign exchange derivative contract, which resulted in a termination ofthe contract and the execution of a new contract. The new contract did notqualify for hedge accounting and all unrealized gains and losses on thecontract were recorded directly to earnings. The new contract was settled on June 30,2005. Consequently, we recorded $8.4 million of gains from a new foreignexchange derivative contract, net of $0.8 million reclassified fromaccumulated other comprehensive loss into earnings on the original contract. Otherincome for the three months ended June 30, 2006 mainly consisted oftransactional net gains (losses) based on foreign currency fluctuations and netgains (losses) on foreign exchange derivative contracts.

***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits increased by$32.8 million, or 40.5%, to $113.7 million for the three months endedJune 30, 2006 from $80.9 million for the three months ended June 30,2005. The increase was primarily due to an increase in the number of brokeragepersonnel from 629 at June 30, 2005 to 828 at June 30, 2006 and anincrease in brokerage personnel performance bonuses of $17.2 millionresulting in large part from our overall higher brokerage commission revenues.

Total compensation andemployee benefits as a percentage of total revenues increased to 60.6% at June 30,2006 from 57.6% from June 30, 2005. Bonus expense represented 51.3% and50.6% of total compensation and employee benefits expense for the three monthsended June 30, 2006 and 2005, respectively. A significant portion of ourbonus expense is subject to contractual guarantees that may require us to makebonus payments to brokers regardless of their performance in any particularperiod. Additionally, sign-on bonus expense represented 6.3% and 3.2% of totalcompensation and employee benefits for the three months ended June 30,2006 and 2005, respectively.

*Communications andQuotes*

Communications and quotesincreased by $3.0 million, or 47.6%, to $9.3 million for the threemonths ended June 30, 2006 from $6.3 million from the three monthsended June 30, 2005. The increase was primarily due to a change in ourproduct mix with equity and commodity comprising a larger percentage of totalbrokerage revenues in the second quarter of 2006 compared to the second quarterof 2005. These product categories generally have higher communications andquotes expenses as a percentage of total brokerage revenues than that of the creditproduct category. Expense levels as a percentage of revenue may vary betweenproduct categories due to brokerage commission and volume levels and the needfor third party data, technology and analytical support.

*Travel andPromotion*

Travel and promotionincreased by $2.6 million, or 43.3%, to $8.6 million for the threemonths ended June 30, 2006 from $6.0 million for the three monthsended June 30, 2005. This expense, as a percentage of our total brokeragerevenues for the three months ended June 30, 2006 increased to 4.9% from4.7% for the same period from the prior year. The increase was primarily due toa change in our revenue product mix with equity and commodity comprising alarger portion of total brokerage revenues in the second quarter of 2006 comparedto the second quarter of 2005. These product categories typically have higher 

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traveland entertainment expenses as a percentage of total brokerage revenue than thatof the credit product category.

*Rent and Occupancy*

Rent and occupancyincreased by $1.0 million, or 25.6%, to $4.9 million for the threemonths ended June 30, 2006 from $3.9 million for the three months ended June 30,2005. The increase was primarily due to the increase in repairs andmaintenance, insurance and utilities resulting from the lease of additionaloffice space in the U.S., London and Paris.

*Depreciation andAmortization*

Depreciation andamortization increased by $0.4 million, or 11.1%, to $4.0 million for the threemonths ended June 30, 2006 from $3.6 million for the three months ended June 30,2005. The increase was primarily due to the increase in property and equipmentcosts, including software development costs.

*Professional Fees*

Professional feesincreased by $2.3 million, or 76.7% to $5.3 million for the three months ended June 30,2006 from $3.0 million for the three months ended June 30, 2005. Theincrease was primarily due to an increase in professional fees related to ourcontinuing preparation to satisfy the requirements of the Sarbanes-Oxley Act of2002 that are or will be applicable to us.  The increase was also attributable to anincrease in audit, tax and other consulting fees, of which $0.6 million wasincurred during the second quarter of 2006 relating to our secondary offering.

*Clearing Fees*

Clearing fees increased by$3.8 million, or 126.7%, to $6.8 million for the three months ended June 30,2006 from $3.0 million for the three months ended June 30, 2005. Thisincrease was due to a higher volume in the number of principal transactionsexecuted during the three months ended June 30, 2006, as compared to thesame period in the prior year which was partially due to the rapid growth ofour equities business in Paris. Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. We also use the services of floor brokers on certain stock exchangesto assist in the execution of transactions. Fees paid to floor brokers in thesecircumstances are included in clearing fees.

*Interest Expense*

Interest expense increasedby $1.2 million, or 200.0%, to $1.8 million for the three months ended June 30,2006 from $0.6 million for the three months ended June 30, 2005. Theincrease was primarily due to higher interest charges on clearing accountsrelated primarily to our equity and corporate bond brokerage operations, whichwas offset by the lower interest expense under our credit facility.

*Other Expenses*

Other expenses decreasedby $2.0 million, or 34.5%, to $3.8 million for the three months ended June 30,2006 from $5.8 million for the three months ended June 30, 2005. Thedecrease was primarily due to a charge of $3.2 million made during the secondquarter of 2005 in connection with newly-hired brokerage personnel in Singaporeto buy-out their employment contracts with their former employers. There was nocomparable charge in the three months ended June 30, 2006. This decreasewas partially offset by an increase in irrecoverable Value Added Tax related toincreased purchases in communications and quotes in the U.K. and other generaloffice and miscellaneous expenses, such as office supplies and computerequipment expenses.

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*Cost of Long-TermContract*

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

*Lease TerminationCosts to Affiliate*

Lease termination costsdecreased by $2.2 million, or 95.7%, to a gain of $0.1 million for the threemonths ended June 30, 2006 from $2.3 million of gain for the three monthsended June 30, 2005. Lease termination costs to affiliate represent theestimated lease termination costs in connection with a former lease in the U.K.with an affiliate. In April 2005, we and the affiliate executed anamendment to the lease termination agreement entered into in December 2004.The amendment accelerated termination of the lease to April 2005 andrequired us to pay a termination charge. As a result of the amendment, in thesecond quarter of 2005, we reduced our lease termination liability by approximately£1.2 million (or $2.3 million).  Further, we signed a new eighteen-monthsublease agreement with the affiliate with rent of £0.5 million (or $0.9 million)per annum plus other related charges. However, in November 2005, wevacated the premise and accrued £0.5 million (or $0.9 million) for theremaining rent plus other related charges during the fourth quarter of 2005. Duringthe second quarter of 2006, we reduced our estimate for related terminationchanges by £0.1 million (or $0.1 million). See Note 14 to the CondensedConsolidated Financial Statements for further discussion.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $10.2 million for the three months ended June 30, 2006and $12.8 million for the three months ended June 30, 2005. Oureffective tax rate was approximately 42.0% for the three months ended June 30,2006 as compared to 43.4% for the comparable period in 2005. The reduction inthe effective tax rate was primarily due to income received on tax-exemptinvestments, decrease in state and local income taxes, and decrease in taxesrelated to foreign operations, which was partially offset by an increase innon-deductible expenses.

**Six Months Ended June 30,2006 Compared to the Six Months Ended June 30, 2005**

Net income for the sixmonths ended June 30, 2006 was $31.1 million as compared to net income of$25.8 million for the six months ended June 30, 2005, an increase of $5.3million or approximately 20.5%. Total revenues increased by $110.6 million, or42.1%, to $373.2 million for the six months ended June 30, 2006 from$262.6 million compared to the same period from the prior year. Our increasedrevenues were primarily due to increased brokerage revenues resulting from thecontinued growth in our brokerage personnel headcount in each of our productcategories either through organic growth in existing businesses, theacquisition of companies or desks, or the opening of desks in developingproduct areas. Our total brokerage personnel headcount increased by 199 to 828at June 30, 2006 from 629 at June 30, 2005. Total expenses increasedby $103.1 million, or 47.6% to $319.6 million for the six months ended June 30,2006 from $216.5 million for the same period from the prior year. Expensesincreased primarily due to a higher number of brokerage personnel as comparedwith the corresponding period in 2005 and the resulting increase in performancerelated brokerage bonuses.

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***Revenues***

*Brokerage Revenues*

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

| ** **                | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **BROKERAGE  REVENUES:**  |       |                                              |       |   |   |
| Credit                    |       | $                                                 | 131,111    |   | $ | 112,402 |   |
| Financial                 |       | 78,430                                            |       | 56,120 |   |
| Equity                    |       | 87,568                                            |       | 42,871 |   |
| Commodity                 |       | 52,787                                            |       | 33,043 |   |
| Total brokerage revenues  |       | $                                                 | 349,896    |   | $ | 244,436 |   |
| **BROKERAGE REVENUES:**   |       |                                              |       |   |   |
| Credit                    |       | 37.5                                              | %          | 46.0 | % |
| Financial                 |       | 22.4                                              |       | 23.0 |   |
| Equity                    |       | 25.0                                              |       | 17.5 |   |
| Commodity                 |       | 15.1                                              |       | 13.5 |   |
| Total brokerage  revenues |       | 100.0                                             | %          | 100.0 | % |

 

Total brokerage revenuesincreased by $105.5 million, or 43.2%, to $349.9 million for the six monthsended June 30, 2006, as compared to $244.4 million for the six monthsended June 30, 2005. Agency commissions increased by $78.4 million, or41.4%, to $267.0 million for the six months ended June 30, 2006 ascompared to $188.7 million for the six months ended June 30, 2005. Principaltransactions increased by $27.2 million, or 48.8%, to $82.9 millionfor the six months ended June 30, 2006 from $55.7 million for the sixmonths ended June 30, 2005. Broker productivity (defined as total brokeragerevenues during the period divided by average monthly brokerage personnelheadcount for the period) increased by approximately 5.6% for the six monthsended June 30, 2006 as compared to the same period from the prior year.

The increase in creditproduct brokerage revenues of $18.7 million was due to a number of factorsincluding continued overall growth in the credit derivatives market, thedevelopment of new credit products, the sectorization of credit products andthe rollout of CreditMatch, a credit derivatives trading platform, in Europe. Ourexisting credit product desks contributed $14.3 of the total increase in creditproduct brokerage revenues. The remaining $4.4 million increase was generatedby the addition of eleven new or restructured credit product desks since June 30,2005. Our investment in and development of credit products was highlighted by acredit product brokerage personnel increase of 38 to a total of 223 employeesat June 30, 2006 from 185 employees at June 30, 2005.

The increase in financialproduct brokerage revenues of $22.3 million was primarily attributable tobrokerage desks covering emerging markets, interest rate derivatives and exoticforeign exchange options that benefited from global interest rate movementcaused by economic growth, high energy costs and inflationary fears. We alsoinvested heavily in our foreign exchange and interest rate derivativesbusinesses, particularly in Asia. The increase in our financial productbrokerage revenues was generated primarily from our existing financial productdesks, which contributed $15.4 million of the increase in financial productbrokerage revenues. The remaining $6.9 million increase in financial productbrokerage revenues was attributable to the addition of eleven new or restructuredfinancial product desks since June 30, 2005. 

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Ourinvestment in and development of financial products was highlighted by afinancial product brokerage personnel increase of 70 to a total of 257employees at June 30, 2006 from 187 employees at June 30, 2005.

The increase in equityproduct brokerage revenues of $44.7 million was primarily due to our new Parisoffice that contributed $23.4 million in brokerage revenues during the firstsix months of 2006, a substantial investment in other equity products in 2005and increased business from our hedge fund customers. Global equity marketsexperienced considerable volatility in the first six months due to globaleconomic growth, rising interest rates and inflation concerns. New orrestructured equity product desks, including desks in our Paris office,contributed $32.4 million of the total increase in equity product brokeragerevenues. The remaining $12.3 million increase in equity product brokeragerevenues was attributable to existing equity product desks. Our investment inand development of equity products was highlighted by an equity productbrokerage personnel increase of 40 to total of 171 employees at June 30,2006 from 131 employees at June 30, 2005.

The increase in commodityproduct brokerage revenues of $19.7 million was primarily attributable to ourStarsupply brokerage business that generated approximately $13.4 million inbrokerage revenues in the first six months of 2006, continued volatility incertain commodity markets and investment in new desks. Our new or restructuredcommodity product desks, including the desks acquired from Starsupply,contributed $16.2 million of the increase in commodity product brokeragerevenues. Our existing commodity desks contributed $3.5 million of the totalincrease in commodity product brokerage revenue. Our investment in anddevelopment of commodity products was highlighted by a commodity productbrokerage personnel increase of 51 to a total of 177 employees at June 30,2006 from 126 employees at June 30, 2005.

*Analytics and Market Data*

Revenues from ouranalytics and market data products decreased by $0.6 million, or 5.9%, to$9.5 million for the six months ended June 30, 2006 as compared to$10.1 million for the six months ended June 30, 2005. The decrease was primarilydue to a decrease in annual update fees for upgrades of software products inthe six months ended June 30, 2006 compared to the comparable period in2005 as we continue to reduce the use of annual update fees in favor of monthlysubscription fees.

*Long-Term Contract Revenue*

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

*Interest Income*

Interest income increasedby $2.7 million, or 142.1%, to $4.6 million for the six months ended June 30,2006 as compared to $1.9 million for the six months ended June 30, 2005. Theincrease is mainly attributable to the higher level of average cash balances inthe U.S. and the increase in interest income on clearing accounts relatedprimarily to our equity and corporate bond brokerage operations.

*Other Income*

Other income decreased$2.8 million, or 45.9%, to $3.3 million for the six months ended June 30,2006 from an increase of $6.1 million for the six months ended June 30,2005. The decrease was primarily attributable to a net gain of $7.6 millionrelating to our foreign exchange derivative contracts recorded 

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duringthe second quarter of 2005, which offset by the transactional net gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.  During the first quarter of 2005, wediscontinued hedge accounting for a foreign exchange derivative contract, whichresulted in a termination of the contract and the execution of a new contract. Thenew contract did not qualify for hedge accounting and all unrealized gains andlosses on the contract were recorded directly to earnings. The new contract wassettled on June 30, 2005. Consequently, we recorded $8.4 million of gainsfrom a new foreign exchange derivative contract, net of $0.8 millionreclassified from accumulated other comprehensive loss into earnings on theoriginal contract. Other income for the six months ended June 30, 2006mainly consisted of transactional net gains (losses) based on foreign currencyfluctuations and net gains (losses) on foreign exchange derivative contracts.

***Expenses***

*Compensation and Employee Benefits*

Compensation and employeebenefits increased by $74.1 million, or 47.4%, to $230.5 million for the sixmonths ended June 30, 2006 from $156.4 million for the six months ended June 30,2005. The increase was primarily due to an increase in the number of brokeragepersonnel from 629 at June 30, 2005 to 828 at June 30, 2006 and anincrease in brokerage personnel performance bonuses of $45.5 million resultingin large part from our overall higher brokerage commission revenues.

Total compensation andemployee benefits as a percentage of total revenues increased to 61.8% at June 30,2006 from 59.5% from June 30, 2005. Bonus expense represented 54.2% and49.4% of total compensation and employee benefits expense for the six monthsended June 30, 2006 and 2005, respectively. A significant portion of ourbonus expense is subject to contractual guarantees that may require us to makebonus payments to brokers regardless of their performance in any particularperiod. Additionally, sign-on bonus expense represented 5.6% and 3.1% of totalcompensation and employee benefits for the six months ended June 30, 2006and 2005, respectively.

*Communications and Quotes*

Communications and quotesincreased by $4.9 million, or 40.5%, to $17.0 million for the six months ended June 30,2006 from $12.1 million from the six months ended June 30, 2005. Theincrease was primarily due to a change in our product mix with equity andcommodity comprising a larger percentage of total brokerage revenues in thesecond quarter of 2006 compared to the second quarter of 2005. These productcategories generally have higher communications and quotes expenses as apercentage of total brokerage revenues than that of the credit product category.Expense levels as a percentage of total brokerage revenue may vary betweenproduct categories due to brokerage commission and volume levels and the needfor third party data, technology and analytical support.

*Travel and Promotion*

Travel and promotionincreased by $4.3 million, or 36.4%, to $16.1 million for the six months ended June 30,2006 from $11.8 million for the six months ended June 30, 2005. Thisexpense, as a percentage of our total brokerage revenues for the six monthsended June 30, 2006 decreased to 4.6% from 4.8% for the same period fromthe prior year. The increase was primarily due to a change in our revenueproduct mix with equity and commodity comprising a larger percentage of totalbrokerage revenues in the second quarter of 2006. These product categoriestypically have higher travel and entertainment expenses as a percentage oftotal brokerage revenue than that of the credit product category.

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*Rent and Occupancy*

Rent and occupancyincreased by $3.0 million, or 40.5%, to $10.4 million for the six months ended June 30,2006 from $7.4 million for the six months ended June 30, 2005. Theincrease was primarily due to the increase in rent expenses resulting from thelease of additional office space in the U.S., London and Paris and the relatedincrease in repairs and maintenance.

*Depreciation and Amortization*

Depreciation andamortization increased slightly by $0.2 million, or 2.6%, to $7.9 million forthe six months ended June 30, 2006 from $7.7 million for the six monthsended June 30, 2005. The increase was primarily due to the increase inproperty and equipment costs, including software development costs.

*Professional Fees*

Professional feesincreased by $4.0 million, or 74.1%, to $9.4 million for the six months ended June 30,2006 from $5.4 million for the six months ended June 30, 2005. Theincrease was primarily due to an increase in professional fees related to ourcontinuing preparation to satisfy the requirements of the Sarbanes-Oxley Act of2002 that are or will be applicable to us.  The increase was also attributable to anincrease in audit, tax and consulting fees, of which $0.6 million was incurredduring the second quarter of 2006 relating to our secondary offering.

*Clearing Fees*

Clearing fees increased by$6.0 million, or 95.2%, to $12.3 million for the six months ended June 30,2006 from $6.3 million for the six months ended June 30, 2005. Thisincrease was due to a higher volume in the number of principal transactionsexecuted during the six months ended June 30, 2006 as compared to the sameperiod in the prior year which was partially due to the rapid growth of ourequities business in Paris. Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. We also use the services of floor brokers on certain stock exchangesto assist in the execution of transactions. Fees paid to floor brokers in thesecircumstances are included in clearing fees.

*Interest Expense*

Interest expense increasedby $1.7 million, or 94.4%, to $3.5 million for the six months ended June 30,2006 from $1.8 million for the six months ended June 30, 2005. Theincrease was primarily due to higher interest charges on clearing accountsrelated to our equity and corporate bond brokerage operations, which wereoffset by the lower interest expense under our credit facility.

*Other Expenses*

Other expenses decreasedby $2.4 million, or 24.5%, to $7.4 million for the six months ended June 30,2006 from $9.8 million for the six months ended June 30, 2005. Thedecrease was primarily due to a charge of $3.2 million made during the secondquarter of 2005 in connection with newly-hired brokerage personnel in Singaporeto buy-out their employment contracts with their former employers, as well as acharge of $2.0 million for an increase in the fair value of the Fenicspurchase obligation due to our initial public offering. There were nocomparable charges in the six months ended June 30, 2006. This decreasewas partially offset by increases in irrecoverable Value Added Tax related toincreased purchases in communications and quotes in the U.K., litigationreserves and other general office and miscellaneous expenses, such as officesupplies and computer equipment expenses.

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*Cost of Long-TermContract*

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

*Lease TerminationCosts to Affiliate*

Lease termination costsdecreased by $2.2 million, or 95.7 %, to a gain of $0.1 million for the sixmonths ended June 30, 2006 from $2.3 million of gain for the six monthsended June 30, 2005. In April 2005, we and the affiliate executed anamendment to the lease termination agreement we entered into in December 2004.The amendment accelerated termination of the lease to April 2005 andrequired us to pay a termination charge. As a result of the amendment, in thesecond quarter of 2005, we reduced our lease termination liability byapproximately £1.2 million (or $2.3 million).  Further, we signed a new eighteen-monthsublease agreement with the affiliate with rent of £0.5 million (or$0.9 million) per annum plus other related charges. However, in November 2005,we vacated the premise and accrued £0.5 million (or $0.9 million) forthe remaining rent plus other related charges during the fourth quarter of 2005.During the second quarter of 2006, we reduced our estimate for relatedtermination changes by £0.1 million (or $0.1 million). See Note 14to the Condensed Consolidated Financial Statements for further discussion.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $22.5 million for the six months ended June 30, 2006and $20.3 million for the six months ended June 30, 2005. Oureffective tax rate was approximately 42.0% for the six months ended June 30,2006 as compared to 44.0% for the comparable period in 2005. The reduction inthe effective tax rate was primarily due to income received on tax-exemptinvestments and a decrease in taxes related to foreign operations.

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**Quarterly Resultsof Operations**

Thefollowing table sets forth, by quarter, our unaudited statement of income datafor the period from January 1, 2005 to June 30, 2006. Results of anyperiod are not necessarily indicative of results for a full year.

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

 

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The following table sets forth our quarterly resultsof operations as a percentage of our total revenues for the indicated periods: 

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

 

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The tables below detail our brokerage revenues byproduct category in dollars and as a percentage of our total brokerage revenuesfor the indicated periods.

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

 

**Liquidity andCapital Resources**

Net cash used byoperations improved to $0.8 million for the six months ended June 30,2006, compared with $5.8 million for the six months ended June 30, 2005. Theimprovement is primarily related to our increased net income that is positivelyadjusted by certain non-cash items such as deferred compensation expense andnet losses on foreign exchange derivative contracts, offset by an increase incash used for working capital. The significant working capital changes arerelated to the net receivables from the broker dealers and clearingorganizations and other liabilities, offset by an increase in accruedcompensation.

Net cash used in investingactivities for the six months ended June 30, 2006 was $13.4 millioncompared to $5.2 million used in the six months ended June 30, 2005. Theincrease in cash used for investing activities was primarily due tosignificantly higher capital expenditures during the first half of 2006 thanthe comparable period of 2005. The increase in capital expenditure wasprimarily due to our continued investment in the development of software forinternal use and an increase in the purchase of computer equipment.

Net cash provided byfinancing activities for the six months ended June 30, 2006 was $1.5million compared to $15.6 million generated for the six months ended June 30,2005. Cash provided by financing activities for the six months ended June 30,2005 consisted of net proceeds received from our initial public offering,offset by the repayments of the notes payable to Jersey Partners Inc. in January 2005and the outstanding principal balance under our 2004 Credit Agreement in February 2005.In the first six months of 2006, cash provided by financing activitiesconsisted of net cash paid on borrowings under our 2006 Credit Agreement,offset by the cash proceeds received and tax benefits realized from theexercise of stock options and cash proceeds from a bank overdraft. The bankoverdraft was due to the timing of a transfer between certain of our bankaccounts, which was not completed until immediately after June 30, 2006.

Our liquidity andavailable cash resources are in part restricted by the regulatory requirementsof our operating subsidiaries, including GFI Securities LLC, GFI SecuritiesLimited, GFI Brokers Limited, GFI (HK) Securities LLC and GFI Group Pte Ltd. 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 

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subjectto the regulated capital requirements of the Securities and Futures Commissionin Hong Kong. GFI Group PTE Ltd. is subject to the regulatory compliancerequirements with the Monetary Authority of Singapore. At June 30, 2006, GFISecurities LLC, GFI Securities Limited, GFI Brokers Limited, GFI (HK)Securities LLC and GFI Group PTE Ltd. were in compliance with their respectiveregulatory capital requirements. See Note 11 to the condensed consolidatedfinancial statements for further discussion. In addition to these regulatorycapital requirements, our liquidity may be impacted by the amount of capitalthat we maintain in clearing accounts and with exchanges to support ourprincipal transactions business. As of June 30, 2006, the balancereceivable from clearing organizations was $67.3 million, an increase of $19.4million compared to the balance as of June 30, 2005. The main reason forthis increase was due to the growth of our principal transactions business,primarily in the equity product category.

Although we have nomaterial commitments for capital expenditures, we anticipate that we willexperience a substantial increase in our capital expenditures and leasecommitments consistent with our anticipated growth in operations, infrastructureand personnel. We currently anticipate that we will continue to experiencesignificant growth in our operating expenses for the foreseeable future andthat our operating expenses will be a material use of our cash resources.

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

**Contractual Obligations and Commitments**

Our contractualobligations and off-balance sheet entities are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contained in our 2005 Form 10-K. Except as described below in this Form 10-Q,there have been no material changes to those obligations or arrangements duringthe six months ended June 30, 2006.

We have variousunconditional purchase obligations. Certain of these obligations are for thepurchase of quotes from a number of information service providers during thenormal course of business. As of June 30, 2006, we had total purchasecommitments for quotes of approximately $14.7 million, with $11.7 milliondue within the next twelve months and $3.0 million due between one to twoyears.

**Off-Balance Sheet Arrangements**

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

**Critical Accounting Policies and Estimates**

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

**Recent Accounting Pronouncement**

In June 2006, theFinancial Accounting Standards Board issued Interpretation (“FASB”) No. 48,*Accounting for Uncertainty in Income Taxes—anInterpretation of FASB No. 109*(“FIN 48”). FIN 48 clarifies 

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theaccounting for uncertain tax positions in accordance with SFAS No. 109, *Accounting for Income Taxes*. The Companywill be required to recognize in its financial statements the largest taxbenefit of a tax position that is “more-likely-than-not” to be sustained onaudit based solely on the technical merits of the position as of the reportingdate. FIN 48 also provides guidance on new disclosure requirements, reportingand accrual of interest and penalties, accounting in interim periods andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. Only tax positions that meet the “more-likely-than-not” threshold at thatdate may be recognized. The cumulative effect of initially applying FIN 48 willbe recognized as a change in accounting principle as of the end of the period inwhich FIN 48 is adopted. The Company is currently evaluating the impact ofadopting FIN 48 on its financial statements.

**ITEM3.**                QUANTITATIVE ANDQUALITATIVE DISLCOSURES ABOUT MARKET RISK

Our quantitative andqualitative disclosures about market risk are described in “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Item 7A—Quantitativeand Qualitative Disclosures about Market Risk” contained in the 2005 Form 10-K.Except as described below in this Form 10-Q, there have been nomaterial changes to those market risks during the six months ended June 30,2006.

**Foreign Currency Exposure Risk**

Weare exposed to market risk associated with movements in foreign currencyexchange rates. There have been no material changes to our riskmanagement policy during the six months ended June 30, 2006.

At June 30, 2006, wehad outstanding foreign exchange derivative contracts to purchase and sellforeign currency that qualified as foreign currency cash flow hedges under SFAS133 with notional amounts translated into U.S. Dollars of $74.4 million. Wewould have paid $1.2 million at June 30, 2006 to settle these contracts,which represents the fair value. At June 30, 2006, the net fair value ofthese contracts was minimal. At June 30, 2006, if the Euro strengthened by10% against the U.S. Dollar and the U.S. Dollar strengthened by 10% against theBritish Pound, it would decrease the fair value of these contracts and, as aresult, accumulated other comprehensive income would decrease by approximately$2.9 million, net of tax.

While our internationalresults of operations, as measured in U.S. dollars, are subject to foreignexchange rate fluctuations, we do not consider the related risk to be materialto our results of operations. If the U.S. Dollar strengthened by 10% againstthe Euro and the British Pound, the net impact to our net income would havebeen a reduction of approximately $2.1 million.

**ITEM4.**                CONTROLS ANDPROCEDURES

As of the end of theperiod covered by this report, the Company’s management carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report in providing a reasonable level ofassurance that information we are required to disclose in reports we file orfurnish under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

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

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**PART II—OTHERINFORMATION**

**ITEM1.**                LEGAL PROCEEDINGS

In the normal course ofbusiness, we are and have been party to, or otherwise involved in, litigations,claims and arbitrations that involve claims for substantial amounts. Theseproceedings have generally involved either competitor claims in connection withnew employee hires, or claims from former employees in connection with thetermination of their employment from us. We believe proceedings of these typesare common in the inter-dealer brokerage industry due to its highly competitivenature. There is also potential for client claims alleging the occurrence oferrors in the execution of brokerage transactions. We are also currently andwill, in the future, be involved, in examinations, investigations or proceedingsby government agencies and self-regulatory organizations. These examinations orinvestigations could result in substantial fines or administrative proceedingsthat could result in censure, the issuance of cease and desist orders, thesuspension or expulsion of a broker dealer and its affiliated persons, officersor employees or other similar consequences. In August 2006, the NASD finedone of our subsidiaries an aggregate of $45,000 for issues relating to theregistration of one individual on one of our brokerage desks and the failure toprovide information as required by TRACE requirements and censured one of ourofficers in relation to the registration issue.

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

**ITEM1A.**        RISK FACTORS

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

**ITEM2.**                UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

Underour 2004 Equity Incentive Plan, we allow employees to elect to have us withholdshares of common stock to satisfy minimum statutory tax withholdingobligations arising on the vesting and settlement of restricted stock units.When we withhold these shares, we are required to remit to the appropriatetaxing authorities the market price of the shares withheld, ****which could be deemed a purchase of the shares of common stock by us onthe date of withholding****. During the quarter ended June 30,2006, we withheld shares of common stock to satisfy tax withholding obligationsas follows:

| **Date** | ** ** | ** ** | ** ** | **No. of Shares** | ** ** | **Average Market Price** | ** ** |
|----------|------------|------------|------------|-----------------------------|------------|------------------------------------|------------|
| April    |       |       | —     |                        |       |                               | —     |   |   |
| May      |       |       | 16,997     |                        |       |                               | $          | 55.34 |   |   |
| June     |       |       | 4,596      |                        |       |                               | 54.07      |   |   |
|          |            |            |            |                             |            |                                    |            |  |  |  |  |  |

 

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**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

At the 2006 Annual Meeting of Stockholders, which washeld on May 31, 2006 (the “Annual Meeting”), the stockholders of theCompany elected two directors to serve until the 2009 Annual Meeting ofStockholders or until successors are duly elected and qualified.

The affirmative vote of a plurality of the votes castby holders of shares of common stock was required to elect the directors.

Thefollowing table sets forth the number of votes cast for and withheld withrespect to each nominee.

| **Nominee**       | ** ** | ** ** | ** ** | **For** | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|---------|------------|--------------|------------|
| Geoffrey Kalish   |       | 26,037,441 |       | 527,256 |       |
| John R. MacDonald |       | 26,037,471 |       | 527,226 |       |

 

The following is a list ofthe Company’s directors whose term of office continued after the 2006 AnnualMeeting:

Michael A. GoochColin HeffronJohn W. WardMarisa Cassoni

**ITEM 6.**                EXHIBITS

Exhibits:

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

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this Quarterly Report on Form 10-Qfor the quarter ended June 30, 2006 to be signed on its behalf by theundersigned, thereunto duly authorized, on the 14th day of August, 2006.

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

 

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**Exhibit Index**

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

 

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