**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

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

**For the transition periodfrom             to           **

**Commissionfile number:  000-51103**

**GFI Group Inc.**

(Exact name of registrantas specified in its charter)

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

 

**(212) 968-4100**

(Registrant’s telephonenumber, including area code)

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, $0.01 par value**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x      No o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes o      No x

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 if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   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.

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated  filer o |
|---------------------------|--------|---------------------|--------|--------------------------|

 

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

As of June 30, 2006,the aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant was $819,900,539 based upon the closing saleprice of $53.95 as reported on the Nasdaq Stock Market.

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date.

| **Class**                                | ** ** | **Outstanding  at February 15, 2007** |
|------------------------------------------|------------|--------------------------------------------|
| Common Stock,  $0.01 par value per share |       | 28,696,263 shares                          |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof registrant’s definitive proxy statement for its annual shareholders’ meetingto be held on June 13, 2007 are incorporated by reference in this AnnualReport on Form 10-K in response to Part III, Items 10, 11, 12,13 and 14.

 

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**TABLEOF CONTENTS**

|            | ** ** | ** **                                                                                                              | ** ** | **    Page    ** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **PART I**                                                                                                         |       |                                                     |       |
| Item 1.    | ** ** | Business                                                                                                                |       | 4                                                        |       |
| Item  1A.  | ** ** | Risk  Factors                                                                                                           |       | 20                                                       |       |
| Item 1B.   | ** ** | Unresolved Staff Comments                                                                                               |       | 35                                                       |       |
| Item 2.    | ** ** | Properties                                                                                                              |       | 35                                                       |       |
| Item  3.   | ** ** | Legal  Proceedings                                                                                                      |       | 35                                                       |       |
| Item 4.    | ** ** | Submission of Matters to a Vote of Security Holders                                                                     |       | 36                                                       |       |
| ** ** | ** ** | **PART II**                                                                                                        |       |                                                     |       |
| Item 5.    | ** ** | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 36                                                       |       |
| Item 6.    | ** ** | Selected Financial Data                                                                                                 |       | 39                                                       |       |
| Item 7.    | ** ** | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                   |       | 40                                                       |       |
| Item 7A.   | ** ** | Quantitative and Qualitative Disclosures About Market  Risk                                                             |       | 68                                                       |       |
| Item 8.    | ** ** | Financial Statements and Supplementary Data                                                                             |       | 71                                                       |       |
| Item 9.    | ** ** | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                   |       | 103                                                      |       |
| Item 9A.   | ** ** | Controls and Procedures                                                                                                 |       | 103                                                      |       |
| Item  9B.  | ** ** | Other  Information                                                                                                      |       | 105                                                      |       |
| ** ** | ** ** | **PART III**                                                                                                       |       |                                                     |       |
| Item 10.   | ** ** | Directors, Executive Officers and Corporate Governance                                                                  |       | 105                                                      |       |
| Item 11.   | ** ** | Executive Compensation                                                                                                  |       | 106                                                      |       |
| Item 12.   | ** ** | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                         |       | 106                                                      |       |
| Item 13.   | ** ** | Certain Relationships and Related Transactions, and  Director Independence                                              |       | 106                                                      |       |
| Item 14.   | ** ** | Principal Accountant Fees and Services                                                                                  |       | 106                                                      |       |
| ** ** | ** ** | **PART IV**                                                                                                        |       |                                                     |       |
| Item 15.   | ** ** | Exhibits and Financial Statement Schedules                                                                              |       | 106                                                      |       |
| Signatures |       | 110                                                                                                                     |       |

 

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**Forward LookingStatements**

**FORWARD-LOOKINGSTATEMENTS**

This Annual Reporton Form 10-K contains “forward-looking statements” within themeaning 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,” “will likely result,” orwords or phrases of similar meaning. These forward-looking statements are basedlargely on the expectations of management and are subject to a number of risksand uncertainties including, but not limited to, the following:

·       the risks and other factors described under theheading “Risk Factors” in Part I—Item 1A of this Annual Report on Form 10-Kand elsewhere in this Annual Report on Form 10-K;

·       expansion and growth of our operations generallyor of specific products or services;

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

·       our entrance into new brokerage markets,including investments in establishing new brokerage desks;

·       competition from current and new competitors;

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

·       future results of operations and financialcondition;

·       the success of our business strategies;

·       economic, political and market factors affectingtrading volumes, securities prices, or demand for our brokerage services;

·       financial difficulties experienced by ourcustomers or key participants in the markets in which we focus our brokerageservices;

·       risks associated with potential acquisitions byus of businesses or technologies;

·       the maturing of key markets and any resultingcontraction in commissions;

·       our ability to manage our internationaloperations;

·       uncertainties associated with currencyfluctuations;

·       our failure to protect or enforce ourintellectual property rights;

·       changes in laws and regulations governing ourbusiness and operations or permissible activities and our ability to complywith such laws and regulations;

·       uncertainties relating to litigation; and

·       changes in the availabilityof capital.

The foregoing risks anduncertainties, as well as those risks discussed under the headings “Item 7—ManagementsDiscussion and Analysis of Financial Condition and Results of Operations” and “Item7A—Quantitative and Qualitative Disclosures About Market Risk” and elsewhere isthis Annual Report on Form 10-K, may cause actual results to differmaterially from the forward-looking statements. The information included hereinis given as of the filing date of this Annual Report on Form 10-Kwith the Securities Exchange Commission (the “SEC”) and future events orcircumstances could differ significantly from these forward-looking statements.The Company does not undertake to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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**PART I.**

**ITEM 1.**                BUSINESS

**Our Business**

**Introduction**

We are a leading inter-dealer broker specializing inover-the-counter (“OTC”) derivatives products and related securities. We foundedour business in 1987 and were incorporated under the laws of the State ofDelaware in 2001 to be a holding company for our subsidiaries. We providebrokerage services and data and analytics products to institutional clients inmarkets for a range of credit, financial, equity and commodity instruments. Wefunction as an intermediary on behalf of our brokerage clients by matchingtheir trading needs with counterparties having reciprocal interests. We focusprimarily on the more complex, and often less liquid, markets for sophisticatedfinancial instruments, primarily OTC derivatives, that offer an opportunity forstrong growth and higher commissions per transaction than the markets for morestandardized financial instruments. We have been recognized by various industrypublications as a leading provider of inter-dealer brokerage services forcertain products in the credit, financial, equity and commodity markets onwhich we focus.

We offer our clients a hybrid brokerage approach,combining a range of telephonic and electronic trade execution services,depending on the needs of the individual markets. We complement our hybridbrokerage capabilities with decision support products, such as value-added dataand analytics software. We earn revenues for our brokerage services and chargefees for certain of our data and analytics products.

At December 31, 2006, we had 175 brokerage desksand 932 brokerage personnel (consisting of 821 brokers and 111 trainees andclerks) serving over 2,000 brokerage and data and analytics clients, includingleading commercial and investment banks, through our principal offices in NewYork, Sugar Land (TX), Englewood (NJ), London, Paris, Hong Kong, Tokyo,Singapore and Sydney.

The Company’s onlyoperating segment consists of its brokerage and analytic and market dataoperations. This segment operates across domestic and international markets.Substantially all of the Company’s identifiable assets are in North America andEurope. For information on our revenues by geographic region see Note 20 to theConsolidated Financial Statements.

**Website Access toReports**

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 SEC: our Annual Reports on Form 10-K; our QuarterlyReports on Form 10-Q; and our Current Reports on Form 8-K;our proxy statements on Schedule 14A, Forms 3, 4 and 5 filed on behalf ofdirectors and executive officers; and amendments to those reports filed orfurnished pursuant to the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).

In addition, you may read and copy any materials thatwe file with the SEC at the SEC’s Public Reference Room at 450 FifthStreet, N.W., Washington, DC 20549. You also may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains an Internet site that contains our reports,proxy and information statements, and other information regarding the Companythat we file electronically with the SEC at http://www.sec.gov.

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.

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Our Internet website andthe information contained therein or connected thereto are not intended to beincorporated into this Annual Report on Form 10-K.

**Our Industry**

On most business days,trillions of dollars in securities, commodities, currencies and derivativeinstruments are traded around the world. These products range from standardizedfinancial instruments, such as common equity securities and futures contracts,that are typically traded on exchanges, to more complex, less standardizedinstruments, such as OTC derivatives, that are typically traded betweeninstitutional dealers, which are primarily global investment banks and moneycenter banks. Buyers and sellers of exchange-traded financial instrumentsbenefit from the price transparency and enhanced liquidity provided byliquidity facilitators, such as market makers and specialists, who participatein those markets. Buyers and sellers of many OTC instruments, on the otherhand, frequently rely on an inter-dealer broker to facilitate liquidity bygathering pricing information and identifying counterparties with reciprocalinterests.

***Market Evolution***

We define a liquid financial market as one in which afinancial instrument is easy to buy or sell quickly with minimal pricedisturbance. The liquidity of a market for a particular financial product orinstrument depends on several factors, including:  the presence of anumber of market participants and facilitators of liquidity, the availabilityof pricing reference data, and the availability of standardized terms. Liquidmarkets are characterized by substantial price competition, efficient executionand high trading volume. While a market for an exchange-traded instrument isordinarily liquid, some large OTC markets, such as the market for U.S. treasurysecurities, are also highly liquid. In such liquid, OTC markets, commissionsare generally lower because there are often numerous, readily identifiablebuyers and sellers causing the traditional telephonic brokerage services ofinter-dealer brokers to be less essential and to command less of a premium.

Less liquid markets are characterized by fewerparticipants, less price transparency and lower trading volumes. Complexfinancial instruments that are traded OTC are often less commoditized and aretraded primarily by more sophisticated institutional buyers and sellers. In aless liquid market, an inter-dealer broker can provide greater value to the efficientexecution of a trade by applying its market knowledge to locate a number ofbids and offers so that buyers and sellers may find counterparties with whichto trade, which can be especially helpful for large or non-standardizedtransactions. An inter-dealer broker ordinarily accomplishes this by contactingpotential counterparties directly by telephone or electronic messaging and, inan increasing number of cases, market participants post prices and may executetransactions via proprietary trading technology provided by the inter-dealerbroker. In addition, in a less liquid market with fewer participants,disclosure of the intention of a participant to buy or sell could disrupt themarket and lead to poor pricing. By using an inter-dealer broker, the identitiesof the transaction parties are not disclosed in many transactions until thetrade is consummated and, therefore, market participants better preserve theiranonymity. For all these reasons, in a less liquid market, an inter-dealerbroker can offer important value to market participants.

As a market for aparticular financial instrument develops and matures, more buyers and sellersenter the market, resulting in more transactions and more pricing information.In addition, the terms of such financial instrument tend to become morestandardized, generally resulting in a more liquid market. In this way, arelatively illiquid market for an instrument may evolve over a period of timeinto a more liquid market. As this evolution occurs, the characteristics oftrading, the preferred mode of execution and the size of commissions thatinter-dealer brokers charge, may also change. In some cases, as the marketmatures, an inter-dealer broker may provide a client with an electronic screenor system that displays the most current pricing information. In addition, amarket may have some characteristics of both more liquid 

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and lessliquid markets, which requires an inter-dealer broker to offer integratedtelephonic and electronic brokering. We refer to this integrated service ashybrid brokerage. In some cases, hybrid brokerage involves coupling traditionalbroker-executed services with various electronic enhancements, such aselectronic communications, price discovery tools and order entry. In othercases, hybrid brokerage involves full electronic execution supported bytelephonic communication between the broker and their clients.

***The Derivatives Market***

Derivatives are increasingly being used by financialinstitutions, hedge funds and large corporations to manage risk or takeadvantage of an anticipated direction of a market by allowing holders to guardagainst gains or declines in the price of underlying financial assets, indicesor other investments without having to buy or sell such underlying assets,indices or other investments. The underlying asset, index or other investmentmay be, among other things, a physical commodity, an interest rate, a stock, anindex or a currency. Derivatives are commonly used to mitigate the risksassociated with interest rate movements, equity ownership, changes in the valueof foreign currency, credit defaults by large corporate and sovereign debtorsand changes in the prices of commodity products. Common types of derivativesinclude futures, options and swaps. They derive their value based on theinherent value of the underlying asset. According to a survey of its membersconducted in 2003 by the International Swaps and Derivatives Association, whichwe refer to as ISDA, over 90% of the world’s 500 largest companies usederivative instruments to manage and hedge their risks more effectively.

Derivatives are traded both OTC and on exchanges.According to a recent report of the Bank for International Settlements, OTCderivatives accounted for over 81% of the total outstanding global derivativestransactions as of June 2006 (as measured by notional amount). Theliquidity of markets for particular OTC derivative instruments varies fromhighly liquid, such as the market for Eurodollar interest rate derivatives, toilliquid, such as the market for certain customized credit derivatives whichare structured to meet specific investor needs.

ISDA also reported in a recent survey of its membersthat in the first half of 2006, among the derivative instruments surveyed,credit derivatives were the fastest growing segment of the derivatives marketwith notional amounts outstanding growing 52% over that six month period. Thesurvey stated that at mid-year 2006, notional amounts outstanding of creditderivatives grew to approximately $26.0 trillion from approximately $12.4trillion at mid-year 2005. This increase represented period-over-period growthof over 109%. Although several exchanges announced plans in 2006 to launch anexchange-traded credit derivative, credit derivatives are currently traded entirelyin OTC transactions, either directly or through inter-dealer brokers and otherfinancial institutions.

Furthermore, the number of different derivativeinstruments is growing as companies and financial institutions develop new andinnovative derivative instruments to meet industry demands for sophisticatedrisk management and complex financial arbitrage. In its 2006 annual survey,Risk magazine identified 120 categories of derivatives, excluding commodityderivatives. Novel derivative instruments often have distinct terms and littleor no trading history with which to estimate a price. Markets for newderivative instruments therefore require market intelligence and the servicesof highly skilled and well-informed brokers and reliable market data and pricingtools.

An example of more novel,OTC derivative instruments would be credit default swaps on asset-backedsecurities (referred to as ABCDS). These instruments allow investors to take oroffset risk of default in the asset-backed securities market, which includessecurities backed by home equity and commercial real estate loans, credit cardreceivables and loans for automobiles, recreational vehicles and boats. Anotherexample of an innovative and complex OTC derivative instrument is carbonemissions options, which allow trading houses and other market participants totake or offset their exposure in the fast growing European market for carbondioxide emissions allowances under the European Union Emissions Trading Scheme,or 

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ETS. TheETS permits European-based companies that exceed individual carbon dioxideemissions targets to purchase emissions allowances from companies that emitless than their emissions targets.

**Our MarketOpportunity**

We believe the markets for financial instruments,especially the markets for derivative instruments, present us with thefollowing opportunities to provide value to our clients:

***Need for efficientexecution in both liquid and less liquid markets.******  ***While the useof execution technology is becoming more common in the inter-dealer brokerageindustry, only certain highly liquid and standardized financial instruments maybe fully traded electronically in an efficient manner. More complex OTCproducts, such as derivatives, typically require telephonic brokerage toprovide market intelligence to clients and to aid the execution process. Webelieve that inter-dealer brokers who provide a combination of telephonic andelectronic brokerage services are better positioned to meet the particularneeds of the markets in which they operate than competitors that cannot offerthis combination of services.

***Need for expertisein the development of new markets.******  ***In order tobetter support their clients’ evolving investment and risk managementstrategies, our dealer clients create new products, including new derivativeinstruments. Dealers also modify their trading techniques in order to bettersupport their clients’ needs, such as by integrating the trading of derivativeinstruments with the trading of related underlying or correlated financialassets, indices or other investments. We believe the markets for these newproducts and trading techniques create an opportunity for those inter-dealerbrokers who, through market knowledge and extensive client relationships, areable to identify these new product opportunities and to focus their brokerageservices appropriately.

***Need for marketintelligence.******  ***Inter-dealer brokers that execute ahigher volume of trades of a particular financial product and have access tomore market participants are better positioned to provide valuable pricinginformation than brokers who less frequently serve that market. In less liquidfinancial markets, including markets for novel and complex financialinstruments, market leadership becomes more important because reliable pricinginformation is scarce. Market participants in these less liquid markets utilizethe services of the leading inter-dealer brokers in order to gain access to themost bids and offers for a particular product. Similarly, inter-dealer brokerswho have a leading market share can offer superior market data and analyticstools based on their access to the broadest selection of transaction andpricing information. For example, market participants are increasingly pursuingtrading strategies that combine credit default swaps with convertible bonds andequity derivatives of securities of a single issuer or a basket of issuers.Inter-dealer brokers that have high volumes of bids and offers in the creditderivative markets and have access to technology which allows them to tracksuch market data against activity in the bond and equity markets are wellpositioned to provide market participants with analytical insight intocorrelated movements in related securities of a single issuer or relatedissuers or indexes.

***Increasing industry consolidation.******  ***Historically,the inter-dealer brokerage industry consisted of a number of small andmid-sized private companies that used traditional telephonic brokerage methodsto serve their clients and to compete against each other in various productcategories. The industry has begun to consolidate in recent years, in part, dueto the increasing importance of technology, including electronic execution,integrated trade processing and analytics and market data. Throughacquisitions, larger inter-dealer brokers with access to capital have beenbetter positioned to make the investments necessary to supply their clientswith this technology. We believe that inter-dealer brokers with developedtechnology resources which enhance brokerage execution and pre-and post-tradeanalysis and processing are better able to recruit and retain the most capablebrokers. As a result of these trends, smaller inter-dealer brokers may find itharder to compete and several have been acquired by larger inter-dealer brokerswith developed technological capabilities and better access to capital. Webelieve that the continued 

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consolidation ofthe industry provides an opportunity for these larger inter-dealer brokers tostrategically expand their businesses to better serve evolving client demands.

**Our CompetitiveStrengths**

We believe our principal competitive strengths are thefollowing.

***Strong Brand andLeading Position in Key Markets.******  ***We believethat over our twenty year history, we have successfully created value in ourbrand that our clients associate with high quality services in the markets onwhich we focus. Our leadership in these markets, such as the markets forcertain credit and equity derivatives, foreign exchange options and commodityproducts, has been recognized by rankings in industry publications such as Riskmagazine, FX Week and Energy Risk magazine. In an annual survey of dealers andbrokers conducted by Risk magazine, we have been ranked as the leading brokerin more categories of credit derivatives than any other inter-dealer brokerover the last eight years. In its 2006 annual survey, Risk magazine also rankedus as a leading broker in credit default swaps and numerous currency, energyand equity derivative markets. In addition, our Fenics® FX option analysisproduct is a leading analytic tool in the foreign exchange market.

We believe our leading positions in these marketsprovide us with greater access to market and pricing information, including abroad selection of proprietary market data that we are able to provide to ourclients. In addition, we believe that our leading market share in key OTCmarkets, such as credit derivatives, and our ability to use technology to tracksuch market data, enables us to provide market participants with betteranalytical insight into correlated movements in related securities of a singleissuer or related issuers or indexes in the credit derivative, bond and equitymarkets. In addition, we believe that, because of these leading marketpositions and differentiated technological capabilities, we are betterpositioned, compared to many of our inter-dealer competitors, to serve thegrowing needs of clients who are pursuing sophisticated capital structurearbitrage strategies and correlation-based trading.

***Ability to Identifyand Develop High Growth, Less Liquid Markets.******  ***We focusprimarily on complex and innovative financial markets where liquidity is harderto achieve and, therefore, our services are more valuable to marketparticipants. We believe these markets offer an opportunity for growth tointer-dealer brokers that move early to foster liquidity. We seek to anticipatethe development and growth of markets for evolving, innovative financialproducts in which we believe we can garner a leading market position and enjoyhigher commissions. For example, we entered the credit derivatives market in1996 at a time when we believed the market showed promise but had only modestactivity. According to the British Bankers’ Association, the size of the globalcredit derivatives market was only $180 billion in 1997 (measured bynotional amount outstanding). According to ISDA, notional amounts outstandingof credit derivatives have grown to $26.0 trillion at mid-year 2006, acompounded annual growth rate of over 79% for that eight and a half yearperiod. We believe our familiarity with the needs of such rapidly growingmarkets and our experience with complex product structures allow us to better serveclients in high-growth, less liquid markets than many of our competitors.

***Hybrid BrokeragePlatforms.******  ***We seek to tailor our use ofelectronic trading and other technology to the transactional nuances of eachspecific market. While the more complex, less liquid markets on which we focusoften require significant amounts of personal and attentive service from ourbrokers, some of our other markets may benefit from the introduction ofelectronic brokerage platforms. Depending on the needs of the individualmarkets, we offer a hybrid approach to our clients that combines a range ofelectronic and telephonic trade execution services. For example, our clientsmay choose between utilizing our GFI CreditMatch® or GFI ForexMatchTM electronictrading platforms to trade credit derivatives or foreign exchange optionsentirely on screen or executing the same transaction over the telephone throughour brokers. We also believe we add value for clients who trade in complex financialmarkets by offering data and Fenics® analytics products for decision support.We seek to establish data communication and 

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“straight-through-processing”connections with our clients’ settlement, risk management and complianceoperations in order to better serve their needs and to strengthen ourrelationships with them. Straight-through-processing generally involves the useof technology to automate the processing of financial transactions, fromexecution to settlement, in order to minimize human error, reduce operationalcosts and time, and enhance transaction information and reporting. We believeour hybrid brokerage approach provides us with a competitive advantage overcompetitors who do not offer this technology.

***Quality Data andAnalytics Products.******  ***We are one of the fewinter-dealer brokers that offer a broad array of data and analytics products toparticipants in the complex financial markets in which we specialize. Our dataproducts are derived from the trade data compiled from our brokerage servicesin our key markets. Our analytics products benefit from the reputation of theFenics® brand for reliability, ease of use and independence from any largedealer. Our Fenics® tools are used, not only by our traditional brokerageclients, but also by their clients, such as national and regional financialinstitutions and large corporations worldwide. These products are designed toserve the needs of certain markets for reliable data and trusted analyticstools and are leveraged to enhance our brokerage revenues across marketproducts. We believe that our ability to offer these products helps to supportour leadership in our key markets.

***Experienced SeniorManagement and Skilled Brokers and Technology Developers.******  ***We have asenior management team that is experienced in identifying and exploitingmarkets for evolving, innovative financial instruments. Our founder and chiefexecutive officer, Michael Gooch, has over 20 years of experience in thederivatives markets and our president, Colin Heffron, has been with our companysince 1988 and, prior to becoming our president, was instrumental in developinga number of brokerage desks and leading the growth of our European operations. Reportingto them is an experienced management team that includes senior market specialistsin each of our product categories. We also employ 821 skilled and specializedbrokers, many of whom have extensive product and industry experience. Althoughthe competition for brokers is intense, we have historically experienced lowbroker turnover, and have been able to effectively hire new brokers andestablish new brokerage desks in areas in which we seek to expand ouroperations. In addition, our in-house technology developers are experienced atdeveloping electronic trading platforms and commercial quality software thatare tailored to the needs of certain select markets in which we focus. Ourbrokers utilize this technology and market information to provide their clientswith enhanced services. We believe that the combination of our experiencedsenior management, skilled brokers and technology developers gives us acompetitive advantage in executing our business strategy.

***Diverse Product and Service Offerings.******  ***We offer ourproducts and services in a diverse array of financial markets and geographicregions. Historically, the markets on which we focus have volume and revenuecycles that are relatively distinct from each other and have generally not beencorrelated to movements in the broad equity indices. Further, our decisionsupport products, including our market data and analytical tools, give us anopportunity to leverage and expand our client base, providing revenue sourcesbeyond our traditional brokerage clients. We believe our diverse product andservice offerings provide us with a competitive advantage over many of ourcompetitors that may have more limited product and service offerings and,therefore, may be more susceptible to downturns in a particular market orgeographic region.

**Our Strategy**

We intend to continue to grow our business andincrease our profitability by being a leading provider of brokerage servicesand data and analytics to the markets on which we focus. We intend to employthe following strategies to achieve our goals.

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***Maintain andenhance our leading positions in key markets.******  ***We plan tocontinue leveraging the leading market share and brand recognition that we havedeveloped for a range of derivative instruments and underlying securities ingrowing credit, financial, equity and commodity markets. We will continuedeploying our specialized brokers in higher-margin, OTC markets, such as creditderivatives, and will seek to improve their productivity through technologicalinnovation, such as state of the art electronic brokerage platforms. We intendto provide market participants with analytical insight into correlatedmovements in related securities of a single issuer or related issuers orindexes in the credit derivative, corporate bond and equity markets. We alsointend to continue offering quality data and analytics products in certainselect markets requiring reliable decision-support tools. Through these means,we seek to enhance our services in existing markets and deepen long-standingrelationships with our global institutional clients.

As part of our efforts to enhance our services in ourkey markets, we and one of our competitors recently agreed to jointly developnew clearing services for OTC derivative products with The ClearingCorporation, a clearinghouse for derivative instruments, and acquired aminority ownership interest in The Clearing Corporation. We believe ourinvestment will complement our hybrid electronic brokerage platforms andstraight-through-processing capabilities. Ultimately, we anticipate that centralizedclearing will further expand the market for OTC derivative products throughadded settlement efficiency and reliability.

***Continue toidentify and develop new products and high-growth markets.******  ***We increasedour number of brokerage desks by 25 desks to 175 desks at December 31,2006 from 150 desks at December 31, 2005 and by 49 desks in 2005 from 101desks at December 31, 2004. Many of these recent brokerage desks cover theless commoditized, newer high-growth markets in which we specialize or covermarkets that are complementary to those markets. Combined, the revenue ofbrokerage desks opened or restructured since the beginning of 2005 represented19.1% of our total revenues for the year ended December 31, 2006. It isoften our practice to establish new brokerage desks through the strategicredeployment of experienced brokers from established brokerage desks andthrough the selective hiring of new brokers or trainees. Individual brokeragedesks are separately tracked and monitored in an effort to drive performance.We will continue to focus on identifying high growth markets where liquidity ismore valuable, thereby yielding early-mover opportunities. We also intend tocontinue to expand our presence in Europe and in the Asia-Pacific markets,where we believe there are opportunities to increase our revenues. As part ofthis effort, we commenced operations in Paris in 2006 and expect to beginoperations in Korea and South Africa in 2007.

***Continue to pursuenew customers and diverse revenue opportunities.******  ***We offer ourproducts and services in a diverse range of financial markets and geographicregions and to hundreds of institutional customers. We believe this diversitywill likely lessen the impact to us of a downturn in any particular market orgeographic region. We will look to expand our customer base as an increasingnumber of sophisticated market participants, such as large hedge funds, look toparticipate in wholesale markets for the execution of derivative transactions.We also intend to continue managing our business with the goal of maintainingthe diversity of our revenues. On a geographic basis, approximately 44% of ourtotal revenues for the year ended December 31, 2006 were generated by ourEuropean operations, 47% was generated by our North American operations and 9%was generated by our operations in the Asia-Pacific region. Additionally, forthe year ended December 31, 2006, no one customer accounted for more thanapproximately 6.5% of our total revenues from all products, services andregions, and our largest brokerage desk accounted for 6.0% of total revenues.

***Leverageinfrastructure and technology to improve margins.******  ***We intend tocontinue to invest in the use and development of technology, including thedevelopment of proprietary electronic trading platforms, to further enhancebroker productivity, increase customer and broker loyalty and improve ourcompetitive position and market share. During 2006, we saw substantial growthin the use of our GFI CreditMatch® 

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electronic tradingplatform in Europe and more recently launched fully electronic trading of cashcorporate bonds in Europe alongside credit derivatives. In addition, we havedeveloped and are continuing to introduce GFI ForexMatchTM, a browser-basedelectronic platform for foreign exchange products. We believe that as the usageof these systems becomes more widespread, we will be able to increase brokerproductivity. Moreover, where possible, we plan to continue to install “straight-through-processing”connections with our clients’ settlement, risk management and complianceoperations, in order to better serve their needs and to provide us withadditional opportunities to increase our revenue. At the same time, we continueto work on ways to improve our ability to leverage our operations,infrastructure and other support areas, such as our executive and financedepartments, to create cost efficiencies and improve margins.

***Strategicallyexpand our operations through business acquisitions.******  ***Historically,the inter-dealer brokerage industry was fragmented and concentrated mainly oncountry or regional specific marketplaces and discrete product sets, such asforeign exchange or energy products. Over time, however, the industry hasexperienced increasing consolidation as larger inter-dealer brokers have soughtto enhance their global brokerage services and offset client commissionpressure in maturing product categories by acquiring smaller competitors thatspecialized in specific product markets. We plan to continue to selectivelyseek opportunities to expand our relationships with large financial dealersinto new or existing product areas through the acquisition of complementarybusinesses.

As part of our generalacquisition strategy, in October 2006, we acquired substantially all ofthe North American brokerage operations and assets of the following Texaslimited partnerships (collectively, “Amerex Energy”): Amerex Natural Gas I,Ltd., Amerex Power Ltd., Amerex Emissions, Ltd., and Amerex Retail EnergyServices, Ltd. for $86.4 million, including cash acquired of $2.1 million and$0.5 million in direct costs related to the acquisition, consisting primarilyof legal and other professional fees. We believe that our increased presence inthe United States energy market is timely because of current volatility anduncertainty in world energy markets. We also believe the acquisition of Amerexis complementary to our existing commodity, energy and shipping brokerageservices. We added ten energy-related desks from Amerex, including Natural GasBasis, Natural Gas Daily, Natural Gas Options, East Power, East Short TermPower, West Power, West Short Term Power, ERCOT, Environmental Commodities andRetail Energy Management. We believe that the acquisition will provide us witha major established presence in the Houston, Texas energy markets, which weview as crucial to servicing the traditional U.S. energy industry participants.

**Our Market Focus**

Our brokerage operations focus on a wide variety ofcredit, financial, equity and commodity instruments around the world. Withinthese markets, we focus on the more complex, less liquid markets forsophisticated financial instruments, primarily OTC derivatives. OTC derivativesare generally structured as forwards, swaps or options. A forward is anagreement between two parties to exchange assets or cash flows at a specifiedfuture date at a price agreed on the trade date. A swap is an agreement betweentwo parties to exchange cash flows or other assets or liabilities at specifiedpayment dates during the agreed-upon life of the contract. An option is anagreement that gives the buyer the right, but not the obligation, to buy orsell a specified amount of an underlying asset or security at an agreed uponprice on, or until, the expiration of the contract. We also support and enhanceour brokerage operations by providing trading platforms and straight-throughprocessing connections where applicable.

We provide brokerage services to our clients throughagency or principal transactions. In agency transactions, we charge acommission for connecting buyers and sellers and assisting in the negotiationof the price and other material terms of the transaction. After all materialterms of a transaction are agreed upon, we identify the buyer and seller toeach other and they then settle the trade directly. Commissions 

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charged to our clients inagency transactions vary across the products for which we provide brokerageservices.

We generate revenue from principal transactions on thespread between the buy and sell price of the security that is brokered. Ourprincipal transactions revenue is primarily derived from matched principaltransactions. In matched principal transactions, we act as a “middleman” byserving as counterparty for an identified buyer and an identified seller inmatching reciprocal back-to-back trades. These transactions are then settledthrough clearing institutions with which we have a contractual relationship.Because the buyer and seller each settle their transactions through us ratherthan with each other, the parties are able to maintain their anonymity. Alimited number of our brokerage desks are allowed to enter into unmatchedprincipal transactions for the purpose of facilitating a customer’s executionneeds for transactions initiated by such customers, adding liquidity to amarket or attracting additional order flow. These unmatched positions areintended to be held short term.

***Credit Products.******  ***We providebrokerage services in a broad range of credit derivatives, bond instruments andother related credit products. The most common credit derivative, a creditdefault swap, was developed by global banks during the early 1990s. A creditdefault swap is essentially like an insurance contract, in which the insuredparty pays a periodic premium until the contract expires or a credit eventoccurs. In return for this premium, the contract seller makes a payment to thebuyer if there is a credit default or other specified credit event with respectto the issuer of the underlying credit instrument referenced in the creditdefault swap. The credit default swap market has evolved from trading simplesingle-entity credit default swaps to a range of customized product structuresand index products, allowing investors greater flexibility in tailoring creditpositions that correspond to their desired risk level.

Offices in New York, London, Sydney, Hong Kong,Singapore and Tokyo each provide brokerage services in a broad range of creditderivative products that include single-entity credit default swaps, emergingmarket credit default swaps, credit indices, options on single-entity creditdefault swaps, options on credit indices and credit index tranches. We also providebrokerage services in markets for a range of non-derivative credit instruments,such as investment grade corporate bonds, high yield corporate bonds, emergingmarket Eurobonds, bank capital preferred shares, asset-backed bonds andfloating rate notes. Our presence in corporate bonds and equities allows us tocompile data on a single issuer from each of the bond, equity and creditderivative markets and to provide investors with analytical insight into asingle issuer or related issuers. We support our credit brokerage with GFICreditMatch®, our electronic trading platform that provides trading, tradeprocessing and straight-through-processing functionality to our clients.Consistent with our hybrid brokerage model, clients may choose between utilizingGFI CreditMatch® to trade certain credit derivative products entirely on screenor executing the same transaction over the telephone through our brokers.

***Financial Products.******  ***We providebrokerage services in a range of financial instruments, including foreignexchange options, exotic options and interest rate swaps. Exotic optionsinclude non-standard options on baskets of foreign currencies, forwardcontracts and non-deliverable forward contracts, which are forward contractsthat do not require physical delivery of the underlying asset. For theseproducts, we offer telephonic brokerage services in our New York, London, HongKong, Singapore and Sydney offices, augmented in select markets with our GFIForexMatchTM trading platform. We also offer a straight-through-processingcapability that automatically reports completed telephonic and electronictransactions directly to our clients’ position-keeping systems and providesposition updates. This processing capability covers currency option tradesexecuted through our worldwide brokerage desks. Our New York office focuses onproviding brokerage services for foreign exchange option trading among the U.S.Dollar, the Japanese Yen and the Euro, which are referred to as the G3currencies, as well as foreign exchange options, forward contracts andnon-deliverable forward contracts and interest rate swaps for certain U.S.,Canadian and Latin American currencies. Our New York office also offers bondoptions, swap options and corporate and emerging market repo brokerageservices. Our London office also covers foreign exchange 

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option trading in the G3currencies along with nearly all European cross currencies, including theRussian Rouble and Eastern European currencies, for which we provide brokerageservices for forwards and non-deliverable forwards. In addition, our Londonoffice offers European and corporate repo and currency basis and dollar swapsbrokerage services. Our brokers in Singapore provide brokerage services forforeign exchange currency options, non-deliverable forwards and interest rateswaps for regional and G3 currencies. Our Hong Kong office provides regionalcurrency and interest rate swap services. Our Sydney office brokers foreignexchange currency options for the Australian dollar for our customers inAustralia.

***Equity Products.******  ***We providebrokerage services in a range of equity products, including U.S. domesticequity, international equity, equity derivatives and Global Depositary Receipts(“GDRs”) and American Depositary Receipt (“ADRs”) stocks. We offer telephonicequity brokerage services from our brokerage desks in New York, London, Paris,Hong Kong, Tokyo and, where appropriate, our electronic trading platforms.Through our various offices we broker trades in the OTC market as well ascertain exchange-traded securities. Our London office provides brokerageservices in equity index options, single stock options, global depositoryreceipts, Pan-European equities and Japanese equity derivatives. From our HongKong office, we offer brokerage services in GDRs and ADRs for Hong Kong, Koreanand Japanese equity derivatives. Our New York office provides brokerageservices in single stock cash equities, single stock options, index options,sector options, equity default swaps, variance swaps, total return swaps andADRs. In the first quarter of 2006, our Paris office began providing brokerageservices in financial futures, cash equities and single stock and equity indexoptions. Our Tokyo office provides services in Japanese single stock and indexoptions. Through our various subsidiaries, we are members of the followingexchanges: International Securities Exchange, Chicago Mercantile Exchange(non-member firm), London Stock Exchange, Eurex, Euronext.liffe, BalticExchange and IntercontinentalExchange.

***Commodity Products.******  ***We providebrokerage services in a wide range of commodity products, including oil,natural gas, biofuel, electricity, wet and dry freight derivatives, preciousmetals, coal, weather derivatives, property derivatives, emissions and pulp andpaper. As a result of our October 2006 acquisition of the North Americanoperations of Amerex, based in Sugar Land, Texas, we added ten energy-relateddesks, including Natural Gas Basis, Natural Gas Daily, Natural Gas Options,East Power, East Short Term Power, West Power, West Short Term Power, ERCOT,Environmental Commodities and Retail Energy Management. Through a partnershipwith A.C.M. Shipping Limited, we offer hybrid telephonic and electronicbrokerage of wet freight derivatives in London, Singapore and New York. Wetfreight derivatives allow oil companies, ship owners and other users of wetfreight cargo capacity to better manage volatile shipping costs for theirproducts by effectively locking in the cost of shipping future product. Weprovide extensive brokerage services for both cash-based and derivativeinstruments in energy products such as electricity, natural gas and weatherderivatives. Weather derivatives allow utilities, agri-businesses and otherweather-affected businesses to better manage risks associated with changes inweather patterns. For example, a utility may purchase a weather derivative froma financial institution in order to guard against the risk that unseasonablycool summer weather will result in lower energy consumption by its clients. OurLondon office provides energy product brokerage services in many Europeannational markets, including for electricity, oil, coal and emissions. InLondon, our telephonic brokerage capabilities are augmented with electronicbrokerage capabilities that enable our clients to trade electricity, coal, andwet and dry freight derivatives on a trading platform we license from a thirdparty. From our New York office, we provide brokerage services in natural gas,oil and electricity in numerous U.S. regional electricity markets. OurSingapore office brokers dry freight derivatives and oil derivatives.

Through collaboration with certain divisions of CBRichard Ellis Group Inc., we provide and continue to develop brokerage servicesin European and U.S. real estate derivatives. The collaboration in the U.K. isnow a leader in the growing property derivatives market. In addition, through ajoint venture with Colliers International, we provide brokerage services inHong Kong property derivatives. Real estate derivatives allow companies andother investors to hedge or speculate on the value of real estate, as 

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measured by an industryindex, without buying or selling actual properties. Transactions typically takethe form of a total return swap, exchanging the property return for a currencyinterest rate plus a fixed spread.

We are a member of ConfirmHub, LLC, a company that hasdeveloped a system for electronic trade confirmations for the North Americanenergy markets. Through this membership, we and other members of ConfirmHub areable to offer electronic trade confirmations through a single secure connectionin a standard format. Over fifty large energy trading companies currentlysubscribe to ConfirmHub.

We provide brokerage services in pulp, recycled,printing, writing and packaging paper products, including a full range ofderivative instruments for such products. From our brokerage desks in New York,London and Sydney, we also serve the global precious metals markets withbrokerage in spot, forward, swap and options contracts focusing on gold,silver, platinum and palladium.

***Data and Analytics.******  ***In selectedmarkets, we license market data and analytics products that are used to buildpricing models, develop trading strategies and to manage, price and revaluederivative portfolios. These products are sold on a subscription basis througha dedicated sales team.

We provide market data in the following productareas:  foreign exchange options, credit derivatives, European repurchaseagreements, emerging market bonds, European and North American energycommodities. We make our data available through a number of channels includingstreaming web portals, file transfer protocol downloads, Fenics analyticaltools and data vendors. Revenue from market data products consists of up-frontlicense fees and monthly subscription fees and individual large database sales.In addition, we have data distribution relationships with Reuters, Bloombergand Quick who license our data for distribution to their global users.

We currently offer our Fenics® analytics productsprimarily for the foreign exchange option markets, and, to a lesser extent, forcertain precious metals, credit derivatives, energy derivatives, propertyderivatives and wet and dry freight markets. Fenics FX is a leading foreignexchange option pricing and analysis tool that is licensed for use at hundredsof sites globally. Fenics FX provides an array of tools, math models andindependent market data that permits clients to quickly and accurately price andrevalue both standard and exotic foreign exchange options. Fenics FX can alsobe integrated with most aspects of a client’s trading infrastructure, andallows clients to control, monitor and more effectively oversee each stage offoreign exchange option trading.

In 2006, we extended ourforeign exchange option products to include an e-commerce foreign exchangeexecution platform called Fenics dealFX. Built in conjunction with one of theworld’s leading foreign exchange dealers, this trading solution facilitateson-line trading of foreign exchange options between our clients and theircustomers. We retained certain of the intellectual property rights on thisproduct and we may seek to implement this solution for other dealers in thefuture. This project brought together our Fenics FX capability with ourexperience in developing on-line trading platforms.

**Our Clients**

As of December 31,2006, we provide brokerage services and data and analytics products to over2,000 institutional clients, including leading investment and commercial banks,large corporations, insurance companies and hedge funds. Notwithstanding ourlarge number of clients, several dozen large financial institutions generatethe majority of our brokerage revenues. The dealers that are our principalbrokerage clients are many of the leading financial institutions in the world,including:  Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank,Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanleyand UBS. Despite the importance of these large financial institutions to ourbrokerage business, no one client accounted for more than approximately 6.5% ofour total revenues from all products and services globally for the year ended December 31,2006.

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**Sales and Marketing**

In order to promote newand existing brokerage, data and analytics software services, we utilize acombination of our own marketing and public relations expertise and externaladvisers in implementing selective advertising and media campaigns. Weparticipate in numerous trade-shows to reach potential brokerage, data andtechnology clients. We also utilize speaking opportunities to position keybrokers and specialists as market experts and help promote our core productsand services. Additionally, we market our brokerage services through the directinteraction of our brokers with their clients. This direct interaction alsopermits our brokers to discuss new product and market developments with ourclients. Our data and analytics products are actively marketed through adedicated sales and support team. As of December 31, 2006, we employed 50sales, marketing and customer support professionals, consisting of 33 salesemployees and executives, 6 marketing employees and 11 customer supportemployees. Our sales force calls on a broad range of clients including traders,risk managers, sales staff, analysts and e-commerce specialists at banks, hedgefunds, fund managers, insurance companies and treasurers in large corporations.

**Technology**

***BrokerageTechnology.******  ***We employ a technology developmentphilosophy that emphasizes state-of-the-art technology with cost efficiency inboth our electronic trading platforms, such as GFI CreditMatch® or GFI ForexMatchTM,and our data and analytics products. We take a flexible approach by developingin-house, purchasing or leasing technology products and services and byoutsourcing support and maintenance where appropriate to manage technologyexpense more effectively. For each market in which we operate, we seek toprovide the optimal mix of electronic and telephonic brokerage.

We offer our products and services through a globalcommunications network that is designed to ensure secure, reliable and timelyaccess to the most current market information. We provide our clients with avariety of means to connect to our brokers and trading platforms, includingdedicated point-to-point data lines, virtual private networks and the Internet.

We are working with an increasing number of ourclients to implement straight-through-processing between our trading platformsand the systems used by our clients to record, report and store transactiondata. These efforts seek to automate large parts of the trade reporting andsettlement process, thereby reducing errors, risks and costs traditionallyassociated with post-trade activities. We may also develop or customize tradingsystems for our customers.

***Market Data andAnalytics Products Technology.******  ***Our marketdata and analytics products are developed internally using advanced developmentmethodologies and computer languages. Through years of developing Fenicsproducts, our in-house software development team is experienced in creatingsimple, intuitive software for use with complex derivative instruments.

***Support andDevelopment.******  ***At December 31, 2006, we employeda team of 192 computer, telecommunication, network, database, client support,quality assurance and software development specialists. The activities of ourdevelopment staff are split approximately evenly between infrastructure supportservices and software development. We devote substantial resources to thecontinuous development and support of our electronic brokerage capabilities,the introduction of new products and services to our clients and the trainingof our employees. Our software development capabilities allow us to be flexiblein our decisions to either purchase or license technology from third parties orto develop it internally.

***Disaster Recovery.******  ***We havecontingency plans in place to protect against major carrier failures,disruption in external services (market data and Internet service providers),server failures and power outages. All critical services are connected viaredundant and diverse circuits and, where possible, we 

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employ sitediversity. Production applications are implemented with a primary and back-upserver, and all data centers have uninterruptible power source and generatorback-up power. Our servers are backed-up daily, and back-up tapes are sentoff-site weekly.

**IntellectualProperty**

We seek to protect our internally developed andpurchased intellectual property through a combination of patent, copyright,trademark, trade secret, contract and fair business practice laws. Whereappropriate, we also license software and technology that is protected byintellectual property rights belonging to third parties. Our proprietarytechnology, including our Fenics software, is generally licensed to clientsunder written license agreements.

We pursue registration of some of our trademarks inthe United States and in other countries. “GFI Group,” “GFInet,” “Fenics,” “GFICreditMatch,” “Amerex” and “Starsupply” are registered trademarks in the UnitedStates and/or numerous overseas jurisdictions. We have also applied forregistration of various other trademarks, including multiple derivations of the“GFI Group,” “GFInet,” “CreditMatch” and “ForexMatch” names.

We have applied forseveral patents related to our products and services. We believe that no singlepatent or application or group of patents or applications will be of materialimportance to our business as a whole.

**Competition**

Competition in the inter-dealer brokerage industry isintense. Our primary competitors with respect to our OTC brokerage services arecurrently other inter-dealer brokers and a few electronic brokerage platforms.Additional competition may arise from securities and futures exchanges. Ourprimary competitors for our data and analytics products are currently otherinter-dealer brokers and data and technology vendors. Certain of our largermarket data competitors offer electronic trading platforms for specificproducts.

***Inter-DealerBrokers.******  ***The current size of the wholesalebrokerage market is difficult to estimate as there is little third party,external data on the industry and several participants are private companiesand do not publicly report revenues. Historically, the inter-dealer brokerageindustry has been characterized by fierce competition for clients and brokers.Over the past several years, the industry has been characterized by the consolidationof well-established, smaller firms into five principal, global inter-dealerbrokers: GFI Group Inc., ICAP plc, Tullett Prebon plc, Tradition FinancialServices (a subsidiary of Cie Financiere Tradition) and Cantor Fitzgerald andits subsidiaries, BGC Partners Inc. and eSpeed, Inc. We believe thisconsolidation has resulted from a number of factors, including:  theconsolidation of primary institutional dealer clients; pressure to reducebrokerage commissions, particularly in more commoditized products; greaterdealer demand for costly technological capabilities; the need to leveragerelatively fixed administrative and regulatory costs and, increasingly, greaterclient demand for market information about correlated financial products.Nevertheless, a number of smaller, privately held firms or consortia that tendto specialize in niche products or specific geographical areas remain in themarket.

***Exchanges.******  ***Certainderivatives exchanges allow participants to trade standardized futures andoptions contracts. Major derivative exchanges include the Chicago MercantileExchange, the Chicago Board of Trade, International Securities Exchange,IntercontinentalExchange, New York Mercantile Exchange, The Chicago BoardOptions Exchange, Eurex and Euronext.liffe. Exchange-traded products, unlikethe OTC products we focus on, typically contain more standardized terms, aremore commoditized, and are typically traded in contracts representing smallernotional amounts. We believe that exchanges will continue to seek to leveragetheir platforms and attempt to grow by introducing products designed to competewith certain of the products covered by inter-dealer brokers in the OTCmarketplace. For 

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example, in 2006, severalexchanges announced plans to launch an exchange-traded credit derivativefutures contract.

***Data and Analytics.******  ***Several largemarket data and information providers compete for a presence on virtually everytrading desk in our industry. Some of these entities currently offer varyingforms of electronic trading of the types of financial instruments in which wespecialize. Some of these entities have announced their intention to expandtheir electronic trading platforms or to develop new platforms. In addition,these entities are currently competitors to, and in some cases clients of, ourdata and analytical services. Further, we face competition for certain sales ofour data products from data vendors formed as a consortium of major financialinstitutions.

**Regulation**

Certain of our subsidiaries, in the ordinary course oftheir business, are subject to extensive regulation by government andself-regulatory organizations both in the United States and abroad. As a matterof public policy, these regulatory bodies are responsible for safeguarding theintegrity of the securities and other financial markets. These regulations aredesigned primarily to protect the interests of the investing public generallyand thus cannot be expected to protect or further the interests of our companyor our stockholders and may have the effect of limiting or curtailing ouractivities, including activities that might be profitable.

***U.S. Regulation andCertain Clearing Arrangements.******  ***GFI SecuritiesLLC, one of our subsidiaries, is registered as a broker-dealer with the SEC,and the State of New York, and is a member of the National Association of SecuritiesDealers (“NASD”). The NASD has recently announced its plans to consolidate itsmember regulation operations with the regulatory arm of the NYSE Group, forminga new self-regulatory organization which will act as the regulator for allbroker-dealers doing business within the U.S. and which is expected to commenceoperations in 2007. GFI Securities LLC is subject to the regulations of theNASD (or its successor self-regulatory organization) and industry standards ofpractice that cover many aspects of its business, including initial licensingrequirements, sales and trading practices, safekeeping of clients’ funds andsecurities, capital structure, record keeping, supervision and the conduct ofaffiliated persons, including directors, officers and employees. GFI SecuritiesLLC also operates an electronic trading platform that is regulated pursuant toRegulation ATS under the Securities Act.

We face the risk of significant intervention byregulatory authorities, including extensive examination and surveillanceactivity. The SEC, the NASD and other governmental regulatory authorities(including state securities commissions) and self-regulatory organizations thatsupervise and regulate us generally have broad oversight and enforcementpowers. If we fail to remain in compliance with laws, rules and industrystandards of practice, we could face investigations and judicial oradministrative proceedings that may result in substantial fines. Alternatively,or in addition to being fined, our regulators could institute administrativeproceedings that can result in censure, the issuance of cease and desistorders, the suspension or expulsion of a broker-dealer and its affiliatedpersons, officers or employees or other similar consequences.

In addition, the businesses that GFI Securities LLCmay conduct are limited by its membership agreement with the NASD. Themembership agreement may be amended by application to include additionalbusinesses. This application process is time-consuming and may not besuccessful. As a result, GFI Securities LLC may be prevented from entering newbusinesses that may be profitable in a timely manner, or at all.

As a member of the NASD, GFI Securities LLC is subjectto certain regulations regarding changes in control of its ownership. NASD Rule 1017generally provides that NASD approval must be obtained in connection with anytransaction resulting in a change in control of a member firm. The NASD definescontrol as ownership of 25% or more of the firm’s equity by a single entity orperson and would include a 

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change in control of aparent company. As a result of these regulations, our future efforts to sellshares or raise additional capital may be delayed or prohibited by the NASD.

Several of GFI Securities LLC’s equity and corporatebond brokerage desks have experienced issues relating to reporting trades tothe NASD on a timely basis, which is required by NASD rules. In May 2006,this subsidiary was fined $49,500 for issues relating to late trade reportingof trades in 2004 and in August 2006, this subsidiary was fined $37,500for issues relating to reporting corporate bond transactions and the failure toproperly register an individual on the firm’s asset backed securities desk in2005. This subsidiary has also paid similar fines for late trade reporting inprior years and is currently being reviewed by the NASD for similar issuesrelating to late trade reporting in 2006. As a result of the foregoing,and after discussion with the NASD, this subsidiary has taken steps designed toimprove its ability to report trades in a timely manner. While we believe thatthese efforts will be effective and diminish or eliminate this problem, wecannot make any assurance that our efforts will be effective. In connectionwith its current examinations, the NASD may seek to impose further fines on usor seek to take other corrective action.

GFI Securities LLC is also an introducing broker withthe National Futures Association, which we refer to as the NFA, and the CommodityFutures Trading Commission, which we refer to as the CFTC. The NFA and CFTCrequire their members to fulfill certain obligations, including the filing ofquarterly and annual financial reports. Failure to fulfill these obligations ina timely manner can result in disciplinary action against the firm.

The SEC, NASD, CFTC and various other regulatoryagencies within and outside of the United States have stringent rules andregulations with respect to the maintenance of specific levels of net capitalby regulated entities. Generally, a broker-dealer’s capital is net worth plusqualified subordinated debt less deductions for certain types of assets. TheNet Capital Rule under the Exchange Act requires that at least a minimumpart of a broker-dealer’s assets be maintained in a relatively liquid form.

If these net capital rules are changed orexpanded, or if there is an unusually large charge against our net capital, ouroperations that require the intensive use of capital would be limited. A largeoperating loss or charge against our net capital could adversely affect ourability to expand or even maintain these current levels of business, whichcould have a material adverse effect on our business and financial condition.

The SEC and the NASD impose rules that requirenotification when net capital falls below certain predefined criteria. These rules alsodictate the ratio of debt to equity in the regulatory capital composition of abroker-dealer, and constrain the ability of a broker-dealer to expand itsbusiness under certain circumstances. If a firm fails to maintain the requirednet capital, it may be subject to suspension or revocation of registration bythe applicable regulatory agency, and suspension or expulsion by theseregulators could ultimately lead to the firm’s liquidation. Additionally, theNet Capital Rule and certain NASD rules impose requirements that mayhave the effect of prohibiting a broker-dealer from distributing or withdrawingcapital and requiring prior notice to the SEC and the NASD for certain capitalwithdrawals.

GFI Securities LLC has been, and currently is, incompliance with the net capital rules and has net capital in excess of theminimum requirements. We do not believe that we are currently subject to anyregulatory inquiries that, if decided adversely, would have any materialadverse effect on us and our subsidiaries taken as a whole.

GFI Securities LLC is also a member of theMortgage-Backed Securities Clearing Corporation, which we refer to as theMBSCC, for the purpose of clearing certain mortgage-backed securities. Thismembership requires GFI Securities LLC to maintain minimum net capital of$5.0 million in excess of the minimum amount prescribed in its membershipagreement, including a minimum deposit with the MBSCC of $250,000.

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We maintain clearing arrangements with selectedfinancial institutions in order to settle our matched principal transactionsand maintain deposits with such institutions in support of those arrangements.

***Foreign Regulationand Certain Clearing Arrangements.******  ***Our overseasbusinesses are also subject to extensive regulation by various foreigngovernments and regulatory bodies. In the United Kingdom, the FinancialServices Authority (“FSA”) regulates our subsidiaries, GFI Brokers Limited andGFI Securities Limited. The regulatory framework applicable to our U.K.regulated subsidiaries is extensive and broadly similar to that described abovefor our U.S. regulated subsidiaries.

As with those U.S. subsidiaries subject to NASD rules,the ability of our regulated U.K. subsidiaries to pay dividends or make capitaldistributions may be impaired due to applicable capital requirements. Ourregulated U.K. subsidiaries are subject to “consolidated” regulation, inaddition to being subject to regulation on a legal entity basis. Consolidatedregulation impacts the regulated entity and its parent holding companies in theU.K, including the regulated entity’s ability to pay dividends or distributecapital.

Our regulated U.K. subsidiaries are also subject toregulations regarding changes in control similar to those described above forGFI Securities LLC. Under FSA rules, regulated entities must obtain priorapproval for any transaction resulting in a change in control of a regulatedentity. Under applicable FSA rules, control is broadly defined as a 10%interest in the regulated entity or its parent or otherwise exercisingsignificant influence over the management of the regulated entity. As a resultof these regulations, our future efforts to sell shares or raise additionalcapital may be delayed or prohibited by the FSA.

GFI Securities Limited is a member of Euroclear forthe purpose of clearing certain debt and equity transactions. This membershiprequires GFI Securities Limited to deposit collateral or provide a letter ofcredit to Euroclear so that Euroclear will extend a clearing line to GFISecurities Limited.

In Hong Kong, the Securities and Futures Commission (“SFC”)regulates our subsidiary, GFI (HK) Securities LLC, as a Securities Dealer.The compliance requirements of the SFC include, among other things, net capitalrequirements (known as the Financial Resources Rule) and stockholders’ equityrequirements. The SFC regulates the activities of the officers, directors,employees and other persons affiliated with GFI (HK) Securities LLC andrequires the registration of such persons.

In addition, GFI (HK) Brokers Ltd. is registered withand regulated by the Hong Kong Monetary Authority (“HKMA”). As part of thisregistration, GFI (HK) Brokers Ltd. is required to maintain stockholders’equity of 5.0 million Hong Kong dollars (or approximately $0.6 million). At thetime it was registered, GFI (HK) Brokers Ltd. was in compliance with theserequirements. However, at December 31, 2006, GFI (HK) Brokers Ltd.’sstockholders’ equity had fallen below the required amount and therefore was notin compliance with this requirement. GFI (HK) Brokers Ltd. discussed thismatter with the HKMA and increased its share capital to meet the requirementssubsequent to year-end. We do not expect to incur a penalty in connection withthis period of non-compliance.

In Tokyo, the Japan Securities Dealers Association (“JSDA”)regulates GFI Securities Limited’s Japanese branch. The JSDA regulates theactivities of the officers, directors, employees and other persons affiliatedwith the branch. This branch is also subject to certain licensing requirementsestablished by the Foreign Securities Firms Law (the “FSFL”). As part of theserequirements, GFI Securities Limited’s Japanese branch is required to maintain “brought-in”capital, as defined, of 50 million Japanese Yen. The branch is also subject tothe net capital rule promulgated by the FSFL, which required that networth plus “brought-in” capital exceed a ratio of 120.0% of relevantexpenditure. In addition, GFI Securities Limited is required to maintain acapital base of 1 billion Japanese Yen.

In Paris, a branch of GFI Securities Limited wasestablished through the exercise of its passport right to open a branch in anEuropean Economic Area (“EEA”) state. This branch commenced operation on February 1,2006. The establishment of the branch was approved by the FSA and acknowledgedby Banque 

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de France in France. Thebranch will be subject to the conduct of business rules of the AutoriteDes Marches Financiers (“AMF”) when dealing with resident customers of Franceand will be regulated, in part, by the FSA.

In Singapore, the Monetary Authority of Singapore (“MAS”)regulates our subsidiary GFI Group PTE Ltd. The applicable compliancerequirements of the MAS include, among other things, maintaining stockholders’equity of 3 million Singapore dollars and monitoring GFI Group PTE Ltd.’strading practices and business activities. The MAS regulates the activities ofcertain of the officers and employees of GFI Group PTE Ltd, and requiresregular reports of our financial condition.

In Sydney, our brokerage operations are conductedthrough a branch of GFI Brokers Limited. GFI Brokers Limited 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 2001 inrespect of the financial services it provides in Australia. This exemptionapplies to foreign companies regulated by the FSA in accordance with UKregulatory standards.

Except as discussed above regarding GFI (HK) BrokersLtd., all of our subsidiaries that are subject to foreign net capital rules were,at December 31, 2006, and currently are, in compliance with those rules andhave net capital in excess of the minimum requirements. We do not believe thatwe are currently subject to any foreign regulatory inquiries that, if decidedadversely, would have any material adverse effect on us and our subsidiariestaken as a whole. As we expand our foreign businesses, we will also becomesubject to regulation by the governments and regulatory bodies in othercountries. The compliance requirements of these different overseer bodies mayinclude, but are not limited to, net capital or stockholders’ equityrequirements.

***Changes in Existing Laws and Rules.******  ***Additionallegislation and regulations, changes in rules promulgated by thegovernment, regulatory bodies or clearing organizations described above orchanges in the interpretation or enforcement of laws and regulations maydirectly affect the manner of our operation, our net capital requirements orour profitability. In addition, any expansion of our activities into new areasmay subject us to additional regulatory requirements that could adverselyaffect our business, reputation and results of operations.

**Employees**

At December 31, 2006,we employed 1,438 people. Of these, 932 are brokerage personnel (consisting of821 brokers and 111 trainees and clerks), 192 are technology andtelecommunications specialists and 50 comprise our data and analytics sales, marketingand customer support professionals. Approximately 48% of our employees arebased in North America, 37% are based in Europe and the remaining 15% are basedin Asia-Pacific. None of our employees are represented by a labor union. Weconsider our relationships with our employees to be good and have notexperienced any interruption of operations due to labor disagreements.

**ITEM 1A.**        RISKFACTORS

**Economic, politicaland market factors beyond our control could reduce trading volumes, securitiesprices and demand for our brokerage services, which could harm our business andour profitability.**

Difficult marketconditions, economic conditions and geopolitical uncertainties have in the pastadversely affected and may in the future adversely affect our business andprofitability. Our business and the brokerage and financial services industryin general are directly affected by national and international economic andpolitical conditions, broad trends in business and finance, the level andvolatility of interest rates, changes in and uncertainty regarding tax laws andsubstantial fluctuations in the volume and price 

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levelsof securities transactions. In each of the three years in the period ended December 31,2006, over 94% of our revenues were generated by our brokerage operations. As aresult, our revenues and profitability are likely to decline significantlyduring periods of low trading volume in the financial markets in which we offerour services. The financial markets and the global financial services businessare, by their nature, risky and volatile and are directly affected by manynational and international factors that are beyond our control. Any one of thefollowing factors, among others, may cause a substantial decline in the U.S.and global financial markets in which we offer our services, resulting inreduced trading volume. These factors include:

·       economic and politicalconditions in the United States, Europe and elsewhere in the world;

·       concerns about terrorismand war;

·       concerns over inflation andwavering institutional and consumer confidence levels;

·       the availability of cashfor investment by our dealer clients and their clients;

·       the level and volatility ofinterest rates and foreign currency exchange rates;

·       the level and volatility oftrading in certain equity and commodity markets;

·       the level and volatility ofthe difference between the yields on corporate securities being traded andthose on related benchmark securities (which difference we refer to as creditspreads); and

·       legislative and regulatorychanges.

Declines in the volume oftrading in the markets in which we operate generally result in lower revenuefrom our brokerage business. In addition, although less common, some of ourbrokerage revenues are determined on the basis of the value of transactions oron credit spreads. Therefore, declines in the value of certain sector or thetightening of credit spreads could result in lower revenue for our brokeragebusiness. Our profitability would be adversely affected by a decline in revenuebecause a portion of our costs are fixed. For these reasons, decreases intrading volume or declining prices or credit spreads could have an adverseeffect on our business, financial condition or results of operations.

**We face substantialcompetition that could negatively impact our market share and ourprofitability.**

The financialservices industry generally, and the inter-dealer brokerage businesses in whichwe are engaged in particular, are very competitive, and we expect competitionto continue to intensify in the future. Some of the companies with which wecompete are better capitalized than we are and have greater financial,technical, marketing and other resources than we have. Our current andprospective competitors include:

·       other large inter-dealerbrokerage firms;

·       smallbrokerage firms that focus on specific products or regional markets, includingfirms that feature electronic brokerage transaction platforms;

·       securities, futures andderivatives exchanges and electronic communications networks; and

·       other providers of data andanalytics products.

Some of our competitors offer a wider range ofservices, have broader name recognition and have larger client bases than wedo. Some of them may be able to respond more quickly to new or evolving opportunities,technologies and client requirements than we can, and may be able to undertakemore extensive marketing activities. Our competitors may also seek to hire ourbrokers, which could result in a loss of brokers by us or in increased costs toretain our brokers. In addition to the competitors described above, our largeinstitutional clients may increase the amount of trading they do directly witheach other 

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rather than through us, orthey may decrease their trading of certain OTC products in favor ofexchange-traded products. In either case our revenues could be adverselyaffected. In particular, several large market data and information providerscurrently offering varying forms of electronic trading of the types offinancial instruments in which we specialize are expanding their current, orare developing new, electronic trading platforms. If we are not able to competesuccessfully in the future, our business, financial condition and results ofoperations would be adversely affected.

We have experiencedintense price competition in our brokerage business in recent years. Somecompetitors may offer brokerage services to clients at lower prices than we areoffering, which may force us to reduce our prices or to lose market share andrevenue. In addition, we focus primarily on providing brokerage services inless liquid markets for complex financial instruments. As the markets for theseinstruments become more liquid, we could lose market share to otherinter-dealer brokers, exchanges and electronic multi-dealer brokers whospecialize in providing brokerage services in more liquid markets. Weincreasingly compete with exchanges for the execution of trades in certainproducts, mainly in derivatives such as options. If a financial instrument forwhich we provide brokerage services becomes listed on an exchange or if anexchange introduces a competing product to the products we broker in the OTCmarket, the need for our services in relation to that instrument could besignificantly reduced. Further, the recent consolidation among exchange firms,and expansion by these firms into derivative and other non-equity tradingmarkets, will increase competition for customer trades and place additionalpricing pressure on commissions and spreads.

**Because competitionfor the services of brokers is intense, we may not be able to attract andretain the highly skilled brokers we need to support our business or we may berequired to incur additional expense to do so.**

We strive to provide high-quality brokerage servicesthat allow us to establish and maintain long-term relationships with ourclients. Our ability to continue to provide these services and maintain theserelationships depends, in large part, upon our brokers. As a result, we mustattract and retain highly qualified brokerage personnel. Competition for theservices of brokers is intense, especially for brokers with extensiveexperience in the specialized markets in which we participate or may seek toenter. If we are unable to hire highly qualified brokers, we may not be able toenter new brokerage markets or develop new products. If we lose one or more ofour brokers in a particular market in which we participate, our revenues maydecrease and we may lose market share in that particular market.

We may not be successful in our efforts to recruit andretain brokerage personnel. If we fail to attract new personnel or to retainand motivate our current personnel, or if we incur increased costs associatedwith attracting and retaining personnel (such as sign-on or guaranteed bonusesto attract new personnel or retain existing personnel), our business, financialcondition and results of operations may suffer.

In addition, recruitmentand retention of qualified staff could result in substantial additional costs.We have been party to, or otherwise involved in, several litigations andarbitrations involving competitor claims in connection with new employee hiresand claims from former employees in connection with the termination of theiremployment. We may also pursue our rights through litigation when competitorshire our employees who are under contract with us. We are currently involved inseveral litigations and arbitrations with our competitors relating to newemployee hires or departures. We believe such proceedings are common in ourindustry due to its highly competitive nature. An adverse settlement orjudgment related to these or similar types of claims could have a materialadverse effect on our financial condition or results of operations. Regardlessof the outcome of these claims, we generally incur significant expense andmanagement time dealing with these claims.

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**We are dependent onour management team, and the loss of any key member of our team may prevent usfrom executing our business strategy effectively.**

Our future success depends, in large part, upon ourmanagement team. In particular, we are highly dependent on the continuedservices of our chief executive officer and founder, Michael Gooch, and otherexecutive officers who possess extensive financial markets knowledge andmanagement skills. Neither Michael Gooch nor Colin Heffron, our president, arebound by employment contracts to remain with us for a specified period of time.We may not be able to find an appropriate replacement for Michael Gooch, ColinHeffron or any other executive officer if the need should arise.

In addition, due to theregulated nature of some of our businesses, some of our executive officers, orother key personnel could become subject to suspensions or other limitations onthe scope of their services to us from time to time. If we lose the services ofany executive officers or other key personnel, we may not be able to manage andgrow our operations effectively, enter new brokerage markets or develop newproducts and our revenues, reputation, business or brand name could beadversely affected. We maintain “key person” life insurance policies on MichaelGooch and Colin Heffron, but we do not have any such policies for our otherofficers or personnel.

**If we are unable tocontinue to identify and exploit new market opportunities, our ability tomaintain and grow our business may be adversely affected.**

As more participants enterour markets, the resulting competition often leads to lower commissions. Thismay result in a decrease in revenue in a particular market even if the volumeof trades we handle in that market has increased. As a result, our strategy isto broker more trades and increase market share in existing markets and to seekout new markets in which we can charge higher commissions. Pursuing thisstrategy may require significant management attention and broker expense. Wemay not be able to attract new clients or successfully enter new markets. If weare unable to continue to identify and exploit new market opportunities on a timelyand cost-effective basis, our revenues may decline, which would adverselyaffect our profitability.

**If we are unable tomanage the risks of international operations effectively, our business could beadversely affected.**

We provide services and products to clients in Europe,Asia and Australia through offices in London, Paris, Hong Kong, Singapore,Sydney and Tokyo and we may seek to further expand our operations throughoutthese regions in the future. For example, in 2007, we intend to provideservices and products from offices in South Africa and Korea. On a geographicbasis, approximately 44% and 42% of our total revenues for the years endedDecember 31, 2006 and 2005, respectively, were generated by our Europeanoperations, 47% and 50%, respectively, were generated by our North Americaoperations and 9% and 8%, respectively, were generated by our operations in theAsia-Pacific region. There are certain additional risks inherent in doingbusiness in international markets, particularly in the regulated brokerageindustry. These risks include:

·       additionalregulatory requirements;

·       tariffs and other tradebarriers;

·       difficulties in recruitingand retaining personnel, and managing international operations;

·       potentially adverse taxconsequences;

·       adverselabor laws, and

·       reduced protection forintellectual property rights.

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If we are unable to manage any of these riskseffectively, our business could be adversely affected.

Our internationaloperations also expose us to the risk of fluctuations in currency exchangerates. For example, a substantial portion of our revenue from our Europeanoperations is received in Euros and U.S. Dollars, whereas many of our expensesfrom our European operations are payable in British Pounds. Our risk managementstrategies relating to exchange rates may not prevent us from suffering lossesthat would adversely affect our financial condition or results of operations.

**Our clients’financial or other problems could adversely affect our business.**

We generally provide brokerage services to our clientsin the form of either agency or matched principal transactions. As described infurther detail in “We have market exposure from unmatched principaltransactions entered into by some of our equity and credit product brokeragedesks”, we also engage in unmatched principal transactions. In agencytransactions, we charge a commission for connecting buyers and sellers andassisting in the negotiation of the price and other material terms of thetransaction. After all material terms of a transaction are agreed upon, weidentify the buyer and seller to each other and leave them to settle the tradedirectly. We are exposed to credit risk for commissions we bill to clients forour agency brokerage services. Our clients may default on their obligations tous due to disputes, bankruptcy, lack of liquidity, operational failure or otherreasons. Any losses arising from such defaults could adversely affect ourfinancial condition or results of operations.

We have adopted policiesand procedures to identify, monitor and manage our credit risk, in both agencyand principal transactions, through reporting and control procedures and bymonitoring credit standards applicable to our clients. These policies andprocedures, however, may not be fully effective. Some of our risk managementmethods depend upon the evaluation of information regarding markets, clients orother matters that are publicly available or otherwise accessible by us. Thatinformation may not, in all cases, be accurate, complete, up-to-date orproperly evaluated. If our policies and procedures are not fully effective orwe are not always successful in monitoring or evaluating the risks to which weare, or may, be exposed, our financial condition or results of operations couldbe adversely affected. In addition, our insurance policies may not provideadequate coverage for these risks.

**The securitiessettlement process exposes us to risks that may impact our liquidity andprofitability. In addition, liability for unmatched trades could adversely affectour results of operations and balance sheet.**

Through our subsidiaries, we provide brokerageservices by executing transactions for our clients. An increasing number ofthese are “matched principal” transactions in which we act as a “middleman” byserving as a counterparty to both a buyer and a seller in matching reciprocalback-to-back trades. These transactions are then settled through clearinginstitutions with whom we have a contractual relationship.

In executing matched principal transactions, we areexposed to the risk that one of the counterparties to a transaction may fail tofulfill its obligations, either because it is not matched immediately or, evenif matched, one party fails to deliver the cash or securities it is obligatedto deliver. Our focus on less liquid markets exacerbates this risk for usbecause transactions in these markets tend to be more likely not to settle on atimely basis. Adverse movements in the prices of securities that are thesubject of these transactions can increase our risk. In addition, widespreadtechnological or communication failures, such as those which occurred as aresult of the terrorist attacks on September 11, 2001 and the blackout inthe eastern portion of the United States in August 2003, as well as actualor perceived credit difficulties or the insolvency of one or more large orvisible market participants, could cause market-wide credit difficulties orother market disruptions. These failures, difficulties or disruptions couldresult in a large number of market participants not settling transactions orotherwise not performing their obligations.

We are subject to financing risk in thesecircumstances because if a transaction does not settle on a timely basis, theresulting unmatched position may need to be financed, either directly by us orthrough 

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one of our clearingorganizations at our expense. These charges may be recoverable from the failingcounterparty, but sometimes are not. Finally, in instances where the unmatchedposition or failure to deliver is prolonged or widespread due to rapid orwidespread declines in liquidity for an instrument, there may also beregulatory capital charges required to be taken by us, which depending on theirsize and duration, could limit our business flexibility or even force thecurtailment of those portions of our business requiring higher levels ofcapital. Credit or settlement losses of this nature could adversely affect ourfinancial condition or results of operations.

In the process ofexecuting matched principal transactions, miscommunications and other errors byour clients or us can arise whereby a transaction is not completed with one ormore counterparties to the transaction, leaving us with either a long or shortunmatched position. These unmatched positions are referred to as “out trades,”and they create a potential liability for the involved subsidiary of ours. Ifan out trade is promptly discovered and there is a prompt disposition of theunmatched position, the risk to us is usually limited. If the discovery of anout trade is delayed, the risk is heightened by the increased possibility ofintervening market movements prior to disposition. Although out trades usuallybecome known at the time of, or later on the day of, the trade, it is possiblethat they may not be discovered until later in the settlement process. When outtrades are discovered, our policy is to have the unmatched position disposed ofpromptly, whether or not this disposition would result in a loss to us. Theoccurrence of out trades generally rises with increases in the volatility ofthe market and, depending on their number and amount, such out trades have thepotential to have a material adverse effect on our financial condition andresults of operations. In addition, the use of fully electronic brokerageplatforms can present these risks because of the potential for erroneousentries by our clients or brokers coupled with the potential that such errorswill not be discovered promptly.

**We have market riskexposure from unmatched principal transactions entered into by some of ourequity and credit product brokerage desks.**

We allow certain of our brokerage desks to enter intounmatched principal transactions in the ordinary course of business for thepurpose of facilitating clients’ execution needs for transactions initiated bysuch clients, adding liquidity to a market or attracting additional order flow.As a result, we have market risk exposure on these unmatched principaltransactions. Our exposure varies based on the size of the overall positions,the terms and liquidity of the instruments brokered, and the amount of time thepositions are held before we dispose of the position.

We do not track ourexposure to unmatched positions on an intra-day basis. These unmatchedpositions are intended to be held short term. Due to a number of factors,including the nature of the position and access to the market on which ittrades, we may not be able to match the position or effectively hedge ourexposure and often may be forced to hold a position overnight that has not beenhedged. To the extent these unmatched positions are not disposed of intra-day,we mark these positions to market. Adverse movements in the securitiesunderlying these positions or a downturn or disruption in the markets for thesepositions could result in a substantial loss. In addition, any principal gainsand losses resulting from these positions could on occasion have adisproportionate effect, positive or negative, on our financial condition andresults of operations for any particular reporting period.

**Financial problemsexperienced by third parties could affect the markets in which we providebrokerage services. In addition, a disruption in the credit derivative marketcould affect our brokerage revenues.**

Problems experienced by third parties could alsoaffect the markets in which we provide brokerage services. For example, inrecent years, hedge funds have increasingly begun to make use of credit andother derivatives as part of their trading strategies. As a result, an increasingpercentage of our business, directly or indirectly, results from tradingactivity by hedge funds. Hedge funds typically employ a significant amount ofleverage to achieve their results and, in the past, certain hedge funds havehad difficulty 

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managing this leverage,which has resulted in market-wide disruptions. If one or more hedge funds thatwas a significant participant in a derivatives market experienced similarproblems in the future, that derivatives market could be adversely affected and,accordingly, our brokerage revenues in that market could decrease.

In addition, recentreports in the U.S. and U.K. have suggested weaknesses in the way creditderivatives are assigned by participants in the credit derivative markets. Suchreports expressed concern that, due to the size of the credit derivativemarket, the volume of assignments and the suggested weaknesses in theassignment process, one or more significant defaults by corporate issuers ofdebt could lead to a market-wide disruption or result in the bankruptcy oroperational failure of hedge funds or other market participants. If the creditderivative markets experience a market disruption or if there was real orperceived lack of confidence that the credit derivative markets could orderly processone or more significant defaults of corporate issuers of debt, the use ofcredit derivatives could be reduced and the credit derivative market could beadversely affected and, accordingly, our brokerage revenues in that marketcould decrease.

**We operate in ahighly regulated industry and we may face restrictions with respect to the waywe conduct certain of our operations.**

Our business issubject to increasingly extensive government and other regulation and ourrelationships with our broker-dealer clients may subject us to increasingregulatory scrutiny. These regulations are designed to protect the interests ofthe investing public generally rather than our stockholders. The Securities andExchange Commission (“SEC”), the NASD, Inc. (“NASD”), and other agenciesextensively regulate the U.S. financial services industry, including certain ofour operations in the United States. Some of our international operations aresubject to similar regulations in their respective jurisdictions, including rules madeby the Financial Services Authority (“FSA”) in the United Kingdom and set outin the FSA’s Handbook of Rules and Guidance, regulations overseen by theAutorite des Marches Financiers (“AMF”) in France, the Securities and FuturesCommission (“SFC”) in Hong Kong, the Monetary Authority of Singapore (“MAS”) inSingapore and the Japanese Securities Dealers Association (“JSDA”) in Japan.These regulatory bodies are responsible for safeguarding the integrity of thesecurities and other financial markets and protecting the interests ofinvestors in those markets. Some aspects of our business are subject toextensive regulation, including:

·       the way we deal with clients;

·       capital requirements;

·       financial and reporting practices;

·       required record keeping and record retentionprocedures;

·       the licensing of employees;

·       the conduct of directors, officers, employeesand affiliates;

·       systems and control requirements;

·       restrictions on marketing, gifts andentertainment; and

·       client identification and anti-money launderingrequirements.

If we fail to comply with any of these laws, rules orregulations, we may be subject to censure, fines, cease-and-desist orders,suspension of business, suspensions of personnel or other sanctions, includingrevocation of our registrations with the NASD, withdrawal of our authorizationsfrom the FSA or revocation of our registrations with other similarinternational agencies to whose regulation we are subject. In the past, we havebeen fined by the NASD for issues relating to late trade reporting. For moredetails, see “Item 1—Business—Regulations.”

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Our authority to operate as a broker in a jurisdictionis dependent on continued registration or authorization in that jurisdiction orthe maintenance of a proper exemption from such registration or authorization.Our ability to comply with all applicable laws and rules is largelydependent on our compliance, credit approval, audit and reporting systems andprocedures, as well as our ability to attract and retain qualified compliance,credit approval, audit and risk management personnel. Our systems and proceduresmay not be effective. In addition, the continued growth and expansion of ourbusiness creates additional strain on our compliance systems and procedures andhas resulted, and we expect will continue to result, in increased costs tomaintain and improve these systems.

Some of our subsidiaries are subject to regulationsregarding changes in control of their ownership. These regulations generallyprovide that regulatory approval must be obtained in connection with anytransaction resulting in a change in control of the subsidiary, which mayinclude changes in control of GFI Group Inc. As a result of theseregulations, our future efforts to sell shares or raise additional capital maybe delayed or prohibited in circumstances in which such a transaction wouldgive rise to a change in control as defined by the applicable regulatory body.

Changes in laws or regulations or in governmentalpolicies could cause us to change the way we conduct our business, which couldadversely affect us. The government agencies that regulate us have broad powersto investigate and enforce compliance and punish noncompliance with theirrules, regulations and industry standards of practice. We or our directors,officers and employees may not comply with the rules and regulations of,and may be subject to claims or actions by, these agencies. In addition,because our industry is heavily regulated, regulatory approval may be requiredprior to expansion of business activities. We may not be able to obtain thenecessary regulatory approvals for any desired expansion. Even if approvals areobtained, they may impose restrictions on our business or we may not be able tocontinue to comply with the terms of the approvals or applicable regulations.The implementation of unfavorable regulations or unfavorable interpretations ofexisting regulations by courts or regulatory bodies could require us to incursignificant compliance costs or cause the development or continuation ofbusiness activities in affected markets to become impractical.

For example, the SEC’s Regulation NMS, which wasadopted in 2005 and is expected to become effective in 2007, introducessignificant changes to the regulation of trading on securities exchanges andmarketplaces. While it is too early to predict the impact that Regulation NMSwill have, it could result in the imposition of additional compliance costs onthe trading businesses of our clients and may alter the environment in whichtheir businesses function, which in turn, could affect our business. Further,in April 2004, the European Union adopted a Directive on Markets inFinancial Instruments (“MiFID”). MiFID will replace the Investment ServicesDirective and is intended to promote a single market for wholesale and retailtransactions in financial instruments. Significant aspects of MiFID have yet tobe agreed upon at the European level and the deadline for MiFID implementationhas recently been revised to late 2007. We continue to monitor developments inthis area and the potential impacts they may have on our European businesses.

For a further descriptionof the regulations which may limit our activities, see “Item 1—Business—Regulation.”

**Our regulatedsubsidiaries are subject to risks associated with net capital requirements, andwe may not be able to engage in operations that require significant capital.**

The SEC, NASD, FSA, JSDAand various other domestic and international regulatory agencies have stringentrules and regulations with respect to the maintenance of specific levelsof net capital by broker-dealers. Generally, a broker-dealer’s net capital isdefined as its net worth plus qualified subordinated debt less deductions forcertain types of assets. If we fail to maintain the required net capital, wemay be subject to suspension or revocation of registration by the NASD orwithdrawal of authorization from the FSA, 

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whichwould have a material adverse effect on our business. If these net capitalrules are changed or expanded, or if there is an unusually large chargeagainst net capital, operations that require the intensive use of capital wouldbe limited. Also, our ability to withdraw capital from our regulatedsubsidiaries is subject to restrictions, which in turn could limit our abilityto pay dividends, repay debt and redeem or purchase shares of our common stock.A large operating loss or charge against net capital could adversely affect ourability to expand or even maintain our present levels of business, which couldhave a material adverse effect on our business. In addition, we may becomesubject to net capital requirements in other foreign jurisdictions in which wecurrently operate or which we may enter. We cannot predict our future capitalneeds or our ability to obtain additional financing. For a further discussionof our net capital requirements, see “Item 1—Business—Regulation.”

**We are subject tonew requirements that we evaluate our internal controls over financialreporting under Section 404 of the Sarbanes-Oxley Act and other corporategovernance initiatives that may expose us to certain risks.**

As of December 31, 2006, we are subject to therequirements of Section 404 of the Sarbanes-Oxley Act and the applicableSecurities and Exchange Commission rules and regulations that require anannual management report on our internal controls over financial reporting. Suchreport includes, among other matters, management’s assessment of theeffectiveness of our internal control over financial reporting, and anattestation report by our independent registered public accounting firmaddressing these assessments.

We cannot be certain as to our ability to continue tocomply with the requirements of SOX. If we are not able to continue to complywith the requirements of Section 404 in a timely manner or with adequatecompliance, we may be subject to sanctions or investigation by regulatoryauthorities, including the SEC or the Nasdaq Stock Market. In addition, shouldwe identify a material weakness, there can be no assurance that we would beable to remediate such material weakness in a timely manner in future periods. Moreover,if we are unable to assert that our internal control over financial reportingis effective in any future period (or if our auditors are unable to express anopinion on the effectiveness of our internal controls), we could lose investorconfidence in the accuracy and completeness of our financial reports, which mayhave an a material adverse effect on our Company.

Our compliance with theSarbanes-Oxley Act may require significant expenses and management resourcesthat would need to be diverted from our other operations and could require arestructuring of our internal controls over financial reporting. Any suchexpenses, time reallocations or restructuring could have a material adverseeffect on our operations. The applicability of the Sarbanes-Oxley Act to uscould make it more difficult and more expensive for us to obtain director andofficer liability insurance, and also make it more difficult for us to attractand retain qualified individuals to serve on our boards of directors, or to serveas executive officers.

**Our investments inexpanding our brokerage and market data and analytics services may not producesubstantial revenue or profit.**

We have made, and expectto continue to make, significant investments in our brokerage and market data andanalytics services, including investments in personnel, technology andinfrastructure, in order to pursue new growth opportunities. With respect toour brokerage services, we may not receive significant revenue and profit fromthe hiring of a new broker or the development of a new brokerage desk or therevenue we do receive may not be sufficient to cover the cost of thesigning-bonus or the minimum level of compensation that we may havecontractually agreed with a newly hired broker. Even when our personnel hiresare ultimately successful, there is typically a transition period before thesehires become profitable. Our continued expansion of brokerage personnel tosupport new growth opportunities results in on-going broker transition periodsthat could adversely affect the level of our compensation and benefit expenseas a percentage of brokerage revenue. With respect to our market data andanalytics services, we may incur 

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substantialdevelopment, sales and marketing expenses and expend significant managementeffort to create a new product or service. Even after incurring these costs, weultimately may not sell any or only small amounts of these products orservices. Consequently, if revenue does not increase in a timely fashion as aresult of these expansion initiatives, the up-front costs associated withexpansion may exceed revenue and reduce our working capital and income.

**We may havedifficulty managing our growth effectively.**

We have experienced significant growth in our businessactivities over the last several years, which has placed, and is expected tocontinue to place, a significant strain on our management and resources.Continued growth will require continued investment in personnel, facilities,information technology infrastructure and financial and management systems andcontrols and regulatory compliance control. We may not be successful inimplementing all of the processes that are necessary to support our growth,which could result in our expenses increasing faster than our revenues, causingour operating margins and profitability to be adversely affected.

The expansion of ourinternational operations, particularly our Asia-Pacific and Europeanoperations, involves additional challenges that we may not be able to meet,such as the difficulty in effectively managing and staffing these operationsand complying with the increased regulatory requirements associated withoperating in new jurisdictions. This expansion, if not properly managed, couldhave a material adverse effect on our business.

**If we acquire othercompanies or businesses, or if we hire new brokerage personnel, we may havedifficulty integrating their operations.**

To achieve our strategic objectives, we have acquiredor invested in, and in the future may seek to acquire or invest in, othercompanies and businesses. We also may seek to hire brokers for new or existingbrokerage desks. These acquisitions or new hires may be necessary in order forus to enter into or develop new product areas. Acquisitions and new hiresentail numerous risks, including:

·       difficulties in theassimilation of acquired personnel, operations, services or products;

·       diversion of management’sattention from other business concerns;

·       assumption of unknownmaterial liabilities of acquired companies or businesses;

·       commercial litigation;

·       the up-front costsassociated with recruiting brokerage personnel, including when establishing anew brokerage desk, such as significant signing bonuses or contractualguarantees of a minimum level of compensation;

·       failure to achievefinancial or operating objectives; and

·       potential loss of clientsor key employees of acquired companies, businesses or newly hired brokeragepersonnel.

If we fail to manage theserisks as we make acquisitions or make new hires, our profitability may beadversely affected, and we may never realize the anticipated benefits of theacquisitions or hires. In addition, entering into new businesses may requireprior approval from our regulators. Our ability to obtain timely approval fromour regulators may hinder our ability to successfully enter new businesses.

**In the event ofemployee misconduct or error, our business may be harmed.**

Employee misconduct could subject us to financiallosses and regulatory sanctions and could seriously harm our reputation andnegatively affect our business. It is not always possible to deter employee 

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misconduct and theprecautions taken to prevent and detect employee misconduct may not always beeffective. Misconduct by employees could include engaging in unauthorized transactionsor activities, failure to properly supervise other employees, engaging inimproper or unauthorized activities on behalf of clients or improperly usingconfidential information.

Employee errors, includingmistakes in executing, recording or reporting transactions for clients, couldcause us to enter into transactions that clients may disavow and refuse tosettle, which could expose us to the risk of material losses until the errorsare detected and the transactions are unwound or reversed. If our clients arenot able to settle their transactions on a timely basis, the time in whichemployee errors are detected may be increased and our risk of material loss canbe increased. Several of our clients are currently experiencing delays insettling credit derivative transactions that we broker on an agency basis. Aswith any unsettled transaction, adverse movements in the prices of thesecurities involved in these transactions before they are unwound or reversedcan increase this risk. The risk of employee error or miscommunication may begreater for products that are new or have non-standardized terms.

**Our creditagreement contains restrictive covenants which may limit our working capitaland corporate activities.**

We are a party toan amended and restated credit agreement with Bank of America N.A. and certainother lenders dated February 24, 2006 (the “2006 Credit Agreement”) whichimposes operating and financial restrictions on us, including restrictionswhich may, directly or indirectly, limit our ability to:

·       merge, acquire or disposeof assets;

·       incur liens, indebtednessor contingent obligations;

·       make investments;

·       engage in certaintransactions with affiliates and insiders;

·       enter into sale andleaseback transactions;

·       pay dividends and other distributions;and

·       enter into new lines ofbusinesses that are substantially different from our current lines of business.

In addition, our 2006 Credit Agreement containscovenants that require us to maintain specified financial ratios and satisfyspecified financial tests. As a result of these covenants and restrictions, wemay be limited in how we conduct our business, and we may be unable to raiseadditional financing, to compete effectively or to take advantage of newbusiness opportunities. We may not be able to remain in compliance with thesecovenants in the future.

Our 2006 Credit Agreementalso contains several events of default, including for non-payment, certainbankruptcy events, covenant or representation breaches or a change in control.

**Computer systemsfailures, capacity constraints and breaches of security could increase ouroperating costs and cause us to lose clients.**

We internally support and maintain many of ourcomputer systems and networks. Our failure to monitor or maintain these systemsand networks or, if necessary, to find a replacement for this technology in atimely and cost-effective manner, would have a material adverse effect on ourability to conduct our operations.

We also rely andexpect to continue to rely on third parties to supply and maintain variouscomputer and communications systems, such as telephone companies, onlineservice providers, data processors, 

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clearingorganizations, software and hardware vendors and back-up services. Our systems,or those of our third party providers, may fail or operate slowly, causing oneor more of the following:

·       unanticipated disruptions in service to ourclients;

·       slower response times;

·       delays in our clients’ trade execution;

·       failed settlement of trades;

·       decreased client satisfaction with our services;

·       incomplete, untimely or inaccurate accounting,recording, reporting or processing of trades;

·       financial losses;

·       litigation or other client claims; and

·       regulatory sanctions.

We may experience systems failures from power or telecommunicationsoutages, acts of God, war, terrorism, human error, natural disasters, fire,sabotage, hardware or software malfunctions or defects, computer viruses,intentional acts of vandalism or similar events. Additionally, our systembackup or disaster recovery plans may not be effective. Any system failure thatcauses an interruption in service or decreases the responsiveness of ourservice, including failures caused by client error or misuse of our systems,could damage our reputation, business and brand name. In addition, if securitymeasures contained in our systems are breached as a result of third-partyaction, employee error, malfeasance or otherwise, our reputation may be damagedand our business could suffer.

If systems maintained byus or third parties malfunction, our clients or other third parties may seekrecourse against us. We could incur significant legal expenses defending theseclaims, even those which we may believe to be without merit. An adverseresolution of any lawsuits or claims against us could result in our obligationto pay substantial damages and could have a material adverse effect on ourfinancial condition or results of operations.

**We depend onthird-party software licenses. The loss of any of our key licenses could adverselyaffect our ability to provide our brokerage services.**

We license software fromthird parties, some of which is integral to our electronic brokerage systemsand our business. These licenses are generally terminable if we breach ourobligations under the licenses or if the licensor gives us notice in advance ofthe termination. If any of these relationships were terminated, or if any ofthese third parties were to cease doing business, we may be forced to spendsignificant time and money to replace the licensed software. These replacementsmay not be available on reasonable terms, if at all. A termination of any ofthese relationships could have a material adverse effect on our financialcondition and results of operations.

**We operate in arapidly evolving business and technological environment and we must adapt ourbusiness effectively and keep up with rapid technological changes in order tocompete effectively.**

The pace of change in our industry is extremely rapid.Operating in such a rapid business environment involves a high degree of risk.Our ability to succeed and compete effectively will depend on our ability toadapt effectively to these changing market conditions and to keep up with rapidtechnological changes.

To remaincompetitive, we must continue to enhance and improve the responsiveness,functionality, accessibility and other features of our electronic brokerageplatform software, network distribution systems and other technologies. Thefinancial services industry is characterized by rapid technological change, 

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changesin use and client requirements and preferences, frequent product and serviceintroductions employing new technologies and the emergence of new industrystandards and practices that could render our existing technology and systemsobsolete. In more liquid markets, development by our competitors of newelectronic trade execution or market information functionality or products thatgain acceptance in the market could give those competitors a “first mover”advantage that may make it difficult for us to overcome with our owntechnology. Our success will depend, in part, on our ability to:

·       develop and license technologies useful in ourbusiness;

·       enhance our existing services;

·       develop or acquire new services and technologiesthat address the increasingly sophisticated and varied needs of our existingand prospective clients; and

·       respond to technological advances and emergingindustry standards and practices on a cost-effective and timely basis.

The development ofproprietary electronic brokerage platforms and other technology to support ourbusiness entails significant technological, financial and business risks.Further, the adoption of new Internet, networking or telecommunicationstechnologies may require us to devote substantial resources to modify, adaptand defend our services. We may not successfully implement new technologies oradapt our electronic brokerage systems and transaction-processing systems toclient requirements or emerging industry standards. We may not be able torespond in a timely manner to changing market conditions or client requirementsor successfully defend any challenges to any technology we develop. If we areunable to anticipate and respond to the demand for new services, products andtechnologies on a timely and cost-effective basis, and to adapt totechnological advancements and changing standards, we may be unable to competeeffectively, which could negatively affect our business, financial condition orresults of operations.

**We may not be ableto obtain additional financing, if needed, on terms that are acceptable.**

Our business is dependentupon the availability of adequate funding and sufficient regulatory andclearing capital. Clearing capital is the amount of cash, guarantees or similarcollateral that we must provide or deposit with our third party clearingorganizations in support of our obligations under our contractual clearingarrangements with these organizations. Historically, these needs have beensatisfied from internally generated funds, investments from our stockholdersand lines of credit made available by commercial banking institutions. Webelieve that, based on current levels of operations and anticipated growth, ourcash from operations, together with cash currently available, and availablefinancing under our 2006 Credit Agreement, will be sufficient to fund ouroperations for the foreseeable future. However, if for any reason we need toraise additional funds, including meeting increased clearing capitalrequirements arising from growth in our brokerage business, we may not be ableto obtain additional financing when needed. If we cannot raise additional fundson acceptable terms, we may not be able to develop or enhance our business,take advantage of future opportunities or respond to competitive pressure orunanticipated requirements.

**Seasonalfluctuations in trading may cause our quarterly operating results to fluctuate.**

In the past, our businesshas experienced seasonal fluctuations, reflecting reduced trading activityduring summer months, particularly in August. We also generally experiencereduced activity in December due to seasonal holidays. As a result, ourquarterly operating results may not be indicative of the results we expect forthe full year. Our operating results may also fluctuate quarter to quarter dueto a variety of factors beyond our control such as conditions in the globalfinancial markets, terrorism, war and other economic and political events.Furthermore, we may experience reduced revenues in a quarter due to a decreasein the number of business days in that quarter.

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**Wemay not be able to protect our intellectual property rights or may be preventedfrom using intellectual property necessary for our business.**

We rely primarily on tradesecret, contract, copyright, trademark and patent law to protect ourproprietary technology. It is possible that third parties may copy or otherwiseobtain and use our proprietary technology without authorization or otherwiseinfringe on our rights. We may also face claims of infringement that couldinterfere with our ability to use technology that is material to our businessoperations. We may face limitations or restrictions on the distribution of someof the market data generated by our brokerage desks. This may limit the comprehensivenessand quality of the data we are able to distribute or sell.

In the future, we may haveto rely on litigation to enforce our intellectual property rights, protect ourtrade secrets, determine the validity and scope of the proprietary rights of othersor defend against claims of infringement or invalidity. Any such litigation,whether successful or unsuccessful, could result in substantial costs and thediversion of resources and the attention of management, any of which couldnegatively affect our business.

In addition, in the pastseveral years, there has been proliferation of so-called “business methodpatents” applicable to the computer and financial services industries. Therehas also been a substantial increase in the number of such patent applicationsfiled. Under current law, U.S. patent applications remain secret for 18 monthsand may, depending upon where else such applications are filed, remain secretuntil a patent is issued. In light of these factors, it is not economicallypracticable to determine in advance whether our products or services mayinfringe the present or future patent rights of others. In addition, althoughwe take steps to protect our technology, we may not be able to protect ourtechnology from disclosure or from other developing technologies that aresimilar or superior to our technology.

**Consolidationamong our clients may cause our revenue to be dependent on a smaller number ofclients and may result in additional pricing pressure.**

Our primary clients areleading financial services institutions. The number of these clients maydecrease as a result of large financial institution mergers. While no clientaccounted for more than approximately 7% and 8% of our total revenues for theyears ended December 31, 2006 and 2005, respectively, if our existingclients consolidate and new clients, such as national and regional banks,insurance companies and large hedge funds, do not generate offsetting volumesof transactions, our revenues may become concentrated in a relatively smallnumber of clients. In that event, our revenues may be dependent on ourrelationships with those clients to a material extent. Furthermore, continuedconsolidation in the financial services industry could lead to the exertion ofadditional pricing pressure by our primary clients impacting the commissions wegenerate from our brokerage services.

**JerseyPartners has significant voting power and may take actions that may not be inthe best interest of our other stockholders.**

Jersey Partners Inc. (“JPI”),together with its subsidiaries, in which our chief executive officer andfounder, Michael Gooch, is the controlling shareholder, owns approximately 44%of our outstanding common stock. Our president, Colin Heffron, is also aminority shareholder of JPI. As a result, through JPI, Michael Gooch has theability to exert substantial influence over all matters requiring approval byour stockholders, including the election and removal of directors and anyproposed merger, consolidation or sale of all or substantially all of ourassets and other corporate transactions. This concentration of control could bedisadvantageous to other stockholders with interests different from those ofMichael Gooch. This concentration of voting power may have the effect ofdelaying or impeding actions that could be beneficial to our otherstockholders, including actions that may be supported by our board ofdirectors. The trading price for our common stock could be adversely affectedif investors perceive disadvantages to owning our stock as a result of thissignificant concentration of share ownership.

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**Provisions of ourcertificate of incorporation and bylaws, agreements to which we are a party,regulations to which we are subject and provisions of our stock option planscould delay or prevent a change in control of our company and entrench currentmanagement.**

Our second amendedand restated certificate of incorporation and bylaws may be deemed to have ananti-takeover effect and may delay, deter or prevent a change of control of us,such as a tender offer or takeover proposal that might result in a premium overthe market price for our common stock. In addition, certain of these provisionsmake it more difficult to bring about a change in the composition of our boardof directors, which could result in entrenchment of current management. Forexample, our second amended and restated certificate of incorporation andbylaws:

·       provide for a classified board of directors;

·       do not permit our stockholders to remove membersof our board of directors other than for cause;

·       do not permit stockholders to act by writtenconsent or to call special meetings;

·       require certain advance notice for directornominations and other actions to be taken at annual meetings of stockholders;

·       require supermajority stockholder approval withrespect to extraordinary transactions such as mergers and certain amendments toour certificate of incorporation and bylaws (including in respect of theprovisions set forth above); and

·       authorize the issuance of “blank check” preferredstock by our board of directors without stockholder approval, which coulddiscourage a takeover attempt.

Under our 2006 Credit Agreement, a change in controlmay lead the lenders to exercise remedies such as acceleration of the loan andtermination of their obligations to fund additional advances under therevolving credit portion of that facility.

Our brokerage businesses are heavily regulated andsome of our regulators require that they approve transactions which couldresult in a change of control, as defined by the then-applicable rules ofour regulators. The requirement that this approval be obtained may prevent ordelay transactions that would result in a change of control.

In addition, our equityincentive plans contain provisions pursuant to which options or restrictedstock units that are unexercisable or unvested may automatically or otherwisebecome exercisable or vested as of the date immediately prior to certain changeof control events. These provisions could have the effect of dissuadingpotential acquirors from pursuing merger discussions with us.

**We do not expect topay any dividends for the foreseeable future.**

We do not anticipate thatwe will pay any dividends to holders of our common stock in the foreseeablefuture. We expect to retain all future earnings, if any, for investment in ourbusiness. In addition, our 2006 Credit Agreement limits our ability to paydividends without the approval of our lenders and any instruments governing ourfuture indebtedness may also contain various covenants that limit our abilityto pay dividends.

**The market price ofour common stock may fluctuate in the future, and future sales of our sharescould adversely affect the market price of our common stock.**

The market price of our common stock has fluctuated inthe past and may fluctuate in the future depending upon many factors, includingour actual results of operations and perceived prospects and the prospects ofthe financial marketplaces in general, differences between our actual financialand operating results and those expected by investors and analysts, changes inanalysts’ recommendations or projections, 

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seasonality, changes ingeneral valuations for companies in our business segment, changes in generaleconomic or market conditions and broad market fluctuations.

Future sales of our shares also could adversely affectthe market price of our common stock. If our existing stockholders sell a largenumber of shares, or if we issue a large number of shares of our common stockin connection with future acquisitions, strategic alliances, new or amendedequity incentive plans or otherwise, the market price of our common stock coulddecline significantly. Moreover, the perception in the public market that thesestockholders might sell shares of common stock could depress the market priceof our common stock.

As of December 31,2006, we had registered under the Securities Act an aggregate of 944,695 sharesof our common stock, which are reserved for issuance upon exercise ofoutstanding options under our 2000 and 2002 Stock Option Plans. In addition, asof December 31, 2006, we had registered under the Securities Act anaggregate 2,869,256 shares of our common stock issuable under the 2004 EquityIncentive Plan. These shares can be sold in the public market upon issuance,subject to any vesting requirements and restrictions under the securities lawsapplicable to resales by affiliates. These sales might impact the liquidity ofour common stock and might have a dilutive effect on existing stockholdersmaking it more difficult for us to sell equity or equity-related securities inthe future at a time and price that we deem appropriate.

**ITEM 1B.**    UNRESOLVED STAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

Our executive headquarters are located at 100 WallStreet, New York, New York 10005, where we occupy approximately 88,000 squarefeet of leased space, pursuant to a lease between GFI and Beacon CapitalPartners, LLC, as amended, that expires on September 30, 2013, unlessearlier terminated in accordance with the terms of the lease. Jersey Partnersis also liable for our obligations under this lease. Our U.K. offices arelocated in London at 1 Snowden Street, EC2 2DQ, where we occupy approximately44,000 square feet pursuant to a lease between us and Broadgate West T5 Limitedand Broadgate West T6 Limited that expires on March 31, 2015. We alsolease office space to support our brokerage operations in New Jersey, Connecticut,Texas, Paris, Hong Kong, Singapore, Tokyo, Seoul and Sydney.

We believe our facilitieswill be adequate for our operations for the next twelve months.

**ITEM 3.**                LEGALPROCEEDINGS

In the normal course of business, we are and have beenparty to, or otherwise involved in, litigations, claims and arbitrations thatinvolve claims for substantial amounts. These proceedings have generallyinvolved either competitor claims in connection with new employee hires, orclaims from former employees in connection with the termination of theiremployment from us. We are also involved, from time to time, in examinations,investigations or proceedings by government agencies and self-regulatoryorganizations. These examinations or investigations could result in substantialfines or administrative proceedings that could result in censure, the issuanceof cease and desist orders, the suspension or expulsion of a broker-dealer andits affiliated persons, officers or employees or other similar consequences. Thereis the potential that one or more of our clients could bring claims against usalleging the occurrence of errors in the execution of brokerage transactions.

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We believe proceedings ofthese types are common in the inter-dealer brokerage industry due to its highlycompetitive nature. Although the ultimate outcome of these proceedings cannotbe ascertained at this time, we believe that damages, if any, resulting fromsuch proceedings will not, in the aggregate, have a material adverse effect onour financial condition, but may be material to our operating results for anyparticular period.

**ITEM 4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERREPURCHASES OF EQUITY SECURITIES

**Market Information**

**Common Stock**

Our common stock has been traded on the Nasdaq StockMarket under the symbol “GFIG” since our initial public offering on January 26,2005. Prior to that time there was no established public trading market for ourcommon stock. The closing share price for our common stock on February 15,2007, as reported by on the Nasdaq Stock Market, was $65.56.

As of February 15, 2007, we had approximately 37holders of record of our common stock.

Set forth below, for each of the last eight fiscalquarters, is the low and high sales prices per share of our common stock asreported on the Nasdaq Stock Market.

| ** **                         | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|
| Year Ended  December 31, 2006 |       |     |       |    |       |
| First Quarter                      |       | $        | 61.46      |    | $          | 45.45 |   |
| Second Quarter                     |       | 65.90    |       | 43.54   |       |
| Third Quarter                      |       | 58.76    |       | 44.54   |       |
| Fourth Quarter                     |       | 64.90    |       | 52.21   |       |
|                                    |            |          |            |         |            |  |  |

 

| ** **                                       | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------------|------------|----------|------------|---------|------------|
| Year Ended  December 31, 2005               |       |     |       |    |       |
| First Quarter  (beginning January 25, 2005) |       | $        | 28.04      |    | $          | 25.00 |   |
| Second Quarter                                   |       | 35.60    |       | 23.05   |       |
| Third Quarter                                    |       | 41.57    |       | 32.37   |       |
| Fourth Quarter                                   |       | 51.36    |       | 37.75   |       |
|                                                  |            |          |            |         |            |  |  |

 

**Dividend Policy**

We do not anticipate paying any dividends on ourcommon stock in the foreseeable future. We currently expect to retain allfuture earnings, if any, for investment in our business. In addition, our 2006Credit Agreement limits our ability to pay dividends without the approval ofour lenders and the instruments governing our future indebtedness may alsocontain various covenants that limit our ability to pay dividends.

Any declaration andpayment of dividends will be at the discretion of our board of directors andwill depend upon, among other things, our earnings, financial condition,capital requirements, level of indebtedness, contractual restrictions withrespect to the payment of dividends, and other considerations that our board ofdirectors deems relevant. The board’s ability to declare a dividend is alsosubject to limits 

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imposedby Delaware corporate law. In addition, our subsidiaries are permitted to paydividends to us subject to (i) certain regulatory restrictions related tothe maintenance of minimum net capital in those of our subsidiaries that aresubject to net capital requirements imposed by the applicable governmentalregulators, and (ii) general restrictions imposed on dividend paymentsunder the jurisdiction of incorporation or organization of each subsidiary.

**Performance Graph**

The following performance graph shows a comparison,from January 25, 2005 (the date our Common Stock commenced trading on TheNasdaq Stock Market) through December 31, 2006, of the cumulative totalreturn for our Common Stock, the Nasdaq Composite Stock Index (CCMP), theNasdaq Other Financial Index (CFIN) and our Peer Group. The Peer Group iscomprised of ICAP plc, Collins Stewart Tullet plc from January 25, 2005until December 14, 2006 and Tullet Prebon plc from December 15, 2006through December 31, 2006 (each of which are listed in the U.K.), CieFinanciere Tradition (a Swiss listed company), MarketAxess Holdings Inc.(MKTX), Espeed Inc. (ESPD), the International Securities Exchange (ISE) and theChicago Mercantile Exchange (CME).

Collins Stewart Tullet plc completed a demerger underU.K. law on December 14, 2006 that resulted in the separate listing ofCollins Stewart plc and Tullet Prebon plc. Tullet Prebon plc now comprises theinter-dealer brokerage operations of the former Collins Stewart Tullet plc. Infuture periods, our Peer Group will include the returns of Tullet Prebon plcfrom and after December 15, 2006.

The performance graph assumes the value of the initialinvestment in the Company’s Common Stock, each index and the Peer Group was$100 on January 25, 2005 and that all dividends have been reinvested. Suchreturns are based on historical results and are not intended to suggest futureperformance. The returns of each company within the Peer Group have beenweighted according to their respective stock market capitalization for purposesof arriving at a peer group average. The International Securities Exchangecompleted its initial public offering on March 8, 2005.

 

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**Recent Sales ofUnregistered Securities**

For the year ended December 31,2006, we granted a total of 535,487 restricted stock units (“RSUs”) toofficers, directors and employees pursuant to our 2004 Equity Incentive Plan.The grant prices of these RSUs ranged from $46.50 to $62.26. These RSUs are tobe converted into common stock to be issued to our officers, directors andemployees over their respective vesting period, which is generally over threeyears. These RSUs were granted pursuant to exemptions from registrationprovided by Rule 701 and/or Section 4(2) under the Securities Act.

**Purchase of EquitySecurities**

Under our 2004 EquityIncentive Plan, we allow employees to elect to have us withhold shares ofcommon stock to satisfy minimum statutory tax withholding obligations arisingon the vesting and settlement of restricted stock units. When we withhold theseshares, we are required to remit to the appropriate taxing authorities themarket price of the shares withheld, which could be deemed a purchase of theshares of common stock by us on the date of withholding. During the quarterended December 31, 2006, we withheld shares of common stock to satisfy taxwithholding obligations as follows:

| **Date** | ** ** | ** ** | ** ** | **No. of Shares** | ** ** | **Average Market Price** | ** ** |
|----------|------------|------------|------------|-----------------------------|------------|------------------------------------|------------|
| October  |       |       | 24,136     |                        |       |                               | $          | 55.36 |   |   |
| November |       |       | 254        |                        |       |                               | $          | 56.56 |   |   |
| December |       |       | 3,786      |                        |       |                               | $          | 59.47 |   |   |

 

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**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

The following table setsforth selected consolidated financial data for the five years ended December 31,2006. This selected consolidated financial data should be read in conjunctionwith “Item 7—Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and with our consolidated financial statements andthe notes thereto contained in this Form 10-K.

| ** **                                                             | ** ** | **For the Year Ended December 31,**                                       | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | **(dollars in thousands except share and per share data)** | ** ** |
| **Consolidated  Statement of Operations Data**                         | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                           | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokerage revenues:                                                    |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Agency commissions                                                     |       | $                                                                                                  | 557,895    |   | $ | 391,583 |   | $ | 262,039 |   | $ | 184,920 |   | $ | 200,492 |   |
| Principal transactions                                                 |       | 151,220                                                                                            |       | 114,417 |   | 101,339 |   | 65,237 |   | 59,359 |   |
| Total brokerage revenues                                               |       | $                                                                                                  | 709,115    |   | $ | 506,000 |   | $ | 363,378 |   | $ | 250,157 |   | $ | 259,851 |   |
| Analytics and market data                                              |       | 18,651                                                                                             |       | 17,395 |   | 16,081 |   | 13,143 |   | 9,615 |   |
| Contract revenues                                                      |       | 6,973                                                                                              |       | — |   | — |   | — |   | — |   |
| Interest income                                                        |       | 9,144                                                                                              |       | 4,637 |   | 1,578 |   | 1,167 |   | 1,401 |   |
| Other income (1)                                                       |       | 3,300                                                                                              |       | 5,560 |   | 3,983 |   | 1,377 |   | 4,353 |   |
| Total Revenues                                                         |       | $                                                                                                  | 747,183    |   | $ | 533,592 |   | $ | 385,020 |   | $ | 265,844 |   | $ | 275,220 |   |
| Expenses:                                                              |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Compensation and employee  benefits                                    |       | 465,554                                                                                            |       | 327,345 |   | 241,847 |   | 166,276 |   | 174,011 |   |
| Other expenses                                                         |       | 179,832                                                                                            |       | 121,958 |   | 100,019 |   | 72,219 |   | 74,465 |   |
| Total expenses                                                         |       | 645,386                                                                                            |       | 449,303 |   | 341,866 |   | 238,495 |   | 248,476 |   |
| Income (loss) before  provision for income taxes and minority interest |       | 101,797                                                                                            |       | 84,289 |   | 43,154 |   | 27,349 |   | 26,744 |   |
| Provision for income taxes                                             |       | 40,719                                                                                             |       | 36,186 |   | 20,031 |   | 12,885 |   | 14,470 |   |
| Net income (loss)                                                      |       | $                                                                                                  | 61,078     |   | $ | 48,103 |   | $ | 23,123 |   | $ | 14,464 |   | $ | 12,274 |   |
| **Earnings  Per Share**                                                | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                  |       | $                                                                                                  | 2.15       |   | $ | 1.80 |   | $ | 1.01 |   | $ | 0.63 |   | $ | 0.59 |   |
| Diluted                                                                |       | $                                                                                                  | 2.09       |   | $ | 1.74 |   | $ | 0.95 |   | $ | 0.61 |   | $ | 0.58 |   |
| **Weighted  average number of shares outstanding**                     | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                  |       | 28,345,697                                                                                         |       | 26,245,628 |   | 16,049,655 |   | 16,049,655 |   | 15,786,933 |   |
| Diluted                                                                |       | 29,175,928                                                                                         |       | 27,699,325 |   | 24,334,003 |   | 23,693,418 |   | 21,231,412 |   |
| Dividends (2)                                                          |       | $                                                                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 4,536 |   |

 

| ** **                                                | ** ** | **For the Year Ended December 31,**                                       | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands except share and per share data)** | ** ** |
| **Consolidated  Statement of Financial Conditions Data:** | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                 |       | $                                                                                                  | 181,484    |   | $ | 144,148 |   | $ | 105,161 |   | $ | 87,299 |   | $ | 63,707 |   |
| Total assets (3)                                          |       | $                                                                                                  | 699,609    |   | $ | 576,137 |   | $ | 640,223 |   | $ | 374,809 |   | $ | 276,756 |   |
| Total debt, including  current portion                    |       | $                                                                                                  | 90,253     |   | $ | 31,247 |   | $ | 58,841 |   | $ | 47,997 |   | $ | 44,966 |   |
| Redeemable convertible  preferred stock                   |       | —                                                                                             |       | — |   | $ | 30,043 |   | $ | 30,043 |   | 30,043 |   |
| Total stockholders’ equity                           |       | $                                                                                                  | 330,469    |   | $ | 238,252 |   | $ | 53,369 |   | $ | 37,778 |   | $ | 23,142 |   |
| **Selected  Statistical Data:**                           | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokerage personnel  headcount (4)                        |       | 932                                                                                                |       | 777 |   | 560 |   | 397 |   | 366 |   |
| Employees                                                 |       | 1,438                                                                                              |       | 1,151 |   | 868 |   | 668 |   | 655 |   |
| Number of brokerage desks  (5)                            |       | 175                                                                                                |       | 150 |   | 101 |   | 78 |   | 65 |   |
| Broker productivity for the  period (6)                   |       | $                                                                                                  | 836        |   | $ | 778 |   | $ | 757 |   | $ | 648 |   | $ | 721 |   |
| **Brokerage  Revenues by Geographic Region:**             | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                                             |       | $                                                                                                  | 326,436    |   | $ | 256,197 |   | $ | 170,438 |   | $ | 102,920 |   | $ | 108,505 |   |
| Europe                                                    |       | 321,308                                                                                            |       | 211,125 |   | 172,417 |   | 128,743 |   | 137,181 |   |
| Asia-Pacific                                              |       | 61,371                                                                                             |       | 38,678 |   | 20,523 |   | 18,494 |   | 14,165 |   |
| Total                                                     |       | $                                                                                                  | 709,115    |   | $ | 506,000 |   | $ | 363,378 |   | $ | 250,157 |   | $ | 259,851 |   |

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(1)             Other income for the year ended December 31,2002 included $1.4 million from the sale of our treasury repurchaseagreement brokerage desk, as well as the receipt during that period of $1.7million of insurance proceeds resulting from business 

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interruptions inconnection with the September 11, 2001 terrorist attacks in New York City.

(2)             In 2002, our subsidiary, GFI Group LLC,paid dividends of $4.5 million to Jersey Partners to compensate it forcertain tax liabilities in those periods during which Jersey Partners was thesole member of GFI Group LLC. This payment was related to Jersey Partners’ taxliabilities for the 11-month period ended November 30, 2001.

(3)             Total assets included receivables frombrokers, dealers and clearing organizations of $174.7 million, $208.9 million,$408.2 million, $192.7 million and $118.5 million at December 31,2006, 2005, 2004, 2003 and 2002, respectively. These receivables primarilyrepresent securities transactions entered into in connection with our matchedprincipal business which have not settled as of their stated settlement dates.These receivables are substantially offset by the corresponding payables tobrokers, dealers and clearing organizations for these unsettled transactions.

(4)             Brokerage personnel headcount includesbrokers, trainees and clerks. As of December 31, 2006, we employed 821brokers.

(5)             A brokerage desk is defined as one or moreindividual brokers working together at a single location that provide brokerageservices with respect to one or more specific financial instruments. Brokeragedesks in different offices are considered separate desks even if they focuson the same financial instrument.

(6)             We are presenting broker productivity toshow the average amount of revenue generated per broker. Broker productivity iscalculated as brokerage revenues divided by average brokerage headcount for theperiod.

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and the notes thereof. This discussion containsforward-looking statements. Actual results could differ materially from theresults discussed in these forward-looking statements. Please see “Forward-LookingStatements” and “Risk Factors” for a discussion of some of the uncertainties,risks and assumptions associated with these statements.*

**BusinessEnvironment**

Our business generally benefits from robust tradingvolumes and volatility in the markets we serve. Trading volume in many of ourmarkets is driven by the trading activity of our dealer customers that, inturn, are responsive to the trading activity and demand of their “buy-side”customers. Those “buy-side” customers include smaller banks, insurancecompanies and financial institutions, investment funds, trading firms and,increasingly, hedge funds. In 2006, according to the Hedge Fund Association,hedge funds numbered approximately 9,000 globally and managed more than $1.4trillion at year-end, up from an estimated $500 billion five years ago. Despitegenerally lower hedge fund returns in 2006 and the collapse of the AmaranthAdvisors hedge fund in the third quarter, net inflows to hedge funds amountedto a record $126.5 billion in 2006 according to the Hedge Fund Research.

During 2006, the global business environment wasgenerally positive for our business, with satisfactory volume levels andgenerally modest volatility in global credit and equity markets, and instancesof more pronounced volatility in certain global financial and energy markets.Market volatility is driven by a range of external and internal factors, someof which are market specific and some of which are correlated to macro-economicconditions. Some external factors contributing to volatility in the marketsincluded international monetary policy, continued global economic expansion,inflationary pressure and other geopolitical issues.

The credit markets did not experience the samevolatility witnessed in 2005 when the unexpected credit downgrades of the U.S.auto sector combined with the occurrence of several natural disasters resultedin an uncertain economic and inflationary environment. Both the Dow Jones CDXNorth American High Yield and iTraxx Europe indices exhibited lower pricevolatility in 2006 than in 2005. Economic growth was strong globally withequity markets worldwide experiencing generally positive returns.  With borrowing rates remaining low, thecorporate bond market experienced a record year with $1.1 trillion in newissuances according to Thomson Financial. The Lehman Brothers U.S. AggregateBond 

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Index rose 4.3% in 2006verses 2.6% in 2005.  The size of themarkets for OTC credit derivatives continued to expand. The notional value ofglobal outstanding OTC credit derivatives increased 109% from $12.4 trillion atJune 30, 2005 to $26.0 trillion at mid-year 2006, according to the latestInternational Swaps and Derivatives Association (ISDA) market survey.

Volatility in the global foreign exchange marketsduring 2006 was driven by several factors including inflationary fears fromhigh commodity prices and strong global economic growth, the U.S. FederalReserve halting its short-term rate increases in the third quarter as othercentral banks worldwide continued to increase rates, and geopolitical issues,particularly as they related to the Middle-East. The U.S. Dollar generallydecreased in relation to the major foreign currencies in 2006 as evidenced by a3.7% decline in the J.P. Morgan Dollar Index; an index that tracks the value ofthe U.S. currency verses a basket of foreign currencies. The U.S. Dollardepreciated 13.7% and 11.4% as compared to the British Pound and Euro,respectively. According to the latest ISDA market survey, the value of notionalamounts outstanding for interest rate swaps and cross currency swaps grew 25%year over year to $250.8 trillion at mid-year 2006.

Equity market volatility decreased in 2006 accordingto the Chicago Board Options Exchange (“CBOE”) Standard & Poor’s (“S&P)500 Volatility and CBOE Dow Jones Industrial Average (“DJIA”) Volatilityindices. Strong global corporate earnings gains in 2006 were partially offsetby higher oil prices and rising short-term interest rates. International stockmarkets outperformed the U.S. stock markets with the Dow Jones World Indexincreasing 23.0% in 2006. In comparison, the DJIA increased 16.3% over the sameperiod. European and emerging markets in Latin America and Asia also sawsignificant gains in equities during the year. Emerging market stocks experiencedsome considerable volatility in the second quarter due to economic andinflationary concerns. The latest ISDA survey indicated notional amountsoutstanding for equity derivatives grew 32% to $6.4 trillion at mid-year 2006from mid-year 2005.

The energy markets werevolatile in 2006 as oil and natural gas prices experienced significant priceswings as geopolitical issues in the Middle-East and the expectation of anactive hurricane season contributed to record prices during the summer months. Thesubsequent cooling of tensions in the Israel and Lebanon conflict along withthe lack of significant hurricane activity led to the rapid deflation of energyprices by the end of the third quarter. The energy trading market seemedlargely unaffected by the collapse of the Amaranth Advisors hedge fund in thethird quarter as trading on the NYMEX and IntercontinentalExchange reachedrecord volumes in 2006.

**Financial Overview**

Our revenues havegrown from $385.0 million for the year ended December 31, 2004 to $747.2 millionfor the year ended December 31, 2006. The main factors contributing to ourgrowth were:

·       the net addition of 97 brokeragedesks during the three year period ended December 31, 2006, which includesthose desks acquired from Amerex and Starsupply, and an increase in brokeragepersonnel (consisting of brokers, trainees and clerks) from 397 brokeragepersonnel at January 1, 2004 to 932 brokerage personnel at December 31,2006;

·       a continued focus on, andinvestment in, growing and higher margin product areas, as well as productareas that complement our existing brokerage services;

·       overall volume growth inthe markets in which we provide brokerage services;

·       the introduction andcontinued development and expansion of our hybrid brokerage capabilities; and

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

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**Revenues**

We derive our revenuesprimarily through our inter-dealer brokerage services and the fees we chargefor certain of our data and analytics products.

***Brokerage Revenues***

Brokerage revenues represent revenues generated fromour brokerage transactions. We provide brokerage services to our clients in theform of either agency or principal transactions. In agency transactions, we chargea commission for connecting buyers and sellers and assisting in the negotiationof the price and other material terms of the transaction. After all materialterms of a transaction are agreed upon, we identify the buyer and seller toeach other and they then settle the trade directly. Commissions charged to ourclients in agency transactions vary across the products for which we providebrokerage services. Commissions from agency transactions representedapproximately 79%, 77%, and 72% of our total brokerage revenue for the yearsended December 31, 2006, 2005 and 2004, respectively. Commissions fromagency transactions are recognized on the date on which the related trade ismade. However, we do not receive our commissions until our invoice is paid bythe client. Clients are invoiced on a monthly basis.

We generate revenue from principal transactions on thespread between the buy and sell price of the security that is brokered. Ourprincipal transactions revenue is primarily derived from matched principal transactions.In matched principal transactions, we act as a middleman by serving ascounterparty for an identified buyer and an identified seller in matchingreciprocal back-to-back trades. Because the buyer and seller each settle theirtransactions with us rather than with each other, the parties are able tomaintain their anonymity. A limited number of our brokerage desks are allowedto enter into unmatched principal transactions for the purpose of facilitatingclients’ execution needs, adding liquidity to a market or attracting additionalorder flow. These unmatched positions are intended to be held short term.Revenues from principal transactions are recognized on the date on which thetrade is made. Generally, we do not receive our net proceeds until thesettlement date of the transaction, typically one to three business days afterthe trade date. Revenue from principal transactions has been growing in totaldollars but decreasing as a percentage of our total brokerage revenue andcomprised approximately 21%, 23% and 28% of our total brokerage revenue for theyears ended December 31, 2006, 2005 and 2004, respectively. The decreasein principal transactions as a percent of total brokerage revenues in 2006 wasprimarily due to significant growth in our brokerage of commodities and otherproducts which are primarily brokered on an agency basis.

The performance of our brokerage desks is largelydependent on a number of factors, including market developments affecting theproducts we broker, the size of transactions, the location of the markets, theterms of the instruments brokered, the currency of the instruments brokered,commission structure, competition, recruitment or departure of key brokers orcustomers, volatility and the level of trading activity in the various productsthat we broker. Additionally, as markets mature and have more participants, theresulting competition generally leads to lower commissions or spreads.Accordingly, our strategy is to seek new markets in which we can charge highercommissions, increase our market share and trading volumes in existing illiquidmarkets, and provide electronic capabilities to more liquid and commoditizedmarkets in order to offset this potential downward pressure on our brokeragerevenues.

We offer our brokerage services in four broad productcategories: credit, financial, equity and commodity. The charts below detailour brokerage revenues by product category in dollars and as a percentage ofour total brokerage revenues for the indicated periods.

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| ** **                | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(dollars in thousands)**                         | ** ** |
| **BROKERAGE REVENUES:**   |       |                                                         |       |   |   |   |   |
| Credit                    |       | $                                                            | 252,797    |   | $ | 219,317 |   | $ | 153,089 |   |
| Equity                    |       | 173,934                                                      |       | 98,795 |   | 71,473 |   |
| Financial                 |       | 156,267                                                      |       | 116,137 |   | 84,709 |   |
| Commodity                 |       | 126,117                                                      |       | 71,751 |   | 54,107 |   |
| Total brokerage revenues  |       | $                                                            | 709,115    |   | $ | 506,000 |   | $ | 363,378 |   |
| **BROKERAGE  REVENUES:**  |       |                                                         |       |   |   |   |   |
| Credit                    |       | 35.6                                                         | %          | 43.3 | % | 42.1 | % |
| Equity                    |       | 24.5                                                         |       | 19.5 |   | 19.7 |   |
| Financial                 |       | 22.1                                                         |       | 23.0 |   | 23.3 |   |
| Commodity                 |       | 17.8                                                         |       | 14.2 |   | 14.9 |   |
| Total brokerage  revenues |       | 100.0                                                        | %          | 100.0 | % | 100.0 | % |

 

As the chart above indicates, our brokerage operationsin the credit product category produced a significant percentage of our totalbrokerage revenues in each of the last three years. We expect that revenuesfrom credit brokerage operations will continue to constitute the largestpercentage of our total brokerage revenues for the foreseeable future. For theyear ended December 31, 2006, the percentage of total brokerage revenues fromthe credit product category decreased by approximately 7.7% from the prior yeardue to increased brokerage revenues in our other product categories. The growthin non-credit products largely resulted from the opening of our office in Parisin 2006 which focuses on equity products, the acquisition of Amerex in October2006, and the growth and volatility in the markets outside of credit. Webelieve that brokerage revenues from our four brokerage categories willcontinue to fluctuate year to year based on, among other things, developmentswhich are outside our control, such as economic and political conditions andevents affecting the various markets for which we provide brokerage services,and the success of initiatives by us to increase our presence in certainmarkets, such as our acquisitions of the Starsupply and Amerex businesses andthe continued development and marketing of our GFI CreditMatch® and GFI ForexMatchTMelectronic trading platforms.

*Credit*

We provide our brokerage services in a wide range ofmarkets for credit instruments, including credit derivatives, investment gradecorporate bonds, high-yield bonds and emerging market bonds. The markets forcredit derivatives, generally, and the market for credit default swaps,specifically, have experienced strong growth in the last three years. As aresult, more competitors have entered these markets. Increased competition hasplaced downward pressure on the commissions that we can charge, resulting inlower commission rates. We expect this trend to continue in the markets for morewidely traded credit derivative products, such as single-entity credit defaultswaps and certain credit derivative index products. Partially in response tothis trend, we have sought to establish and increase our presence in marketsfor newer credit derivative products that have fewer competitors and allow forhigher commissions, and have developed the GFI CreditMatch® platform to expandour presence in the existing more liquid credit derivatives products. We havealso sought to support an increasing movement among our clients to integratetransactions involving certain credit derivatives with other related orcorrelated financial instruments. We believe this trend, together with ourexisting presence in the credit derivatives market, may permit us to expand ourpresence in the markets for these related or correlated financial instruments,some of which are in the credit products area and others of which are in thefinancial and equity product areas.

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*Equity*

We provide brokerageservices in a range of markets for equity products, including U.S. equity,international equity, equity derivatives and GDRs and ADRs. In 2006, there wasincreased volumes in equity products as our clients continued to integratetheir trading of certain equity and credit derivative products, in an effort toexploit arbitrage opportunities that may arise from the volatility in pricefluctuations of debt and equity instruments issued by a company. In response toour customer’s needs and management’s desire to further diversify our productmix, we increased our presence in equities markets worldwide in 2006. Our Parisoffice, which specializes in cash equities and equity derivatives, opened inthe first quarter of 2006, more than doubling our equity revenues in Europe. Weplan to continue to develop our equity brokerage services in each of ourgeographic regions.

*Financial*

Our financial productsbrokerage services cover a wide range of markets for financial instruments, includingforeign exchange options, bond options and repurchase agreements. We believethat our customers increased their trading of financial products in 2006 due tothe volatility from higher short-term interest rates, a weaker than expectedU.S. Dollar, and general economic and inflationary uncertainty caused by highcommodity prices and geopolitical concerns. Over the past few years, we haveexpanded our presence in the financial products area by adding brokerage desksin markets for emerging market foreign exchange options, regional interest ratederivatives and non-deliverable forwards contracts. In addition, we expandedour operations in Tokyo and Singapore in 2006, in part, to capitalize on thegrowth trend in the Asia-Pacific markets for financial products. We havedeveloped and introduced our proprietary GFI ForexMatchTM trading platform onmany of our foreign exchange options brokerage desks worldwide.

*Commodity*

We provide brokerageservices in a diverse array of markets for commodity products, includingelectricity, oil and oil products, natural gas, wet and dry freightderivatives, precious metals, coal, natural gas, weather derivatives,emissions, pulp and paper and property derivatives. Wet and dry freightderivatives, emissions and property derivatives are examples of new productmarkets in which we have participated in the last few years as we continue todevelop new markets. We substantially increased the size of our U.S. energybrokerage business in 2006 with our acquisition of Amerex in October 2006. The acquisition of Amerex is part of ourstrategy to broaden our presence in the OTC energy markets and complements ourother leading energy desks, including freight derivatives. We believe that theacquisition will provide us with a major established presence in the Houston,Texas energy markets, which we believe is crucial to servicing the traditionalU.S. energy industry participants.

***Analytics and Market Data***

In addition to revenues from our brokerage services,we also earn revenues from the sale of our analytics and market data products.We offer our clients analytics and market data products which are used to buildpricing models, develop trading strategies and price and revalue theirderivative positions. Our Fenics FX calculator is a widely-used analytical toolin the foreign exchange markets.

We generate revenues fromsoftware licenses, data subscription fees and upgrade/maintenance feesassociated with our analytics and market data products offerings. For softwarelicenses, we charge our clients up-front, one-time license fees and annual andmonthly subscription fees. We also charge upgrade fees that are generallytreated as follow-on licenses. We sell our data either on a subscription feebasis or in customized one-time sales. Our analytics and market data productsare marketed to a broader range of clients than are our brokerage services,including national and regional banks, large corporations and hedge funds.

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***Contract Revenue***

Contract revenue consistsprimarily of revenue recognized under a long-term contract pursuant to which wedeveloped an online foreign exchange trading system and customized it for acustomer. The long-term contract was considered substantially completed duringthe second quarter of 2006. Additionally, contract revenues include revenuesgenerated from the additional work provided to the customer on a time andmaterials basis. See Contract Costs below for a discussion of the expensesrelating to this contract. See Note 2 to the Consolidated Financial Statementsfor further discussion.

***Interest Income***

We generate interestincome primarily from the investment of our cash balances and from interestearned on balances held at third party clearing organizations. We currentlyinvest our cash in highly liquid investments with maturities of three months orless.

***Other Income***

Other income primarilyconsists of transactional gains (losses) based on foreign currency fluctuationsand gains (losses) on foreign exchange derivative contracts. Additionally, wehave historically included income received by us from non-recurring items suchas litigation settlements, insurance settlements, gains on the sale of anon-strategic brokerage desk, and other non-recurring items. Other income alsoincludes income recognized from technology hosting services we provide to athird party.

**Expenses**

***Compensation and Employee Benefits***

Our principal operating cost is our compensation andemployee benefits expense, which includes salaries, sign-on bonuses, incentivecompensation and related employee benefits and taxes. Our employees can beallocated into three general categories: brokerage employees, data andanalytics products employees and administrative and support employees, whichinclude our executive officers. The most significant component of our overallcompensation and employee benefits expense is the employment costs of ourbrokerage personnel.

Our compensation and employee benefits expense for allemployees has both a fixed and variable component. Base salaries and benefitcosts are primarily fixed for all employees. Employees also receive bonuses,which constitute the variable portion of our compensation and employee benefitsexpense. Bonuses for brokerage personnel are primarily based on the operatingresults of their related brokerage desk as well as their individualperformance. For many of our brokerage employees, their bonus constitutes asignificant component of their overall compensation. Bonuses for otheremployees generally are more broadly based on our overall performance. For mostof these employees, the bonus is typically a smaller component of their overallcompensation than is the case for our brokerage personnel. Accordingly, bonuscosts, and therefore compensation and employee benefits expense, are variableand normally rise and fall in relation to our brokerage revenues. A significantportion of brokerage bonuses are typically paid semi-annually in March forthe six month period ending December 31 of the prior year, and inSeptember, for the six month period ending June 30 of that year. A portionof bonuses to brokers and other employees may be paid in the form of restrictedstock units (“RSUs”). Bonuses expensed to all employees, including non-cashcompensation charges related to the issuance of RSUs, represented 52%, 50% and49% of total compensation and employee benefits expense for the years ended December 31,2006, 2005 and 2004, respectively. A significant portion of our bonus expenseis subject to contractual guarantees that may require us to make bonus paymentsto brokers regardless of their performance in any particular period.

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Additionally, we grant sign-on bonuses for certainnewly-hired brokers or for certain of our existing brokers who agree tolong-term employment agreements. These sign-on bonuses may be paid in the formof cash, RSUs or forgivable loans and are typically amortized over the term ofthe related employment agreement, which is generally two to four years. Theseemployment agreements typically contain repayment or forfeiture provisions forunvested RSUs or all or a portion of the sign-on bonus and forgivable loanshould the employee voluntarily terminate his or her employment or if theemployee’s employment is terminated for cause during the initial term of theagreement. Sign-on bonuses expensed to all employees, including non-cashcompensation charges related to the issuance of RSUs, represented 5%, 4% and 4%of total compensation and employee benefits expense for the years ended December 31,2006, 2005 and 2004, respectively.

We believe that in certain situations, we can expandour business into strategic product areas through recruitment of experiencedbrokers who can build successful brokerage desks. Such recruitment may cause usto incur upfront signing bonuses which increase current and future compensationexpense as such compensation expense is generally recognized over a two to fouryear period. During 2006, we incurred increased compensation expense forsign-on bonuses in order to recruit and retain key brokers for the strategicexpansion of our brokerage operations in the financial and equity productareas. In the current period and the foreseeable future, we intend to continueto pursue strategic expansion opportunities by using our cash or common stockor a combination thereof to hire brokers or acquire brokerage businesses.

We pay the brokerage personnel in our U.K. office inBritish Pounds. As a result, we are exposed to movements in foreign currencyexchange rates because most of the revenues associated with our U.K. operationsare received in Euros and U.S. Dollars. We attempt to mitigate this exposure bycalculating all bonuses earned for all brokerage personnel in our U.K. officein U.S. Dollars and making payments in foreign currency equivalents.

As discussed above, weissued RSUs to compensate our employees in connection with certain performanceand sign-on bonuses. The RSUs issued were measured at fair value based on themarket value of our common stock at the date of grant and the relatedcompensation expense is recognized over their respective vesting term, which isgenerally over three years. For the years ended December 31, 2006 and2005, total non-cash compensation charges of approximately $12.2 million and$2.7 million, respectively, net of forfeitures, were recorded related to theissuance of RSUs. Additionally, prior to 2005, we issued options to our employeesunder the 2000 and the 2002 Stock Option Plans and these options wereexercisable upon our IPO in January 2005. For the years ended December 31,2006 and 2005, total non-cash compensation charges of approximately $0.5million and $1.3 million, respectively, net of forfeitures, were recordedrelated to stock options granted under the 2002 Stock Option Plan.

***Communications andMarket Data***

Our communications expenseconsists primarily of costs for our voice and data connections with our clientsand clearing agents. These costs generally increase as we add new brokeragedesks and clients.

Our market data systemsexpense consists primarily of fees for access to market data and relatedservices, primarily provided by the Reuters and Bloomberg systems. Many ofthese costs are fixed because these systems are required regardless oftransaction volume. Further, many of our market data systems vendors requireone- to two-year service contracts. We have expanded our presence in certainequity products which require greater usage of information data systems andtrade reporting systems. As a result, we expect market data systems expense toincrease in the future.

***Travel andPromotion***

Travel and promotionexpenses related to our brokerage clients include travel and cliententertainment costs. We have a policy that seeks to limit travel and promotionexpense attributable to each 

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brokeragedesk to an amount consistent with the revenue productivity of that brokeragedesk. This is accomplished by deducting any excess travel and promotion expensefrom the calculation of bonus compensation for many of our desks.

***Rent and Occupancy***

Our rent and occupancyexpenses include the costs of leasing, furnishing and maintaining our officesin North America, Europe and the Asia-Pacific region, including maintaining ourtechnology infrastructure in these offices. Our rent and occupancy expenseincreased in 2005 and 2006 as a result of the execution or assumption ofadditional leases. For example, during 2005, we substantially completed themove of our U.K. personnel to new London office space, assumed Starsupply’sNorth American leases, executed a lease for our premises in Paris and expandedour operations in Tokyo. We incurred $2.0 million relating to the duplicaterent and related charges on the London office space, which we began occupyingin the fourth quarter of 2005. Additionally, during 2006, we assumed Amerex’sNorth American leases. As we expand our business within existing locations orto new locations, our rent and occupancy expenses will likely increase.

***Depreciation andAmortization***

Our depreciation andamortization expense arises from the depreciation and amortization of property,equipment and leasehold improvements, including software internally developedfor our trading platforms and related support software products, theamortization of software inventory developed in connection with analyticsproducts to be marketed to third parties and the amortization of acquiredintangible assets with definite lives. Over the past few years, we haveincurred significant costs in the development of software for internal use aswell as for software to be marketed externally. As a result, depreciation andamortization expense has increased over this period. Software developed forinternal use is depreciated once the software is ready for its intended use.Software inventory developed for external sales is amortized once the productis available for general release to clients. We expect that depreciation andamortization expense will continue to increase because we continue to incursignificant costs in the development of software for internal use as well assoftware to be marketed externally. Additionally, we expect that depreciationand amortization expense will increase in connection with purchases of propertyand equipment and leasehold improvements resulting from the additional leaseswe entered into during the year and from the amortization of the intangibleassets acquired in the Amerex acquisition. See Note 8 to the Consolidated FinancialStatements for further discussion of the Amerex acquisition.

***Professional Fees***

Our professional feesinclude fees paid to consultants and other professionals who are engaged tosupport our strategic development of new and existing businesses and technologies.Our accounting and legal fees are also included in these costs. As a publiccompany, we are subject to various reporting and corporate governancerequirements, including the requirements of the Sarbanes-Oxley Act of 2002(“SOX”) and the SEC rules and regulations implementing that Act, as wellas recent changes to the Nasdaq Stock Market rules. During 2006, ourprofessional fees expense exceeded historical levels due to costs we incurredrelating to our first year of compliance with the requirements ofSection 404 of SOX and costs incurred with respect to our secondaryoffering. We believe that our professional fees will decrease in 2007 as weexpect to lower our SOX compliance costs during 2007.

***Clearing Fees***

Our clearing fees expenserelates to expenses for clearing and settlement services and other transactionexpenses that support principal transactions. These amounts also include feeswe pay to exchanges and floor brokers in connection with brokering variousequity products. Clearing fees expense 

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generallyfluctuates based on transaction volumes and has increased in recent years dueto an increase in the volume of principal transactions that we executed.

***Interest Expense***

Our interest expenseconsists of interest charged by lenders to us in connection with our loans andlines of credit provided under our 2006 Credit Agreement and by our third partyclearing organizations. Our credit obligations bear variable rates of interest.As a result, our interest expense is subject to change based on the prevailinginterest rate environment and the amount of variable rate debt we haveoutstanding.

***Other Expenses***

Our other expensesprimarily relate to litigation reserves, general office expenses, irrecoverablevalue-added taxes (“VAT”) and other miscellaneous operating expenses.Irrecoverable VAT represents the portion of VAT we pay in connection withpurchases of services and products in Europe which cannot be claimed as acredit on our VAT return. Irrecoverable VAT amounts are determined based on acomputed VAT recovery rate. In 2006, our VAT increased significantly due to anincrease in the purchases of communications and market data in the U.K. Otherexpenses such as litigation reserves and other general office expenses havealso increased during 2006.

***Contract Costs***

Contract costs primarilyrepresent the development and customization costs we incurred under a long-termcontract pursuant to which we developed an online currency trading system andcustomized it for a customer. The long-term contract was substantiallycompleted during the second quarter of 2006. Additionally, contract costsinclude costs incurred from the additional work provided to the above-mentionedcustomer on a time and materials basis. See Contract Revenue above for furtherdiscussion relating to the revenues associated with this contract. See Note 2to the Consolidated Financial Statements for further discussion.

***Lease Termination Costs to Affiliate***

Lease termination costsrepresent the various charges incurred in connection with the termination ofthe lease for our former primary office in the U.K, which we leased from anaffiliate. See Note 22 to our Consolidated Financial Statements for furtherdiscussion of these costs.

***Provision for Income Taxes***

Our provision for incometaxes consists of current and deferred tax provisions relating to federal,state and local taxes, as well as applicable taxes related to foreignsubsidiaries. We file a consolidated federal income tax return andcombined state and local income tax returns. The difference between thestatutory income tax rate and our effective tax rate for a given period isprimarily a reflection of the tax effects of our foreign operations, generalbusiness credits and the non-deductibility of certain expenses.

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**Results ofOperations**

The following table sets forth our consolidatedresults of operations for the periods indicated:

| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**       | ** ** |
| **REVENUES:**                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokerage  revenues:                      |       |                                       |       |   |   |   |   |
| Agency commissions                        |       | $                                          | 557,895    |   | $ | 391,583 |   | $ | 262,039 |   |
| Principal transactions                    |       | 151,220                                    |       | 114,417 |   | 101,339 |   |
| Total brokerage revenues                  |       | 709,115                                    |       | 506,000 |   | 363,378 |   |
| Analytics and market data                 |       | 18,651                                     |       | 17,395 |   | 16,081 |   |
| Contract revenue                          |       | 6,973                                      |       | — |   | — |   |
| Interest income                           |       | 9,144                                      |       | 4,637 |   | 1,578 |   |
| Other income                              |       | 3,300                                      |       | 5,560 |   | 3,983 |   |
| Total revenues                            |       | 747,183                                    |       | 533,592 |   | 385,020 |   |
| **EXPENSES:**                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation and employee benefits        |       | 465,554                                    |       | 327,345 |   | 241,847 |   |
| Communications and market data            |       | 37,300                                     |       | 25,860 |   | 20,536 |   |
| Travel and promotion                      |       | 32,391                                     |       | 24,652 |   | 19,511 |   |
| Rent and occupancy                        |       | 20,559                                     |       | 15,450 |   | 10,669 |   |
| Depreciation and amortization             |       | 19,021                                     |       | 15,284 |   | 13,856 |   |
| Professional fees                         |       | 19,152                                     |       | 10,700 |   | 9,468 |   |
| Clearing fees                             |       | 24,471                                     |       | 13,683 |   | 9,816 |   |
| Interest                                  |       | 6,818                                      |       | 3,635 |   | 3,159 |   |
| Other expenses                            |       | 14,543                                     |       | 13,890 |   | 10,353 |   |
| Contract cost                             |       | 5,819                                      |       | — |   | — |   |
| Lease termination costs to affiliate      |       | (242                                       | )          | (1,196 | ) | 2,651 |   |
| Total expenses                            |       | 645,386                                    |       | 449,303 |   | 341,866 |   |
| Income before  provision for income taxes |       | 101,797                                    |       | 84,289 |   | 43,154 |   |
| Provision for  income taxes               |       | 40,719                                     |       | 36,186 |   | 20,031 |   |
| Net income                                |       | $                                          | 61,078     |   | $ | 48,103 |   | $ | 23,123 |   |

 

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The following table sets forth our consolidatedresults of operations as a percentage of our total revenues for the periodsindicated:

| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **REVENUES:**                            |       |                                       |       |   |   |   |   |
| Brokerage revenues:                      |       |                                       |       |   |   |   |   |
| Agency commissions                       |       | 74.7                                       | %          | 73.4 | % | 68.0 | % |
| Principal transactions                   |       | 20.2                                       |       | 21.4 |   | 26.3 |   |
| Total brokerage revenues                 |       | 94.9                                       |       | 94.8 |   | 94.3 |   |
| Analytics and market data                |       | 2.5                                        |       | 3.3 |   | 4.2 |   |
| Contract revenue                         |       | 1.0                                        |       | — |   | — |   |
| Interest income                          |       | 1.2                                        |       | 0.9 |   | 0.4 |   |
| Other income                             |       | 0.4                                        |       | 1.0 |   | 1.1 |   |
| Total revenues                           |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| **EXPENSES:**                            |       |                                       |       |   |   |   |   |
| Compensation and employee benefits       |       | 62.3                                       |       | 61.3 |   | 62.8 |   |
| Communications and market data           |       | 5.0                                        |       | 4.8 |   | 5.3 |   |
| Travel and promotion                     |       | 4.3                                        |       | 4.6 |   | 5.1 |   |
| Rent and occupancy                       |       | 2.8                                        |       | 2.9 |   | 2.8 |   |
| Depreciation and amortization            |       | 2.5                                        |       | 2.9 |   | 3.6 |   |
| Professional fees                        |       | 2.6                                        |       | 2.0 |   | 2.5 |   |
| Clearing fees                            |       | 3.3                                        |       | 2.6 |   | 2.5 |   |
| Interest                                 |       | 0.9                                        |       | 0.7 |   | 0.8 |   |
| Other expenses                           |       | 1.9                                        |       | 2.6 |   | 2.7 |   |
| Contract costs                           |       | 0.8                                        |       | — |   | — |   |
| Lease termination costs to affiliate     |       | 0.0                                        |       | (0.2 | ) | 0.7 |   |
| Total expenses                           |       | 86.4                                       | %          | 84.2 | % | 88.8 | % |
| Income before provision for income taxes |       | 13.6                                       | %          | 15.8 | % | 11.2 | % |
| Provision for income taxes               |       | 5.4                                        |       | 6.8 |   | 5.2 |   |
| Net income                               |       | 8.2                                        | %          | 9.0 | % | 6.0 | % |

 

**Year endedDecember 31, 2006 Compared to the Year Ended December 31, 2005**

Net income for the yearended December 31, 2006 was $61.1 million as compared to net incomeof $48.1 million for the year ended December 31, 2005, an increase of$13.0 million or approximately 27.0%. Total revenues increased by $213.6million, or 40.0%, to $747.2 million for the year ended December 31,2006 from $533.6 million for the prior year. Our increased revenues wereprimarily due to increased brokerage revenues across each of our productcategories. Total expenses increased by $196.1 million, or 43.6% to$645.4 million for the year ended December 31, 2006 from$449.3 million for the prior year. Expenses increased primarily because ofincreased compensation expense for the year ended December 31, 2006, whichwas attributable to an increase in performance-based bonus expense as a resultof higher revenues, as well as higher sign-on bonus expense.

***Revenues***

*Brokerage Revenues*

Total brokerage revenues increased by $203.1 millionor 40.1%, to $709.1 million for the year ended December 31, 2006 from$506.0 million for the year ended December 31, 2005. Agency commissionsincreased by $166.3 million, or 42.5% to $557.9 million for the year endedDecember 31, 2006 as compared to $391.6 million for the year endedDecember 31, 2005. Principal transactions increased by $36.8 million, or32.2%, to $151.2 million for the year ended December 31, 2006 from $114.4million for the year ended 

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December 31, 2005. Ofthe total increase in brokerage revenues of $203.1 million, approximately$179.6 million was attributable to revenues generated from our existing desksacross all product areas. Revenues increased in each of our product categorieswith the largest increases in our equity and commodities product categories.Broker productivity (defined as total brokerage revenues during the perioddivided by average monthly brokerage personnel headcount for the period)increased by approximately 7.5% for the year ended December 31, 2006, ascompared to the same period from the prior year.

The increase in credit product brokerage revenues of$33.5 million for the year ended December 31, 2006 as compared to the sameperiod in 2005 was due to a number of factors, including continued overallgrowth in the credit derivatives market, the development of new creditproducts, the sectorization of credit products and the continuing rollout ofGFI CreditMatch® in Europe and the U.S. Our existing credit product deskscontributed $31.5 million of the total increase in credit product brokeragerevenues. The remaining $2.0 million increase was generated by the addition offive new or restructured credit product desks since December 31, 2005. Anew or “restructured” brokerage desk generally refers to a brokerage desk thathas been created out of a part of an existing desk in order to allow thebrokers on that restructured desk to focus on one or more specific financialinstruments or market sectors for which the existing brokerage desk hadpreviously provided brokerage services. Our credit product brokerage personnel headcountincreased by 9 to 232 employees at December 31, 2006 from 223 employees atDecember 31, 2005.

The increase in equity product brokerage revenues of$75.1 million for the year ended December 31, 2006 as compared to the sameperiod in 2005 was due to inclusion of a full-year of revenues from our Parisoffice, which focuses on equity product brokerage and which contributed $49.1million in brokerage revenues during the year ended December 31, 2006, andthe development of other equity products and increased business from our hedgefund customers. Our existing equity product desks, including those desks in ourParis office, contributed $69.6 million, of the total increase in equityproduct brokerage revenues. The remaining $5.5 million increase in equityproduct brokerage revenues was attributable to the addition of three new orrestructured equity product desks since December 31, 2005. Our equityproduct brokerage personnel headcount increased by 21 to 173 employees atDecember 31, 2006 from 152 employees at December 31, 2005.

The increase in financial product brokerage revenuesof $40.1 million for the year ended December 31, 2006 as compared to thesame period in 2005 was primarily attributable to the growth in ourAsia-Pacific brokerage operations, global interest rate volatility resultingfrom economic growth and inflation concerns and the development of new productsand existing emerging market products. The increase in our financial productbrokerage revenues was generated primarily from our existing financial productdesks, which contributed $39.6 million of the increase in financial productbrokerage revenues. The remaining $0.5 million increase in financial productbrokerage revenues was attributable to the addition of three new or restructuredfinancial product desks since December 31, 2005. Our financial productbrokerage personnel headcount increased by 28 to 262 employees atDecember 31, 2006 from 234 employees at December 31, 2005.

The increase in commodityproduct brokerage revenues of $54.4 million for the year endedDecember 31, 2006 as compared to the same period in 2005 was attributableto the full-year effect of the acquisition of the Starsupply oil productbrokerage business that generated approximately $26.2 million in brokeragerevenues during 2006, the acquisition of the Amerex business, which providedrevenue of $15.0 million in 2006 from ten new desks, and considerable pricevolatility in certain commodity markets. Our existing commodity desks,including desks acquired from Starsupply, contributed $38.9 million of thetotal increase in commodity product brokerage revenue. Our new or restructuredcommodity product desks, including desks acquired from Amerex, contributed$15.5 million of the increase in commodity product brokerage revenues. Ourcommodity product brokerage personnel headcount increased by 96 to 265employees at December 31, 2006 from 169 employees at December 31,2005.

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*Analytics and Market Data*

Revenues from ouranalytics and market data products increased by $1.3 million, or 7.5%, to $18.7million for the year ended December 31, 2006 from $17.4 million for theyear ended December 31, 2005. This increase was primarily due to anincrease in subscription fees for market data products and the licensing of analyticalsoftware, including Fenics Foreign Exchange.

*Contract Revenue*

Contract revenue consistsprimarily of revenues recognized under a long-term contract pursuant to whichwe developed an online foreign exchange currency trading system and customizedit for a customer. During the second quarter of 2006, the project wassubstantially completed and consequently, we recorded $5.9 million in long-termcontract revenues. Additionally, contract revenues include revenues generatedfrom the additional work provided to the customer on a time and materials basisand such revenue amounted to $1.1 million during the latter part of 2006. SeeNote 2 to the Consolidated Financial Statements for further discussion.

*Interest Income*

Interest income increasedby $4.5 million, or 97.8%, to $9.1 million for the year ended December 31,2006 as compared to $4.6 million for the year ended December 31, 2004. 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 increased clearing account balances from our expanded equity andcorporate bond brokerage operations.

*Other Income*

Other income decreased by$2.3 million, or 41.1%, to $3.3 million for the year ended December 31,2006 as compared to $5.6 million for the year ended December 31, 2005. Thedecrease was primarily attributable to the net gain of $7.6 million relating toour foreign exchange derivative contracts recorded during the second quarter of2005. During the first quarter of 2005, we discontinued hedge accounting for aforeign exchange derivative contract, which resulted in a termination of thatcontract and the execution of a new contract. The new contract did not qualifyfor hedge accounting and therefore, all unrealized gains and losses on thiscontract were recorded directly to earnings. The new contract was settled onJune 30, 2005. Consequently, we recorded $8.4 million of gains from thenew contract, net of $0.8 million that was reclassified from accumulated othercomprehensive loss into earnings on the original contract. Other income for theyear ended December 31, 2006 mainly consisted of transactional net gains(losses) based on foreign currency fluctuations and net gains (losses) onforeign exchange derivative contracts.

***Expenses***

*Compensation and Employee Benefits*

Compensation and employeebenefits expenses increased by $138.2 million, or 42.2%, to $465.5 million forthe year ended December 31, 2006 from $327.3 million for the year endedDecember 31, 2005. The increase was primarily attributable to an increasein the number of brokerage personnel from 777 at December 31, 2005 to 932at December 31, 2006 and an increase in brokerage personnel performancebonuses of $72.5 million. The increased performance bonuses were due, in largepart, to our overall higher total brokerage revenues.

Total compensation andemployee benefits as a percentage of total revenues increased slightly to 62.3%at December 31, 2006 from 61.3% at December 31, 2005. Bonus expenserepresented 52.0% and 49.5% of total compensation and employee benefits expensefor the year ended December 31, 2006 and 2005, respectively. A significantportion of our bonus expense is subject to contractual guarantees that mayrequire us to make bonus payments to brokers regardless of their performance inany particular period. Additionally, sign-on bonus expense represented 5.2% and4.4% of total compensation and employee benefits for the years endedDecember 31, 2006 and 2005, respectively.

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*Communications and Market Data*

Costs for communicationsand market data systems, such as Bloomberg and Reuters, increased by $11.4million, or 44.0%, to $37.3 million for the year ended December 31, 2006from $25.9 million from the year ended December 31, 2005. The increase wasprimarily attributable to the increase in brokerage desks and brokeragepersonnel, including in those areas, such as equities, that rely more heavilyon market data systems.

*Travel and Promotion*

Travel and promotionincreased by $7.7 million, or 31.2%, to $32.4 million for the year endedDecember 31, 2006 from $24.7 million for the year ended December 31,2005. This expense, as a percentage of our total brokerage revenues for theyear ended December 31, 2006 decreased slightly to 4.6% from 4.9% for theyear ended December 31, 2005. This decrease was primarily due to theCompany’s continuing efforts to lower costs and the increase in the Company’stotal brokerage revenues.

*Rent and Occupancy*

Rent and occupancyincreased by $5.1 million, or 32.9% to $20.6 million for the year endedDecember 31, 2006 from $15.5 million for the year ended December 31,2005. The increase was primarily due to the increase in repairs, maintenance,utilities and insurance expenses resulting from the lease of additional or the replacementof office space in the U.S. and U.K.

*Depreciation and Amortization*

Depreciation andamortization expense increased by $3.7 million, or 24.2%, to $19.0 million forthe year ended December 31, 2006 from $15.3 million for the year endedDecember 31, 2005. The increase was primarily due to the increase incapitalized property and equipment costs, including software development costs,and the amortization of intangibles resulting from the acquisition of Amerex.

*Professional Fees*

Professional fees expenseincreased by $8.4 million, or 78.5%, to $19.1 million for the year endedDecember 31, 2006 from $10.7 million for the year ended December 31,2005. This increase was primarily due to an increase in professional feesrelating to our first year of compliance with the requirements ofSection 404 of SOX and costs incurred related to our secondary offering.The increase was also attributable to other non-SOX related audit, tax andconsulting fees.

*Clearing Fees*

Clearingfee expense increased by $10.8 million, or 78.8%, to $24.5 million for the yearended December 31, 2006 from $13.7 million for the year endedDecember 31, 2005. The increase was due to a higher volume of principaltransactions executed during the year ended December 31, 2006, as comparedto the prior year. This increase was partially due to the commencement andrapid growth of our equities business in our Paris office, which commencedoperations in the first quarter of 2006. Clearing fees, as a percentage of ourtotal revenues from principal transactions increased to 16.2% for the yearended December 31, 2006 from 11.9% for the comparable period in the prioryear.  This increase was due to the typesof principal transactions and the related high cost of clearing fees for tradesexecuted by brokers in our Paris office. Excluding transactions from our Parisoffice, clearing fees, as a percentage of our total revenues from principaltransactions was 14.4% and 11.9% for the year ended December 31, 2006 and2005, respectively. Principal transactions are generally settled through thirdparty clearing organizations that charge us a fee for their services. We alsouse the services of floor brokers on certain stock exchanges to assist in theexecution of transactions. Fees paid to floor brokers in these circumstancesare included in clearing fees.  Further, executionfees paid to exchanges are included in clearing fees.

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*Interest Expense*

Interest expense increasedby $3.2 million, or 88.9%, to $6.8 million for the year ended December 31,2006 from $3.6 million for the year ended December 31, 2005. The increasewas primarily due to higher interest charges on clearing accounts relatedprimarily to our equity and corporate bond brokerage operations and an increasein interest expense under our credit facility mainly due to the higher level ofoutstanding net borrowings during the year end December 31, 2006 ascompared to the same period in the prior year.

*Other Expenses*

Other expenses increasedby $0.6 million, or 4.3%, to $14.5 million for the year ended December 31,2006 from $13.9 million for the year ended December 31, 2005. The increasewas attributable to an increase in irrecoverable VAT related to increasedpurchases in communications and market data in the U.K., litigation reserve andother general office expenses. Other expenses in 2005 included one-time chargesof $3.2 million in connection with the buy-out of employment contracts for ournewly-hired brokerage personnel in Singapore and $2.0 million relating to thefair value of the Fenics purchase obligations.

*Contract Costs*

Contract costs primarilyrepresent the development and customization cost we incurred under a long-termcontract pursuant to which we developed an online foreign exchange currencytrading system and customized it for a customer. The long-term contract wasconsidered substantially completed during the second quarter of 2006 and werecorded $5.2 million in contract costs. Additionally, contract costs include$0.6 million of expenses incurred from the additional work provided to thecustomer on a time and materials basis. See Note 2 to the ConsolidatedFinancial Statements for further discussion.

*Lease TerminationCosts to Affiliate*

Lease termination costsdecreased by $1.0 million, or 83.3%, to a gain of $0.2 million for the yearended December 31, 2006 from a gain of $1.2 million for the year ended December 31,2005. In April 2005, we and an affiliate executed an amendment to thelease termination agreement entered into in December 2004. The amendmentaccelerated termination of the lease to April 2005 and required us to paya termination charge. As a result of the amendment, in the second quarter of2005, we reduced our lease termination liability by approximately £1.2 million(or $2.3 million). Further, we signed a new eighteen-month sublease agreementwith the affiliate with rent of £0.5 million (or $0.9 million) per annum plusother related charges. However, in November 2005, we vacated the premiseand accrued £0.5 million (or $0.9 million) for the remaining rent plus otherrelated charges during the fourth quarter of 2005. During the third quarter of2006, we reduced our estimate for related termination charges by £0.1 million(or $0.1 million). We paid the remaining rent due to the affiliate under thesublease in the fourth quarter of 2006. See Note 21 to the ConsolidatedFinancial Statements for further discussion.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $40.7 million for the year ended December 31, 2006 and $36.2million for the year ended December 31, 2005. Our effective tax rate was40.0% for the year ended December 31, 2006 as compared to 42.9% for theyear ended December 31, 2005. The reduction in the effective tax rate wasprimarily due to decreases in state and local taxes, as well as a decrease intaxes related to our foreign operations. Additionally, the effects ofnon-deductible expenses were reduced due to a higher level of pre-tax income in2006.

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**Year ended December 31,2005 Compared to the Year Ended December 31, 2004**

Net income for the yearended December 31, 2005 was $48.1 million as compared to net incomeof $23.1 million for the year ended December 31, 2004, an increase of$25.0 million or approximately 108.0%. Total revenues increased by $148.6million, or 38.6%, to $533.6 million for the year ended December 31,2005 from $385.0 million for the prior year. Our increased revenues wereprimarily due to increased brokerage revenues across each of our productcategories. Total expenses increased by $107.4 million, or 31.4%, to$449.3 million for the year ended December 31, 2005 from$341.9 million for the prior year. Expenses increased primarily because ofincreased compensation expense for the year ended December 31, 2005, whichwas attributable to an increase in performance-based bonus expense as a resultof higher revenues, as well as higher sign-on bonus expense.

***Revenues***

*Brokerage Revenues*

Total brokerage revenues increased by $142.6 millionor 39.2%, to $506.0 million for the year ended December 31, 2005 from$363.4 million for the year ended December 31, 2004. Agency commissionsincreased by $129.5 million, or 49.4% to $391.6 million for the year ended December 31,2005 as compared to $262.0 million for the year ended December 31, 2004.Principal transactions increased by $13.1 million, or 12.9%, to $114.4 millionfor the year ended December 31, 2005 from $101.3 million for the yearended December 31, 2004. Of the total increase in brokerage revenues of$142.6 million, approximately $119.6 million was attributable to revenuesgenerated from our existing desks across all product areas. Revenues increasedin each of our product categories with most of the increase in our creditproduct category.

The increase in credit product brokerage revenues of$66.2 million was due to a number of factors including robust trading activityin the credit markets due to specific credit events including auto and autosupplies sector credit downgrades and bankruptcies, continued overall growth inthe credit derivatives market, the development of new credit products, and theinvestment in and sectorization of both credit derivatives and corporate bonds.Our existing credit product desks contributed $62.1 million of the totalincrease in credit product brokerage revenues. The remaining $4.1 millionincrease was generated by the addition of fifteen new or restructured creditproduct desks since December 31, 2004. Our investment in and developmentof credit products was highlighted by a credit product brokerage personnelincrease of 39 to 223 employees at December 31, 2005 from 184 employees atDecember 31, 2004.

The increase in financial product brokerage revenuesof $31.4 million was primarily attributable to the combination of increasedrevenues from brokerage desks covering emerging markets, interest ratederivatives and exotic foreign exchange options in both the U.S. and U.K. dueto volatility resulting from U.S. interest rate movement, uncertainty in thedirection of the U.S. economy, inflationary fears due to high energy costs, andinvestment in our foreign exchange and interest rate derivatives business,particularly in Asia. The increase in our financial product brokerage revenues wasgenerated primarily from our existing financial product desks, whichcontributed $29.6 million of the increase in financial product brokeragerevenues. The remaining $1.8 million increase in financial product brokeragerevenues was attributable to the addition of seven new or restructuredfinancial product desks since December 31, 2004. Our investment infinancial products was highlighted by a financial product brokerage personnelincrease of 98 to 234 employees at December 31, 2005 from 136 employees atDecember 31, 2004.

The increase in equity product brokerage revenues of$27.3 million was due to the full-year effect of brokerage personnel hires in2004, new brokerage personnel hires and new desks established in 2005, and oursuccess in marketing equities and equity derivatives execution to hedge funds.Our existing equity product desks contributed $18.9 million of the totalincrease in equity product brokerage revenues. The remaining $8.4 millionincrease in equity product brokerage revenues was attributable to the additionof thirteen new or restructured equity product desks since December 31,2004. Our investment in and 

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development of equityproducts was highlighted by an equity product brokerage personnel increase of24 to 152 employees at December 31, 2005 from 128 employees at December 31,2004.

The increase in commodityproduct brokerage revenues of $17.7 million was attributable to the combinationof investments in new or restructured desks, including revenue of $6.7 millionfrom the nine new desks added as a result of the Starsupply acquisition, therebound in energy trading and increased volatility in certain energy markets.Our existing commodity desks contributed $9.0 million of the total increase incommodity product brokerage revenue. Our new or restructured commodity productdesks contributed $8.7 million of the increase in commodity product brokeragerevenues. Our investment in commodity products was highlighted by a commodityproduct brokerage personnel increase of 57 to 169 employees at December 31,2005 from 112 employees at December 31, 2004.

*Analytics andMarket Data*

Revenues from ouranalytics and market data products increased by $1.3 million, or 8.1%, to $17.4million for the year ended December 31, 2005 from $16.1 million for theyear ended December 31, 2004. This increase was primarily attributable tothe increase in foreign exchange software licenses, energy softwaresubscriptions and other data subscriptions, offset in part by a decrease inupdate fees for foreign exchange data services.

*Interest Income*

Interest income increasedby $3.0 million, or 187.5%, to $4.6 million for the year ended December 31,2005 as compared to $1.6 million for the year ended December 31, 2004. Theincrease is mainly attributable to the higher level of average cash balancesduring the year.

*Other Income*

Other income increased by$1.6 million, or 40.0%, to $5.6 million for the year ended December 31,2005 as compared to $4.0 million for the year ended December 31, 2004. Theincrease is primarily related to $8.4 million in gains from one of our foreignexchange derivative contracts, offset by a loss of $2.5 million reclassifiedfrom accumulated other comprehensive loss into earnings on a foreign exchangederivative contract that was de-designated as a hedge in March 2005, whichwas offset by the transactional net losses based on foreign currencyfluctuations. Other income for the year ended December 31, 2004 mainlyconsisted of transactional net gains (losses) based on foreign currencyfluctuations, net gains (losses) on foreign exchange derivative contracts andproceeds received by us from a litigation settlement related to an employmentcontract dispute with one of our competitors.

***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits expenses increasedby $85.5 million, or 35.4%, to $327.3 million for the year ended December 31,2005 from $241.8 million for the year ended December 31, 2004. Theincrease was primarily attributable to an increase in the number of brokeragepersonnel from 560 at December 31, 2004 to 777 at December 31, 2005,an increase in performance-related brokerage bonuses of $52.9 million and anincrease in expense related to sign-on bonuses of $5.0 million resulting inlarge part from our overall higher total brokerage revenues and the increase inbrokerage personnel.

Total compensation andemployee benefits as a percentage of total revenues decreased slightly to 61.3%at December 31, 2005 from 62.8% at December 31, 2004. Totalcompensation and employee benefits as a percentage of total revenues, excludingthe effect of new share-based compensation 

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arrangementsin 2005 which deferred certain compensation costs, would have been 63.4% forthe year ended December 31, 2005.

*Communications andMarket Data*

Costs for communicationsand market data systems increased by $5.4 million, or 26.3%, to $25.9 millionfor the year ended December 31, 2005 from $20.5 million from the yearended December 31, 2004. The increase was primarily attributable to theincrease in brokerage desks and brokerage personnel.

*Travel andPromotion*

Travel and promotionincreased by $5.2 million, or 26.7%, to $24.7 million for the year ended December 31,2005 from $19.5 million for the year ended December 31, 2004. Thisexpense, as a percentage of our total brokerage revenues for the year ended December 31,2005 decreased slightly to 4.9% from 5.4% for the year ended December 31,2004. This decrease was primarily due to the Company’s efforts to lower costsand the increase in the Company’s total brokerage revenues.

*Rent and Occupancy*

Rent and occupancyincreased by $4.8 million, or 44.9% to $15.5 million for the year ended December 31,2005 from $10.7 million for the year ended December 31, 2004. The increasewas primarily due to the lease of additional office space in the U.S. and U.K.

*Depreciation andAmortization*

Depreciation andamortization expense increased by $1.4 million, or 10.1%, to $15.3 million forthe year ended December 31, 2005 from $13.9 million for the year ended December 31,2004. The increase was partially attributable to the increase in property andequipment, including software, and the accelerated depreciation of $1.1 millionrelated to certain long-lived assets to be abandoned as a result of the earlytermination of the lease of our former primary U.K. office. Another factor thatcontributed to the increase in depreciation and amortization expense was theincrease of amortization of intangibles as a result of the acquisition ofStarsupply and software development costs.

*Professional Fees*

Professional feesincreased by $1.2 million, or 12.6%, to $10.7 million for the year ended December 31,2005 from $9.5 million for the year ended December 31, 2004. This increasewas primarily due to the increase in audit and other consulting services, whichwas offset by a decrease in external legal fees.

*Clearing Fees*

Clearing fees increased by$3.9 million, or 39.8%, to $13.7 million for the year ended December 31,2005 from $9.8 million for the year ended December 31, 2004. This increasewas due to an increase in the number of principal transactions executed duringthe year ended December 31, 2005 as compared to the year ended December 31,2004. Principal transactions are generally settled through third party clearingorganizations that charge us a fee for their services. We also use the servicesof floor brokers on certain stock exchanges to assist in the execution oftransactions. Fees paid to floor brokers in these circumstances are included inclearing fees.

57

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*Interest Expense*

Interest expense increasedby $0.4 million, or 12.5%, to $3.6 million for the year ended December 31,2005 from $3.2 million for the year ended December 31, 2004. The increasewas primarily due to increased interest charges on third party clearingaccounts related to our brokerage operations, offset by a decrease in interestexpense under our credit agreement with Bank of America, N.A. and certain otherlenders dated August 23, 2004 (“2004 Credit Agreement”) resulting from adecrease in borrowings.

*Other Expenses*

Other expenses increasedby $3.5 million, or 33.7%, to $13.9 million for the year ended December 31,2005 from $10.4 million for the year ended December 31, 2004. The increasewas attributable to a number of factors including a charge of $3.2 million inconnection with the buy-out of employment contracts for our newly-hiredbrokerage personnel in Singapore and an increase in the fair value of theFenics purchase obligations offset by a decrease in irrecoverable VAT relatingto purchases in communications and market data in the U.K. and a decrease inother general office and miscellaneous expenses.

*Lease TerminationCosts to Affiliate*

Lease termination costsdecreased by $3.9 million, or 144.4%, to a gain of $1.2 million for the yearended December 31, 2005 from $2.7 million in expense for the year ended December 31,2004. Lease termination costs to affiliate represents the estimated leasetermination costs in connection with the termination of the lease for ourformer primary office in the U.K., which we leased from an affiliate. In December 2004,we entered into an agreement to terminate this U.K. lease with the terminationdate set for September 1, 2005 and as a result accrued an estimate forthis obligation of £1.5 million (or approximately $2.9 million). In April 2005,the Company and the affiliate executed an amendment to the lease terminationagreement entered into in December 2004. The amendment acceleratedtermination of the lease to April 2005 and required the Company to pay atermination charge of £0.2 million (or $0.4 million). As a result of theamendment, in the second quarter of 2005, the Company reduced its leasetermination liability by approximately £1.2 million (or $2.3 million). Further,the Company signed a new eighteen-month sublease agreement with the affiliatewith rent of £0.5 million (or $0.9 million) per annum plus other relatedcharges. However, in November 2005, the Company vacated the premise andaccrued £0.5 million (or $0.9 million) for the remaining rent plus otherrelated charges at year-end. Included in this amount was £0.1 million (or $0.2million) which will be paid to third parties.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $36.2 million for the year ended December 31, 2005 and $20.0million for the year ended December 31, 2004. Our effective tax rate was42.9% for the year ended December 31, 2005 as compared to 46.4% for theyear ended December 31, 2004. The reduction in the effective tax rate wasprimarily due to decreases in state and local taxes, as well as a decrease intaxes related to our foreign operations. Additionally, the effects ofnon-deductible expenses were reduced due to higher level of pre-tax income in2005.

58

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**Quarterly Resultsof Operations**

Thefollowing table sets forth, by quarter, our unaudited statement of operationsdata for the period from January 1, 2005 to December 31, 2006.Results of any period are not necessarily indicative of results for a full yearand may, in certain periods, be affected by seasonal fluctuations in ourbusiness.

| ** **          | ** ** | **Quarter Ended**               | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **December 31,  2006**          | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokerage revenues: |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Agency commissions                    |   |   | $       | 151,890 |   |   |    | $      | 138,961 |    |   | $      | 130,134 |   |   | $      | 136,910 |   |   |   | $       | 104,335 |   |    |   | $      | 98,559  |   |   | $ | 100,718 |   |   | $ | 87,971 |   |   |
|---------------------------------------|--------|--------|---------|---------|--------|--------|---------|--------|---------|---------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|---------|--------|---------|--------|--------|---------|--------|--------|---|---------|--------|--------|---|--------|--------|--------|
| Principal transactions                |   |   | 33,890  |    |   |   | 34,478  |   |    | 41,792  |   |   | 41,060  |   |   |   | 31,250  |   |   |   | 27,420  |    |   | 27,635  |   |   | 28,112  |   |   |
| Total brokerage revenues              |   |   | 185,780 |    |   |   | 173,439 |   |    | 171,926 |   |   | 177,970 |   |   |   | 135,585 |   |   |   | 125,979 |    |   | 128,353 |   |   | 116,083 |   |   |
| Analytics and market data             |   |   | 4,232   |    |   |   | 4,954   |   |    | 4,271   |   |   | 5,194   |   |   |   | 3,388   |   |   |   | 3,894   |    |   | 4,711   |   |   | 5,402   |   |   |
| Contract revenue                      |   |   | 1,092   |    |   |   | —  |   |    | 5,881   |   |   | —  |   |   |   | —  |   |   |   | —  |    |   | —  |   |   | —  |   |   |
| Interest income                       |   |   | 2,366   |    |   |   | 2,150   |   |    | 2,395   |   |   | 2,233   |   |   |   | 1,458   |   |   |   | 1,236   |    |   | 883     |   |   | 1,060   |   |   |
| Other income (loss)                   |   |   | 601     |    |   |   | (585    | )      |    | 3,093   |   |   | 191     |   |   |   | (145    | )      |   |   | (420    | )       |   | 6,376   |   |   | (251    | )      |   |
| Total revenues                        |   |   | 194,071 |    |   |   | 179,958 |   |    | 187,566 |   |   | 185,588 |   |   |   | 140,286 |   |   |   | 130,689 |    |   | 140,323 |   |   | 122,294 |   |   |
| **Expenses**                          |   |   |    |    |   |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |    |    |   |    |   |   |    |   |   |
| Compensation and employee  benefits   |   |   | 122,465 |    |   |   | 112,543 |   |    | 113,701 |   |   | 116,845 |   |   |   | 89,511  |   |   |   | 81,461  |    |   | 80,896  |   |   | 75,477  |   |   |
| Communications and market  data       |   |   | 10,545  |    |   |   | 9,799   |   |    | 9,303   |   |   | 7,653   |   |   |   | 7,064   |   |   |   | 6,656   |    |   | 6,341   |   |   | 5,799   |   |   |
| Travel and promotion                  |   |   | 9,242   |    |   |   | 7,069   |   |    | 8,549   |   |   | 7,531   |   |   |   | 7,017   |   |   |   | 5,833   |    |   | 6,041   |   |   | 5,761   |   |   |
| Rent and occupancy                    |   |   | 5,511   |    |   |   | 4,594   |   |    | 4,841   |   |   | 5,613   |   |   |   | 3,447   |   |   |   | 4,662   |    |   | 3,913   |   |   | 3,428   |   |   |
| Depreciation and  amortization        |   |   | 6,799   |    |   |   | 4,338   |   |    | 4,048   |   |   | 3,836   |   |   |   | 4,159   |   |   |   | 3,434   |    |   | 3,599   |   |   | 4,092   |   |   |
| Professional fees                     |   |   | 5,397   |    |   |   | 4,391   |   |    | 5,320   |   |   | 4,044   |   |   |   | 2,507   |   |   |   | 2,797   |    |   | 2,927   |   |   | 2,469   |   |   |
| Clearing fees                         |   |   | 6,312   |    |   |   | 5,884   |   |    | 6,798   |   |   | 5,477   |   |   |   | 3,858   |   |   |   | 3,480   |    |   | 2,974   |   |   | 3,371   |   |   |
| Interest                              |   |   | 2,170   |    |   |   | 1,124   |   |    | 1,772   |   |   | 1,752   |   |   |   | 1,016   |   |   |   | 778     |    |   | 597     |   |   | 1,244   |   |   |
| Other expenses                        |   |   | 4,046   |    |   |   | 3,098   |   |    | 3,843   |   |   | 3,556   |   |   |   | 1,855   |   |   |   | 2,217   |    |   | 5,809   |   |   | 4,009   |   |   |
| Contract costs                        |   |   | 639     |    |   |   | —  |   |    | 5,180   |   |   | —  |   |   |   | —  |   |   |   | —  |    |   | —  |   |   | —  |   |   |
| Lease termination costs to  affiliate |   |   | (57     | )       |   |   | (93     | )      |    | (92     | )      |   | —  |   |   |   | 1,070   |   |   |   | —  |    |   | (2,266  | )      |   | —  |   |   |
| Total expenses                        |   |   | 173,069 |    |   |   | 152,747 |   |    | 163,263 |   |   | 156,307 |   |   |   | 121,504 |   |   |   | 111,318 |    |   | 110,831 |   |   | 105,650 |   |   |
| Income before provision for  taxes    |   |   | 21,002  |    |   |   | 27,211  |   |    | 24,303  |   |   | 29,281  |   |   |   | 18,782  |   |   |   | 19,371  |    |   | 29,492  |   |   | 16,644  |   |   |
| Provision for income taxes            |   |   | 7,593   |    |   |   | 10,621  |   |    | 10,207  |   |   | 12,298  |   |   |   | 7,363   |   |   |   | 8,523   |    |   | 12,810  |   |   | 7,490   |   |   |
| Net income                            |   |   | $       | 13,409  |   |   |    | $      | 16,590  |    |   | $      | 14,096  |   |   | $      | 16,983  |   |   |   | $       | 11,419  |   |    |   | $      | 10,848  |   |   | $ | 16,682  |   |   | $ | 9,154  |   |   |

 

59

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

| ** **                            | ** ** | **Quarter Ended**      | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| **Revenues**                          | ** ** |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage revenues:                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions                    |       |                        | 78.2       | % |   |   | 77.2 | % |   |   | 69.4 | % |   |   | 73.8 | % |   |   | 74.4 | % |   |   | 75.4 | % |   |   | 71.8 | % |   |   | 72.0 | % |   |
| Principal transactions                |       |                        | 17.5       |   |   |   | 19.2 |   |   |   | 22.3 |   |   |   | 22.1 |   |   |   | 22.3 |   |   |   | 21.0 |   |   |   | 19.7 |   |   |   | 23.0 |   |   |
| Total brokerage revenues              |       |                        | 95.7       |   |   |   | 96.4 |   |   |   | 91.7 |   |   |   | 95.9 |   |   |   | 96.7 |   |   |   | 96.4 |   |   |   | 91.5 |   |   |   | 95.0 |   |   |
| Analytics and market data             |       |                        | 2.2        |   |   |   | 2.8 |   |   |   | 2.3 |   |   |   | 2.8 |   |   |   | 2.4 |   |   |   | 3.0 |   |   |   | 3.4 |   |   |   | 4.4 |   |   |
| Contract revenue                      |       |                        | 0.6        |   |   |   | — |   |   |   | 3.1 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Interest income                       |       |                        | 1.2        |   |   |   | 1.2 |   |   |   | 1.3 |   |   |   | 1.2 |   |   |   | 1.0 |   |   |   | 0.9 |   |   |   | 0.6 |   |   |   | 0.8 |   |   |
| Other income (loss)                   |       |                        | 0.3        |   |   |   | (0.4 | ) |   |   | 1.6 |   |   |   | 0.1 |   |   |   | (0.1 | ) |   |   | (0.3 | ) |   |   | 4.5 |   |   |   | (0.2 | ) |   |
| Total revenues                        |       |                        | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **Expenses**                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee  benefits   |       |                        | 63.1       | % |   |   | 62.5 | % |   |   | 60.6 | % |   |   | 63.0 | % |   |   | 63.8 | % |   |   | 62.3 | % |   |   | 57.6 | % |   |   | 61.7 | % |   |
| Communications and market  data       |       |                        | 5.4        |   |   |   | 5.4 |   |   |   | 5.0 |   |   |   | 4.1 |   |   |   | 5.0 |   |   |   | 5.1 |   |   |   | 4.6 |   |   |   | 4.8 |   |   |
| Travel and promotion                  |       |                        | 4.8        |   |   |   | 3.9 |   |   |   | 4.6 |   |   |   | 4.1 |   |   |   | 5.0 |   |   |   | 4.5 |   |   |   | 4.3 |   |   |   | 4.7 |   |   |
| Rent and occupancy                    |       |                        | 2.8        |   |   |   | 2.6 |   |   |   | 2.6 |   |   |   | 3.0 |   |   |   | 2.5 |   |   |   | 3.6 |   |   |   | 2.8 |   |   |   | 2.8 |   |   |
| Depreciation and  amortization        |       |                        | 3.5        |   |   |   | 2.4 |   |   |   | 2.2 |   |   |   | 2.1 |   |   |   | 3.0 |   |   |   | 2.6 |   |   |   | 2.6 |   |   |   | 3.3 |   |   |
| Professional fees                     |       |                        | 2.8        |   |   |   | 2.4 |   |   |   | 2.8 |   |   |   | 2.2 |   |   |   | 1.8 |   |   |   | 2.1 |   |   |   | 2.1 |   |   |   | 2.0 |   |   |
| Clearing fees                         |       |                        | 3.3        |   |   |   | 3.3 |   |   |   | 3.6 |   |   |   | 3.0 |   |   |   | 2.8 |   |   |   | 2.7 |   |   |   | 2.1 |   |   |   | 2.8 |   |   |
| Interest                              |       |                        | 1.1        |   |   |   | 0.6 |   |   |   | 0.9 |   |   |   | 0.9 |   |   |   | 0.7 |   |   |   | 0.6 |   |   |   | 0.4 |   |   |   | 1.0 |   |   |
| Other expenses                        |       |                        | 2.1        |   |   |   | 1.7 |   |   |   | 2.0 |   |   |   | 1.9 |   |   |   | 1.3 |   |   |   | 1.7 |   |   |   | 4.1 |   |   |   | 3.3 |   |   |
| Contract costs                        |       |                        | 0.3        |   |   |   | — |   |   |   | 2.8 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Lease termination costs to  affiliate |       |                        | 0.0        |   |   |   | (0.1 | ) |   |   | — |   |   |   | — |   |   |   | 0.8 |   |   |   | — |   |   |   | (1.6 | ) |   |   | — |   |   |
| Total expenses                        |       |                        | 89.2       | % |   |   | 84.7 | % |   |   | 87.1 | % |   |   | 84.3 | % |   |   | 86.7 | % |   |   | 85.2 | % |   |   | 79.0 | % |   |   | 86.4 | % |   |
| Income before provision for  taxes    |       |                        | 10.8       |   |   |   | 15.3 |   |   |   | 12.9 |   |   |   | 15.7 |   |   |   | 13.3 |   |   |   | 14.8 |   |   |   | 21.0 |   |   |   | 13.6 |   |   |
| Provision for income taxes            |       |                        | 3.9        |   |   |   | 5.9 |   |   |   | 5.4 |   |   |   | 6.6 |   |   |   | 5.2 |   |   |   | 6.5 |   |   |   | 9.1 |   |   |   | 6.1 |   |   |
| Net income                            |       |                        | 6.9        | % |   |   | 9.4 | % |   |   | 7.5 | % |   |   | 9.1 | % |   |   | 8.1 | % |   |   | 8.3 | % |   |   | 11.9 | % |   |   | 7.5 | % |   |

 

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

| ** **               | ** ** | **Quarter Ended**               | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **December 31,  2006**          | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage  Revenues:** |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Credit                   |       |   | $      | 61,032  |   |   |   | $      | 60,654     |       |       | $      | 59,838  |   |   | $      | 71,273  |   |   |   | $      | 55,443  |       |       |       | $      | 51,472  |   |   | $ | 60,749  |   |   | $ | 51,653  |   |   |
|--------------------------|------------|--------|--------|---------|--------|--------|--------|--------|------------|------------|------------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|---------|------------|------------|------------|--------|---------|--------|--------|---|---------|--------|--------|---|---------|--------|--------|
| Financial                |       |   | 39,232 |    |   |   | 38,605 |   |       | 38,942     |       |   | 39,488  |   |   |   | 29,213  |   |   |   | 30,804 |    |       | 29,835     |       |   | 26,285  |   |   |
| Equity                   |       |   | 44,940 |    |   |   | 41,426 |   |       | 46,109     |       |   | 41,459  |   |   |   | 29,931  |   |   |   | 25,993 |    |       | 21,869     |       |   | 21,002  |   |   |
| Commodity                |       |   | 40,576 |    |   |   | 32,754 |   |       | 27,037     |       |   | 25,750  |   |   |   | 20,998  |   |   |   | 17,710 |    |       | 15,900     |       |   | 17,143  |   |   |
| Total brokerage revenues |       |   | $      | 185,780 |   |   |   | $      | 173,439    |       |       | $      | 171,926 |   |   | $      | 177,970 |   |   |   | $      | 135,585 |       |       |       | $      | 125,979 |   |   | $ | 128,353 |   |   | $ | 116,083 |   |   |
| **Brokerage Revenues:**  | ** ** |   |   |    |   |   |   |   | ** ** | ** ** | ** ** |   |    |   |   |   |    |   |   |   |   |    | ** ** | ** ** | ** ** |   |    |   |   |
| Credit                   |       |   | 32.9   | %       |   |   | 35.0   | %      |       | 34.8       | %          |   | 40.0    | %      |   |   | 40.9    | %      |   |   | 40.8   | %       |       | 47.3       | %          |   | 44.5    | %      |   |
| Financial                |       |   | 21.1   |    |   |   | 22.2   |   |       | 22.7       |       |   | 22.2    |   |   |   | 21.5    |   |   |   | 24.5   |    |       | 23.2       |       |   | 22.6    |   |   |
| Equity                   |       |   | 24.2   |    |   |   | 23.9   |   |       | 26.8       |       |   | 23.3    |   |   |   | 22.1    |   |   |   | 20.6   |    |       | 17.0       |       |   | 18.1    |   |   |
| Commodity                |       |   | 21.8   |    |   |   | 18.9   |   |       | 15.7       |       |   | 14.5    |   |   |   | 15.5    |   |   |   | 14.1   |    |       | 12.4       |       |   | 14.8    |   |   |
| Total brokerage revenues |       |   | 100.0  | %       |   |   | 100.0  | %      |       | 100.0      | %          |   | 100.0   | %      |   |   | 100.0   | %      |   |   | 100.0  | %       |       | 100.0      | %          |   | 100.0   | %      |   |

 

60

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**Liquidity andCapital Resources**

To date, we have financed our operations through cashflows from operations, proceeds received from sales of our equity securitiesand borrowings under our credit facilities. On February 24, 2006, weamended and restated the terms of our 2004 Credit Agreement with the Bank ofAmerica and certain lenders, which we refer to as the 2006 Credit Agreement.The 2006 Credit Agreement provided for maximum borrowings to be increased from$80.0 million under the 2004 Credit Agreement to $135.0 million under the 2006Credit Agreement and extended the expiration date from August 23, 2007 toFebruary 24, 2011. In September 2006, we entered into an agreementthat increased the maximum permitted borrowing under the 2006 Credit Agreementto $160.0 million. See Note 10 to the Consolidated Financial Statements forfurther details.

Cash and cash equivalents consist of cash and highlyliquid investments with maturities, when purchased, of three months or less. AtDecember 31, 2006, we had $181.5 million of cash and cash equivalentscompared to $144.1 million and $105.2 million at December 31, 2005 and2004, respectively. The changes to our cash and cash equivalents balances forthese periods are due to our operating, investing and financing activities asdiscussed below.

Thefollowing table sets forth our cash flows from operating activities, investingactivities and financing activities for the years ended December 31,

| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash provided by  operating activities              |       | $        | 69,870     |     | $          | 15,653   |       | $ | 15,212 |   |
| Cash used in  investing activities                  |       | (106,700 | )          | (35,735  | )          | (7,795   | )          |
| Cash provided by  financing activities              |       | 73,944   |       | 58,889   |       | 10,574   |       |
| Effects of  foreign currency translation adjustment |       | 222      |       | 180      |       | (129     | )          |
| Increase in cash and  cash equivalents              |       | $        | 37,336     |     | $          | 38,987   |       | $ | 17,862 |   |

 

Cash provided by operating activities primarilyconsists of net income adjusted for certain non-cash items includingdepreciation and amortization and the effects of changes in working capital.Cash provided by operating activities was $69.9 million for the year ended December 31,2006 and consisted of net income of $61.1 million adjusted for non-cash itemsof $33.0 million and $24.2 million utilized for working capital. The $24.2million utilized for working capital primarily consisted of changes in netreceivables to brokers, dealers and clearing organizations, accrued commissionsreceivables and other assets, offset by increases in accrued compensation,income taxes payable and accounts payable and accrued liabilities. Cash providedby operating activities was $15.7 million for the year ended December 31,2005 and consisted of net income of $48.1 million adjusted for non-cash itemsof $23.7 million and $56.1 million utilized for working capital. Cash providedby operating activities was $15.2 million for the year ended December 31,2004 and consisted of net income of $23.1 million adjusted for non-cash itemsof $14.0 million and $21.9 million of working capital. The significant increasein cash provided by operating activities in 2006 as compared to 2005 and 2004is primarily related to our improved net income, positively adjusted by certainnon-cash items such as deferred compensation expense and depreciation andamortization expense.

Cash used in investing activities was $106.7 millionfor the year ended December 31, 2006 as compared to $35.7 million and $7.8million for each of the years ended December 31, 2005 and 2004,respectively. The significant increase in cash used in investing activitiesduring 2006 as compared to 2005 and 2004, was primarily attributable to $84.3million in net cash used for the acquisition of substantially all of the NorthAmerican brokerage operations and assets of Amerex. See Note 8 to theConsolidated Financial Statements for further details of the Amerexacquisition.

Cash provided by financing activities was $73.9million for the year ended December 31, 2006 as compared to $58.9 millionand $10.6 million for the years ended December 31, 2005 and 2004,respectively. 

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Cash provided by financingactivities primarily consisted of net borrowings of $58.0 million under the2006 Credit Agreement, which was used to fund the Amerex acquisition. Additionally,cash provided by financing activities included cash proceeds of $8.4 millionrelated to stock option exercises and tax benefits of $11.7 million related toshare-based compensation which was offset by cash paid for taxes relating tovested RSUs. The cash provided by financing activities for the year ended December 31,2005 reflected net proceeds of $73.7 million received from the IPO and $13.3million from the exercise of stock options and a warrant, offset by therepayment of a $9.3 million loan note payable to JPI and $68.5 million of netrepayments of amounts under our 2004 Credit Facility. Cash provided byfinancing activities was $10.6 million for the year ended December 31,2004 primarily consisted of net borrowings under the revolving portion of our2002 Credit Agreement.

Under the 2006 Credit Agreement, loans will bearinterest of the London Interbank Offered Rate (“LIBOR”) plus a margindetermined by our consolidated leverage ratio as defined in the 2006 CreditAgreement. The 2006 Credit Agreement contains covenants which restrict, amongother things, our ability to borrow, pay dividends, distribute assets,guarantee debts of others and lend funds to affiliated companies and containscriteria on the maintenance of certain financial statement amounts and ratios,all as defined in the agreement. At December 31, 2006, there was $91.2million in outstanding borrowings and $6.5 million of outstanding letters ofcredit under our 2006 Credit Agreement. At December 31, 2006, we had $62.3million of availability under the 2006 Credit Agreement. Subsequent to yearend, we repaid $20.0 million of the outstanding borrowings. We are currently incompliance with all of our obligations under the 2006 Credit Agreement.

Our liquidity and available cash resources are in partrestricted by the regulatory requirements of our operating subsidiariesincluding GFI Securities LLC, GFI Securities Limited, GFIBrokers Limited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd. and GFIGroup PTE Ltd. These operating subsidiaries are subject to minimum capitalrequirements and/or licensing and financial requirements imposed by their respectivemarket regulators that are intended to ensure general financial soundness andliquidity based on certain minimum capital, licensing and financialrequirements. U.S. and U.K. regulations prohibit a registered broker-dealerfrom repaying borrowings of its parent or affiliates, paying cash dividends,making loans to its parent or affiliates or otherwise entering intotransactions that result in a significant reduction in its regulatory netcapital position without prior notification or approval from its principalregulator. Our non-regulated subsidiaries are not subject to theserestrictions. The capital structures of each of our broker-dealer subsidiariesare designed to provide each with capital and liquidity consistent with itsbusiness and regulatory requirements.

Our U.S. broker-dealer, GFI Securities LLC, is subjectto the net capital rules under the Exchange Act and the Commodity ExchangeAct. As of December 31, 2006, GFI Securities LLC had Net Capital, asdefined under the Exchange Act, of $33.3 million, which was $33.0 million inexcess of its required minimum net capital of $0.3 million.

GFI Securities Limited and GFI Brokers Limited aresubject to the capital requirements of FSA in the United Kingdom. As of December 31,2006, GFI Securities Limited had financial resources, as defined by theFSA, of $22.7 million, which was $7.3 million in excess of its requiredfinancial resources of $15.4 million. As of December 31, 2006, GFIBrokers Limited had financial resources, as defined by the FSA, of $22.1million, which was $13.1 million in excess of its required financial resourcesof $9.0 million.

GFI Securities Limited’s Japanese branch is requiredto maintain “brought-in” capital, as defined, of 50 million Japanese Yen aspart of its licensing requirement, in accordance with the Foreign SecuritiesFirms Law. In addition, GFI Securities Limited is required to maintain acapital base of 1 billion Japanese Yen (approximately $8.4 million). Further,GFI Securities Limited is subject to the JSDA’s financial requirement thatrevenue plus “brought-in” capital exceed a ratio of 120.0% of relevantexpenditure. At 

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December 31, 2006,GFI Securities Limited and its Japanese branch were in compliance with thesecapital requirements and maintained a ratio in excess of 120.0%.

GFI Securities Limited’s Paris branch was establishedthrough the exercise of its passport right to open a branch in an EEA state.This branch commenced operation on February 1, 2006. The establishment ofthe branch was approved by FSA and acknowledged by Banque de France in France.The branch will be subject to the conduct of business rules of AMF whendealing with resident customers of France and will be regulated, in part, bythe FSA.

GFI Brokers’ Sydney branch is registered as a foreigncorporation in Australia and is conditionally exempt from the requirement tohold an Australian financial services license under the Australian Securitiesand Investments Commission Corporations Act 2001 in respect of the financialservices it provides in Australia. This exemption applies to foreign companiesregulated by the FSA in accordance with U.K. regulatory standards.

GFI (HK) Securities LLC is subject to the capitalrequirements of the SFC in Hong Kong. At December 31, 2006, GFI (HK)Securities LLC had net capital of approximately $0.7 million, which was $0.3million in excess of its required minimum net capital of $0.4 million.

GFI (HK) Brokers Ltd. is registered with and regulatedby the HKMA. As part of this registration, GFI (HK) Brokers Ltd. is required tomaintain stockholders’ equity of 5.0 million Hong Kong dollars (orapproximately $0.6 million). At the time it was registered, GFI (HK)Brokers Ltd. was in compliance with these requirements. However, at December 31,2006, GFI (HK) Brokers Ltd.’s stockholders’ equity had fallen below therequired amount and therefore was not in compliance with this requirement. GFI(HK) Brokers Ltd. discussed this matter with the HKMA and increased its sharecapital to meet the requirements subsequent to year-end. We do not expect toincur a penalty in connection with this period of non-compliance.

In Singapore, the MAS regulates our subsidiary, GFIGroup PTE Ltd. Our compliance requirements with the MAS include, amongother things, maintaining stockholders’ equity of 3.0 million Singaporedollars and monitoring GFI Group PTE Ltd.’s trading practices and businessactivities. At December 31, 2006, GFI Group PTE Ltd had stockholders’equity of 4.1 million Singapore dollars (approximately $2.7 million),which was 1.1 million Singapore dollars (approximately $0.7 million)in excess of its required stockholders’ equity.

In addition to these regulatory capital requirements,our liquidity may be impacted by the amount of capital that we maintain inclearing accounts and with exchanges to support our principal transactionsbusiness. As of December 31, 2006, the balance receivable from clearingorganizations was $93.0 million, an increase of $45.1 million from the sameperiod in the prior year. The main reason for this increase was the growth inour brokerage businesses, primarily in the equity product category, whichexecute transactions on a matched principal basis.

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

We believe that, based oncurrent levels of operations and anticipated growth, our cash from operations,together with cash currently available and our ability to borrow under our 2006Credit Agreement, will be sufficient to fund our operations for at least thenext 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 

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equityor debt financing will be available when needed or, if available, that thefinancing will be on terms satisfactory to us and not dilutive to ourthen-current stockholders.

**ContractualObligations and Commitments**

Thefollowing table summarizes certain of our contractual obligations as of December 31,2006:

| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**      | ** ** |
| **Contractual Obligations** | ** ** | ** **                                | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Notes Payable (1)           |       | $                                         | 91,674     |   |   | $ | 91,674 | ** ** |   | $ | — |   | $ | — |   |   | $ | — | ** ** |   |
| Operating Leases  (2)       |       | 56,677                                    |       |   | 5,588 | ** ** |   | 15,619 |   | 16,759 |   |   | 18,711 | ** ** |   |
| Purchase  Obligations (3)   |       | 11,885                                    |       |   | 10,406 | ** ** |   | 1,479 |   | — |   |   | — | ** ** |   |
| **Total**                   |       | $                                         | 160,236    |   |   | $ | 107,668 | ** ** |   | $ | 17,098 |   | $ | 16,759 |   |   | $ | 18,711 | ** ** |   |

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(1)          Amounts listed underNotes Payable represent outstanding borrowings under our 2006 Credit Agreementand vary from the notes payable reflected in our financial statements becauseour financial statements reflect the total debt net of unamortized loan fees.Additionally, amounts listed under Notes Payable included interest due of $488which was paid in January 2007. In February 2006, we amended andrestated our 2004 Credit Agreement. Additionally, in September 2006, weentered into an agreement that increased the maximum permitted borrowings underthe 2006 Credit Agreement. See Note 10 to the Consolidated Financial Statementsfor further details regarding the 2004 and 2006 Credit Agreements.

(2)          Amounts listed underOperating Leases include the future minimum rental commitments relating to ourChristopher Street lease in London, which premises we vacated in February 2006.The future minimum rental commitments include obligations for the periodcovering January 2006 through February 2008, at which time we canterminate the lease without a penalty. See Note 15 to the ConsolidatedFinancial Statements for further details.

(3)          Amountslisted under Purchase Obligations include agreements for market data withvarious information service providers. Additionally, it includes purchasecommitments for capital expenditures relating to our European and Korea offices.See Note 15 to our Consolidated Financial Statements for further details.

**Off-Balance SheetEntities**

We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.

**Critical AccountingPolicies and Estimates**

**General**

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations discusses our consolidated financialstatements which have been prepared in accordance with U.S. generally acceptedaccounting principles, which require us to make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, netrevenue and expenses, and the disclosure of contingent assets and liabilities.We base our estimates and judgments on historical experience and on variousother factors that we believe are reasonable under the circumstances. Webelieve that the 

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accounting estimatesemployed and the resulting balances are reasonable; however, actual results maydiffer from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requiresan accounting estimate to be made based on assumptions about matters that arehighly uncertain at the time the estimate is made; if different estimatesreasonably could have been used; or if changes in the estimate that arereasonably likely to occur periodically could materially impact the financialstatements. We believe the following critical accounting policies reflect thesignificant estimates and assumptions used in the preparation of theConsolidated Financial Statements.

**Revenue Recognition**

We provide brokerage services to our clients in theform of either agency or principal transactions. In agency transactions, wecharge commissions for executing transactions between buyers and sellers. Weearn revenue from principal transactions on the spread between the buy and sellprice of the security that is brokered. Our principal transaction revenue isprimarily derived from matched principal transactions. In matched principaltransactions, we simultaneously agree to buy instruments from one party andsell them to another. Certain of our brokerage desks enter into unmatchedprincipal transactions in the ordinary course of business, primarily for thepurpose of facilitating our clients’ execution needs, adding liquidity to amarket or attracting additional order flow. These unmatched positions areintended to be held short term. Brokerage revenues and related expenses fromagency and principal transactions are recognized on a trade date basis. We donot receive actual payment of the commissions or the net spread until thespecific account receivable is collected in an agency transaction or until thespecific settlement date in a principal transaction.

We evaluate the level of our allowance for doubtfulaccounts based on the financial condition of our clients, the length of timereceivables are past due and our historical experience with the particularclient. Also, if we know of a client’s inability to meet its financialobligations, we record a specific provision for doubtful accounts for estimatedlosses resulting from the inability of that client to make payments. The amountof the provision will be charged against the amounts due to reduce thereceivable to the amount we reasonably believe will be collected. If thefinancial condition of one of our clients were to deteriorate, resulting in animpairment of its ability to make payments, an additional provision could berequired. Due to changing economic business and market conditions, we reviewthe provision monthly and make changes to the provision as appropriate. Ourallowance for doubtful accounts at December 31, 2006 was $3.5 million.

**SoftwareDevelopment Capitalization**

*SoftwareInventory—**We*capitalize costs related to thedevelopment of certain software products or the costs related to thesignificant enhancement of existing products that meet the criteria ofStatement of Financial Accounting Standards (“SFAS”) No. 86, *Accounting for the Costs of Computer Software to BeSold, Leased, or Otherwise Marketed*. SFAS No. 86 provides forthe capitalization of computer software that is to be used as an integral partof a product or process to be sold or leased, after technological feasibilityhas been established for the software and all research and developmentactivities for the other components of the product or process have beencompleted. We cease capitalizing costs when the product is available forgeneral release to our customers. Software inventory is stated at the lower ofcost or net realizable value, which is based on projected revenues. We amortizethe costs based on the greater of the ratio of current year revenue to currentyear revenue plus projected revenue or straight-line, generally over threeyears. Amortization begins when a product is available for general release tocustomers.

The capitalized costs, the estimate of a product’seconomic life and the estimate of projected revenues require management’sjudgment. Any changes in key assumptions, market conditions or othercircumstances could result in an impairment of the capitalized asset and a chargeto our operating results.

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*Internal-Use Software—**We*capitalize certaincosts of software developed or obtained for internal use in accordance with theStatement of Position (“SOP”) 98-1, *Accountingfor the Costs of Corporate Software Developed or Obtained for Internal Use*.We capitalize software development costs when application development beginsand it is probable that the project will be completed and the software will beused as intended. Costs associated with preliminary project stage activities,maintenance and all other post implementation stage activities are expensed asincurred. Our policy provides for the capitalization of certain payroll andpayroll-related costs for employees who are directly associated with internaluse computer software projects, as well as external direct costs of materialsand services associated with developing or obtaining internal use software.Capitalized personnel costs are limited to time directly spent on suchprojects. Capitalized costs are ratably amortized, using the straight-linemethod, over the estimated useful lives which are typically over three years.Our judgment as to which costs to capitalize, when to begin capitalizing suchcosts and what period to amortize the costs over, may materially affect our resultsof operations. If management determines that the fair value of the software isless than the carrying value, an impairment loss would be recognized in anamount equal to the difference between the fair value and the carrying value.

**Goodwill**

Under SFAS No. 142,*Goodwill and Other Intangible Assets*,management is required to perform a detailed review, at least annually, of thecarrying value of our intangible assets, which includes goodwill. In thisprocess, management is required to make estimates and assumptions in order todetermine the fair value of our assets and liabilities and projected futureearnings using various valuation techniques, including a discounted cash flowmodel. Management uses its best judgment and information available to it at thetime to perform this review. Because management’s assumptions and estimates areused in projecting future earnings as part of the valuation, actual results maydiffer. If management determines that the fair value of the intangible asset isless than its carrying value, an impairment loss would be recognized in anamount equal to the difference between the fair value and the carrying value.

**Contingencies**

In the normal course of business, we have been namedas defendants in various lawsuits and proceedings and have been involved incertain regulatory examinations. Additional actions, investigations orproceedings may be brought from time to time in the future. We are subject tothe possibility of losses from these various contingencies. Considerable judgmentis necessary to estimate the probability and amount of any loss from suchcontingencies. An accrual is made when it is probable that a liability has beenincurred or an asset has been impaired and the amount of loss can be reasonablyestimated. We accrue a liability for the estimated costs of adjudication orsettlement of asserted and unasserted claims existing as of the balance sheetdate. We have recorded reserves for certain contingencies to which we may haveexposure, such as reserves for certain income tax and litigation contingenciesand contingencies related to the employer portion of National InsuranceContributions in the U.K. We disclose asserted claims when it is at leastreasonably possible that an asset had been impaired or a liability had beenincurred as of the date of the financial statements and unasserted claims whenit is considered probable that a claim will be asserted and there is areasonable possibility that the outcome will be unfavorable.

It is not presentlypossible to determine our ultimate exposure to these matters and there is noassurance that the resolution of these matters will not significantly exceedthe reserves we have accrued. It is management’s opinion that the ultimateresolution of these matters, while not likely to have a material adverse effecton our consolidated financial condition, could be material to our operatingresults for any particular period.

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**Income Taxes**

In accordance with SFAS No. 109, *Accounting for Income Taxes*, we providefor income taxes using the asset and liability method under which deferredincome taxes are recognized for the estimated future tax effects attributableto temporary differences and carry-forwards that result from events that havebeen recognized either in the financial statements or the income tax returns,but not both. The measurement of current and deferred income tax liabilitiesand assets is based on provisions of enacted tax laws. Valuation allowances arerecognized if, based on the weight of available evidence, it is more likely thannot that some portion of the deferred tax assets will not be realized. Ourinterpretation of complex tax law may impact our measurement of current anddeferred income taxes.

We are subject to regularexaminations by the Internal Revenue Service, taxing authorities in foreigncountries, and states in which we have significant business operations. Weregularly assess the likelihood of additional assessments in each taxingjurisdiction resulting from on-going and subsequent years’ examinations.Included in our current tax expense are charges to accruals for expected taxassessments in accordance with SFAS No. 5,*Accounting for Contingencies*. The resolution of these tax matterscould have a material impact on our effective tax rate.

**Recent AccountingPronouncements**

***In***June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—anInterpretation of FASB No. 109*(“FIN 48”). FIN 48 clarifies theaccounting for uncertain tax positions in accordance with SFAS No. 109, *Accounting for Income Taxes*. We will berequired to recognize in our financial statements the largest tax benefit of atax position that is “more-likely-than-not” to be sustained on audit basedsolely on the technical merits of the position as of the reporting date. FIN 48also provides guidance on new disclosure requirements, reporting and accrual ofinterest and penalties, accounting in interim periods and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006.

We will adopt FIN 48 effective January 1,2007. We are currently evaluating the impact of adopting FIN 48 on ourconsolidated financial statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides guidance on how prior year misstatements should be taken intoconsideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. The SEC Staff believes registrants shouldquantify errors using both a balance sheet and income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relative quantitative and qualitative factors are considered, ismaterial. SAB 108 is effective for the first fiscal year ending after November 15,2006. We adopted SAB 108 as of December 31, 2006. The adoption of SAB No. 108did not have a material impact on our consolidated financial statements.

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

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In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159provides a “Fair Value Option” under which a company may irrevocably elect fairvalue as the initial and subsequent measurement attribute for certain financialassets and liabilities. This Fair Value Option will be available on a contract-by-contractbasis with changes in fair value recognized in earnings as those changes occur.The effective date for SFAS 159 is the beginning of each reporting entity’sfirst fiscal year that begins after November 15, 2007. SFAS 159 alsoallows an entity to early adopt provided that the entity also adopts therequirements of SFAS 157. We are currently evaluating the impact ofadopting SFAS 159 on our consolidated financial statements.

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISLOSURE ABOUT MARKET RISK**

In the normal course ofbusiness, we are exposed to foreign currency exchange rate fluctuations relatedto our international brokerage operations, changes in interest rates whichimpact our variable-rate debt obligations, credit risk associated withpotential non-performance by counterparties or customers and market riskassociated with our principal transactions. Our risk management strategy withrespect to certain of these market risks includes the use of derivativefinancial instruments. We use derivatives only to manage existing underlyingexposures of the Company. Accordingly, we do not use derivative contracts forspeculative purposes. Our risks, risk management strategy, and a sensitivityanalysis estimating the effects of changes in fair values for exposuresrelating to foreign currency and interest rate exposures are outlined below.

**Foreign CurrencyExposure Risk**

We are exposed to risks associated with changes inforeign exchange rates. As foreign currency exchange rates change, the U.S.Dollar equivalent of revenues and expenses denominated in foreign currencieschange. Our U.K. operations generate a majority of their revenues in U.S.Dollars and Euros but pay a significant amount of their expenses in BritishPounds. We enter into foreign exchange forward and foreign exchange collarcontracts (“Foreign Exchange Derivative Contracts”) to mitigate our exposure toforeign currency exchange rate fluctuations. Certain of these Foreign ExchangeDerivative Contracts are designated and qualify as foreign currency cash flowhedges under SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*, asamended. The gain or loss on derivatives designated as cash flow hedges isincluded in other comprehensive income in the period that changes in fair valueoccur and is reclassified to income in the same period that the hedged itemaffects income. At December 31, 2006, we had no Foreign ExchangeDerivative Contracts that were designated as foreign currency cash flow hedges.

We are also exposed to counterparty credit risk fornonperformance of Foreign Exchange Derivative Contracts and in the event ofnonperformance, to market risk for changes in currency rates. Thecounterparties with whom we execute foreign exchange derivative contracts aremajor international financial institutions. We monitor our positions with andthe credit quality of these financial institutions and we do not anticipatenonperformance by the counterparties.

While our internationalresults of operations, as measured in U.S. Dollars, are subject to foreignexchange rate fluctuations, we do not consider the related risk to be materialto our results of operations. If the Euro and the British Pound strengthened by10% against the U.S. Dollar, the net impact to our net income would have been areduction of approximately $6.4 million as of December 31, 2006.

**Interest Rate Risk**

We had $91.2 million invariable-rate debt outstanding at December 31, 2006. These debtobligations are subject to fluctuations in interest rates, which impact theamount of interest we must pay. If variable interest rates were to increase by0.50% per annum, the annual impact to our net income would be a reduction ofapproximately $0.3 million.

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**Credit Risk**

Credit risk arises from potential non-performance bycounter parties and customers. We have established policies and procedures tomanage our exposure to credit risk. We maintain a thorough credit approvalprocess to limit exposure to counterparty risk and employ stringent monitoringto control the market and counterparty risk from our matched principalbusiness. Our brokers may only execute transactions for clients that have beenapproved by our credit committee following review by our credit department. Ourcredit approval process includes verification of key financial information andoperating data and anti-money laundering verification checks. Our credit reviewprocess includes consideration of independent credit agency reports and a visitto the entity’s premises, if necessary. We have developed and utilize aproprietary, electronic credit risk monitoring system.

Credit approval is grantedby our credit committee, which is comprised of senior management andrepresentatives from our compliance, finance and legal departments. Creditapproval is granted subject to certain trading limits and may be subject toadditional conditions, such as the receipt of collateral or other creditsupport. Counterparties are reviewed for continued credit approval on at leastan annual basis, and the results are reviewed by the credit committee. Maintenanceprocedures include reviewing current audited financial statements and publiclyavailable information on the client, collecting data from credit ratingagencies where available and reviewing any changes in ownership, title orcapital of the client. For our agency business, our approval process consistsof the requisite anti-money laundering and know-your-customer verifications. Inthe last five years, we have had no material losses due to the nonpayment by,or the nonperformance of, our customers.

**PrincipalTransactions**

Through our subsidiaries, we execute matched principaltransactions in which we act as a “middleman” by serving as counterparty toboth a buyer and a seller in matching back-to-back trades. These transactionsare then settled through a third-party clearing organization. Settlementtypically occurs within one to three business days after the trade date. Cashsettlement of the transaction occurs upon receipt or delivery of the underlyinginstrument that was traded. In a limited number of circumstances, we may settlea principal transaction on a free of payment basis or by physical delivery ofthe underlying instrument.

The number of matched principal trades we execute has continuedto grow as compared to prior years. Matched principal trades in the less liquidmarkets on which we focus are less likely to settle on a timely basis thantransactions in more liquid markets. Receivables from brokers, dealers andclearing organizations and payables to brokers, dealers and clearingorganizations on our consolidated statement of financial condition primarilyrepresent the simultaneous purchase and sale of the securities associated withthose matched principal transactions that have not settled as of their statedsettlement dates. Our experience has been that substantially all of thesetransactions ultimately settle.

Matched principal transactions expose us to risks. Inexecuting matched principal transactions, we are exposed to the risk that oneof the counterparties to a transaction may fail to fulfill its obligations,either because it is not matched immediately or, even if matched, oneparty fails to deliver the cash or securities it is obligated to deliver.Our focus on less liquid and OTC markets exacerbates this risk for us becausetransactions in these markets are less likely to settle on a timely basis.Adverse movements in the prices of securities that are the subject of thesetransactions can increase our risk. In addition, widespread technological orcommunication failures, such as those which occurred as a result of theterrorist attacks on September 11, 2001 and the blackout in the easternportion of the United States in August 2003, as well as actual orperceived credit difficulties or the insolvency of one or more large or visiblemarket participants, could cause market-wide credit difficulties or othermarket disruptions. These failures, difficulties or 

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disruptions could resultin a large number of market participants not settling transactions or otherwisenot performing their obligations.

We are subject to financing risk in thesecircumstances because if a transaction does not settle on a timely basis, theresulting unmatched position may need to be financed, either directly by us orthrough one of our clearing organizations at our expense. These charges may berecoverable from the failing counterparty, but sometimes are not. Finally, ininstances where the unmatched position or failure to deliver is prolonged orwidespread due to rapid or widespread declines in liquidity for an instrument,there may also be regulatory capital charges required to be taken by us, whichdepending on their size and duration, could limit our business flexibility oreven force the curtailment of those portions of our business requiring higherlevels of capital. Credit or settlement losses of this nature could adverselyaffect our financial condition or results of operations.

In the process of executing matched principaltransactions, miscommunications and other errors by our clients or us can arisewhereby a transaction is not completed with one or more counterparties to thetransaction, leaving us with either a long or short unmatched position. Theseunmatched positions are referred to as “out trades,” and they create apotential liability for us. If an out trade is promptly discovered and there isa prompt disposition of the unmatched position, the risk to us is usuallylimited. If the discovery of an out trade is delayed, the risk is heightened bythe increased possibility of intervening market movements prior to disposition.Although out trades usually become known at the time of, or later on the dayof, the trade, it is possible that they may not be discovered until later inthe settlement process. When out trades are discovered, our policy is to havethe unmatched position disposed of promptly, whether or not this dispositionwould result in a loss to us. The occurrence of out trades generally rises withincreases in the volatility of the market and, depending on their number andamount, such out trades have the potential to have a material adverse effect onour financial condition and results of operations. Transactions done on anagency basis may also give rise to such risks.

In addition, liability for unmatched trades couldadversely affect our results of operations and balance sheet. We allow certainof our brokerage desks to enter into unmatched principal transactions in theordinary course of business, primarily for the purpose of facilitating clients’execution needs, adding liquidity to a market or attracting additional orderflow. As a result, we have market risk exposure on these unmatched principaltransactions. Our exposure varies based on the size of the overall positions,the terms of the instruments brokered, and the amount of time the positions areheld before we dispose of the position. We do not track our exposure tounmatched positions on an intra-day basis; however, we attempt to mitigate ourmarket risk on these positions by hedging our exposure. These unmatchedpositions are intended to be held short term. However, due to a number offactors, including the nature of the position and access to the market on whichit trades, we may not be able to match the position and we may be forced tohold a position overnight that has not been hedged. To the extent theseunmatched positions are not disposed of intra-day, we mark these positions tomarket.

Adverse movements in the securities underlying thesepositions or a downturn or disruption in the markets for these positions couldresult in a substantial loss. In addition, principal gains and losses resultingfrom these positions could on occasion have a disproportionate effect, positiveor negative, on our financial condition and results of operations for anyparticular reporting period.

We also attempt to mitigate the risks associated withprincipal transactions through our credit approval and credit monitoringprocesses. We maintain a credit approval process as described above under thediscussion of “Credit Risk” as a means of mitigating exposure to counterpartyrisk. In addition, our credit risk department regularly monitors concentrationof market risk to financial instruments, countries or counterparties andregularly monitors trades that have not settled within prescribed settlementperiods or volume thresholds. We have developed and utilize a proprietary,electronic risk monitoring system, which provides management with twice dailycredit reports that analyze credit concentration.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEPENDENTAUDITORS’ REPORT**

**Table of Contents**

| Report of Independent  Registered Public Accounting Firm         |   | 72 |   |
|------------------------------------------------------------------|--------|----|--------|
| Consolidated Statements of Financial Position                    |   | 73 |   |
| Consolidated Statements of Income                                |   | 74 |   |
| Consolidated Statements of Comprehensive Income                  |   | 75 |   |
| Consolidated Statements of Cash Flows                            |   | 76 |   |
| Consolidated Statements of Changes in Stockholders’  Equity |   | 77 |   |
| Notes  to Consolidated Financial Statements                 |   | 78 |   |

 

71

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM**

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

We have audited the accompanying consolidatedstatements of financial condition of GFI Group Inc. and subsidiaries (the “Company”)as of December 31, 2006 and 2005, and the related consolidated statementsof income, comprehensive income, cash flows and changes in stockholders’ equityfor each of the three years in the period ended December 31, 2006. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of December 31, 2006 and 2005, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 28, 2007 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.

/s/ Deloitte & Touche

New York, New YorkFebruary 28, 2007

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**GFI GROUP INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Dollars in thousands except share and per share amounts)**

| ** **                                                                                                                                                       | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                       |       |                 |       |   |   |
| Cash and cash equivalents                                                                                                                                        |       | $                    | 181,484    |   | $ | 144,148 |   |
| Deposits with clearing organizations                                                                                                                             |       | 7,973                |       | 7,824 |   |
| Accrued commissions receivable, net                                                                                                                              |       | 120,731              |       | 89,727 |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                    |       | 174,693              |       | 208,938 |   |
| Property, equipment and leasehold improvements, net                                                                                                              |       | 41,396               |       | 31,674 |   |
| Software inventory, net                                                                                                                                          |       | 5,770                |       | 5,687 |   |
| Goodwill                                                                                                                                                         |       | 91,891               |       | 26,683 |   |
| Intangible assets, net                                                                                                                                           |       | 14,833               |       | 2,355 |   |
| Other assets                                                                                                                                                     |       | 60,838               |       | 59,101 |   |
| TOTAL ASSETS                                                                                                                                                     |       | $                    | 699,609    |   | $ | 576,137 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                   |       |                 |       |   |   |
| LIABILITIES                                                                                                                                                      |       |                 |       |   |   |
| Accrued compensation                                                                                                                                             |       | $                    | 128,047    |   | $ | 88,628 |   |
| Accounts payable and accrued expense                                                                                                                             |       | 31,336               |       | 22,455 |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                         |       | 84,995               |       | 165,766 |   |
| Notes payable, net                                                                                                                                               |       | 90,253               |       | 31,247 |   |
| Other liabilities                                                                                                                                                |       | 34,509               |       | 28,914 |   |
| Lease termination payable to affiliate                                                                                                                           |       | —               |       | 875 |   |
| Total Liabilities                                                                                                                                                |       | $                    | 369,140    |   | $ | 337,885 |   |
| Commitments and  contingencies                                                                                                                                   |       |                 |       |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                        |       |                 |       |   |   |
| Preferred stock, $0.01 par value; 5,000,000 shares  authorized, none outstanding at December 31, 2006 and 2005                                              |       | —               |       | — |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized and 28,698,505 and 27,904,568 shares outstanding at  December 31, 2006 and 2005, respectively |       | 287                  |       | 279 |   |
| Additional paid in capital                                                                                                                                       |       | 224,442              |       | 195,360 |   |
| Retained earnings                                                                                                                                                |       | 105,868              |       | 44,790 |   |
| Accumulated other comprehensive loss                                                                                                                             |       | (128                 | )          | (2,177 | ) |
| Total Stockholders’ Equity                                                                                                                                  |       | 330,469              |       | 238,252 |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                 |       | $                    | 699,609    |   | $ | 576,137 |   |

 

See notes to consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(In thousands, except share and per share data)**

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUES:                                    |       |                                       |       |   |   |   |   |
| Brokerage  revenues:                         |       |                                       |       |   |   |   |   |
| Agency commissions                           |       | $                                          | 557,895    |   | $ | 391,583 |   | $ | 262,039 |   |
| Principal transactions                       |       | 151,220                                    |       | 114,417 |   | 101,339 |   |
| Total brokerage revenues                     |       | 709,115                                    |       | 506,000 |   | 363,378 |   |
| Analytics and market data                    |       | 18,651                                     |       | 17,395 |   | 16,081 |   |
| Contract revenue                             |       | 6,973                                      |       | — |   | — |   |
| Interest income                              |       | 9,144                                      |       | 4,637 |   | 1,578 |   |
| Other income                                 |       | 3,300                                      |       | 5,560 |   | 3,983 |   |
| Total revenues                               |       | 747,183                                    |       | 533,592 |   | 385,020 |   |
| EXPENSES:                                    |       |                                       |       |   |   |   |   |
| Compensation and employee benefits           |       | 465,554                                    |       | 327,345 |   | 241,847 |   |
| Communications and market data               |       | 37,300                                     |       | 25,860 |   | 20,536 |   |
| Travel and promotion                         |       | 32,391                                     |       | 24,652 |   | 19,511 |   |
| Rent and occupancy                           |       | 20,559                                     |       | 15,450 |   | 10,669 |   |
| Depreciation and amortization                |       | 19,021                                     |       | 15,284 |   | 13,856 |   |
| Professional fees                            |       | 19,152                                     |       | 10,700 |   | 9,468 |   |
| Clearing fees                                |       | 24,471                                     |       | 13,683 |   | 9,816 |   |
| Interest                                     |       | 6,818                                      |       | 3,635 |   | 3,159 |   |
| Other expenses                               |       | 14,543                                     |       | 13,890 |   | 10,353 |   |
| Contract costs                               |       | 5,819                                      |       | — |   | — |   |
| Lease termination costs to affiliate         |       | (242                                       | )          | (1,196 | ) | 2,651 |   |
| Total Expenses                               |       | 645,386                                    |       | 449,303 |   | 341,866 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES     |       | 101,797                                    |       | 84,289 |   | 43,154 |   |
| PROVISION FOR  INCOME TAXES                  |       | 40,719                                     |       | 36,186 |   | 20,031 |   |
| NET INCOME                                   |       | $                                          | 61,078     |   | $ | 48,103 |   | $ | 23,123 |   |
| EARNINGS PER SHARE                           |       |                                       |       |   |   |   |   |
| Basic                                        |       | $                                          | 2.15       |   | $ | 1.80 |   | $ | 1.01 |   |
| Diluted                                      |       | $                                          | 2.09       |   | $ | 1.74 |   | $ | 0.95 |   |
| WEIGHTED AVERAGE SHARES  OUSTANDING BASIC    |       |                                       |       |   |   |   |   |
| Class A common stock                    |       | —                                     |       | 484,426 |   | 5,893,846 |   |
| Common stock                                 |       | 28,345,697                                 |       | 25,761,202 |   | 10,155,809 |   |
| WEIGHTED AVERAGE SHARES  OUTSTANDING DILUTED |       | 29,175,928                                 |       | 27,699,325 |   | 24,334,003 |   |

 

See notes to consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands)**

| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET INCOME                                                                   |       | $                                          | 61,078     |   | $ | 48,103 |   | $ | 23,123 |   |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                          |       |                                       |       |   |   |   |   |
| Unrealized gain  (loss) on foreign derivative exchange contracts, net of tax |       | 1,827                                      |       | 5,353 |   | (7,598 | ) |
| Foreign currency  translation adjustment, net of tax                         |       | 222                                        |       | 180 |   | (129 | ) |
| COMPREHENSIVE INCOME                                                         |       | $                                          | 63,127     |   | $ | 53,636 |   | $ | 15,396 |   |

 

See notes to consolidated financial statements

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**GFIGROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 61,078     |   | $ | 48,103 |   | $ | 23,123 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 19,021                                     |       | 15,284 |   | 13,856 |   |
| Amortization of loan fees                                                          |       | 238                                        |       | 400 |   | 270 |   |
| Provision for doubtful accounts                                                    |       | (27                                        | )          | 649 |   | 815 |   |
| Loss on disposal of fixed assets                                                   |       | 181                                        |       | — |   | — |   |
| Deferred compensation                                                              |       | 12,708                                     |       | 4,110 |   | 195 |   |
| (Benefit from) provision for deferred taxes                                        |       | (5,381                                     | )          | 9,666 |   | (4,344 | ) |
| Loss on foreign currency exchange for notes payable                                |       | 1,381                                      |       | 93 |   | — |   |
| Loss on Fenics Purchase Obligation                                                 |       | —                                     |       | 2,030 |   | 570 |   |
| (Gain)/Loss on foreign exchange derivative contracts                               |       | 5,156                                      |       | (7,344 | ) | — |   |
| Lease termination payable to affiliate                                             |       | (242                                       | )          | (1,195 | ) | 2,651 |   |
| (Increase) decrease in  operating assets:                                          |       |                                       |       |   |   |   |   |
| Deposits with clearing organizations                                               |       | (149                                       | )          | 1,009 |   | (888 | ) |
| Accrued commissions receivable                                                     |       | (20,578                                    | )          | (40,098 | ) | (22,981 | ) |
| Receivables from brokers, dealers and clearing  organizations                      |       | 34,245                                     |       | 199,303 |   | (215,562 | ) |
| Software inventory                                                                 |       | (2,677                                     | )          | (3,215 | ) | (1,584 | ) |
| Other assets                                                                       |       | 68                                         |       | (40,788 | ) | (6,941 | ) |
| Increase (decrease) in  operating liabilities:                                     |       |                                       |       |   |   |   |   |
| Accrued compensation                                                               |       | 31,482                                     |       | 24,531 |   | 21,521 |   |
| Accounts payable and accrued expenses                                              |       | 8,256                                      |       | 516 |   | (486 | ) |
| Payables to brokers, dealers and clearing  organizations                           |       | (80,771                                    | )          | (210,298 | ) | 198,375 |   |
| Income taxes payable                                                               |       | 9,843                                      |       | (169 | ) | 4,070 |   |
| Other liabilities                                                                  |       | (3,446                                     | )          | 13,769 |   | 2,552 |   |
| Cash paid to affiliate for lease termination                                       |       | (516                                       | )          | (703 | ) | — |   |
| Cash provided by operating activities                                              |       | 69,870                                     |       | 15,653 |   | 15,212 |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Net cash used for business acquisitions                                            |       | (84,452                                    | )          | (19,631 | ) | — |   |
| Purchase of property, equipment and leasehold  improvements                        |       | (21,310                                    | )          | (18,740 | ) | (7,795 | ) |
| Proceeds/(disbursements) from foreign exchange  derivative contracts               |       | (938                                       | )          | 2,636 |   | — |   |
| Cash used in investing activities                                                  |       | (106,700                                   | )          | (35,735 | ) | (7,795 | ) |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Repayment of notes payable                                                         |       | (70,000                                    | )          | (68,500 | ) | (3,000 | ) |
| Proceeds from notes payable                                                        |       | 128,000                                    |       | 49,712 |   | 14,500 |   |
| Repayment of loan notes payable                                                    |       | —                                     |       | (9,250 | ) | — |   |
| Payment of loan fees                                                               |       | (613                                       | )          | — |   | (926 | ) |
| Issuance of common stock                                                           |       | —                                     |       | 73,651 |   | — |   |
| Proceeds from exercises of stock options and a  warrant                            |       | 8,428                                      |       | 13,276 |   | — |   |
| Cash paid for taxes on vested restricted stock units                               |       | (3,576                                     | )          | — |   | — |   |
| Tax benefit related to share-based compensation                                    |       | 11,705                                     |       | — |   | — |   |
| Cash provided by financing activities                                              |       | 73,944                                     |       | 58,889 |   | 10,574 |   |
| Effects of foreign currency translation adjustment                                 |       | 222                                        |       | 180 |   | (129 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS                                              |       | 37,336                                     |       | 38,987 |   | 17,862 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 144,148                                    |       | 105,161 |   | 87,299 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                          | 181,484    |   | $ | 144,148 |   | $ | 105,161 |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                       |       |   |   |   |   |
| Interest paid                                                                      |       | $                                          | 6,076      |   | $ | 3,540 |   | $ | 3,036 |   |
| Income taxes paid,  net of refunds                                                 |       | $                                          | 17,578     |   | $ | 33,211 |   | $ | 20,907 |   |

 

See notes to consolidated financial statements

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**GFIGROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In thousands)**

| ** **                                                                                    | ** ** | **Convertible  Preferred  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid In  Capital** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|-------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| BALANCE, JANUARY 1, 2004                                                                      |       |                              | $          | 29,069                          |       |              |       | $                                     | 59         |                                           |       |                                                  | $          | 102       |       |   | $ | 34,967 |   |   | $ | (26,436 | ) |   |   | $ | 17 |   |   | $ | 37,778 |   |
| Foreign currency translation adjustment                                                       |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | (129 | ) |   | (129 |   |
| Unrealized gains on foreign derivative exchange  contracts                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | (7,598 | ) |   | (7,598 | ) |
| Deferred compensation                                                                         |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | 195       |       |   | — |   |   |   | — |   |   | 195 |   |
| Net income                                                                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | 23,123 |   |   |   | — |   |   | 23,123 |   |
| BALANCE, DECEMBER 31, 2004                                                                    |       |                              | 29,069     |                            |       |              | 59         |                                  |       |                                           | 102        |                                                  |       | 35,162    |       |   | (3,313 | ) |   |   | (7,710 | ) |   | 53,369 |   |
| Issuance of common stock for exercise of stock  options and a warrant                         |       |                              | —     |                            |       |              | —     |                                  |       |                                           | 11         |                                                  |       | 13,265    |       |   | — |   |   |   | — |   |   | 13,276 |   |
| Proceeds from issuance of common stock                                                        |       |                              | —     |                            |       |              | —     |                                  |       |                                           | 40         |                                                  |       | 73,611    |       |   | — |   |   |   | — |   |   | 73,651 |   |
| Conversions of equity                                                                         |       |                              | (29,069    | )                               |       |              | (59        | )                                     |       |                                           | 126        |                                                  |       | 59,045    |       |   | — |   |   |   | — |   |   | 30,043 |   |
| Tax benefits associated with share-based awards                                               |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | 10,167    |       |   | — |   |   |   | — |   |   | 10,167 |   |
| Foreign currency translation adjustment                                                       |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | 180 |   |   | 180 |   |
| Unrealized gains on foreign exchange derivative  contracts                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | 5,353 |   |   | 5,353 |   |
| Deferred compensation                                                                         |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | 4,110     |       |   | — |   |   |   | — |   |   | 4,110 |   |
| Net income                                                                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | 48,103 |   |   |   | — |   |   | 48,103 |   |
| BALANCE, DECEMBER 31, 2005                                                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | 279        |                                                  |       | 195,360   |       |   | 44,790 |   |   |   | (2,177 | ) |   | 238,252 |   |
| Issuance of common stock for exercise of stock options  and vesting of restricted stock units |       |                              | —     |                            |       |              | —     |                                  |       |                                           | 8          |                                                  |       | 8,420     |       |   | — |   |   |   | — |   |   | 8,428 |   |
| Withholding of restricted stock units in satisfaction  of tax requirements                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | (3,751    | )          |   | — |   |   |   | — |   |   | (3,751 | ) |
| Tax benefits associated with share-based awards                                               |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | 11,705    |       |   | — |   |   |   | — |   |   | 11,705 |   |
| Foreign currency translation adjustment                                                       |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | 222 |   |   | 222 |   |
| Unrealized gains on foreign derivative exchange  contracts                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | — |   |   |   | 1,827 |   |   | 1,827 |   |
| Deferred compensation                                                                         |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | 12,708    |       |   | — |   |   |   | — |   |   | 12,708 |   |
| Net income                                                                                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       | —    |       |   | 61,078 |   |   |   | — |   |   | 61,078 |   |
| BALANCE, DECEMBER  31, 2006                                                                   |       |                              | $          | —                          |       |              |       | $                                     | —     |                                           |       |                                                  | $          | 287       |       |   | $ | 224,442 |   |   | $ | 105,868 |   |   |   | $ | (128 | ) |   | $ | 330,469 |   |

 

See notes to consolidated financial statements.

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

**1. ORGANIZATION AND BUSINESS**

The consolidated financialstatements include the accounts of GFI Group Inc. and its subsidiaries(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 and analyticsproducts for decision support, which it licenses to the financial servicesindustry and other corporations. The Company’s principal operating subsidiariesinclude: GFI Securities LLC, GFI Brokers LLC, GFI Group LLC, GFI SecuritiesLimited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd.,GFI Group PTE Ltd., Amerex Brokers LLC and Fenics Limited and subsidiaries (“Fenics”).As of December 31, 2006, Jersey Partners, Inc. (“JPI”) ownsapproximately 44% of the Company’s outstanding shares of common stock. TheCompany’s chief executive officer, Michael Gooch, is the controllingshareholder of JPI.

**2.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Basis of Presentation—******The***Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, revenues and expenses, and the disclosure ofcontingencies in the consolidated financial statements. Management believesthat the estimates utilized in the preparation of the consolidated financialstatements are reasonable and prudent. Actual results could differ materiallyfrom these estimates.

All material intercompanytransactions and balances have been eliminated.

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

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

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

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

Additionally, from time totime, under the circumstances described above, if a transaction fails to settleon a timely basis or if a customer defaults on its obligations, the Company mayhold securities positions overnight. These positions are marked to market on adaily basis. Principal transactions revenues and related expenses arerecognized on a trade date basis.

***Analytics and Market Data Revenue Recognition—******Analytics*** revenueconsists mostly of fees for licenses of software products as well asmaintenance, installation, customer training and technical support of those 

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

products. Marketdata revenue primarily consists of subscription fees and fees from customizedone-time sales. Analytics revenue is recognized when all of the followingcriteria are met: persuasive evidence of an arrangement exists, delivery of theproduct has occurred and no significant implementation obligations remain, thefee is fixed and determinable, and collectibility is probable. Fees for futureupdates of software products are considered separate arrangements and relatedrevenues are recognized when the customer acknowledges participation in theupdate and delivery occurs. Market data revenue from subscription fees is recognizedover the term of the subscription period, which is generally two years. Marketdata revenue from customized one-time sales is recognized upon delivery of thedata.

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

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

***Long-Term Construction Type Contract—******The***Companyis a party to a long-term construction-type contract pursuant to which theCompany developed an online currency trading system and customized it for acustomer. The contract was accounted for using the completed-contract method inaccordance with Accounting Research Bulletin No. 45,*Long-Term Construction-Type Contracts,”*and with the applicable guidance provided by SOP 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 when the project is substantially complete. SOP 81-1 statesthat a contract is considered substantially complete when only inconsequentialactions remain incomplete, the remaining costs in comparison to the total coststo be incurred are immaterial and the potential risk is insignificant in amount.During the second quarter of 2006, the contract was considered substantiallycomplete and the related revenues and expenses were recognized.

Additionally, inconjunction with this long-term construction type contract, the Companyprovides hosting services to the customer. Revenue for hosting services isrecognized as services are rendered.

Subsequent to thecompletion of this long-term construction type contract, the Company hasentered into contracts with this customer to provide additional work on a timeand material basis. The additional contracts are not considered stand-alonecontracts; rather, they are considered extensions of the long-term constructiontype contract. These contracts are accounted for under the completed contractmethod as they are short-term in nature. Contract revenue and expense of $1,092and $639, respectively, was recognized during the fourth quarter of 2006.

***Software Inventory—******In***accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 86,*Accounting for the Costs of Computer Software to beSold, Leased or Otherwise Marketed,* the 

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

Company capitalizescertain costs of software developed for new products or for significantenhancements to existing products, once technological feasibility isestablished. The Company ceases capitalizing costs when the product isavailable for general release to the customers. Software inventory is stated atthe lower of cost or net realizable value, which is based on projectedrevenues. Amortization is calculated on the greater of the ratio of currentyear revenue to current year revenue plus projected revenue or straight-line,generally over three years. Amortization begins when a product is available forgeneral release to customers. Expenditures for maintenance and repairs arecharged directly to expense as incurred.

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

***Prepaid Bonuses and Forgivable Employee Loans—******Prepaid***bonusesand forgivable loans to employees are stated at historical value net ofamortization where the contract between the Company and the employee providesfor the return of proportionate amounts outstanding if employment is severedprior to the termination of the contract. Amortization is calculated using thestraight-line method over the term of the contract, which is generally overthree years. These forgivable loans have interest rates of up to 4.5%. TheCompany expects to fully recover the unamortized portion of prepaid bonuses andforgivable loans when employees voluntarily terminate their employment, or iftheir employment is terminated for cause, prior to the expiration of thecontract. The prepaid bonuses and forgivable loans are included in other assetsin the Consolidated Statements of Financial Condition.

***Derivative Financial Instruments—******The*** Companyuses foreign exchange derivative contracts to reduce the effects offluctuations in certain receivables and payables denominated in foreigncurrencies. Certain of these contracts are designated and qualify as foreigncurrency cash flow hedges under SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*,as amended (“SFAS No. 133”). The Company reclassifies gains andlosses on the foreign exchange derivative contracts included in accumulatedother comprehensive loss into earnings at the time the hedged transactions arerecognized. The Company measures effectiveness by assessing the changes in theexpected future cash flows of the hedged items. The ineffective portion of thehedges, if any, is included in other income. There is no portion of thederivative instruments’ gains or losses that has been excluded from theassessment of effectiveness. For foreign exchange derivative contracts that donot qualify for hedge accounting under SFAS No. 133, the Company recordsthese contracts at fair value and all realized and unrealized gains and lossesare included in other income in the Consolidated Statement of Income.

***Income Taxes—******In*** accordancewith SFAS No. 109,*Accounting forIncome Taxes*, the Company provides for income taxes using the assetand liability method under which deferred income taxes are recognized for theestimated future tax effects attributable to temporary differences andcarry-forwards that result from events that have been recognized either in thefinancial statements or the income tax returns, but not both. The measurementof current and deferred income tax liabilities and assets is based onprovisions of enacted tax laws. Valuation allowances are recognized if, based onthe weight of available evidence, it is more likely than not that some portionof the deferred tax assets will not be realized.

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

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

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

For share based awardsissued prior to the adoption of SFAS 123(R), the Company followed the fairvalue recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”), asamended by SFAS No. 148, *Accounting forStock-Based Compensation Transition and Disclosure*, prospectively toall awards granted, modified, or settled after January 1, 2003. Pursuantto this method, the Company expensed the grant-date fair value of optionsissued to employees on or after January 1, 2003 over the related vestingperiod and the compensation expense related to modifications of outstandingoptions was calculated as the difference between fair value of the existing andmodified options on the date of modification. Prior to January 1, 2003,the Company used the intrinsic method as prescribed by Accounting PrinciplesBoard Opinion No. 25, *Accounting forStock 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.

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

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

| ** **                                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net income—as reported                                                                   |       | $                                          | 48,103     |   | $ | 23,123 |   |
| Add:                                                                                          |       |                                       |       |   |   |
| Effect of stock-based  employee compensation included in reported net income, net of tax |       | 2,561                                      |       | 33 |   |
| Deduct:                                                                                       |       |                                       |       |   |   |
| Total stock-based  employee compensation determined under fair value method, net of tax  |       | (2,690                                     | )          | (328 | ) |
| Net income—pro forma                                                                     |       | $                                          | 47,974     |   | $ | 22,828 |   |
| Basic earnings per  share—as reported                                                    |       | $                                          | 1.80       |   | $ | 1.01 |   |
| Basic earnings per  share—pro forma                                                      |       | $                                          | 1.79       |   | $ | 1.00 |   |
| Diluted earnings per  share—as reported                                                  |       | $                                          | 1.74       |   | $ | 0.95 |   |
| Diluted earnings per share—pro forma                                                     |       | $                                          | 1.73       |   | $ | 0.94 |   |

 

***Recent Accounting Pronouncements—***In****June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB No. 109*(“FIN48”). FIN 48 clarifies the accounting for uncertain tax positions in accordancewith SFAS No. 109, *Accounting forIncome Taxes*. The Company will be required to recognize in itsfinancial statements the largest tax benefit of a tax position that is “more-likely-than-not”to be sustained on audit based solely on the technical merits of the positionas of the reporting date. FIN 48 also provides guidance on new disclosurerequirements, reporting and accrual of interest and penalties, accounting ininterim periods and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006.

The Company will adopt FIN48 effective January 1, 2007. The Company is currently evaluating theimpact of adopting FIN 48 on our consolidated financial statements.

In Septembers 2006, theSEC staff issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB 108 provides guidance on how prior year misstatements should be taken intoconsideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. The SEC Staff believes registrants shouldquantify errors using both a balance sheet and income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relative quantitative and qualitative factors are considered, ismaterial. SAB 108 is effective for the first fiscal year ending after November 15,2006. The Company adopted SAB 108 as of December 31, 2006. The adoption ofSAB No. 108 did not have a material impact on the Company’s consolidatedfinancial statements.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value and requires enhanceddisclosures about fair value measurements. SFAS 157 requires companies todisclose the fair value of its financial instruments according to a fair valuehierarchy, as defined. Additionally, companies are required to provide enhanceddisclosure for certain financial instruments within the hierarchy, including a 

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

reconciliationof the beginning and ending balances separately for each major category ofassets and liabilities. SFAS 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the impact of adopting SFAS 157 on its consolidated financialstatements.

In February 2007, the FASBissued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”).SFAS 159 provides a “Fair Value Option” under which a company mayirrevocably elect fair value as the initial and subsequent measurementattribute for certain financial assets and liabilities. This Fair Value Optionwill be available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur. The effective date forSFAS 159 is the beginning of each reporting entity’s first fiscal yearthat begins after November 15, 2007. SFAS 159 also allows an entityto early adopt provided that the entity also adopts the requirements ofSFAS 157. The Company is currently evaluating the impact of adoptingSFAS 159 on its consolidated financial statements.

**3.  DEPOSITSWITH CLEARING ORGANIZATIONS**

The Company maintainsdeposits at various clearing companies and organizations that perform clearingand custodial functions for the Company. These deposits consist of cash.

**4.  ACCRUEDCOMMISSIONS RECEIVABLE**

Accrued commissionsreceivable represent amounts due from brokers, dealers, banks and other financialand nonfinancial institutions for the execution of securities, commodities,foreign exchange and derivative brokerage transactions. In determining theallowance for doubtful accounts, management considers the financial conditionof the Company’s clients, the length of time receivables are past due andhistorical experience. Accrued commissions receivable are presented net ofallowance for doubtful accounts of approximately $3,547 and $3,202 as of December 31,2006 and 2005, respectively. The allowance is based on management’s estimateand is reviewed on a periodic basis based on the aging of outstandingreceivables and counterparty exposure.

**5.  RECEIVABLES FROM AND PAYABLES TO BROKERS,DEALERS AND CLEARING ORGANIZATIONS**

Amounts receivablefrom and payable to brokers, dealers and clearing organizations consisted ofthe following:

| ** **                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Receivables from brokers, dealers and clearing  organizations: |       |                  |       |   |   |
| Contract value of fails  to deliver                            |       | $                     | 80,837     |   | $ | 161,069 |   |
| Balance receivable from  clearing organizations                |       | 93,856                |       | 47,869 |   |
| Total                                                          |       | $                     | 174,693    |   | $ | 208,938 |   |
| Payables to brokers, dealers and clearing  organizations:      |       |                  |       |   |   |
| Contract value of fails  to receive                            |       | $                     | 72,394     |   | $ | 148,971 |   |
| Balance payable to  clearing organizations                     |       | 566                   |       | 466 |   |
| Payable to financial  institutions                             |       | 12,035                |       | 16,329 |   |
| Total                                                          |       | $                     | 84,995     |   | $ | 165,766 |   |

 

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

**6.  PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS**

Property,equipment and leasehold improvements consist of the following:

| ** **                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Software                                                                                        |       | $                                          | 53,612     |   | $ | 45,303 |   |
| Computer equipment                                                                              |       | 15,960                                     |       | 13,003 |   |
| Leasehold improvements                                                                          |       | 17,180                                     |       | 13,357 |   |
| Communications equipment                                                                        |       | 11,694                                     |       | 7,981 |   |
| Furniture and fixtures                                                                          |       | 4,511                                      |       | 3,954 |   |
| Automobiles                                                                                     |       | 181                                        |       | 181 |   |
| Total                                                                                           |       | 103,138                                    |       | 83,779 |   |
| Accumulated depreciation  and amortization                                                      |       | (61,742                                    | )          | (52,105 | ) |
| Property, equipment, and leasehold improvements less  accumulated depreciation and amortization |       | $                                          | 41,396     |   | $ | 31,674 |   |

 

During the year ended December 31,2006 and 2005, the Company removed from its consolidated financial statements$4,312 and $7,530, respectively, of fully depreciated or almost fullydepreciated fixed assets that are no longer in use and the related accumulateddepreciation. Depreciation and amortization expense for the years ended December 31,2006, 2005 and 2004 was $13,949, $12,807, and $12,424, respectively.

**7.  SOFTWAREINVENTORY**

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Software inventory, cost |       |                  |       |   |   |
| Work in process          |       | $                     | 1,048      |   | $ | 4,295 |   |
| Finished goods           |       | 8,244                 |       | 3,295 |   |
|                     |       | 9,292                 |       | 7,590 |   |
| Accumulated amortization |       | (3,522                | )          | (1,903 | ) |
| Software inventory, net  |       | $                     | 5,770      |   | $ | 5,687 |   |

 

In December 2006, theCompany removed from its consolidated financial statements $975 of fullyamortized software that would no longer be sold and the related accumulatedamortization. Amortization expense for the years ended December 31, 2006,2005 and 2004 was $2,594, $1,023 and $625, respectively. Included in the amortizationexpense for the year ended December 31, 2006 was $825 to write downcertain software inventory to its net realizable value.

**8.  GOODWILL ANDINTANGIBLE ASSETS**

On October 1, 2006, the Company completed an acquisitionof substantially all of the North American brokerage operations and assets ofthe following Texas limited partnerships (collectively, “Amerex Energy”):Amerex Natural Gas I, Ltd., Amerex Power, Ltd., Amerex Emissions, Ltd. andAmerex Retail Energy Services, Ltd. Amerex Energy operated as a leadinginter-dealer broker of electric power, natural 

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

gas and emissions productsand related derivative and option contracts in North America. The results ofAmerex Energy’s operations have been included in the consolidated financialstatements since that date.

TheAmerex Energy acquisition was accounted for as a purchase business combination.Assets acquired were recorded at their fair value as of October 1, 2006.The purchase price was $86,424, including cash acquired of $2,097 and $475 ofdirect transaction costs related to the acquisition, consisting primarily oflegal and other professional fees. Included as part of the purchase price is$5,000 that was deposited into an escrow account with a third-party escrowagent as collateral for certain indemnities provided by Amerex Energy. Anyamounts remaining in the escrow account at March 30, 2008 that are notsubject to pending claims will be distributed to Amerex Energy. Managementdetermined the fair value of the identifiable intangible assets acquired basedupon an independent valuation model. The purchase price was allocated asfollows:

| ** **                                                                            | ** ** | ** ** | ** ** | **Useful Life**      | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|
| *Assets:*                                                                             | * *   | * *   | * *   | * *                  | * *   |
| Cash                                                                                  |       | $          | 2,097      |                      |       |   |
| Accounts Receivables                                                                  |       | 9,098      |       |                      |       |
| Property, plant and  equipment, including internally developed software acquired |       | 2,543      |       |                      |       |
| Intangible assets  subject to amortization-                                           |       |       |       |                      |       |
| Trademark and trade name                                                              |       | 2,320      |       | 5 Years                   |       |
| Customer relationships                                                                |       | 10,200     |       | 6 Years                   |       |
| Covenants not to compete                                                              |       | 1,706      |       | 3.5 Months – 5 Years |       |
| Favorable lease  agreements                                                           |       | 620        |       | 8 Years                   |       |
| Intangible assets not  subject to amortization—                                  |       |       |       |                      |       |
| Proprietary knowledge                                                                 |       | 110        |       | Indefinite                |       |
| Prepaid and other assets                                                              |       | 1,596      |       |                      |       |
| Goodwill                                                                              |       | 65,175     |       |                      |       |
| Total assets acquired                                                                 |       | $          | 95,465     |                      |       |   |
| *Liabilities:*                                                                        | * *   | * *   | * *   | * *                  | * *   |
| Accrued compensation                                                                  |       | $          | 7,937      |                      |       |   |
| Accounts payable and  accrued expense                                                 |       | 530        |       |                      |       |
| Other liabilities                                                                     |       | 574        |       |                      |       |
| Total liabilities  assumed                                                            |       | 9,041      |       |                      |       |
| Net Assets Acquired                                                                   |       | $          | 86,424     |                      |       |   |

 

Total acquired intangible assets that are subject toamortization totaled $14,846 and have a weighted-average useful life ofapproximately 5.12 years.

Fenics Limited minority shareholders were paidapproximately $125 for 14,916 shares tendered to the Company, or approximately3% of the outstanding minority shares. The acquisition of the Fenics minorityshares resulted in an increase in goodwill of $33. As of December 31,2006, approximately 11,313 of the Fenics minority shares have not been tenderedto the Company.

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

Changesin the carrying amount of the Company’s goodwill for the years ended December 31,2005 and 2006 were as follows:

| Goodwill:                             |   |   |   |
|---------------------------------------|--------|--------|--------|
| Balance as of December 31, 2004  |   | $      | 11,482 |   |
| Goodwill acquired during the year     |   | 15,201 |   |
| Balance as of December 31, 2005  |   | 26,683 |   |
| Goodwill acquired during the year     |   | 65,208 |   |
| Balance as of  December 31, 2006 |   | $      | 91,891 |   |

 

Based on the results of its annual impairment tests,the Company determined that no impairment of goodwill existed as of January 1,2007, 2006 and 2005. The Company will continue to evaluate goodwill on anannual basis as of the beginning of its new fiscal year, and whenever eventsand changes in circumstances indicate that there may be a potential impairment.

Intangibleassets consisted of the following:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Gross intangible assets        |       |                  |       |   |   |
| Customer base/relationships    |       | $                     | 12,690     |   | $ | 2,490 |   |
| Trade name                     |       | 4,070                 |       | 1,750 |   |
| Core technology                |       | 3,230                 |       | 3,230 |   |
| Covenants not to compete       |       | 2,256                 |       | 550 |   |
| Favorable lease agreements     |       | 620                   |       | — |   |
| Proprietary knowledge          |       | 110                   |       | — |   |
| Patent                         |       | 34                    |       | 34 |   |
| Total gross  intangible assets |       | 23,010                |       | 8,054 |   |
| Accumulated amortization       |       | (8,177                | )          | (5,699 | ) |
| Net intangible assets          |       | $                     | 14,833     |   | $ | 2,355 |   |

 

Amortization expense for the years ending December 31,2006, 2005 and 2004 was $2,478, $1,454 and $808, respectively.

At December 31,2006, expected amortization expense for the definite lived intangible assets isas follows:

| 2007  |   | $     | 3,224  |   |
|-------|--------|-------|--------|--------|
| 2008  |   | 2,574 |   |
| 2009  |   | 2,565 |   |
| 2010  |   | 2,532 |   |
| 2011  |   | 2,325 |   |
| Total |   | $     | 13,220 |   |

 

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

**9. OTHER ASSETS**

Otherassets consisted of the following:

| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Prepaid bonuses            |       | $                     | 27,927     |   | $ | 31,107 |   |
| Forgivable  employee loans |       | 3,441                 |       | 2,582 |   |
| Income taxes  receivable   |       | 1,750                 |       | 7,540 |   |
| Deferred tax  assets       |       | 5,625                 |       | 2,242 |   |
| Other assets               |       | 22,095                |       | 15,630 |   |
| Total Other Assets         |       | $                     | 60,838     |   | $ | 59,101 |   |

 

**10. NOTES PAYABLE**

On August 23, 2004, the Company entered into acredit agreement with Bank of America N.A. and certain other lenders (the “2004Credit Agreement”). The 2004 Credit Agreement provided for a multicurrencyrevolving cash facility in a principal amount of $80,000, which included aletter of credit facility with a sub-limit of $30,000.

In February 2006, the Company amended andrestated the terms of the 2004 Credit Agreement. The amended and restatedcredit agreement (the “2006 Credit Agreement”) provided for maximum borrowingsof $135,000, which included up to $50,000 for letters of credit, and has anexpiration date of February 24, 2011. In September 2006, the Companyentered into an agreement that increased the maximum permitted borrowings underthe 2006 Credit Agreement to $160,000, including up to $50,000 in letters ofcredit. Revolving loans may be either base rate loans or currency rate loans.Currency rate loans and the letters of credit bear interest at the annual rateof LIBOR plus the applicable margin in effect for that interest period. Baserate loans bear interest at a rate per annum equal to a base rate plus theapplicable margin in effect for that interest period. As long as no default hasoccurred under the 2006 Credit Agreement, the applicable margin for both thebase rate and currency rate loans is based on a matrix that varies with a ratioof outstanding debt to EBITDA, as defined in the 2006 Credit Agreement. At December 31,2006, the applicable margin was 1.0% and the one-month LIBOR was 5.35%. Amountsoutstanding under the 2006 Credit Agreement are secured by substantially allthe assets of the Company and certain assets of the Company’s subsidiaries.

TheCompany had outstanding borrowings under its 2006 Credit Agreement as of December 31,2006 and under its 2004 Credit Agreement as of December 31, 2005 asfollows:

| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Loan Available  (1)            |       | $                                     | 160,000    |   | $ | 80,000 |   |
| Loans Outstanding              |       | $                                     | 91,186     |   | $ | 31,805 |   |
| Letters of Credit  Outstanding |       | $                                     | 6,500      |   | $ | 6,500 |   |

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

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

As of December 31, 2006, the combined aggregatematurities for all outstanding notes payable were $91,186, which is due in 2007.The outstanding loans bore interest rates ranging from 4.42% to 6.11% at December 31,2006 and from 3.42% to 5.38% at December 31, 2005. In January 2007,the Company repaid $20,000 of the outstanding loan balance.

At December 31, 2006 and 2005, notes payable wererecorded net of unamortized loan fees of $933 and $558, respectively.

The 2006 Credit Agreementand the 2004 Credit Agreement contain certain financial and other covenants.The Company was in compliance with all applicable covenants at December 31,2006 and 2005, respectively.

**11. INCOME TAXES**

Theprovision for income taxes consists of the following:

| ** **                          | ** ** | **Year Ended December 31,** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|------------|
| ** **                          | ** ** | **2006**                                   | ** ** | **2005**   | ** ** | **2004** | ** ** | ** ** |
| Current Provision:                  |       |                                       |       |       |   |   |   |   |
| Federal                             |       | $                                          | 11,332     |       | $ | 9,883 |   | $ | 6,690 |   |   |
| Foreign                             |       | 29,961                                     |       | 12,369     |   | 14,212 |   |   |
| State and local                     |       | 4,807                                      |       | 4,268      |   | 3,473 |   |   |
| Total current  provision            |       | 46,100                                     |       | 26,520     |   | 24,375 |   |   |
| Deferred Provision  (Benefit):      |       |                                       |       |       |   |   |   |   |
| Federal                             |       | (1,289                                     | )          | 3,136      |   | (1,295 | ) |   |
| Foreign                             |       | (3,499                                     | )          | 5,703      |   | (2,257 | ) |   |
| State and local                     |       | (593                                       | )          | 827        |   | (792 | ) |   |
| Total deferred  provision (benefit) |       | (5,381                                     | )          | 9,666      |   | (4,344 | ) |   |
| Total                               |       | $                                          | 40,719     |       | $ | 36,186 |   | $ | 20,031 |   |   |

 

The Company had pre-tax income from foreign operationsof  $79,451, $46,773 and $26,429 for the years ended December 31,2006, 2005 and 2004, respectively. Pre-tax income from domestic operations was$22,346, $37,516 and $16,725 for the years ended December 31, 2006, 2005and 2004, respectively.

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

Deferredincome taxes reflect the net tax effects of temporary differences between thefinancial reporting and tax bases of assets and liabilities and are measuredusing the enacted tax rates and laws that will be in effect when suchdifferences are expected to reverse. Significant components of the Company’sgross deferred tax assets (liabilities) are set forth below:

| ** **                                 | ** ** | **As of December 31,** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|------------|
| ** **                                 | ** ** | **2006**                              | ** ** | **2005**   | ** ** | ** ** |
| **Deferred tax assets:**                   |       |                                  |       |       |   |   |
| Deferred  compensation                     |       | $                                     | 6,022      |       | $ | 2,451 |   |   |
| Net  operating/capital loss carryforwards  |       | 5,078                                 |       | 6,860      |   |   |
| Foreign deferred  items                    |       | 4,776                                 |       | 2,405      |   |   |
| Foreign tax  credits                       |       | 631                                   |       | 686        |   |   |
| Liability  reserves                        |       | 1,091                                 |       | 1,217      |   |   |
| Prepaid expenses                           |       | 780                                   |       | 781        |   |   |
| Deferred revenue                           |       | —                                |       | 436        |   |   |
| Other                                      |       | 1,102                                 |       | 1,287      |   |   |
| Valuation  allowance                       |       | (4,828                                | )          | (5,939     | ) |   |
| Total deferred tax assets                  |       | $                                     | 14,652     |       | $ | 10,184 |   |   |
| **Deferred  tax liabilities:**             |       |                                  |       |       |   |   |
| Depreciation/amortization                  |       | $                                     | (6,547     | )          | $ | (7,689 | ) |   |
| Prepaid  compensation                      |       | (3,146                                | )          | (2,697     | ) |   |
| Unrealized gain  on currency hedging       |       | (195                                  | )          | (635       | ) |   |
| Other                                      |       | (999                                  | )          | (118       | ) |   |
| Total deferred  tax liabilities            |       | $                                     | (10,887    | )          | $ | (11,139 | ) |   |
| **Net deferred tax  assets/(liabilities)** |       | $                                     | 3,765      |       | $ | (955 | ) |   |

 

Cumulative undistributed earnings of foreignsubsidiaries were approximately $78,498 at December 31,2006. No deferredU.S. federal income taxes have been provided for the undistributed earnings tothe extent that they are permanently reinvested in the company’s foreignoperations. It is not practical to determine the amount of additional tax thatmay be payable in the event these earnings are repatriated.

The deferred tax assets relating to foreign deferreditems listed above consist primarily of depreciation and amortization, deferredcompensation and unpaid intra-group royalties and interest. Additionally,during 2006, the valuation allowance was decreased by $1,111, primarily due toa decrease in foreign net operating loss carry forwards. At December 31,2006, the company had U.S. net operating loss carryforward of $5,433 andforeign net operating loss of $13,659. The U.S. amounts are subject to annuallimitations on utilization and will begin to expire in various years after2018. The foreign amounts are primarily Singapore and Hong Kong carryforwardsthat are subject to annual limitations on utilization, but can be carriedforward indefinitely. Further, the Company has $631 of foreign tax creditcarryforwards at December 31, 2006 that will expire in 2012.

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

Thecorporate statutory U.S. federal tax rate was 35% for the three yearspresented. A reconciliation of the statutory U.S. federal income tax rate tothe Company’s effective income tax rate is set forth below:

| ** **                                                     | ** ** | **December 31,** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|------------|
| ** **                                                     | ** ** | **2006**              | ** ** | **2005**   | ** ** | **2004** | ** ** | ** ** |
| U.S. federal  income tax at statutory rate                     |       | 35.0                  | %          | 35.0       | % | 35.0 | % |   |
| U.S. state and  local income taxes, net of federal tax benefit |       | 2.9                   |       | 4.1        |   | 4.8 |   |   |
| Foreign  operations                                            |       | 1.3                   |       | 2.8        |   | 3.3 |   |   |
| Non-deductible  expenses                                       |       | 1.5                   |       | 2.0        |   | 4.1 |   |   |
| General business  credit                                       |       | (0.1                  | )          | (1.0       | ) | (1.0 | ) |   |
| Tax-Exempt Income                                              |       | (0.6                  | )          | (0.3       | ) | — |   |   |
| Other                                                          |       | —                |       | 0.3        |   | 0.2 |   |   |
| Effective income tax  rate                                     |       | 40.0                  | %          | 42.9       | % | 46.4 | % |   |

 

Income tax benefits of approximately $11,705 and$10,167 from the exercise of stock options and the vesting of restricted stockunits was credited directly to additional paid-in capital in 2006 and 2005respectively. No such benefit was recorded in 2004.

The company is subject toregular examinations by the Internal Revenue Service (the “IRS”), taxingauthorities in foreign countries, and states in which the Company hassignificant business operations. The company regularly assesses the likelihoodof additional assessments in each of the taxing jurisdiction resulting fromon-going and subsequent years’ examinations. Included in current tax expenseare charges to accruals for expected tax assessments in accordance with SFAS No. 5,*Accounting for Contingencies*. Theresolution of these tax matters could have a material impact on the Company’seffective tax rate.

**12. STOCKHOLDERS’EQUITY**

*Conversion—*During 2005, all shares of Class A common stockand Series A, B and C preferred stock were converted into Class Bcommon stock and Class B common stock was renamed Common Stock.

| ** **                              | ** ** | **Class A  Common Stock  Shares** | ** ** | **Common  Stock  Shares** | ** ** | ** **  |
|-----------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|-------------|
| Authorized (at  December 31, 2006) |       |                                        | —     |                      |       | 100,000,000 |   |   |
| Outstanding:                            |       |                                        |       |                      |       |        |   |   |
| January 1, 2004                    |       |                                        | 5,893,846  |                      |       | 10,155,809  |   |   |
| December 31, 2004                  |       |                                        | 5,893,846  |                      |       | 10,155,809  |   |   |
| December 31, 2005                  |       |                                        | —     |                      |       | 27,904,568  |   |   |
| December 31, 2006                  |       |                                        | —     |                      |       | 28,698,505  |   |   |
| Par value per share                     |       |                                        | $          | 0.01                      |       |        | $ | 0.01 |   |   |
|                                         |            |                                             |            |                           |            |             |  |  |  |  |

 

**Share Issuance**

During 2006, the Companyissued 793,937 shares of common stock in connection with the exercise of stockoptions and vesting of RSUs. The Company received total cash proceeds of $8,428in connection with the exercise of stock options.

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

**Common Stock**

Each holder of GFI CommonStock is entitled to one vote per share on all matters submitted to a vote ofstockholders. Subject to the rights of holders of the Company’s preferredstock, the holders of GFI Common Stock are entitled to receive dividends when,as and if declared by GFI’s board of directors.

**Preferred Stocks**

As of December 31, 2004,the Company had 2,842,093 and 178,941 shares of Series A and Series BPreferred Stocks, respectively, with a par value of $0.01 per share, which wereautomatically converted into Common Stock upon completion of the Company’sinitial public offering (“IPO”) in January 2005. As of December 31,2006 and 2005, the Company had one class of preferred stock with 5,000,000shares authorized and none issued.

**Series CRedeemable Convertible Preferred Stock**

The Company had 3,723,545shares of Series C Redeemable Convertible Preferred Stock (“Series CPreferred Stock”) at December 31, 2004, which were automatically convertedinto common stock upon the completion of the IPO in January 2005.

**13. EARNINGS PERSHARE**

The Series A Preferred Stock, the Series BPreferred Stock, and the Series C Preferred Stock, (together, the “ConvertiblePreferred Securities”) were participating securities, such that in the event adividend was declared or paid on the common stock, the Company would have beenrequired to declare and pay dividends on the Convertible Preferred Securitiesas if the Convertible Preferred Securities had been converted into commonstock. Basic earnings per share for Class A and Common Stock is calculatedby dividing net income available to common stockholders by the weighted averagenumber of Class A and Common Stock outstanding, respectively, during theperiod.

Diluted earnings per share is calculated by dividingnet income by the sum of the weighted average number of shares outstanding plusoutstanding stock options, RSUs and warrant using the “treasury stock” method. Inaddition, the 2004 and 2005 diluted earnings per share included the dilutiveeffect of convertible preferred stock using the “if-converted” method andcontingently issuable shares of common stock to the Series C PreferredStockholders.

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

Basicand diluted earnings per share for the years ended December 31, 2006, 2005and 2004 were as follows:

| ** **                                                                                 | ** ** | **December 31,** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|
| ** **                                                                                 | ** ** | **2006**              | ** ** | **2005**   | ** ** | **2004** | ** ** | ** ** |
| **Basic earnings per share**                                                               | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income applicable to stockholders                                                      |       | $                     | 61,078     |       | $ | 48,103 |   | $ | 23,123 |   |   |
| Income allocated to participating preferred  stockholders                                  |       | —                |       | (903       | ) | (6,842 | ) |   |
| Income available to common stockholders                                                    |       | $                     | 61,078     |       | $ | 47,200 |   | $ | 16,281 |   |   |
| Weighted average  common shares outstanding:                                               |       |                  |       |       |   |   |   |   |
| Class A common stock                                                                  |       | —                |       | 484,426    |   | 5,893,846 |   |   |
| Common stock                                                                               |       | 28,345,697            |       | 25,761,202 |   | 10,155,809 |   |   |
| Weighted average common shares outstanding                                                 |       | 28,345,697            |       | 26,245,628 |   | 16,049,655 |   |   |
| Basic earnings per share—Class A and Common  stock                               |       | $                     | 2.15       |       | $ | 1.80 |   | $ | 1.01 |   |   |
| **Diluted  earnings per share**                                                            |       |                  |       |       |   |   |   |   |
| Net income applicable to stockholders                                                      |       | $                     | 61,078     |       | $ | 48,103 |   | $ | 23,123 |   |   |
| Weighted average common shares outstanding                                                 |       | 28,345,697            |       | 26,245,628 |   | 16,049,655 |   |   |
| Effect of  dilutive shares:                                                                |       |                  |       |       |   |   |   |   |
| Options, warrant and RSUs                                                                  |       | 830,231               |       | 899,348    |   | 190,993 |   |   |
| Convertible preferred shares                                                               |       | —                |       | 248,304    |   | 3,021,034 |   |   |
| Redeemable convertible preferred shares                                                    |       | —                |       | 306,045    |   | 3,723,545 |   |   |
| Effect of contingently issuable shares subject to  Series C purchase price adjustment |       | —                |       | —     |   | 1,348,776 |   |   |
| Weighted average shares outstanding and common stock  equivalents                          |       | 29,175,928            |       | 27,699,325 |   | 24,334,003 |   |   |
| Diluted earnings  per share                                                                |       | $                     | 2.09       |       | $ | 1.74 |   | $ | 0.95 |   |   |

 

Options and a warrant topurchase 24,658, and 263,079 shares with exercise prices greater than theaverage market prices of common stock, as estimated by management, wereoutstanding during 2005 and 2004, respectively, and were excluded from therespective computations of diluted earnings per share because their effectwould be anti-dilutive. Options to purchase 1,248,191 shares were outstandingunder the GFI Group Inc. 2002 Stock Option Plan (“GFI Group 2002 Plan”) atDecember 31, 2004 and were excluded from the computation of dilutedearnings per share for the respective periods because the contingency relatedto the exercisability of these options was not met. This contingency was metupon the Company’s IPO, which occurred in January 2005. Consequently,options granted under the GFI Group 2002 Plan have been included indiluted earnings per share to the extent they are dilutive. Further, 125,986and 198,754 RSUs were also excluded from the computation of diluted earningsper share for the years ended December 31, 2006 and 2005, respectively,because their effect would have been anti-dilutive.

**14. SHARE-BASEDCOMPENSATION**

The Company issues RSUs to its employees under the GFIGroup Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”). Thisplan permits the grant of non-qualified stock options, stock 

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

appreciation rights,shares of restricted stock, restricted stock units and performance units toemployees, non-employee directors or consultants. The Company issues sharesfrom authorized but unissued shares, which are reserved for issuance upon thevesting of RSUs granted pursuant to the 2004 Equity Incentive Plan. Subject tocertain adjustment provisions in this Plan, as of December 31, 2006,2,869,256 shares of our common stock, or any other security issued by theCompany in substitution or exchange therefore, were available for grants ofawards under this plan. The fair value of RSUs is based on the closing price ofthe Company’s common stock on the date of grant and is recorded as deferredcompensation and amortized to compensation expense over the vesting period ofthe grants, which is generally over three years.

Modified RSUs are reflected as cancellations andgrants in the summary of RSUs below. During 2006, the Company modified thevesting terms of certain RSUs for several employees in connection with thetermination of their employment. As a result of these modifications, theCompany recorded compensation expense totaling $1,727 in 2006 representing thefair value of the RSUs on the date of modification.

Thefollowing activity relating to the RSUs has occurred under the Company’s 2004Equity Incentive Plan:

| ** **                          | ** ** | **RSUs** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------|------------|--------------------------------------------------------|------------|
| Outstanding  December 31, 2004 |       | —   |       |                                                   | $          | — |   |   |
| Granted                             |       | 608,359  |       |                                                   | 31.91      |   |   |
| Vested                              |       | (6,333   | )          |                                                   | 25.50      |   |   |
| Terminated                          |       | (2,801   | )          |                                                   | 21.00      |   |   |
| Outstanding  December 31, 2005 |       | 599,225  |       |                                                   | 32.03      |   |   |
| Granted                             |       | 535,487  |       |                                                   | 55.50      |   |   |
| Vested                              |       | (215,110 | )          |                                                   | 34.52      |   |   |
| Cancelled                           |       | (46,749  | )          |                                                   | 35.83      |   |   |
| Outstanding  December 31, 2006 |       | 872,853  |       |                                                   | $          | 45.61 |   |   |

 

Theweighted average fair value of RSUs granted during the year was $55.50 perunit, compared with $31.91 per unit for the same period in the prior year. Totalcompensation expense and related income tax benefits recognized in relation toRSUs is as follows:

| ** **            | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Compensation  expense |       | $                                                        | 12,228     |   | $ | 2,731 |   |
| Income tax benefits   |       | 4,631                                                    |       | 1,042 |   |
|                       |            |                                                          |            |  |  |  |  |

 

At December 31, 2006, total unrecognizedcompensation cost related to the RSUs prior to the consideration of expectedforfeitures was approximately $32,250 and is expected to be recognized over aweighted-average period of 2.06 years. The total fair value of RSUs that vestedduring the year ended December 31, 2006 and 2005 was $7,426 and $161,respectively.

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

As of December 31, 2006, the Company had stockoptions outstanding under two plans: the GFI Group 2002 Plan and theGFInet inc. 2000 Stock Option plan (the “GFInet 2000 Plan”). No additionalgrants will be made under these plans. Under each plan: options were granted toemployees, non-employee directors or consultants to the Company; both incentiveand non-qualified stock options were available for grant; options were issuedwith terms up to ten years from date of grant; and options were generallyissued with an exercise price equal to or greater than the fair market value atthe time the option was granted. In addition to these terms, both the GFI 2002Group Plan and the GFInet 2000 Plan contained events that had to occur prior toany options becoming exercisable. Options outstanding under both plans areexercisable for common stock. The Company issues shares from theauthorized but unissued shares reserved for issuance under the GFI Group 2002Plan or the GFInet 2000 Plan, respectively, upon the exercise of option grantsunder such plans.

The exercisability of options issued under the GFIGroup 2002 Plan was contingent upon the Company completing an initial publicoffering of the Company’s common stock, which occurred in January 2005.During 2004, the Company amended all outstanding options issued under the GFIGroup 2002 Plan prior to January 1, 2003 to extend the term of eachoption. These amendments were accounted for as modifications underSFAS 123. Pursuant to the requirements of SFAS 123, options issued onor after January 1, 2003 are measured at fair value at the date of grant.All options modified after January 1, 2003 are measured at the incrementalfair value of the options calculated on the date of modification, in additionto the amount calculated as fair value on the date of grant. For options issuedon or modified after January 1, 2003, compensation expense measured on thedate of grant or modification were recorded upon our IPO in January 2005to the extent such options were vested with the remaining compensation expenseto be recorded over the remaining vesting period.

The exercisability of options issued under the GFInet2000 Plan was contingent upon the earlier of the Company completing an IPO ofthe Company’s common stock, which occurred in January 2005, or the dateupon which certain limited liability companies that have purchased our capitalstock distribute such capital stock to their members. The measurement date forall options issued under the GFInet 2000 Plan was the date of grant. During2001, options were issued under the GFInet 2000 Plan with exercise prices belowthe fair market value of the stock at the date of grant.

The weighted average fair value of the stock optionsgranted or modified during the years ended December 31, 2004 was $1.68,utilizing the weighted average assumptions described below. The fair value ofthe options granted or modified under both the GFI Group 2002 Plan and GFInet2000 Plan was estimated on the date of grant or modification using theBlack-Scholes option pricing model with the following assumptions: (i) dividendyield of 0%; (ii) expected term of five years; (iii) volatility of 0%(until the filing of the Company’s initial registration statement on June 16,2004); and (iv) an average risk-free interest rate of 3.4% and 2.9% forthe years ended December 31, 2004 and 2003, respectively. In estimatingthe fair value of options granted subsequent to the filing of its initialregistration statement on June 16, 2004, the Company assumed an averagevolatility of 33% based on the average volatilities of comparable public entities.Options under both plans vest ratably over a period of two to four years. During2006, the Company modified certain stock options and the weighted average fairvalue of the modified stock options was $6.50.

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

All repriced and modified options are reflected ascancellations and grants in all the summaries below of stock optiontransactions.

Asummary of stock option transactions is as follows:

| ** **                          | ** ** | **GFI Group 2002 Plan** | ** ** | **GFInet 2000 Plan**             | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Options**                            | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding  January 1, 2004   |       | 803,552                                |       |                                       | $          | 11.88 |   |   | 1,569,619 |   |   | $ | 12.12 |   |   |
| Granted                             |       | 1,098,551                              |       |                                       | 13.77      |   |   | 141,052 |   |   | 11.93 |   |   |
| Terminated                          |       | (653,912                               | )          |                                       | 11.88      |   |   | (253,390 | ) |   | 14.37 |   |   |
| Outstanding  December 31, 2004 |       | 1,248,191                              |       |                                       | 13.55      |   |   | 1,457,282 |   |   | 11.71 |   |   |
| Exercised                           |       | (261,491                               | )          |                                       | 12.44      |   |   | (786,359 | ) |   | 11.48 |   |   |
| Terminated                          |       | (33,263                                | )          |                                       | 16.48      |   |   | (12,261 | ) |   | 17.15 |   |   |
| Outstanding  December 31, 2005 |       | 953,437                                |       |                                       | 13.75      |   |   | 658,662 |   |   | 11.88 |   |   |
| Granted                             |       | 17,632                                 |       |                                       | 21.00      |   |   | — |   |   | — |   |   |
| Exercised                           |       | (328,091                               | )          |                                       | 13.61      |   |   | (335,102 | ) |   | 11.64 |   |   |
| Terminated                          |       | (21,317                                | )          |                                       | 19.87      |   |   | (526 | ) |   | 9.50 |   |   |
| Outstanding  December 31, 2006 |       | 621,661                                |       |                                       | $          | 13.83 |   |   | 323,034 |   |   | $ | 12.13 |   |   |

 

Thefollowing table summarizes information about the GFI Group 2002 Plan options asof December 31, 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                  |       |                                    | 488,920    |                                                |       |   | 7.26 |   |   |   | $ | 11.88 |   |   |   | 395,891 |   |   |   | $ | 11.88 |   |   |
|   21.00       |       |                                    | 132,741    |                                                |       |   | 7.53 |   |   |   | 21.00 |   |   |   | 81,425 |   |   |   | 21.00 |   |   |

 

Thefollowing table summarizes information about the GFInet 2000 Plan options as ofDecember 31, 2006:

|                         | ** ** | **Stock Options Outstanding and Exercisable** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Options  Outstanding  and  Exercisable**                        | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  9.50       |       |                                                              | 213,151    |   |   |   | 3.46 |   |   |   | $ | 9.50 |   |   |
|   11.88       |       |                                                              | 30,843     |   |   |   | 6.47 |   |   |   | 11.88 |   |   |
|   14.25       |       |                                                              | 11,418     |   |   |   | 4.04 |   |   |   | 14.25 |   |   |
|   19.00       |       |                                                              | 50,549     |   |   |   | 4.18 |   |   |   | 19.00 |   |   |
|   23.75       |       |                                                              | 17,073     |   |   |   | 3.49 |   |   |   | 23.75 |   |   |

 

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

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

| ** **            | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Compensation  expense |       | $                                                        | 480        |   | $ | 1,379 |   | $ | 195 |   |
| Income tax benefits   |       | 201                                                      |       | 533 |   | — |   |
|                       |            |                                                          |            |  |  |  |  |  |  |  |

 

At December 31, 2006, total unrecognizedcompensation cost related to unvested stock option awards prior to theconsideration of expected forfeitures was approximately $175 and is expected tobe recognized over the weighted average period of 0.30 years.

For the year ended December 31,2006 and 2005, the total fair value of options that vested was $640 and $618,respectively. The total intrinsic value of options exercised for the year endedDecember 31, 2006 and 2005 was $27,809 and $27,441, respectively. Additionally,the total intrinsic value of options outstanding and exercisable at December 31,2006 was $46,295 and $39,491, respectively.

**15. COMMITMENTS ANDCONTINGENCIES**

**Operating Leases****—The**Company hasnon-cancelable operating leases for computer hardware and software,communications equipment, and office space that expire on various dates through2015. At December 31, 2006, the future minimum rental commitments undersuch leases are as follows:

| 2007       |   | $      | 5,588  |   |
|------------|--------|--------|--------|--------|
| 2008       |   | 7,734  |   |
| 2009       |   | 7,885  |   |
| 2010       |   | 8,287  |   |
| 2011       |   | 8,472  |   |
| Thereafter |   | 18,711 |   |
| Total      |   | $      | 56,677 |   |

 

Many of the leases for office space contain escalationclauses that require payment of additional rent to the extent of increases incertain operating and other costs. In addition, certain of the Company’s leasesgrant a free rent period, which is amortized over the lease term. Theaccompanying consolidated statements of income reflect all rent expense on astraight-line basis over the term of the leases. Rent expense under the leasesfor the years ended December 31, 2006, 2005, and 2004 was $8,999, $8,194,and $4,300, respectively.

**PurchaseObligations****—The** Company has variousunconditional purchase obligations. These obligations are for the purchase ofmarket data from a number of information service providers during the normalcourse of business. As of December 31, 2006, the Company had totalpurchase commitment for market data of approximately $10,763, with $9,284 duewithin the next twelve months and $1,479 due between one to two years. Additionally,the Company has purchase commitments for capital expenditures related to thepurchase of certain software and installation in the U.K. of $621 and $501related to the new 

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

office in Korea. All ofthese purchase commitments for capital expenditures are due within the nexttwelve months.

**Contingencies****—In** the normalcourse of business, the Company and certain subsidiaries included in theconsolidated financial statements have been named as defendants in variouslawsuits and proceedings and have been involved in certain regulatoryexaminations. Additional actions, investigations or proceedings may be broughtfrom time to time in the future. We are subject to the possibility of lossesfrom these various contingencies. Considerable judgment is necessary toestimate the probability and amount of any loss from such contingencies. Anaccrual is made when it is probable that a liability has been incurred or anasset has been impaired and the amount of loss can be reasonably estimated. TheCompany accrues a liability for the estimated costs of adjudication orsettlement of asserted and unasserted claims existing as of the balance sheet date.

The Company has recorded reserves for certaincontingencies to which we may have exposure, such as reserves for certainincome tax and litigation contingencies and contingencies related to theemployer 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 that the ultimateresolution of these matters, while not likely to have a material adverse effecton the consolidated financial condition of the Company, could be material tothe Company’s operating results for any particular period.

***Risks andUncertainties******—The*** Companyprimarily generates its revenues by executing and facilitating transactions forcounterparties. Revenues for these services are transaction based. As a result,the Company’s revenues could vary based upon the transaction volume ofsecurities, commodities, foreign exchange and derivative markets.

***Guarantees******—The*** Company,through its subsidiaries, is a member of certain exchanges and clearinghouses.Under the membership agreements, members are generally required to guaranteecertain obligations. Additionally, if a member becomes unable to satisfy itsobligations to the clearinghouse, other members may be required to meetshortfalls. To mitigate these performance risks, the exchanges andclearinghouses often require members to post collateral as well as meet certainminimum financial standards. The Company’s maximum potential liability underthese arrangements 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 Consolidated Statement of Financial Condition for these arrangements.

**16. RETIREMENTPLANS**

In the United States, the Company has established theGFI Group 401(k) plan, pursuant to the applicable laws of the InternalRevenue Code. It is available to all eligible U.S. employees as stated in theplan document and is subject to the provisions of the Employee RetirementIncome Security Act of 1974. Employees may voluntarily contribute a portion oftheir compensation, not to exceed the statutory limit. The Company did not makeany contributions to the plan for the years ended December 31, 2006, 2005,or 2004.

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

In the U.K. the Companyhas established two defined contribution plans pursuant to the applicable lawsin the U.K. Employees of the U.K. subsidiaries may voluntarily designate aportion of their monthly compensation to be contributed, which the Companymatches up to a certain percentage. The GFI Group Personal Pension Plans areopen to all U.K. employees after the completion of three months of employment.Additionally, there was an Occupational Pension Plan which was available onlyto senior employees. The Company also matched contributions made under thisplan up to a certain percentage. In April 2006, the Occupational PensionPlan was replaced by the Executive Pension Plan with similar matchingcontributions up to a certain percentage. The Company has made aggregatecontributions of $1,437, $1,198, and $1,166 in 2006, 2005 and 2004,respectively, for the GFI Group Personal Pension Plans, Occupational PensionPlan and the Executive Pension Plan.

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

The Company, through GFInet and GFI Group LLC andtheir primary subsidiaries, operates as an inter-dealer broker. In this role,the Company is interposed between buyers and sellers (“counterparties”). Agencybrokerage transactions facilitated by the Company are settled between thecounterparties on a give-up basis. Principal transactions are cleared throughvarious clearing organizations. In the event of counterparty nonperformance,the Company may be required to purchase or sell financial instruments atunfavorable market prices, which may result in a loss to the Company. The Companydoes not anticipate nonperformance by counterparties. The Company monitors itscredit risk daily and has a policy of reviewing regularly the credit standingof counterparties with which it conducts business.

Unsettled transactions(i.e., securities failed-to-receive and securities failed-to-deliver) areattributable to matched-principal transactions executed by subsidiaries and arerecorded at contract value. Cash settlement is achieved upon receipt ordelivery of the security. In the event of nonperformance, the Company maypurchase or sell the security in the market and seek reimbursement for lossesfrom the contracted counterparty.

**18. FINANCIALINSTRUMENTS**

*DerivativeFinancial Instrument—**The* Company is exposed to changesin the U.S. Dollar compared to the British Pound and the Euro for anticipatedsales and expenses in those currencies. The risk management policy of theCompany is to manage transactional foreign exchange exposure through the use offoreign exchange forward and foreign exchange collar contracts (“ForeignExchange Derivative Contracts”). Certain of these Foreign Exchange DerivativeContracts are designated and qualify as foreign currency cash flow hedges underSFAS No. 133. The Foreign Exchange Derivative Contracts are recordedin the Consolidated Statements of Financial Condition at fair value in otherassets or other liabilities. Gains and losses on the effective portion of thehedges as well as on the underlying items being hedged are recorded to otherincome in the Consolidated Statements of Income.

In March 2005, the Company discontinued hedgeaccounting for a foreign exchange derivative contract that was previouslydesignated and qualified as a hedge under SFAS No. 133. The de-designationof this contract was necessary because the Company renegotiated the exchangerates in the contract that resulted in its termination and the execution of anew contract. Subsequent to such de-designation, the Company discontinuedprospectively hedge accounting for the original contract. Unrealized losses onthe original contract remained in accumulated other comprehensive loss and werereclassified into earnings 

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

over the term of theoriginal contract. Since de-designation, $6,814 ($4,770 after-tax) wasreclassified from accumulated other comprehensive loss into earnings. At December 31,2006, there was no remaining unrealized loss related to the de-designatedforeign exchange derivative contract. As of December 31, 2006, the Companyhad no foreign exchange derivative contracts that were designated as foreigncurrency cash flow hedges. For the years ended December 31, 2006, 2005 and2004, there was no hedge ineffectiveness. For the years ended December 31,2006, 2005 and 2004, unrealized gains (losses) before tax totaling $2,610,$7,813 and ($11,141), respectively, were recorded as other comprehensive income(loss).

The Company does not hold or issue derivativefinancial instruments for trading purposes. The counterparties with whom theCompany trades foreign exchange contracts are major international financialinstitutions. The Company monitors its positions with and the credit quality ofthese financial institutions and does not expect nonperformance by thecounterparties.

*Fair Value of FinancialInstruments—**Substantially* all of the Company’sassets and liabilities are carried at fair value or contracted amounts thatapproximate fair value. Assets and liabilities that are recorded at contractedamounts approximating fair value consist primarily of receivables from andpayables to brokers, dealers and clearing organizations. These receivables andpayables are short term in nature and have subsequently substantially allsettled at the contracted amounts. The Company’s debt obligations are carriedat historical amounts. The fair value of the Company’s debt obligations wasestimated using market rates of interest available to the Company for debtobligations of similar types and approximates the carrying value at December 31,2006 and 2005. The Company’s derivatives are summarized below, showing the fairvalue of the related assets and liabilities that are included in other assetsor other liabilities in the Consolidated Statements of Financial Condition asof December 31, 2006 and 2005:

| **Asset/(Liabilities)**                 | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Foreign Exchange  Derivative Contracts: |       |       |       |     |       |
| Assets                                  |       | $          | 649        |     | 2,196      |     |
| Liabilities                             |       | (139       | )          | (79      | )          |
| Fenics Purchase  Obligation             |       | (53        | )          | (144     | )          |
|                                         |            |            |            |          |            |          |            |  |

 

The fair value of the Foreign Exchange DerivativeContracts were estimated based on quoted market prices of comparable instruments.The fair value of the Fenics Purchase Obligation was estimated using anexchange option model that included assumptions of management’s estimate of thefair value of the common stock of the Company and the common stock of Fenics,volatility, correlation and the expected life of the obligation.

Included in other assetsin the Consolidated Statements of Financial Condition as of December 31,2006 were $1,638 of assets primarily relating to the U.K. equity instrumentsheld by the Company and recorded at current market value.

**19. REGULATORYREQUIREMENTS**

GFI Securities LLC is a registered broker-dealer withthe Securities and Exchange Commission and the National Association ofSecurities Dealers, Inc. (“NASD”). GFI Securities LLC is also a registered

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

introducing broker withthe National Futures Association and the Commodity Futures Trading Commission.Accordingly, GFI Securities LLC is subject to the net capital rules underthe Exchange Act and the Commodity Exchange Act. Under these rules, GFISecurities LLC is required to maintain minimum Net Capital, as defined, of notless than the greater of $250 or 2% of aggregate debits, as defined. GFIBrokers Limited and GFI Securities Limited are subject to the capitalrequirements of the Financial Services Authority in the United Kingdom (“FSA”).GFI (HK) Securities LLC is subject to the capital requirements of theSecurities and Futures Commission in Hong Kong, which require that GFI (HK)Securities LLC maintain minimum capital, as defined, of approximately $395.

Thefollowing table sets forth the minimum capital, as defined, that certain of theCompany’s subsidiaries must be maintained as of December 31, 2006:

| ** **                    | ** ** | **GFI Securities  LLC** | ** ** | **GFI Brokers  Limited** | ** ** | **GFI Securities  Limited** | ** ** | **GFI (HK)  Securities LLC** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| Net Capital                   |       |                         | $          | 33,258                        |       |                             |       | $                                      | 22,127     |   |   |   | $ | 22,689 |   |   |   | $ | 703 |   |   |
| Minimum Net  Capital required |       |                         | 250        |                          |       |                             | 9,003      |                                   |       |   | 15,388 |   |   |   | 395 |   |   |
| Excess Net Capital            |       |                         | $          | 33,008                        |       |                             |       | $                                      | 13,124     |   |   |   | $ | 7,301 |   |   |   | $ | 308 |   |   |

 

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

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

GFI Securities Limited’s Japanese branch is subject tocertain licensing requirements established by the Foreign Securities Firms Law(the “FSFL”) in Japan. In July 2006, GFI Securities Limited’s Japanesebranch obtained a full securities license with the FSFL. As part of thelicensing requirements, GFI Securities Limited’s Japanese branch is required tomaintain “brought-in” capital, as defined under the FSFL, of 50,000 JapaneseYen (approximately $420). In addition, GFI Securities Limited is required tomaintain a capital base of 1,000,000 Japanese Yen (approximately $8,393). GFISecurities Limited’s Japanese branch is also subject to the net capital rule promulgatedby the FSFL, which requires that net worth, including “brought-in” capital,exceed a ratio of 120.0% of relevant expenditure. At December 31, 2006,GFI Securities Limited and its Japanese branch were in compliance withthese capital requirements and maintained a ratio in excess of 120.0%.

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

GFI Brokers Limited’s Sydney branch is registered as aforeign corporation in Australia and is conditionally exempt from therequirement to hold an Australian financial services license under theAustralian Securities and Investments Commission Corporations Act of 2001 inrespect of the financial 

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

services it provides inAustralia. This exemption applies to foreign companies regulated by the FSA inaccordance with U.K. regulatory standards.

GFI (HK) Brokers Ltd. is registered with and regulatedby the Hong Kong Monetary Authority (“HKMA”). As part of this registration, GFI(HK) Brokers Ltd. is required to maintain stockholders’ equity of 5,000 HongKong dollars (or approximately $643). At the time it was registered, GFI (HK)Brokers Ltd. was in compliance with these requirements. However, at December 31,2006, GFI (HK) Brokers Ltd.’s stockholders’ equity had fallen below therequired amount and therefore was not in compliance with this requirement. GFI(HK) Brokers Ltd. discussed this matter with the HKMA and increased its sharecapital to meet the requirements subsequent to year-end. GFI (HK) Brokers Ltd.does not expect to incur a penalty in connection with this period ofnon-compliance.

These regulatory rules mayrestrict the Company’s ability to withdraw capital from its regulated subsidiaries.Except as discussed above regarding GFI (HK) Brokers Ltd., the Company’sregulated subsidiaries were in compliance with all minimum net capitalrequirements as of December 31, 2006.

**20. GEOGRAPHICINFORMATION**

The Company offers its products and services in theNorth America, Europe and the Asia-Pacific region.

Informationregarding revenue for the years ended December 31, 2006, 2005 and 2004,and information regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in geographic areas as of December 31,2006, 2005 and 2004 are as follows:

| ** **    | ** ** | **For the year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:     |       |                                                         |       |   |   |   |   |
| North America |       | $                                                            | 352,976    |   | $ | 268,101 |   | $ | 170,661 |   |
| Europe        |       | 326,174                                                      |       | 222,058 |   | 191,831 |   |
| Asia-Pacific  |       | 68,033                                                       |       | 43,433 |   | 22,528 |   |
| Total         |       | $                                                            | 747,183    |   | $ | 533,592 |   | $ | 385,020 |   |

 

| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Long-lived  Assets, as defined: |       |                                  |       |   |   |
| North America                   |       | $                                     | 32,158     |   | $ | 25,200 |   |
| Europe                          |       | 12,753                                |       | 10,645 |   |
| Asia-Pacific                    |       | 2,255                                 |       | 1,516 |   |
| Total                           |       | $                                     | 47,166     |   | $ | 37,361 |   |

 

Revenues are attributed togeographic areas based on the location of the relevant legal entities. Certainreclassifications have been made to the 2005 geographic revenues to conform tocurrent presentations.

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

**21. OTHER COMPREHENSIVE INCOME (LOSS)**

| ** **                                                           | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Unrealized  gain (loss) on foreign exchange derivative contracts** | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current Period Change:                                               |       |                                                         |       |   |   |   |   |
| Before Tax Amount                                                    |       | $                                                            | 2,610      |   | $ | 7,813 |   | $ | (11,141 | ) |
| Tax Expense (Benefit)                                                |       | (783                                                         | )          | (2,460 | ) | 3,543 |   |
| After Tax Amount                                                     |       | $                                                            | 1,827      |   | $ | 5,353 |   | $ | (7,598 | ) |
| **Foreign  currency translation adjustment**                         | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Before Tax Amount                                                    |       | $                                                            | 400        |   | $ | 341 |   | $ | (284 | ) |
| Tax Expense (Benefit)                                                |       | (178                                                         | )          | (161 | ) | 155 |   |
| After Tax Amount                                                     |       | $                                                            | 222        |   | $ | 180 |   | $ | (129 | ) |

 

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

| ** ** | ** ** | **For the year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                     | ** ** | **2005** | ** ** |
| Gross loss |       | $                                                            | 4,807      |   | $ | 1,812 |   |
| Net of tax |       | 3,365                                                        |       | 643 |   |
|            |            |                                                              |            |  |  |  |  |

 

**22. RELATED PARTYTRANSACTIONS**

**Office lease arrangementswith affiliates**

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 third quarter of2006, the Company reduced its estimate for related termination charges by £50(or$93). Of the remaining accrual balance of $157, approximately $62 and$95 will be paid to the affiliate and third parties, respectively. During thefourth quarter of 2006, the Company paid the remaining balance of $62 to theaffiliate. Additionally, a remaining accrual balance of $33 will be paid tothird parties.

In addition, the Companyleases a corporate apartment in London from GFI Brokers (Channel Islands)Limited. We currently pay a monthly lease payment of approximately £2 for thisapartment. The lease term for this corporate apartment is on a month-to-monthbasis.

**Forgivable Loans toEmployees**

**The Company periodically providesforgivable employee loans to employees when they enter into fixed termemployment agreements with the Company. See Notes 2 and 9 for further details.**

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**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Disclosure Controls**

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 annual 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.

**Management’sReport on Internal Control Over Financial Reporting**

The management of the Company is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. Internal control over financial reportingis a process designed under the supervision of the Company’s principalexecutive and principal financial officers to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of theCompany’s financial statements for external purposes in accordance withgenerally accepted accounting principles.

The Company’s internal control over financialreporting includes those policies and procedures that: (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of theCompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006. In making this assessment, the Company’s management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-Integrated Framework. Based on its assessment andthe COSO criteria, management believes that, as of December 31, 2006, theCompany maintained effective internal control over financial reporting.

The Company’s auditedconsolidated financial statements include the results of the North Americanbrokerage operations and assets of Amerex Energy, acquired by the Company on October 1,2006. However, consistent with published SEC guidance on the permissible scopeof management’s internal control report, management’s assessment of internalcontrol over financial reporting did not include Amerex Energy. The financialstatements for Amerex Energy reflect total assets (exclusive of Goodwill andIntangibles, controls over which were included in management’s assessment) andrevenues constituting 

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approximately3% and 2%, respectively, of the related consolidated financial statementamounts as of and for the year ended December 31, 2006. See Note 8 to theConsolidated Financial Statements for additional information regarding thisacquisition.

**Report ofIndependent Registered Public Accounting Firm**

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

We have audited management’s assessment, included in theaccompanying December 31, 2006 Form 10-K of GFI Group Inc. andsubsidiaries (the “Company”) at Item 9A under the heading “Management’s Reporton Internal Control Over Financial Reporting,” that the Company maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in *Internal Control—Integrated**Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission. As described in Management’sReport on Internal Control Over Financial Reporting, management excluded fromits assessment the internal control over financial reporting at Amerex Energy,which was acquired on October 1, 2006 and whose financial statementsreflect total assets (exclusive of goodwill and intangibles, controls overwhich were included in management’s assessment) and total revenues constituting3% and 2%, respectively, of the related consolidated financial statementamounts as of and for the year ended December 31, 2006. Accordingly, ouraudit did not include the internal control over financial reporting at AmerexGroup. TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the 

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effectiveness of theinternal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal**Control—Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated statement of financial condition of theCompany as of December 31, 2006 and the related consolidated statements ofincome, comprehensive income, cash flows and changes in stockholders’ equityfor the year ended December 31, 2006 and our report dated February 28,2007 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & ToucheNew York, New YorkFebruary 28, 2007

**Change in InternalControls**

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 fourth quarter of 2006 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

**ITEM 9B.**       OTHERINFORMATION

None.

**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required to be furnished pursuant tothis item will be set forth under the caption “Election of Directors” in theregistrant’s proxy statement (the “Proxy Statement”) to be furnished tostockholders in connection with the 2007 Annual Meeting of Stockholders to beheld on June 13, 2007, and is incorporated herein by reference.

The information required to be furnished pursuant tothis item with respect to compliance with Section 16(a) of theExchange Act will be set forth under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in the Proxy Statement, and is incorporatedherein by reference.

We have adopted a Code ofBusiness Conduct and Ethics that applies to all directors, officers andemployees. We have also adopted a Code of Business Conduct and Ethics that isapplicable to the Company’s senior financial and accounting officers (includingthe chief executive officer, chief financial officer and corporate controller).A copy of these codes are posted on the Company’s website,*www.gfigroup.com*, under the section “InvestorRelations—Corporate Governance”. In the event the Company substantively amendsor waives a provision of its Codes of Business Conduct and Ethics, the Companyintends to disclose the amendment or waiver on the Company’s website as well.

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**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredto be furnished pursuant to this item will be set forth under the caption “ExecutiveCompensation” in the Proxy Statement, and is incorporated herein by reference.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information requiredto be furnished pursuant to this item will be set forth under the captions “SecurityOwnership of Certain Beneficial Owners”, “Security Ownership of Directors andExecutive Officers” and “Equity Compensation Plan Information” in the ProxyStatement, and is incorporated herein by reference.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredto be furnished pursuant to this item will be set forth under the caption “CertainRelationships and Related Party Transactions and Director Independence” in theProxy Statement, and is incorporated herein by reference.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information requiredto be furnished pursuant to this item will be set forth under the caption “FeesPaid to Independent Auditors” in the Proxy Statement, and is incorporatedherein by reference.

**PART IV**

**ITEM 15.**         EXHIBITS,FINANCIAL STATEMENT SCHEDULES

**(a)(1) Financial Statements.  **SeeIndex to Financial Statements on page 71.

**(a)(2) Financial Statement Schedules.  **Wehave included Schedule I—Condensed Financial Information of GFI Group Inc.(Parent Company Only) on pages I-1 to I-5.

**(a)(3)Exhibits.  **The following Exhibits are filed as part ofthis Report as required by Regulation S-K. Exhibits 10.5 through 10.14 aremanagement contracts or compensatory plans or arrangements.

| Number | ** ** | **Description**                                                                                                                                                                                                                        | ** ** | ** ** | ** ** |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| 3.1*   |       | Second Amended and  Restated Certificate of Incorporation of the Registrant. (Filed as  Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed  on March 31, 2005, File No. 000-51103).           |       |
| 3.2*   |       | Second Amended and  Restated Bylaws of the Registrant. (Filed as Exhibit 3.2 to the  Company’s Annual Report on Form 10-K filed on March 31, 2005,  File No. 000-51103)                                       |       |
| 4.1*   |       | See Exhibits 3.1 and 3.2  for provisions of the Second Amended and Restated Certificate of  Incorporation and Second Amended and Restated Bylaws for the Registrant  defining the rights of holders of Common Stock of the Registrant. |       |
| 4.2*   |       | Specimen Stock  Certificate. (Filed as Exhibit 4.2 to Amendment No. 5 to the  Company’s Registration Statement on Form S-1 filed on  January 24, 2005, File No. 333-116517)                              |       |

106

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| 4.3*    |   | Amended and  Restated Stockholders Agreement, dated as of June 3, 2002, among the  Registrant and the stockholders named therein. (Filed as Exhibit 4.3 to  Amendment No. 2 to the Company’s Registration Statement on Form S-1  filed on September 17, 2004, File No. 333-116517)                                                                                                                                                                                                                                                                                                                              |   |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.4*    |   | Series A  Registration Rights Agreement, dated as of March 10, 2000, between the  Registrant and the parties named therein, as amended by the Amendment  Agreement dated as of November 30, 2001, by and among the Registrant,  GFInet inc. and the parties named therein, as amended by Amendment  No. 2 to the Registration Rights Agreement dated as of June 3,  2002, by and among the Registrant and the parties named therein. (Filed as  Exhibit 4.4 to Amendment No. 2 to the Company’s Registration  Statement on Form S-1 filed on September 17, 2004, File  No. 333-116517) |   |
| 4.5*    |   | Series B  Registration Rights Agreement, dated as of June 1, 2000, between the  Registrant and the parties named therein, as amended by the Amendment  Agreement dated as of November 30, 2001, by and among the Registrant, GFInet inc.  and the parties named therein, as amended by Amendment No. 2 to the  Registration Rights Agreement dated as of June 3, 2002, by and among the  Registrant and the parties named therein. (Filed as Exhibit 4.5 to the  Company’s Registration Statement on Form S-1, File No. 333-116517)                                                              |   |
| 4.6*    |   | Series C  Registration Rights Agreement, dated as of June 3, 2002, between the  Registrant and the parties named therein. (Filed as Exhibit 4.6 to  Amendment No. 2 to the Company’s Registration Statement on Form S-1  filed on September 17, 2004, File No. 333-116517)                                                                                                                                                                                                                                                                                                                                 |   |
| 10.1*   |   | Amended and  Restated Credit Agreement, dated February 24, 2006, among the Registrant  and GFI Holdings Limited, as borrowers, subsidiaries of the Registrant named  therein, as guarantors, Bank of America, N.A., as administrative agent,  Barclays Bank Plc, as syndication agent, the other lenders party thereto and  Bank of America Securities LLC, as sole lead arranger and sole book running  manager. (Filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on February 28, 2006)                                                                                                         |   |
| 10.1.1* |   | Lender Joinder  Agreement, dated September 21, 2006, to the Credit Agreement among GFI  Group Inc., GFI Holdings Limited, Bank of Montreal and Bank of America, N.A.  (Filed as Exhibit 10.1.1 to the Company’s Quarterly Report on  Form 10-Q filed on November 13, 2006, File No. 000-51103)                                                                                                                                                                                                                                                                                                                       |   |
| 10.2*   |   | Amended and  Restated Domestic Security Agreement, dated February 24, 2006, by the  Registrant, GFI Group LLC, GFInet inc., GFI Brokers LLC, Interactive  Ventures LLC and Fenics Software Inc. as grantors, in favor of Bank of  America, N.A., as administrative agent. (Filed as Exhibit 10.2 to the  Company’s Annual Report on Form 10-K filed on March 24, 2006,  File No. 000-51103)                                                                                                                                                                                                                |   |
| 10.3.1* |   | Debenture, dated  August 23, 2004, by GFI Holdings Limited and the other subsidiaries  named therein, as chargors, in favor of Bank of America, N.A., as  administrative agent. (Filed as Exhibit 10.3 to Amendment No. 2 to  the Company’s Registration Statement on Form S-1 filed on  September 17, 2004, File No. 333-116517)                                                                                                                                                                                                                                                                               |   |
| 10.3.2* |   | Supplemental  Indenture, dated February 24, 2006, by GFI Holdings Limited and other  subsidiaries named therein, as chargors, in favor of Bank of America, N.A.,  as administrative agent. (Filed as Exhibit 10.3.2 to the Company’s  Annual Report on Form 10-K filed on March 24, 2006, File  No. 000-51103)                                                                                                                                                                                                                                                                                                       |   |

107

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| 10.4*  |   | Disability  Agreement, dated as of December 30, 2004, between the Registrant and  Michael A. Gooch. (Filed as Exhibit 10.4 to Amendment No. 5 to  the Company’s Registration Statement on Form S-1 filed on  January 24, 2005, File No. 333-116517)                                                                                     |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.5*  |   | Employment  Agreement, dated as of July 17, 2000, between the Registrant and Donald  P. Fewer, as amended by the First Amendment to Employment Agreement dated as  of March 11, 2004. (Filed as Exhibit 10.4 to Amendment No. 2  to the Company’s Registration Statement on Form S-1 filed on  September 17, 2004, File No. 333-116517) |   |
| 10.6*  |   | Employment  Agreement, dated as of May 1, 2002, between the GFI Holdings Limited and  Stephen McMillan. (Filed as Exhibit 10.5 to Amendment No. 2 to the  Company’s Registration Statement on Form S-1 filed on  September 17, 2004, File No. 333-116517)                                                                                    |   |
| 10.7*  |   | Employment  Agreement, dated as of November 18, 2002, between the Registrant and  James A. Peers. (Filed as Exhibit 10.6 to Amendment No. 2 to  the Company’s Registration Statement on Form S-1 filed on  September 17, 2004, File No. 333-116517)                                                                                     |   |
| 10.8*  |   | Employment  Agreement, dated as of December 1, 2003, between GFI Holdings  Limited and Jurgen Breuer. (Filed as Exhibit 10.8 to Amendment  No. 4 to the Company’s Registration Statement on Form S-1  filed on January 6, 2005, File No. 333-116517)                                                                                    |   |
| 10.9*  |   | 2002 Stock Option  Plan. (Filed as Exhibit 10.7 to Amendment No. 2 to the Company’s  Registration Statement on Form S-1 filed on September 17,  2004, File No. 333-116517)                                                                                                                                                                        |   |
| 10.10* |   | 2000 Stock Option  Plan. (Filed as Exhibit 10.8 to Amendment No. 2 to the Company’s  Registration Statement on Form S-1 filed on September 17,  2004, File No. 333-116517)                                                                                                                                                                        |   |
| 10.11* |   | GFI Group  Occupational Pension Plan. (Filed as Exhibit 10.9 to Amendment  No. 2 to the Company’s Registration Statement on Form S-1  filed on September 17, 2004, File No. 333-116517)                                                                                                                                                           |   |
| 10.12* |   | Guardian Trust of  GFI Brokers Limited. (Filed as Exhibit 10.10 to Amendment No. 2 to  the Company’s Registration Statement on Form S-1 file don  September 17, 2004, File No. 333-116517)                                                                                                                                                        |   |
| 10.13* |   | 2004 Equity  Incentive Plan. (Filed as Exhibit 10.12 to Amendment No. 3 to the  Company’s Registration Statement on Form S-1 filed on  November 30, 2004, File No. 333-116517)                                                                                                                                                                    |   |
| 10.14* |   | Senior Executive  Annual Bonus Plan. (Filed as Exhibit 10.13 to Amendment No. 3 to  the Company’s Registration Statement on Form S-1 filed on  November 30, 2004, File No. 333-116517)                                                                                                                                                            |   |
| 10.15* |   | Employment  Agreement, dated as of June 29, 2004, between GFI Holdings Limited and  Ronald Daniel Levi. (Filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed on May 5, 2006, File No. 000-51103)                                                                                                                             |   |
| 21.1   |   | List of  subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                         |   |
| 23.1   |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                      |   |
| 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).                                                                                                                                                                                                                                   |   |

108

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| 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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*                    Previouslyfiled.

109

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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 Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006 to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 1st day of March, 2007.

|        |   | GFI GROUP INC.                          |
|--------|--------|----------------------------------------------|
|   |   |                                         |
|   |   | By:                                          | /s/ JAMES  A. PEERS |
|   |   | Name: James A. Peers                    |
|   |   | Title:*  Chief  Financial Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report on Form 10-Khas been signed by the following persons in the capacities and on the datesindicated.

|                      | **Signature** | ** **                                    | ** ** | ** **    | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------|---------------|-----------------------------------------------|------------|---------------|-----------|------------|------------|------------|----------|------------|
| /s/ MICHAEL  GOOCH   |          | Chairman of the  Board and Chief Executive    |       | March 1, 2007 |
| Michael  Gooch       |          | Officer (principal  executive officer)        |       |          |
| /s/ COLIN  HEFFRON   |          | President and  Director                       |       | March 1, 2007 |
| Colin  Heffron       |          |                                          |       |          |
| /s/ JAMES  A. PEERS  |          | Chief Financial  Officer                      |       | March 1, 2007 |
| James  A. Peers      |          | (principal financial and  accounting officer) |       |          |
| /s/ GEOFFREY  KALISH |          | Director                                      |       | March 1, 2007 |
| Geoffrey  Kalish     |          |                                          |       |          |
| /s/ RANDY  MACDONALD |          | Director                                      |       | March 1, 2007 |
| Randy  MacDonald     |          |                                          |       |          |
| /s/ JOHN  W. WARD    |          | Director                                      |       | March 1, 2007 |
| John  W. Ward        |          |                                          |       |          |
| /s/ MARISA  CASSONI  |          | Director                                      |       | March 1, 2007 |
| Marisa Cassoni       |          |                                          |       |          |

 

110

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**Schedule I**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Stockholders of

GFIGroup Inc.

New York, New York

We have audited theconsolidated financial statements of GFI Group Inc. and subsidiaries (the “Company”)as of December 31, 2006 and 2005, and for each of the three years in theperiod ended December 31, 2006, management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as of December 31,2006, and the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006, and have issued our reports thereondated February 28, 2007; such reports are included elsewhere in this Form 10-K.Our audits also included Schedule I listed in Item 15. This financial statementschedule is the responsibility of the Company’s management. Our responsibilityis to express an opinion based on our audits. In our opinion, such financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

/s/ DELOITTE& TOUCHE

NewYork, New York

February 28, 2007

I-1

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**GFIGROUP INC.**

**(ParentCompany Only)**

**CONDENSED STATEMENTS OFFINANCIAL CONDITION**

**DECEMBER 31, 2006 AND 2005**

**(In thousands)**

| ** **                                                                                                                                                       | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **Assets:**                                                                                                                                                      | ** ** | ** **           | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                        |       | $                    | 25,787     |   | $ | 5,230 |   |
| Investments in subsidiaries, equity basis                                                                                                                        |       | 159,676              |       | 105,146 |   |
| Advances to subsidiaries                                                                                                                                         |       | 217,654              |       | 145,531 |   |
| Other assets                                                                                                                                                     |       | 6,152                |       | 3,022 |   |
| Total assets                                                                                                                                                     |       | $                    | 409,269    |   | $ | 258,929 |   |
| **Liabilities and Stockholders’ Equity:**                                                                                                                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| Notes payable, net                                                                                                                                               |       | $                    | 77,067     |   | $ | 19,442 |   |
| Other liabilities                                                                                                                                                |       | 1,733                |       | 1,235 |   |
|                                                                                                                                                             |       | 78,800               |       | 20,677 |   |
| Preferred stock, $0.01 par value; 5,000,000 shares  authorized, none outstanding at December 31, 2006 and 2005                                              |       | —               |       | — |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized and 28,698,505 and 27,904,568 shares outstanding at  December 31, 2006 and 2005, respectively |       | 287                  |       | 279 |   |
| Additional paid in capital                                                                                                                                       |       | 224,442              |       | 195,360 |   |
| Retained earnings                                                                                                                                                |       | 105,868              |       | 44,790 |   |
| Accumulated other comprehensive loss                                                                                                                             | ** ** | (128                 | )          | (2,177 | ) |
| Total Stockholders’ Equity                                                                                                                                  | ** ** | 330,469              |       | 238,252 |   |
| Total liabilities and  stockholders’ equity                                                                                                                 |       | $                    | 409,269    |   | $ | 258,929 |   |

 

See Notes to Condensed Financial Statements.

I-2

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**GFIGROUP INC.**

**(ParentCompany Only)**

**CONDENSEDSTATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31,2006, 2005 AND 2004**

**(In thousands)**

| ** **                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| REVENUES:                                                                     |       |     |       |     |       |     |       |
| Interest income                                                               |       | $        | 361        |     | $          | 247      |       | $ | 23 |   |
| EXPENSES:                                                                     |       |     |       |     |       |     |       |
| Interest expense                                                              |       | 2,142    |       | 1,116    |       | 1,642    |       |
| Other expenses                                                                |       | 806      |       | 3,651    |       | 576      |       |
| Total expenses                                                                |       | 2,948    |       | 4,767    |       | 2,218    |       |
| LOSS BEFORE BENEFIT FROM INCOME TAXES AND EQUITY IN  EARNINGS OF SUBSIDIARIES |       | (2,587   | )          | (4,520   | )          | (2,195   | )          |
| BENEFIT FROM  INCOME TAXES                                                    |       | 1,035    |       | 1,941    |       | 1,019    |       |
| LOSS BEFORE  EQUITY IN EARNINGS OF SUBSIDIARIES                               |       | (1,552   | )          | (2,579   | )          | (1,176   | )          |
| Equity in  earnings of subsidiaries, net of tax                               |       | 62,630   |       | 50,682   |       | 24,299   |       |
| NET INCOME                                                                    |       | $        | 61,078     |     | $          | 48,103   |       | $ | 23,123 |   |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:                                |       |     |       |     |       |     |       |
| Unrealized gain (loss) on foreign exchange  derivative contracts, net of tax  |       | 1,827    |       | 5,353    |       | (7,598   | )          |
| Foreign currency translation adjustments, net of tax                          |       | 222      |       | 180      |       | (129     | )          |
| COMPREHENSIVE INCOME                                                          |       | $        | 63,127     |     | $          | 53,636   |       | $ | 15,396 |   |
|                                                                          |       |     |       |     |       |     |       |

 

See Notes to Condensed Financial Statements.

I-3

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**GFIGROUP INC.**

**(ParentCompany Only)**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31,2006, 2005 AND 2004**

**(In thousands)**

| ** **                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities                                         |       |     |       |     |       |     |       |
| Net income                                                                    |       | $        | 61,078     |     | $          | 48,103   |       | $ | 23,123 |   |
| Adjustments to reconcile net income to net cash used  in operating activities |       |     |       |     |       |     |       |
| Noncash transactions in net income                                            |       | (63,192  | )          | (52,072  | )          | (24,853  | )          |
| Changes in operating assets and liabilities                                   |       | (1,598   | )          | 3,386    |       | (2,111   | )          |
| Cash used in  operating activities                                            |       | (3,712   | )          | (583     | )          | (3,841   | )          |
| Cash flows used  in investing activities                                      |       | (41,545  | )          | (50,590  | )          | (18,490  | )          |
| Cash flows  provided by financing activities                                  |       | 65,814   |       | 56,378   |       | 10,574   |       |
| Increase  (decrease) in cash and cash equivalents                             |       | 20,557   |       | 5,205    |       | (11,757  | )          |
| Cash and cash equivalents,  beginning of year                                 |       | 5,230    |       | 25       |       | 11,782   |       |
| Cash and cash  equivalents, end of year                                       |       | $        | 25,787     |     | $          | 5,230    |       | $ | 25 |   |

 

See Notes to Condensed Financial Statements.

I-4

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**GFIGROUP INC.(Parent Company Only)**

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**YEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004(In thousands)**

**1. BASIS OFPRESENTATION**

The accompanying condensed financial statements (the “ParentCompany Financial Statements”), including the notes thereto, should be read inconjunction with the consolidated financial statements of GFI Group Inc.and subsidiaries (“the Company”) and the notes thereto.

The Parent CompanyFinancial Statements for the years ended December 31, 2006, 2005 and 2004are prepared in accordance with accounting principles generally accepted in theUnited States of America, which require management to make estimates andassumptions that affect the reported amounts of assets and liabilities,revenues and expenses, and the disclosure of contingencies in the condensedfinancial statements. Management believes that the estimates utilized in thepreparation of the condensed financial statements are reasonable and prudent.Actual results could differ materially from these estimates.

**2. GUARANTEES**

From time to time, theCompany provides guarantees, on behalf of its subsidiaries, to clients for thepurpose of providing credit enhancement for such clients. Such guaranteesgenerally provide that the Company will guarantee the performance of allliabilities, obligations and undertakings owed by such subsidiary with respectto matched principal transactions entered into by such subsidiary with therelevant client. These guarantees are generally terminable on less than 30 daysnotice. The Company has not recorded any contingent liability in the condensedfinancial statements for these indemnifications and believes that theoccurrence of any events that would trigger payments under these guarantees isremote.

**3. INVESTMENTS IN SUBSIDIARIES**

GFI Group Inc. received dividendsof $8,500 and $10,000 from its subsidiaries during the years ended December 31,2006 and 2005, respectively. The dividends were reflected as a return oninvestments in subsidiaries.

**4. ADVANCES TO SUBSIDIARIES**

As of December 31,2006 and 2005, GFI Group Inc. had receivables from subsidiaries of $217,654 and$145,531 related primarily to the allocation of funds received, from notespayable and the issuance of equity securities, to subsidiaries to fund workingcapital.

**5. NOTES PAYABLE**

As of December 31, 2006 and 2005, GFI Group Inc.had notes payable of $77,067 and $19,442 related to the 2006 Credit Agreementand 2004 Credit Agreement, respectively. The notes payable were recorded net ofunamortized loan fees of $933 and $558 for years ended December 31, 2006and 2005, respectively. In addition, GFI Group Inc. guarantees borrowings underthe 2006 Credit Agreement made by certain of its subsidiaries. As of December 31,2006 and 2005, there were borrowings of $13,186 and $11,805, respectively, outstandingby a subsidiary subject to such guarantee.

I-5

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