**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE**     |
|------------|-------------------------------------------------------------------------|
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                     |
| ** ** | **For the fiscal year ended December 31, 2005**                    |
| ** ** | **OR**                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
| ** ** | **SECURITIES EXCHANGE ACT OF 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:

**Common Stock, $0.01 par value**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o      No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes o      No x

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer [ ] |   | Accelerated filer  [ ] |   | Non-accelerated  filer [ X ] |
|-----------------------------|--------|------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o      No x

As ofJune 30, 2005, the aggregate market value of the registrant’s common stockheld by non-affiliates of the registrant was $275,344,676 based upon theclosing sale price of $35.60 as reported on the National Association of Securities Dealers AutomatedQuotation System National Market System.

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| Class                                    | ** ** | **Outstanding at  February 28, 2006** |
|------------------------------------------|------------|--------------------------------------------|
| Common Stock,  $0.01 par value per share |       | 28,042,939 shares                          |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof Registrant’s definitive proxy statement for its annual shareholders’ meetingto be held on May 31, 2006 are incorporated by reference in this Form 10-Kin response to Part III, Items 10, 11, 12, 13 and 14.

 

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**TABLE OF CONTENTS**

|            | ** ** | ** **                                                                                                                 | ** ** | **Page** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** ** |       | **PART I**                                                                                                            |       |     |   |   |
| Item 1.    |       | Business                                                                                                                   |       |     | 4 |   |
| Item 1A.   |       | Risk  Factors                                                                                                              |       |     | 20 |   |
| Item 1B.   |       | Unresolved Staff Comments                                                                                                  |       |     | 33 |   |
| Item 2.    |       | Properties                                                                                                                 |       |     | 33 |   |
| Item 3.    |       | Legal  Proceedings                                                                                                    |       |     | 33 |   |
| Item 4.    |       | Submission of Matters to a Vote of Security Holders                                                                        |       |     | 34 |   |
| ** ** |       | **PART II**                                                                                                           |       |     |   |   |
| Item 5.    |       | Market for Registrant’s Common Equity, Related  Stockholder Matters   and Issuer Purchases of Equity Securities  |       |     | 34 |   |
| Item 6.    |       | Selected Financial Data                                                                                               |       |     | 36 |   |
| Item 7.    |       | Management’s Discussion and Analysis of Financial Condition  and   Results of Operations                              |       |     | 37 |   |
| Item 7A.   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                           |       |     | 64 |   |
| Item 8.    |       | Financial Statements and Supplementary Data                                                                                |       |     | 68 |   |
| Item 9.    |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                      |       |     | 102 |   |
| Item 9A.   |       | Controls and Procedures                                                                                               |       |     | 102 |   |
| Item  9B.  |       | Other  Information                                                                                                         |       |     | 102 |   |
| ** ** |       | **PART III**                                                                                                          |       |     |   |   |
| Item 10.   |       | Directors and Executive Officers of the Registrant                                                                         |       |     | 102 |   |
| Item 11.   |       | Executive Compensation                                                                                                     |       |     | 103 |   |
| Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters..                          |       |     | 103 |   |
| Item 13.   |       | Certain Relationships and Related Transactions                                                                        |       |     | 103 |   |
| Item 14.   |       | Principal Accountant Fees and Services                                                                                |       |     | 103 |   |
| ** ** |       | **PART IV**                                                                                                           |       |     |   |   |
| Item 15.   |       | Exhibits and Financial Statement Schedules                                                                            |       |     | 103 |   |
| Signatures |       |                                                                                                                       | 106        |     |

 

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**Forward LookingStatements**

**FORWARD-LOOKING STATEMENTS**

ThisAnnual Report on Form 10-K contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include, without limitation, any statement that maypredict, forecast, indicate or imply future results, performance orachievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “will be,” “will likely continue,” “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:

·       therisks and other factors described under the heading “Risk Factors” andelsewhere in this Annual Report;

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

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

·       ourentrance into new brokerage markets, investments in establishing new brokerage desks;

·       competitionfrom current and new competitors;

·       futureresults of operations and financial condition;

·       thesuccess of our business strategies;

·       economic,political and market factors affecting trading volumes, securities prices, or demandfor our brokerage services;

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

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

·       ourability to manage our international operations;

·       uncertaintiesassociated with currency fluctuations;

·       ourfailure to protect or enforce our intellectual property rights;

·       ourability to keep up with rapid technological change;

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

·       uncertaintiesrelating to litigation; and

·       changesin the availability of capital.

The foregoing risks anduncertainties, as well as those risks discussed under the headings “Item 1A—RiskFactors”; “Item 7—Managements Discussion and Analysis of Financial Conditionand Results of Operations” and “Item 7A—Quantitative and QualitativeDisclosures About Market Risk” and elsewhere is this Annual Report, may causeactual results to differ materially from the forward-looking statements. Theinformation included herein is given as of the filing date of this Form 10-Kwith the Securities Exchange Commission (the “SEC”) and future events orcircumstances could differ significantly from 

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theseforward-looking statements. The Company does not undertake to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

**PART I.**

**ITEM 1.**                BUSINESS

**Our Business**

**Introduction**

We are a leadinginter-dealer broker specializing in over-the-counter derivatives products andrelated securities. We founded our business in 1987 and were incorporated underthe laws of the State of Delaware in 2001 to be a holding company for oursubsidiaries. We provide brokerage services and data and analytics products toinstitutional clients in markets for a range of credit, financial, equity andcommodity instruments. We function as an intermediary on behalf of ourbrokerage clients by matching their trading needs with counterparties havingreciprocal interests. We focus on the more complex, and often less liquid,markets for sophisticated financial instruments, primarily over-the-counterderivatives, that offer an opportunity for strong growth and higher commissionsper transaction than the markets for more standardized financial instruments. Wehave been recognized by various industry publications as a leading provider ofinter-dealer brokerage services for certain products in the credit,financial, equity and commodity markets on which we focus.

We offer our clients ahybrid brokerage approach, combining a range of telephonic and electronic tradeexecution services, depending on the needs of the individual markets. Wecomplement our hybrid brokerage capabilities with decision support products,such as value-added data and analytics software. We earn revenues for ourbrokerage services and charge fees for certain of our data and analyticsproducts.

At December 31, 2005,we had 150 brokerage desks and 777 brokerage personnel (consisting of brokers,trainees and clerks) serving over 1,700 brokerage and data and analyticsclients, including leading commercial and investment banks, through ourprincipal offices in New York, Englewood (NJ), London, Paris, Hong Kong, Tokyo,Singapore and Sydney. As of December 31, 2005, we employed 694 brokers.

**Website Access toReports**

Our Internet websiteaddress is *www.gfigroup.com*.Through our Internet website, we make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing themwith, or furnishing them to, the SEC: our annual report on Form 10-K;our quarterly reports on Form 10-Q; our current reports on Form 8-K;Forms 3, 4 and 5 filed on behalf of directors and executive officers; andamendments to those reports filed or furnished pursuant to Section 13(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our ProxyStatements for our Annual Meetings will also be available through our Internetwebsite.

Information relating tocorporate governance of the Company is also available on our website includinginformation concerning our directors, board committees, including committeecharters, our Code of Business Conduct and Ethics for all employees and forsenior financial officers and our compliance procedures for accounting andauditing matters. In addition, the Investor Relations page of our websiteincludes supplemental financial information that we make available from time totime.

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

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**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 over-the-counter derivatives, that are typically tradedbetween institutional dealers, which are primarily global investment banks andmoney center 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 over-the-counter instruments, onthe other hand, frequently rely on an inter-dealer broker to facilitateliquidity by gathering pricing information and identifying counterparties withreciprocal interests.

***Market Evolution***

We define a liquid financialmarket as one in which a financial instrument is easy to buy or sell quicklywith minimal price disturbance. The liquidity of a market for a particularfinancial product or instrument depends on several factors, including:  the presence of a number of marketparticipants and facilitators of liquidity, the availability of pricingreference data, and the availability of standardized terms. Liquid markets arecharacterized by substantial price competition, efficient execution and hightrading volume. While a market for an exchange-traded instrument is ordinarilyliquid, some large over-the-counter markets, such as the market for U.S.treasury securities, are also highly liquid. In such liquid, over-the-countermarkets, commissions are generally lower because there are often numerous,readily identifiable buyers and sellers causing the traditional telephonicbrokerage services of inter-dealer brokers to be less essential and to commandless of a premium.

Less liquid markets arecharacterized by fewer participants, less price transparency and lower tradingvolumes. Complex financial instruments that are traded over-the-counter areoften less liquid and are traded primarily by more sophisticated institutionalbuyers and sellers. In a less liquid market, an inter-dealer broker can providegreater value to the efficient execution of a trade by applying its marketknowledge to locate a number of bids and offers so that buyers and sellers mayfind counterparties with which to trade, which can be especially helpful forlarge or non-standardized transactions. An inter-dealer broker ordinarilyaccomplishes this by contacting potential counterparties directly by telephoneor electronic messaging and, in some cases, with proprietary trading technology.In addition, in a less liquid market with fewer participants, disclosure of theintention of a participant to buy or sell could disrupt the market and lead topoor pricing. By using an inter-dealer broker, the identities of thetransaction parties are not disclosed in many transactions until the trade isconsummated and, therefore, market participants better preserve their anonymity.For all these reasons, in a less liquid market, an inter-dealer broker canoffer important value to market participants.

As a market for a particularfinancial instrument develops and matures, more buyers and sellers enter themarket, resulting in more transactions and more pricing information. Inaddition, 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 and less liquidmarkets, which requires an inter-dealer broker to offer integrated telephonicand electronic brokering. We refer to this integrated service as hybridbrokerage. In some cases, hybrid brokerage involves coupling traditionalbroker-executed services with various electronic enhancements, such as 

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electroniccommunications, price discovery tools and order entry. In other cases, hybridbrokerage involves full electronic execution supported by telephoniccommunication between the broker and its clients.

***The DerivativesMarket***

Derivatives areincreasingly being used by financial institutions, hedge funds and largecorporations to manage risk or take advantage of an anticipated direction of amarket by allowing holders to guard against gains or declines in the price ofunderlying financial assets, indices or other investments, without having tobuy or sell such underlying assets, indices or other investments. Theunderlying asset, index or other investment may be, among other things, aphysical commodity, an interest rate, a stock, an index or a currency.Derivatives are commonly used to mitigate the risks associated with interestrate movements, equity ownership, changes in the value of foreign currency,credit defaults by large corporate and sovereign debtors and changes in theprices of commodity products. Common types of derivatives include futures,options and swaps. They derive their value based on the inherent value of theunderlying asset. According to a survey of its members conducted in 2003 by theInternational Swaps and Derivatives Association, which we refer to as ISDA,over 90% of the world’s 500 largest companies use derivative instruments tomanage and hedge their risks more effectively.

Derivatives are tradedboth over-the-counter and on exchanges. According to a recent report of theBank for International Settlements, over-the-counter derivatives accounted forover 82% of the total outstanding global derivatives transactions as of June 2005(as measured by notional amount). The liquidity of markets for particularover-the-counter derivative instruments varies from highly liquid, such as themarket for Eurodollar interest rate derivatives, to illiquid, such as themarket for certain customized credit derivatives which are structured to meetspecific investor needs.

ISDA also reported in arecent survey of its members that in the second half of 2005, among thederivative instruments surveyed, credit derivatives were the fastest growingsegment of the derivatives market with notional amounts outstanding growing 39%over that six month period. The survey stated that at year-end 2005, notionalamounts outstanding of credit derivatives grew to approximately$17.3 trillion from approximately $8.4 trillion at year-end 2004. Thisincrease represented period-over-period growth of over 105%. Credit derivativesare currently traded entirely in over-the-counter transactions, either directlyor through inter-dealer brokers and other financial institutions.

Furthermore, the number ofdifferent derivative instruments is growing as companies and financialinstitutions develop new and innovative derivative instruments to meet industrydemands for sophisticated risk management and complex financial arbitrage. Inits 2005 annual survey, Risk magazine identified 146 categories of derivatives,excluding commodity derivatives. Novel derivative instruments often havedistinct terms and little or no trading history with which to estimate a price.Markets for new derivative instruments therefore require market intelligenceand the services of highly skilled and well-informed brokers and reliablemarket data and pricing tools.

An example of more novel,over-the-counter derivative instruments would be credit default swaps onasset-backed securities (referred to as ABCDS). These instruments allowinvestors to take or offset risk of default in the asset-backed securitiesmarket, which includes securities backed by home equity and commercial realestate loans, credit card receivables and loans for automobiles, recreationalvehicles and boats. Another example of an innovative and complexover-the-counter derivative instrument is carbon emissions options, which allowtrading houses and other market participants to take or offset their exposurein the fast growing European market for carbon dioxide emissions allowancesunder the European Union EmissionsTrading Scheme, or ETS. The ETS permits European-based companies thatexceed individual carbon dioxide emissions targets to purchase emissionsallowances from companies that emit less than their emissions targets.

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**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 use ofexecution technology is becoming more common in the inter-dealerbrokerage industry, only certain highly liquid and standardized financialinstruments may be fully traded electronically in an efficient manner. Morecomplex over-the-counter products, such as derivatives, typically requiretelephonic brokerage to provide market intelligence to clients and to aid theexecution process. We believe that inter-dealer brokers who provide acombination of telephonic and electronic brokerage services are betterpositioned to meet the particular needs of the markets in which they operatethan competitors that cannot offer this combination of services.

***Need for expertisein the development of new markets.******  ***In order to bettersupport their clients’ evolving investment and risk management strategies, ourdealer clients create new products, including new derivative instruments.Dealers also modify their trading techniques in order to better support theirclients’ needs, such as by integrating the trading of derivative instrumentswith the trading of related underlying or correlated financial assets, indicesor other investments. We believe the markets for these new products and tradingtechniques create an opportunity for those inter-dealer brokers who,through market knowledge and extensive client relationships, are able toidentify these new product opportunities and to focus their brokerage servicesappropriately.

***Need for marketintelligence.******  ***Inter-dealer brokers that execute a highervolume of trades of a particular financial product and have access to moremarket 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 accessto the most bids and offers for a particular product. Similarly, inter-dealerbrokers who have a leading market share can offer superior market data andanalytics tools based on their access to the broadest selection of transactionand pricing information. For example, market participants are increasinglypursuing trading strategies that combine credit default swaps with convertiblebonds and equity derivatives of securities of a single issuer or a basket ofissuers. Inter-dealer brokers that have high volumes of bids and offers in thecredit derivative markets and have access to technology which allows them totrack such 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, theinter-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 havebeen better positioned to make the investments necessary to supply theirclients with this technology. As a result of these trends, smaller inter-dealerbrokers may find it harder to compete and several have been acquired by largerinter-dealer brokers with developed technological capabilities and betteraccess to capital. We believe that the continued consolidation of the industryprovides an opportunity for these larger inter-dealer brokers tostrategically expand their businesses to better serve evolving client demands.

**Our Competitive Strengths**

We believe our principal competitive strengths are thefollowing.

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***Leading Position inKey Markets and Strong Brand.*****  **We believe that over our eighteenyear history, we have successfully created value in our brand that our clientsassociate with high quality services in the markets on which we focus. Ourleadership in these markets, such as the markets for certain credit and equityderivatives, foreign exchange options and commodity products, has beenrecognized by rankings in industry publications such as Risk magazine, FX Weekand Energy Risk magazine. In an annual survey conducted by Risk magazine, wehave been named the leading broker in more categories of credit derivativesthan any other inter-dealer broker in each of the last seven years. Inits 2005 annual survey, Risk magazine also named us as a leading broker innumerous currency and equity options markets. The Risk magazine rankings arebased on an annual survey of dealers and brokers in the various markets coveredby the magazine. In addition, our Fenics® FX option analysis product is aleading analytic tool in the foreign exchange market. We believe our leadingpositions in these markets provide us with greater access to market and pricinginformation in those markets, including a broad selection of proprietary marketdata that we are able to provide to our clients. In addition, we believe thatour leading market share in key over-the-counter markets, such as creditderivatives, and our ability to use technology to track such market data,enables us to provide market participants with better analytical insight intocorrelated movements in related securities of a single issuer or relatedissuers or indexes in the credit derivative, bond and equity markets than otherinter-dealer brokers can offer. We further believe our leadership positions inthese areas and our well-developed relationships with leading financialinstitutions better enables us to identify and exploit market opportunitiesresulting from the introduction of new or evolving financial instruments inthose markets.

***Ability to Identifyand Develop High Growth, Less Liquid Markets.*****  **We focus on complex and innovativefinancial markets where liquidity is harder to achieve and, therefore, ourservices are more valuable to market participants. We believe these marketsoffer an opportunity for growth to inter-dealer brokers that move earlyto foster liquidity. We seek to anticipate the development and growth ofmarkets for evolving, innovative financial products in which we believe we cangarner a leading market position and enjoy higher commissions. For example, weentered the credit derivatives market in 1996, at a time when we believed themarket showed promise but had only modest activity. According to the BritishBankers’ Association, the size of the global credit derivatives market was only$180 billion in 1997 (measured by notional amount outstanding). Accordingto ISDA, notional amounts outstanding of credit derivatives have grown to $17.3trillion at year-end 2005, a compounded annual growth rate of over 77% for thateight year period. We believe our familiarity with the needs of such rapidlygrowing markets and our experience with complex product structures allow us tobetter serve clients in high-growth, less liquid markets than many of ourcompetitors.

***Hybrid BrokeragePlatforms.*****  **Mostof the trading in our markets was historically performed over the telephonebetween individual brokers and clients. However, in an increasing number of themarkets in which we participate, telephonic brokerage services are beingsupplemented by electronic trading systems. While we expect this trend tocontinue, we believe that the more complex, less liquid markets on which wefocus often require significant amounts of personal and attentive service fromour brokers. We seek to tailor our use of technology to the trading nuances ofeach specific market. To the extent we identify a need for it in a market, weoffer a hybrid approach to our clients that combines a range of telephonic andelectronic trade execution services depending on the needs of the individualmarkets. For example, our clients may choose between utilizing our GFICreditMatch® electronic trading platform to trade credit derivatives entirelyon screen or may execute the same transaction over the telephone through ourbrokers. We also believe we add value for clients who trade in the complexfinancial markets in which we specialize by offering data and Fenics® analyticsproducts for decision support as well as our MarketHub analytics product foranalytical insight into correlated movements in related securities of a singleissuer or related issuers or indexes. We seek to establish data communicationand “straight-through-processing” connections with our clients’settlement, risk management and compliance operations in order to better servetheir needs and to strengthen our relationships with them. Straight-through-processinggenerally 

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involves the use oftechnology to automate the processing of financial transactions, from executionto settlement, in order to minimize human error, reduce operational costs andtime, and enhance transaction information and reporting. We believe our hybridbrokerage approach provides us with a competitive advantage over competitorswho do not offer this technology.

***Quality Data andAnalytics Products.*****  **We are one of the few inter-dealer brokers thatoffer a broad array of data and analytics products to participants in thecomplex financial markets in which we specialize. Our data products are derivedfrom the trade data compiled from our brokerage services in our key markets. Forexample, our MarketHub analytics product is a cross-asset application whichcombines our detailed credit default swaps data with exchange-traded equity andequity options data and news, commentary and analytics in a single web-basedapplication. Our MarketHub product is designed to give our brokers and clientsa cross-asset view of different securities in a company’s capital structure inorder to identify and analyze correlated movements or other relationships amongfinancial instruments and markets. Our analytics products also benefit from thereputation of the Fenics® brand for reliability, ease of use and independencefrom any large dealer. Our Fenics® tools are used, not only by our traditionalbrokerage clients, but also by their clients, such as national and regionalfinancial institutions and large corporations worldwide. These products aredesigned to serve the needs of certain markets for reliable data and trustedanalytics tools and are leveraged to enhance our brokerage revenues acrossmarket products. We believe that our ability to offer these products helps tosupport our leadership in our key markets.

***Experienced SeniorManagement and Skilled Brokers and Technology Developers.*****  **We have a senior management teamthat is experienced in identifying and exploiting markets for evolving,innovative financial instruments. We also employ over 690 skilled andspecialized brokers, many of whom have extensive product and industryexperience. Working with our senior management, our brokers have shown anability to identify future trading markets and take advantage of opportunitiesthey may present, which provides us with a competitive advantage over firmsthat emphasize electronic trading in relatively mature markets. Although thecompetition for brokers is intense, we have historically experienced low brokerturnover, and have been able to effectively hire new brokers and establish newbrokerage desks in areas in which we seek to expand our operations. Inaddition, our in-house technology developers are experienced at developingelectronic trading platforms and commercial quality software that are tailoredto the needs of certain select markets in which we focus. Our brokers utilizethis technology and market information to provide their clients with enhancedservices. We believe that the combination of our experienced senior management,skilled brokers and technology developers gives us a competitive advantage inexecuting our business strategy.

***Diverse Product and Service Offerings.*****  **We offer our products and servicesin a diverse array of financial markets and geographic regions. Historically,the markets on which we focus have volume and revenue cycles that arerelatively distinct from each other and have generally not been correlated tomovements in the broad equity indices. Further, our decision support products,including our market data and analytical tools, give us an opportunity toleverage and expand our client base, providing revenue sources beyond ourtraditional brokerage clients. We believe our diverse product and serviceofferings provide us with a competitive advantage over many of our competitorsthat may have more limited product and service offerings and, therefore, may bemore susceptible to downturns in a particular market or geographic region.

**Our Strategy**

We intend to continue to grow our business by being aleading provider of brokerage services and data and analytics to the markets onwhich we focus. We intend to employ the following strategies to achieve ourgoals.

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***Maintain andenhance our leading positions in key markets.******  ***We intend to maintainour position as a leading provider of brokerage services and data and analyticsproducts to the markets on which we focus. We plan to continue leveraging themarket strength and brand recognition that we have developed for a range ofderivative instruments and underlying securities in the credit, financial,equity and commodity markets. We will also continue deploying our specializedbrokers in higher-margin product areas and improve their productivitythrough technological innovation. We intend to continue to leverage both ourleading market share in key over-the-counter markets, such as creditderivatives, and our technological ability to track such market data. Thisallows us to provide market participants with analytical insight intocorrelated movements in related securities of a single issuer or relatedissuers or indexes in the credit derivative, corporate bond and equity markets.We also intend to continue offering quality data and analytics products incertain select products requiring reliable decision-support tools. Throughthese means, we seek to enhance our services in existing markets and deepenlong-standing relationships with our global institutional clients.

***Continue to expandthrough hiring new brokers and identifying and developing less liquid,high-growth markets.******  ***We increased our number of brokerage desks by 49desks to 150 desks at December 31, 2005 from 101 desks from December 31,2004 and by 23 desks in 2004 to 101 desks at December 31, 2004 from 78desks at December 31, 2003. Many of these brokerage desks cover the lessliquid, high-growth markets in which we specialize or cover markets that arecomplementary to those markets. Combined, the revenue of brokerage desks openedor restructured since the beginning of 2003 represented 39.4% of our totalrevenues for the year ended December 31, 2005. In the past, we haveprimarily established new brokerage desks through the strategic redeployment ofexisting brokers from other brokerage desks and the selective hiring of newbrokers. Individual brokerage desks are separately tracked and monitored in aneffort to drive performance. We will continue to focus on identifying highgrowth markets where liquidity is more valuable and to actively pursue early-moveropportunities. We also intend to continue to expand our presence in Europe andin the Asia-Pacific markets, where we believe there are opportunities toincrease our revenues. As part of this effort, in 2005, we expanded ouroperations in Tokyo and entered into a lease for office space in Paris. In thefirst quarter of 2006, our Paris office commenced operations.

***Continue to pursuediverse revenue opportunities.******  ***We offer our productsand services in a diverse array of financial markets and geographic regions,which we believe can lessen the impact to us of a downturn in any particularmarket or geographic region. We intend to continue managing our business withthe goal of maintaining the diversity of our revenues. On a geographic basis,approximately 42.2% of our total revenues for the year ended December 31,2005 was generated by our European operations, 50.2% was generated by our NorthAmerican operations and 7.6% was generated by our operations in the Asia-Pacificregion. Additionally, for the year ended December 31, 2005, no onecustomer accounted for more than approximately 7.5% of our total revenues fromall products, services and regions, and our largest brokerage desk accountedfor less than 7.0% of total revenues.

***Strategicallyexpand our operations through business acquisitions.******  ***Historically, theinter-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 havesought to 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 this strategy, in September 2005, we acquired theNorth American business of Starsupply Petroleum LLC (“Starsupply”), a leadingbroker of oil products and related derivative and option contracts for$15.3 million in cash, including $0.2 million of direct transactioncosts related to the acquisition, consisting primarily of legal and otherprofessional fees. We believe that our increased presence in the United Statesoil brokerage market is timely because of 

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current volatility anduncertainty in world oil markets. We also believe the acquisition of Starsupplyis complementary to our existing commodity, energy and shipping brokerageservices. We added nine energy-related desks from Starsupply, includingpetroleum feedstocks, petroleum products, crude oil, petrochemicals, productderivatives, crude derivatives, crude and product options, fuel oil and gasliquids. By increasing our product offerings, we can increase the number ofpoints of contact with our institutional clients, which we believe will furtherinstitutionalize our client relationships and strengthen the GFI brand.

***Leverage infrastructure and technology to improvemargins.******  ***Althoughwe will continue to invest in our operational capabilities and technology, webelieve that we are now well positioned to leverage our operations, technologyand other support areas, such as our executive and finance departments, tocreate cost efficiencies and improve margins. This leverage was demonstrated in2005 as total revenues for the year ended December 31, 2005 grew 38.6%over the prior year while income before provision for income taxes grew 95.3%. Moreover,we will continue to provide technologically enhanced transaction capabilitiesand, where possible, 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. We will also continue to seekto further expand our pre-tax margins through management of the cost of ouroperations and the selective application of technology to improve brokerproductivity.

**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 over-the-counter derivatives. Over-the-counterderivatives are generally structured as forwards, swaps or options. A forwardis an agreement between two parties to exchange an asset or cash flows at aspecified future date at a price agreed on the trade date. A swap is anagreement between two parties to exchange cash flows or other assets orliabilities at specified payment dates during the agreed-upon life of thecontract. An option is an agreement that gives the buyer the right, but not theobligation, to buy or sell a specified amount of an underlying asset at anagreed upon price on, or until, the expiration of the contract. We also supportand enhance our brokerage operations by providing trading platforms andstraight-through processing 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 charged to ourclients in agency transactions vary across the products for which we providebrokerage services.

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. Becausethe buyer and seller each settle their transactions through us rather than witheach other, the parties are able to maintain their anonymity. A limited numberof our brokerage desks are allowed to enter into unmatched principaltransactions to facilitate a customer’s execution needs for transactionsinitiated by such customers or for the purpose of proprietary trading in orderto arbitrage the value between an exchange traded fund and its componentsecurities. These unmatched positions are intended to be held short term.

***Credit Products.******  ***We provide brokerageservices in a broad range of credit derivative and cash bond instruments. Themost common credit derivative, a credit default swap, was developed by globalbanks 

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during the early 1990s. Acredit default swap is essentially like an insurance contract, in which theinsured party pays a periodic premium until the contract expires or a creditevent occurs. In return for this premium, the contract seller makes a paymentto the buyer if there is a credit default or other specified credit event withrespect to the issuer of the underlying credit instrument referenced in thecredit default swap. The credit default swap market has evolved from tradingsimple single-entity credit default swaps to a range of customized productstructures and index products, allowing investors greater flexibility intailoring credit positions that correspond to their desired risk level.

Each of our offices in New York, London, Sydney, HongKong, Singapore and Tokyo provides 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 alsoprovide brokerage services in markets for a range of non-derivative creditinstruments, such as investment grade corporate bonds, high yield corporatebonds, emerging market Eurobonds, bank capital preferred shares, asset-backedbonds and floating rate notes. We have continued to expand our services in NewYork and London to better accommodate clients that engage in trading strategiesthat combine credit default swaps with corporate bonds and equity derivativeson securities of a single issuer. This expansion allows us increasingly 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®, an electronic trading system that provides trading, tradeprocessing and straight-through-processing functionality to our clients. Consistentwith our hybrid brokerage model, clients may choose between utilizing GFICreditMatch® to trade certain credit derivative products entirely on screen orexecuting the same transaction over the telephone through our brokers.

***Financial Products.******  ***We provide brokerageservices in a range of financial instruments, including foreign exchangeoptions, exotic options and interest rate swaps. Exotic options includenon-standard options on baskets of foreign currencies, forward contracts andnon-deliverable forward contracts, which are forward contracts that do notrequire physical delivery of the underlying asset. For these products, we offertelephonic brokerage services in our New York, London, Hong Kong, Singapore andSydney offices, augmented in select markets with our GFI FX Trading System, abrowser-based electronic trading platform. We also offer astraight-through-processing capability that automatically reports completedtelephonic and electronic transactions directly to our clients’position-keeping systems and provides position updates. This processingcapability covers currency option trades executed through our worldwide brokeragedesks. Our New York office focuses on providing brokerage services for foreignexchange option trading among the U.S. Dollar, the Japanese Yen and the Euro,which are referred to as the G3 currencies, as well as foreign exchangeoptions, forward contracts and non-deliverable forward contracts and interestrate swaps for certain U.S., Canadian and Latin American currencies. Our NewYork office also offers bond options, swap options and corporate and emergingmarket repo brokerage services. Our London office also covers foreign exchangeoption trading in the G3 currencies along with nearly all European crosscurrencies, including the Russian Rouble and Eastern European currencies, forwhich we provide brokerage services for forwards and non-deliverable forwards.In addition, our London office offers European and corporate repo and currencybasis and dollar swaps brokerage services. Our brokers in Singapore providebrokerage services for foreign exchange currency options, non-deliverableforwards and interest rate swaps for regional and G3 currencies. Our Sydneyoffice brokers foreign exchange currency options for the Australian dollar forour customers in Australia.

***Equity Products.******  ***We provide brokerageservices in a range of equity products, including U.S. domestic equity,international equity, equity derivatives and Global Depositary Receipts (“GDRs”)and American Depositary Receipt (“ADRs”) stocks. We offer telephonic equitybrokerage services from our brokerage desks in New York, London, Paris and HongKong and, where appropriate, our electronic screen-based trading systems. Throughour various offices we broker trades in the over-the-counter market 

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as well as certainexchange-traded securities. Our London office provides brokerage services inequity index options, single stock options, global depository receipts,Pan-European equities and Japanese equity derivatives. From our Hong Kongoffice, we offer brokerage services in GDRs and ADRs for Hong Kong, Korean andJapanese equity derivatives. Our New York office provides brokerage services insingle stock cash equities, single stock options, index options, sectoroptions, equity default swaps, variance swaps, total return swaps and ADRs. Inthe first quarter of 2006, our Paris office began providing brokerage servicesin financial futures, cash equities and single stock and equity index options. Throughour various subsidiaries, we are members of the following exchanges:International Securities Exchange, Chicago Mercantile Exchange (non-memberfirm), London Stock Exchange, Eurex, Euronext.liffe, Baltic Exchange andIntercontinental Exchange.

***Commodity Products.******  ***We provide brokerageservices in a wide range of commodity products, including oil, natural gas,electricity, wet and dry freight derivatives, precious metals, coal, weatherderivatives, emissions and pulp and paper. As a result of our acquisition ofStarsupply, based in Englewood, New Jersey, we added nine energy-related desks,including petroleum feedstocks, petroleum products, crude oil, petrochemicals,product derivatives, crude derivatives, crude and product options, fuel oil andgas liquids. Through a partnership with A.C.M. Shipping Limited, we offerhybrid telephonic and electronic brokerage of wet freight derivatives inLondon, Singapore and New York. Wet freight derivatives allow oil companies,ship owners and other users of wet freight cargo capacity to better managevolatile shipping costs for their products by effectively locking in the costof shipping future product. We provide extensive brokerage services for bothcash-based and derivative instruments in energy products such as electricity,natural gas and weather derivatives. Weather derivatives allow utilities, agri-businessesand other weather-affected businesses to better manage risks associated withchanges in weather patterns. For example, a utility may purchase a weatherderivative from a financial institution in order to guard against the risk thatunseasonably cool summer weather will result in lower energy consumption by itsclients. Our London office provides energy product brokerage services in manyEuropean national 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 system 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.

We provide both telephonic and electronic brokerage inpulp, recycled, printing, writing and packaging paper products, including afull range of derivative instruments for such products, such as physicalforwards, financial swaps, options, caps, floors and collars. From ourbrokerage desks in New York, London and Sydney, we also serve the globalprecious metals markets with brokerage in spot, forward, swap and optionscontracts focusing on gold, silver, platinum and palladium.

***Data and Analytics.******  ***In selected markets,we license market data and analytics products that are used to build pricingmodels, develop trading strategies and to manage, price and revalue derivativeportfolios. These products are sold on a subscription basis through a dedicatedsales team. We also sell our MarketHub analytics product, which combines ourdetailed credit default swaps data with exchange-traded equity and equityoptions data and news, commentary and analytics in a single web-basedapplication, on a subscription basis.

We provide market data in the following productareas:  foreign exchange options, creditderivatives, European repurchase agreements, emerging market bonds, Europeanenergy and North American energy. We make our data available through a numberof channels including streaming web portals, file transfer protocol downloads,Fenics analytical tools and data vendors. Revenue from market data productsconsists of up-front license fees and monthly subscription fees and individuallarge database sales. In addition, we have data distribution relationships withReuters, Telerate, Bloomberg, Quick and Comstock who license our data fordistribution to their global users.

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We currently offer our Fenics® analytics productsprimarily for the foreign exchange option markets, and, to a lesser extent, forcertain precious metals, credit derivative, energy derivative and wet and dryfreight markets. Fenics FX is a leading foreign exchange option pricing andanalysis tool that is licensed for use at hundreds of sites globally. Fenics FXprovides an array of tools, math models and independent market data thatpermits clients to quickly and accurately price and revalue both standard andexotic foreign exchange options. Fenics FX can also be integrated with mostaspects of a client’s trading infrastructure, and allows clients to control,monitor and more effectively oversee each stage of foreign exchange optiontrading.

Recently we extended our foreign exchange optionproducts to include an e-commerce foreign exchange execution platform calledFenics DealFX. Built in conjunction with one of the world’s leading foreignexchange dealers, this trading solution is now in use and facilitates on-linetrading of foreign exchange options between our clients and their customers. Weretained certain of the intellectual property rights on this product and are indiscussions with other dealers to implement this solution. This project broughttogether our Fenics FX capability with our experience in developing on-linetrading platforms. In addition, we recently introduced our MarketHub analyticsproduct, a cross-asset application which combines our detailed credit defaultswaps data with exchange-traded equity and equity options data and news,commentary and analytics in a single web-based application. Our MarketHubproduct is designed to give our clients a cross-asset view of differentsecurities in a company’s capital structure in order to identify and analyzecorrelated movements or other relationships among financial instruments andmarkets.

We also offer FenicsCredit, a tool for pricing and managing credit derivatives. Fenics Creditallows clients to price and manage credit default swaps, credit options andbaskets of credit derivatives. Fenics Energy is an advanced option pricing andrisk analysis tool for the over-the-counter electricity and gas markets whichallows users to price a broad range of option contracts. Fenics Freightprovides market data, analytical tools and option pricing for freightderivatives.

**Our Clients**

As of December 31,2005, we provide brokerage services and data and analytics products to over1,700 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 Stanley and UBS. Despite the importance of these largefinancial institutions to our brokerage business, no one client accounted formore than approximately 7.5% of our total revenues from all products andservices globally for the year ended December 31, 2005.

**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 selectiveadvertising and media campaigns. We participate in numerous trade-shows toreach potential brokerage, data and technology clients. We also utilizespeaking opportunities to position key brokers and specialists as marketexperts and help promote our core products and services. Additionally, wemarket our brokerage services through the direct interaction of our brokerswith their clients. This direct interaction also permits our brokers to discussnew product and market developments with our clients. Our data and analyticsproducts are actively marketed through a dedicated sales and support team. Asof December 31, 2005, we employed 45 sales, marketing and customer supportprofessionals, consisting of 28 sales employees and executives, 4 marketingemployees and 13 customer support employees. Our sales force calls on a broadrange of clients including traders, risk managers, sales staff, analysts ande-commerce 

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specialistsat banks, hedge funds, fund managers, insurance companies and treasurers inlarge corporations.

**Technology**

***BrokerageTechnology.******  ***Weemploy a technology development philosophy that emphasizes state-of-the-arttechnology with cost efficiency in both our electronic brokerage systems anddata 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 systems, includingdedicated point-to-point data lines, virtual private networks and the Internet.

We are working with a small but increasing number ofour clients to implement straight-through-processing between our tradingsystems and the systems used by our clients to record, report and storetransaction data. These efforts seek to automate large parts of the tradereporting and settlement process, thereby reducing errors, risks and coststraditionally associated with post-trade activities. We may also develop orcustomize trading systems for our customers.

***Market Data andAnalytics Products Technology.******  ***Our market data andanalytics 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. OurMarketHub analytics product is a web-based, cross-asset application combiningour detailed credit default swaps data with exchange-traded equity and equityoptions data and news, commentary and analytics in a single web-basedapplication.

***Support andDevelopment.******  ***AtDecember 31, 2005, we employed a team of 148 computer, telecommunication,network, database, client support, quality assurance and software developmentspecialists. The activities of our development staff are split approximatelyevenly between infrastructure support services and software development. Wedevote substantial resources to the continuous development and support of ourelectronic brokerage capabilities, the introduction of new products andservices to our clients and the training of our employees. Our softwaredevelopment capabilities allow us to be flexible in our decisions to eitherpurchase or license technology from third parties or to develop it internally.

***Disaster Recovery.******  ***We have contingencyplans in place to protect against major carrier failures, disruption inexternal services (market data and Internet service providers), server failuresand power outages. All critical services are connected via redundant anddiverse circuits and, where possible, we employ site diversity. Productionapplications are implemented with a primary and back-up server, and all datacenters have uninterruptible power source and generator back-up power. Ourservers are backed-up daily, and back-up tapes are sent off-site weekly.

**Intellectual Property**

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. Where appropriate,we also license software and technology that is protected by intellectualproperty rights belonging to third parties. Our proprietary technology,including our Fenics software, is generally licensed to clients under writtenlicense agreements.

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We pursue registration of some of our trademarks inthe United States and in other countries. “GFI Group,” “GFInet,” “Fenics,” “GFICreditMatch” and “Starsupply” are registered trademarks in the United Statesand/or numerous overseas jurisdictions. We have also applied for registrationof various other trademarks, including multiple derivations of the “GFI Group,”“GFInet” and “GFI CreditMatch” 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 over-the-counter brokerageservices are currently other inter-dealer brokers and a few electronicbrokerage platforms. Additional competition may arise from multi-dealer tradingconsortia and securities and futures exchanges. Our primary competitors for ourdata and analytics products are currently other inter-dealer brokers and dataand technology vendors.  Certain of ourlarger competitors have announced their intention to offer enhanced electronictrading platforms for specific products.

***Inter-DealerBrokers.******  ***Thecurrent size of the wholesale brokerage market is difficult to estimate asthere is little third party, external data on the industry and severalparticipants are private companies and do not publicly report revenues. Historically,the inter-dealer brokerage industry has been characterized by fiercecompetition for clients and brokers. Over the past several years, the industryhas been characterized by the consolidation of well-established, smaller firmsinto five principal, global inter-dealer brokers: GFI Group Inc., ICAP Plc, theTullett Prebon division of Collins Stewart Tullett Plc, Tradition FinancialServices (a subsidiary of Cie Financiere Tradition) and Cantor Fitzgerald/BGCPartners L.P. and its publicly traded subsidiary, eSpeed, Inc. We believethis consolidation has resulted from a number of factors, including:  the consolidation of primary institutionaldealer clients; pressure to reduce brokerage commissions, particularly in morecommoditized products; greater dealer demand for costly technologicalcapabilities; the need to leverage relatively fixed administrative andregulatory costs and, increasingly, greater client demand for marketinformation about correlated financial products. Nevertheless, a number ofsmaller, privately held firms that tend to specialize in niche products orspecific geographical areas remain in the market.

***Consortia andExchanges.******  ***TheInternet boom resulted in the establishment of many electronic brokerage ortrading platform start-ups. Only a limited number of these firms, with eitherbacking from groups that have organized themselves as a consortium of majordealers or from one or more inter-dealer brokers, have survived. Dealer firmswithin a consortium platform could elect to conduct a disproportionate orincreased share of their business between other member firms, or even to dealdirectly with each other, thus reducing liquidity in the traditionalinter-dealer markets and potentially reducing the size of our market.

Certain derivatives exchanges allow participants totrade standardized futures and options contracts. Major derivative exchangesinclude the Chicago Mercantile Exchange, the Chicago Board of Trade, TheChicago Board of Options, Eurex and Euronext.liffe. Exchange-traded products,unlike the over-the-counter products we focus on, typically contain morestandardized terms, are more commoditized, and are typically traded incontracts representing smaller notional amounts. We believe that exchanges willcontinue to seek to leverage their platforms and attempt to grow by introducingproducts designed to compete with certain of the products covered byinter-dealer brokers in the over-the-counter marketplace.

***Data and Analytics.******  ***Several large marketdata 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 

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announced theirintention to expand their electronic trading platforms or to develop newplatforms. In addition, these entities are currently competitors to, and insome cases clients of, our data and analytical services. Further, we facecompetition for certain sales of our data products from data vendors formed asa consortium of major financial institutions.

**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 Securities LLC,one of our subsidiaries, is registered as a broker-dealer with the SEC, and theState of New York, and is a member of the National Association of SecuritiesDealers (“NASD”). Broker-dealers are subject to regulations and industrystandards of practice that cover many aspects of their business, includinginitial licensing requirements, sales and trading practices, safekeeping ofclients’ funds and securities, capital structure, record keeping, supervisionand the conduct of affiliated persons, including directors, officers andemployees. GFI Securities LLC also operates an electronic trading system thatis regulated pursuant to Regulation 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 enforcement powers.If we fail to remain in compliance with laws, rules and industry standardsof practice, we could face investigations and judicial or administrativeproceedings that may result in substantial fines. Alternatively, or in additionto being fined, our regulators could institute administrative proceedings thatcan result in censure, the issuance of cease and desist orders, the suspensionor expulsion of a broker-dealer and its affiliated persons, officers oremployees 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 change in control of a parent company. As a resultof these regulations, our future efforts to sell shares or raise additionalcapital 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 February 2006,this subsidiary was fined $25,000 for issues relating to late trade reportingof trades in 2004 and in October 2005, this subsidiary was fined $35,000for issues relating to late trade reporting in 2003. This subsidiary has alsopaid similar fines in prior years and is currently being examined by the NASDfor similar issues relating to late trade reporting  in 2004 and 2005. As a result of theforegoing, and after 

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discussion with the NASD,this subsidiary has taken steps designed to improve its ability to reporttrades in a timely manner. While we believe that these efforts will beeffective and diminish or eliminate this problem, we cannot make any assurancethat our efforts will be effective. In connection with its currentexaminations, the NASD may seek to impose further fines on us or seek to takeother corrective action.

GFI Securities LLC is also an introducing broker withthe National Futures Association, which we refer to as the NFA, and theCommodity Futures Trading Commission, which we refer to as the CFTC. The NFAand CFTC require their members to fulfill certain obligations, including thefiling of quarterly and annual financial reports. Failure to fulfill theseobligations in a timely manner can result in disciplinary action against thefirm.

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 millionin excess of the minimum amount prescribed in its membership agreement,including a minimum deposit with the MBSCC of $250,000.

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. Our 

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regulated U.K.subsidiaries are subject to “consolidated” regulation, in addition to beingsubject to regulation on a legal entity basis. Consolidated regulation impactsthe regulated entity and its parent holding companies in the U.K, including theregulated entity’s ability to pay dividends or distribute capital.

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 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 required to maintain “brought-in” capital, asdefined, of 50,000,000 Japanese Yen as part of its licensing requirement, inaccordance with the Foreign Securities Firms Law. The branch is also subject tothe JSDA’s financial requirement that revenue plus “brought-in” capital exceeda ratio of 120.0% of relevant expenditure.

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 de France in France. The branch will be subject to the conduct ofbusiness rules of the Autorite Des Marches Financiers (“AMF”) when dealingwith resident customers of France and 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 compliance requirementsof the MAS include, among other things, maintaining stockholders’ equity of3 million Singapore dollars and monitoring GFI Group PTE Ltd.’s tradingpractices and business activities. The MAS regulates the activities of certainof the officers and employees of GFI Group PTE Ltd, and requires regularreports 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 exemption appliesto foreign companies regulated by the FSA in accordance with UK regulatorystandards.

All of our subsidiaries that are subject to foreignnet capital rules have been, 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 other 

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countries. The compliancerequirements of these different overseer bodies may include, but are notlimited to, net capital or stockholders’ equity requirements.

***Changes in Existing Laws and Rules.******  ***Additional legislationand regulations, changes in rules promulgated by the government,regulatory bodies or clearing organizations described above or changes in theinterpretation or enforcement of laws and regulations may directly affect themanner of our operation, our net capital requirements or our profitability. Inaddition, any expansion of our activities into new areas may subject us toadditional regulatory requirements that could adversely affect our business,reputation and results of operations.

**Employees**

At December 31, 2005,we employed 1,151 people. Of these, 777 are brokerage personnel (consisting of694 brokers and 83 trainees and clerks), 148 are technology andtelecommunications specialists and 45 comprise our data and analytics sales, marketingand customer support professionals. Approximately 45% of our employees arebased in North America, 40% 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. RISK FACTORS**

**Economic,political and market factors beyond our control could reduce trading volumes,securities prices and demand for our brokerage services, which could harm ourbusiness and our profitability.**

In each of thethree years in the period ended December 31, 2005, over 94% of ourrevenues were generated by our brokerage operations. As a result, our revenuesand profitability are likely to decline significantly during periods of lowtrading volume in the financial markets in which we offer our services, whichare directly affected by many national and international factors. Any one ofthe following factors, among others, may cause a substantial decline in thefinancial markets in which we offer our services, resulting in reduced tradingvolume. 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. Our profitability would be adversely affected by a declinein revenue because a portion of our costs are fixed. For these reasons,decreases in trading volume or declining prices or credit spreads could have anadverse effect on our business, financial condition or results of operations.

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**We face substantial competition that could negativelyimpact our market share and our profitability.**

The financial servicesindustry generally, and the inter-dealer brokerage businesses in which we areengaged in particular, are very competitive, and we expect competition tocontinue 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 inter-dealerbrokerage firms;

·       electronic multi-dealertrading companies or consortia;

·       other providers of data andanalytics products; and

·       securities, futures andderivatives exchanges and electronic communications networks.

Some of our competitorsoffer a wider range of services, have broader name recognition and have largerclient bases than we do. Some of them may be able to respond more quickly tonew or evolving opportunities, technologies and client requirements than wecan, and may be able to undertake more extensive marketing activities. Ourcompetitors may also seek to hire our brokers, which could result in a loss ofbrokers by us or in increased costs to retain our brokers. In addition to thecompetitors described above, our large institutional clients may increase theamount of trading they do directly with each other rather than through us, inwhich case our revenues could be adversely affected. In particular, severallarge market data and information providers currently offering varying forms ofelectronic trading of the types of financial instruments in which we specializehave announced their intention to expand their electronic trading platforms orto develop new platforms. If we are not able to compete successfully in thefuture, our business, financial condition and results of operations would beadversely 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 on providing brokerage services in less liquidmarkets for complex financial instruments. As the markets for these instrumentsbecome more liquid, we could lose market share to other inter-dealer brokersand electronic multi-dealer brokers who specialize in providing brokerageservices in more liquid markets. If a financial instrument for which we providebrokerage services becomes listed on an exchange, the need for the services ofan inter-dealer broker for that instrument may be severely diminished and, as aresult, the need for our services in relation to that instrument could besignificantly reduced.

**Becausecompetition for the services of brokers is intense, we may not be able toattract and retain the highly skilled brokers we need to support our businessor we may be required to incur additional expense to do so.**

We strive to providehigh-quality brokerage services that allow us to establish and maintainlong-term relationships with our clients. Our ability to continue to providethese services and maintain these relationships depends, in large part, uponour brokers. As a result, we must attract and retain highly qualified brokeragepersonnel. Competition for the services of brokers is intense, especially forbrokers with extensive experience in the specialized markets in which weparticipate or may seek to enter. If we are unable to hire highly qualifiedbrokers, we may not be able to enter new brokerage markets or develop newproducts. If we lose one or more of our brokers in a particular market in whichwe participate, our revenues may decrease and we may lose market share in thatparticular market.

We may not be successfulin our efforts to recruit and retain brokerage personnel. If we fail to attractnew personnel or to retain and motivate our current personnel, or if we incurincreased costs associated with attracting and retaining personnel (such assign-on bonuses to attract new personnel), our business, financial conditionand results of operations may suffer.

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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.

**Weare dependent on our management team, and the loss of any key member of ourteam may prevent us from executing our business strategy effectively.**

Our future successdepends, in large part, upon our management team. In particular, we are highlydependent on the continued services of our chief executive officer and founder,Michael Gooch, and other executive officers who possess extensive financialmarkets knowledge and management skills. Neither Michael Gooch nor ColinHeffron, our president, are bound by employment contracts to remain with us fora specified period of time. We may not be able to find an appropriatereplacement for Michael Gooch, Colin Heffron or any other executive officer ifthe need should arise. In addition, due to the regulated nature of some of ourbusinesses, some of our executive officers, or other key personnel could becomesubject to suspensions or other limitations on the scope of their services tous from time to time. If we lose the services of any executive officers orother key personnel, we may not be able to manage and grow our operationseffectively, enter new brokerage markets or develop new products. We maintain “keyperson” life insurance policies on Michael Gooch, but we do not have any suchpolicies for our other officers or personnel.

**If weare unable to continue to identify and exploit new market opportunities, ourability to maintain 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 atimely and cost-effective basis, our revenues may decline, which wouldadversely affect our profitability.

**If weare unable to manage the risks of internationaloperations effectively, our business could be adversely affected.**

Weprovide services and products to clients in Europe, Asia and Australia throughoffices in London, Paris, Hong Kong, Singapore, Sydney and Tokyo and we mayseek to further expand our operations throughout these regions in the future.On a geographic basis, approximately 42% and 50% of our total revenues for theyears ended December 31, 2005 and 2004, respectively, were generated byour European operations, 50% and 44%, respectively, were generated by our NorthAmerica operations and 8% and 6%, respectively, were generated by ouroperations in the Asia-Pacific region. There are certain additional risksinherent in doing business in international markets, particularly in the regulatedbrokerage industry. These risks include:

·       additional regulatoryrequirements;

·       tariffs and other tradebarriers;

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·       difficulties in recruitingand retaining personnel, and managing international

·       operations;

·       potentially adverse taxconsequences; and

·       reduced protection forintellectual property rights.

If we are unable to manageany of these risks effectively, 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.

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

We generally providebrokerage services to our clients in the form of either agency or matchedprincipal transactions. As described in further detail below, we also engage inunmatched 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 leave them to settle the trade directly. We are exposed tocredit risk for commissions we bill to clients for our agency brokerageservices. Our clients may default on their obligations to us due to disputes,bankruptcy, lack of liquidity, operational failure or other reasons. Any lossesarising from such defaults could adversely affect our financial condition orresults 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.

**Thesecurities settlement process exposes us to risks that may impact our liquidityand profitability. In addition, liability for unmatched trades could adverselyaffect our results of operations and balance sheet.**

Through our subsidiaries,we provide brokerage services by executing transactions for our clients. Anincreasing number of these are “matched principal” transactions in which we actas a “middleman” by serving as a counterparty to both a buyer and a seller inmatching reciprocal back-to-back trades. These transactions are then settledthrough clearing institutions with whom we have a contractual relationship.

In executing matchedprincipal transactions, we are exposed to the risk that one of thecounterparties to a transaction may fail to fulfill its obligations, eitherbecause it is not matched immediately or, even if matched, one party fails todeliver the cash or securities it is obligated to deliver. Our focus on lessliquid markets exacerbates this risk for us because transactions in thesemarkets tend to be more likely not to settle on a timely basis. Adversemovements 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 

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or othermarket disruptions. These failures, difficulties or disruptions could result ina large number of market participants not settling transactions or otherwisenot performing their obligations.

We are subject tofinancing risk in these circumstances because if a transaction does not settleon a timely basis, the resulting unmatched position may need to be financed,either directly by us or through one of our clearing organizations at ourexpense. These charges may be recoverable from the failing counterparty, butsometimes are not. Finally, in instances where the unmatched position orfailure to deliver is prolonged or widespread due to rapid or widespreaddeclines in liquidity for an instrument, there may also be regulatory capitalcharges required to be taken by us, which depending on their size and duration,could limit our business flexibility or even force the curtailment of thoseportions of our business requiring higher levels of capital. Credit orsettlement losses of this nature could adversely affect our financial conditionor 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.

**Wehave market risk exposure from unmatched principal transactions entered into bysome of our equity and credit product brokerage desks.**

We allow certain of ourbrokerage desks to enter into unmatched principal transactions in the ordinarycourse of business for the purpose of facilitating clients’ execution needsand, in a limited number of instances and subject to risk management limits,for the purpose of proprietary trading to arbitrage the value between anexchange traded fund and its component securities. As a result, we have marketrisk exposure on these unmatched principal transactions. Our exposure variesbased on the size of the overall positions, the terms and liquidity of theinstruments brokered, and the amount of time the positions are held before wedispose 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.

**Financialproblems experienced by third parties could affect the markets in which weprovide brokerage services.**

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 

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derivatives as part oftheir trading strategies. Hedge funds typically employ a significant amount ofleverage to achieve their results and, in the past, certain hedge funds havehad difficulty managing this leverage, which has resulted in market-widedisruptions. If one or more hedge funds that was a significant participant in aderivatives market experienced similar problems in the future, that derivativesmarket could be adversely affected and, accordingly, our brokerage revenues inthat market could decrease.

**We operate in a highly regulated industry and wemay face restrictions with respect to the way we conduct certain of ouroperations.**

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 SEC, the NASD,and other agencies extensively regulate the U.S. financial services industry,including certain of our operations in the United States. Some of ourinternational operations are subject to similar regulations in their respectivejurisdictions, including regulations overseen by the FSA in the United Kingdom,the AMF in France, the SFC in Hong Kong, the MAS in Singapore and the JSDA inJapan. These regulatory bodies are responsible for safeguarding the integrityof the securities 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 withclients;

·       capital requirements;

·       financial and reportingpractices;

·       required record keeping andrecord retention procedures;

·       the licensing of employees;

·       the conduct of directors,officers, employees and affiliates;

·       systems and controlrequirements;

·       restrictions on marketing;and

·       client identification andanti-money laundering requirements.

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, FSA or 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.” Our authority to operate as a broker in a jurisdiction is dependent oncontinued registration in that jurisdiction or the maintenance of a properexemption from such registration. Our ability to comply with all applicablelaws and rules is largely dependent on our compliance, credit approval,audit and reporting systems and procedures, as well as our ability to attractand retain qualified compliance, credit approval, audit and risk managementpersonnel. Our systems and procedures may not be effective.

Some of our subsidiariesare subject to regulations regarding changes in control of their ownership.These regulations generally provide that regulatory approval must be obtainedin connection with any transaction resulting in a change in control of thesubsidiary, which may include changes in control of GFI Group Inc. As aresult of these regulations, our future efforts to sell shares or raiseadditional capital may be delayed or prohibited in circumstances in which sucha transaction would give rise to a change in control as defined by theapplicable regulatory body.

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

**Ourregulated subsidiaries are subject to risks associated with net capitalrequirements, and we may not be able to engage in operations that requiresignificant 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 or FSA,which would have a material adverse effect on our business. If these netcapital rules are changed or expanded, or if there is an unusually largecharge against net capital, operations that require the intensive use ofcapital would be limited. Also, our ability to withdraw capital from ourregulated subsidiaries is subject to restrictions, which in turn could limitour ability to pay dividends, repay debt and redeem or purchase shares of ourcommon stock. A large operating loss or charge against net capital couldadversely affect our ability to expand or even maintain our present levels ofbusiness, which could have a material adverse effect on our business. Inaddition, we may become subject to net capital requirements in other foreignjurisdictions in which we currently operate or which we may enter. We cannotpredict our future capital needs or our ability to obtain additional financing.For a further discussion of our net capital requirements, see “Item 1—Business—Regulation.”

**Weare subject to new requirements that we evaluate our internal controls overfinancial reporting under Section 404 of the Sarbanes-Oxley Act and othercorporate governance initiatives that may expose us to certain risks.**

As of December 31, 2006, we will be subject tothe requirements of Section 404 of the Sarbanes-Oxley Act and theSecurities and Exchange Commission rules and regulations require an annualmanagement report on our internal controls over financial reporting, including,among other matters, management’s assessment of the effectiveness of ourinternal control over financial reporting, and an attestation report by ourindependent registered public accounting firm addressing these assessments.

We cannot be certain as to the timing of thecompletion of our evaluation, testing and remediation actions or the impact ofthe same on our operations. If we are not able to implement the requirements ofSection 404 in a timely manner or with adequate compliance, we may besubject to sanctions or investigation by regulatory authorities, including theSEC or the Nasdaq National Market. Moreover, if we are unable to assert thatour internal control over financial reporting is effective in any future period(or if our auditors are unable to express an opinion on the effectiveness ofour internal controls), we could lose investor confidence in the accuracy andcompleteness of our financial reports, which may have an a material adverseeffect on our Company.

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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 toserve as executive officers.

**Ourinvestments in expanding our brokerage and market data and analytics servicesmay not produce substantial revenue.**

We have made, and expectto continue to make, significant investments in our brokerage and market dataand analytics services, including investments in technology and infrastructure,in order to pursue new growth opportunities. With respect to our brokerageservices, we may not receive significant revenue and profit from the hiring ofa new broker or the development of a new brokerage desk. With respect to ourmarket data and analytics services, we may incur substantial development, salesand marketing expenses and expend significant management effort to create a newproduct or service. Even after incurring these costs, we ultimately may notsell any or only small amounts of these products or services. Consequently, ifrevenue does not increase in a timely fashion as a result of these expansioninitiatives, the up-front costs associated with expansion may exceed revenueand reduce our working capital and income.

**Wemay have difficulty 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. We may not be successful in implementing all of the processes thatare necessary to support our growth, which could result in our expensesincreasing faster than our revenues, causing our operating margins andprofitability 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 other companies or businesses, or if we hire new brokeragepersonnel, we may have difficulty integrating their operations.**

To achieve our strategicobjectives, we have acquired or invested in, and in the future may seek toacquire or invest in, other companies and businesses. We also may seek to hirebrokers for new or existing brokerage desks. These acquisitions or new hiresmay be necessary in order for us to enter into or develop new product areas.Acquisitions and new hires entail 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;

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·       the up-front costsassociated with recruiting brokerage personnel, including when establishing anew brokerage desk;

·       failure to achievefinancial or operating objectives; and

·       potential loss of clientsor key employees of acquired companies, businesses or newly**hired brokerage personnel.

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.

**Inthe event of employee 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 employeemisconduct and the precautions taken to prevent and detect employee misconductmay not always be effective. Misconduct by employees could include engaging inunauthorized transactions or activities, failure to properly supervise otheremployees, engaging in improper or unauthorized activities on behalf of clientsor improperly using confidential 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.

**Ourcredit agreement contains restrictive covenants which may limit our workingcapital and 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 otherdistributions;

·        and enter into new linesof businesses that are substantially different from our current lines ofbusiness.

In addition, our 2006 Credit Agreement containscovenants that require us to maintain specified financial ratios and satisfy specifiedfinancial tests. As a result of these covenants and restrictions, we may belimited in how we conduct our business, and we may be unable to raiseadditional financing, to compete 

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effectively or to takeadvantage of new business opportunities. We may not be able to remain incompliance with these covenants 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.

**Computersystems failures, capacity constraints and breaches of security could increaseour operating 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, clearing organizations, software andhardware vendors and back-up services. Our systems, or those of our third partyproviders, may fail or operate slowly, causing one or more of the following:

·       unanticipated disruptionsin service to our clients;

·       slower response times;

·       delays in our clients’trade execution;

·       failed settlement oftrades;

·       decreased client satisfactionwith our services;

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

·       financial losses;

·       litigation or other clientclaims; and

·       regulatory sanctions.

We may experience systems failures from power ortelecommunications outages, acts of God, war, terrorism, human error, naturaldisasters, fire, sabotage, hardware or software malfunctions or defects,computer viruses, intentional acts of vandalism or similar events. Any systemfailure that causes an interruption in service or decreases the responsivenessof our service, including failures caused by client error or misuse of oursystems, could damage our reputation, business and brand name. In addition, ifsecurity measures contained in our systems are breached as a result ofthird-party action, employee error, malfeasance or otherwise, our reputationmay be damaged and 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.

**Wedepend on third-party software licenses. The loss of any of our key licensescould adversely affect our ability to provide our brokerage services.**

We license software fromthird parties, some of which is integral to our business. These licenses aregenerally terminable if we breach our obligations under the licenses or if thelicensor gives us notice in advance of the termination. If any of theserelationships were terminated, or if any of these third parties 

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were tocease doing business, we may be forced to spend significant time and money toreplace the licensed software. These replacements may not be available onreasonable terms, if at all. A termination of any of these relationships couldhave a material adverse effect on our financial condition and results ofoperations.

**Wemust keep up with rapid technological changes in order to compete effectively.**

To remaincompetitive, we must continue to enhance and improve the responsiveness,functionality, accessibility and other features of our software, networkdistribution systems and technologies. The financial services industry ischaracterized by rapid technological change, changes in use and clientrequirements and preferences, frequent product and service introductionsemploying new technologies and the emergence of new industry standards andpractices that could render our existing technology and systems obsolete.Development by our competitors of new electronic trade execution or marketinformation products that gain acceptance in the market could give thosecompetitors a “first mover” advantage that may make it difficult for us toovercome with our own technology. Our success will depend, in part, on ourability to:

·       develop and licensetechnologies useful in our business;

·       enhance our existingservices;

·       develop or acquire newservices and technologies that address the increasingly**sophisticated and varied needs of ourexisting and prospective clients; and

·       respond to technologicaladvances and emerging industry standards and practices on a**cost-effective and timely basis.

The development oftechnology to support our business entails significant technological, financialand business risks. Further, the adoption of new Internet, networking ortelecommunications technologies may require us to devote substantial resourcesto modify and adapt our services. We may not successfully implement newtechnologies or adapt our technology 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 clientrequirements. If we are unable to anticipate and respond to the demand for newservices, products and technologies on a timely and cost-effective basis, andto adapt to technological advancements and changing standards, we may be unableto compete effectively, which could negatively affect our business.

**Wemay not be able to obtain additional financing, if needed, on terms that areacceptable.**

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.

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**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 due toa 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.

**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 trade secret, contract,copyright, trademark and patent law to protect our proprietary technology. Itis possible that third parties may copy or otherwise obtain and use ourproprietary technology without authorization or otherwise infringe on ourrights. We may also face claims of infringement that could interfere with ourability to use technology that is material to our business operations. We mayface limitations or restrictions on the distribution of some of the market datagenerated by our brokerage desks. This may limit the comprehensiveness andquality 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 ofothers or defend against claims of infringement or invalidity. Any suchlitigation, whether successful or unsuccessful, could result in substantialcosts and the diversion of resources and the attention of management, any ofwhich could negatively affect our business.

**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 8% and 7% of our total revenues for theyear ended December 31, 2005 and 2004, 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 50%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 

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pricefor our common stock could be adversely affected if investors perceivedisadvantages to owning our stock as a result of this significant concentrationof share ownership.

**Provisionsof our certificate of incorporation and bylaws, agreements to which we are aparty, regulations to which we are subject and provisions of our stock optionplans could delay or prevent a change in control of our company and entrenchcurrent management.**

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 classifiedboard of directors;

·       do not permit ourstockholders to remove members of our board of directors other than**for cause;

·       do not permit stockholdersto act by written consent or to call special meetings;

·       require certain advancenotice for director nominations and other actions to be taken at**annual meetings of stockholders;

·       require supermajoritystockholder approval with respect 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 “blankcheck” preferred stock by our board of directors**without stockholder approval, which could discourage a takeoverattempt.

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 stockoption plans contain provisions pursuant to which options that areunexercisable or unvested may automatically become exercisable or vested as of thedate immediately prior to certain change of control events. These provisionscould have the effect of dissuading potential acquirors from pursuing mergerdiscussions with us.

**We donot expect to pay 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.

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**The market price of our commonstock may fluctuate in the future, and future sales of our shares couldadversely affect the market price of our common stock.**

The market price of our common stock may fluctuate inthe future depending upon many factors, including our actual results ofoperations and perceived prospects and the prospects of the financialmarketplaces in general, differences between our actual financial and operatingresults and those expected by investors and analysts, changes in analysts’ recommendationsor projections, seasonality, changes in general valuations for companies in ourbusiness segment, changes in general economic or market conditions and broadmarket 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 or otherwise, themarket price of our common stock could decline significantly. Moreover, theperception in the public market that these stockholders might sell shares ofcommon stock could depress the market price of our common stock.

As of December 31, 2005 we had registered underthe Securities Act an aggregate of 1,612,099 shares of our common stock, whichare reserved for issuance upon exercise of outstanding options under our 2000and 2002 Stock Option Plans. In addition, as of December 31, 2005, we hadregistered under the Securities Act 3,000,000 shares of our common stockissuable under the 2004 Equity Incentive Plan. These shares can be sold in thepublic market upon issuance, subject to 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-relatedsecurities in the future at a time and price that we deem appropriate.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

Our executive headquarters are located at 100 WallStreet, New York, New York 10005, where we occupy approximately 79,000 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 Partners is also liable for ourobligations under this lease. Our U.K. offices are located in London at 1Snowden Street, EC2 2DQ, where we occupy approximately 44,000 square feetpursuant to a lease between us and Broadgate West T5 Limited and Broadgate WestT6 Limited that expires on March 31, 2015.  We also lease office space totalingapproximately 21,000 square feet to support our brokerage operations in NewJersey, Texas, New York, Connecticut, Paris, Hong Kong, Singapore, Tokyo andSydney with various lease expirations through 2016.

We believe our facilities will be adequate for ouroperations 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. 

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There is also potentialfor client claims alleging the occurrence of errors in the execution ofbrokerage transactions.

We believe proceedings of these types are common inthe inter-dealer brokerage industry due to its highly competitive nature. Althoughthe ultimate outcome of these proceedings cannot be ascertained at this time,we believe that damages, if any, resulting from such proceedings will not, inthe aggregate, have a material adverse effect on our financial condition, butmay be material to our operating results for any particular period.

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

None.

**PART II**

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

**Market Information**

**Common Stock**

Our common stock has been traded on the NasdaqNational Market 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 28,2006, as reported by Bloomberg Financial Markets, was $60.06.

As of February 28, 2006, we had approximately 54holders of record of our common stock.

Setforth below, for each of the last four fiscal quarters, is the low and highsales prices per share of our common stock as reported by Bloomberg FinancialMarkets.

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

 

**Useof Proceeds of Initial Public Offering**

The effective date of our registration statement(Registration No. 333-116517) filed on Form S-1 relatingto our IPO was January 25, 2005. In our IPO, we sold 3,947,369 shares ofCommon Stock at a price of $21.00 per share and the selling stockholders sold2,788,439 shares (including shares sold pursuant to the underwriters’over-allotment option) of Common Stock at a price of $21.00 per share. Our IPOwas managed on behalf of the underwriters by Citigroup, Merrill Lynch &Company, Banc of America Securities LLC, JP Morgan, and Jefferies &Company, Inc. The offering closed on January 31, 2005. Proceeds to usfrom our IPO, after deduction of the underwriting discounts and commissions ofapproximately $5.8 million and offering costs of approximately$3.4 million, totaled approximately $73.7 million.

Of the $73.7 million raised, approximately$9.7 million was used to repay the outstanding principal amount plusaccrued interest, of our senior subordinated term loan with Jersey Partners.This note was to mature on June 15, 2011, and had an interest rate ofLIBOR + 5.00%, or 7.40%, at December 31, 2004. Pursuant to theterms of the senior subordinated loan agreement, upon the consummation of ourIPO, we were required to pay the loan back in full. In February 2005, weused a portion of the net proceeds from 

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the IPO to pay down infull the then current outstanding balances plus accrued interest of $52.6million under our credit agreement with Bank of America N.A. and certainlenders dated August 23, 2004, which we amended and restated on February 24,2006. We refer to our credit agreement, prior to its amendment and restatement,as the 2004 Credit Agreement. We also used $4.2 million of the net proceedsfrom the IPO to purchase the shares of capital stock of Fenics Limited notowned by us. Further, we used $3.2 million of the net proceeds from the IPO inconnection with newly-hired brokerage personnel in Singapore to buy-out theiremployment contracts with their former employers and $4.0 million for capitalcontributions to certain subsidiaries in Asia to be used for investments in keypersonnel recruitment and for working capital purposes. As of September 30,2005, we had fully utilized our net proceeds from the IPO.

**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 imposed by Delaware corporate law. In addition, oursubsidiaries are permitted to pay dividends to us subject to (i) certainregulatory restrictions related to the maintenance of minimum net capital inthose of our subsidiaries that are subject to net capital requirements imposedby the applicable governmental regulators, and (ii) general restrictionsimposed on dividend payments under the jurisdiction of incorporation ororganization of each subsidiary.

**RecentSales of Unregistered Securities**

For the year ended December 31,2005, we granted a total of 608,359 restricted stock units (“RSUs”) toofficers, directors and employees pursuant to our 2004 Equity Incentive Plan. Thegrant prices of these RSUs ranged from $21.00 to $47.80. These RSUs are to beconverted 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 SecuritiesAct.

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**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing table sets forth selected consolidated financial data for the fiveyears ended December 31, 2005. This selected consolidated financial datashould be read in conjunction with “Item 7—Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and with ourconsolidated financial statements and the notes thereto contained in this Form 10-K.

| ** **                                                             | ** ** | **For the Year Ended December 31,**                                       | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                             | ** ** | **(dollars in thousands except share and per share data)** | ** ** |
| **Consolidated  Statement of Operations Data**                         |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| **Revenues**                                                           |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Brokerage revenues:                                                    |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Agency commissions                                                     |       | $                                                                                                  | 391,583    |   | $ | 262,039 |   | $ | 184,920 |   | $ | 200,492 |   | $ | 169,453 |   |
| Principal transactions                                                 |       | 114,417                                                                                            |       | 101,339 |   | 65,237 |   | 59,359 |   | 42,709 |   |
| Total brokerage revenues                                               |       | $                                                                                                  | 506,000    |   | $ | 363,378 |   | $ | 250,157 |   | $ | 259,851 |   | $ | 212,162 |   |
| Analytics and market data                                              |       | 17,395                                                                                             |       | 16,081 |   | 13,143 |   | 9,615 |   | 6,077 |   |
| Interest income                                                        |       | 4,637                                                                                              |       | 1,578 |   | 1,167 |   | 1,401 |   | 1,543 |   |
| Other income (1)                                                       |       | 5,560                                                                                              |       | 3,983 |   | 1,377 |   | 4,353 |   | 576 |   |
| Total Revenues                                                         |       | $                                                                                                  | 533,592    |   | $ | 385,020 |   | $ | 265,844 |   | $ | 275,220 |   | $ | 220,358 |   |
| Expenses:                                                              |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits                                     |       | 327,345                                                                                            |       | 241,847 |   | 166,276 |   | 174,011 |   | 142,574 |   |
| Impairment of goodwill and intangible asset (2)                        |       | —                                                                                             |       | — |   | — |   | — |   | 38,968 |   |
| Other expenses                                                         |       | 121,958                                                                                            |       | 100,019 |   | 72,219 |   | 74,465 |   | 66,226 |   |
| Total expenses                                                         |       | 449,303                                                                                            |       | 341,866 |   | 238,495 |   | 248,476 |   | 247,768 |   |
| Income (loss) before provision for income taxes and  minority interest |       | 84,289                                                                                             |       | 43,154 |   | 27,349 |   | 26,744 |   | (27,410 | ) |
| Provision for income taxes                                             |       | 36,186                                                                                             |       | 20,031 |   | 12,885 |   | 14,470 |   | 4,436 |   |
| Minority interest                                                      |       | —                                                                                             |       | — |   | — |   | — |   | (30 | ) |
| Net income (loss)                                                      |       | $                                                                                                  | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   | $ | 12,274 |   | ($31,816 | ) |
| **Earnings  Per Share**                                                |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                  |       | $                                                                                                  | 1.80       |   | $ | 1.01 |   | $ | 0.63 |   | $ | 0.59 |   | ($3.13 | ) |
| Diluted                                                                |       | $                                                                                                  | 1.74       |   | $ | 0.95 |   | $ | 0.61 |   | $ | 0.58 |   | ($3.13 | ) |
| **Weighted  average number of shares outstanding**                     |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                  |       | 26,245,628                                                                                         |       | 16,049,655 |   | 16,049,655 |   | 15,786,933 |   | 10,153,711 |   |
| Diluted                                                                |       | 27,699,325                                                                                         |       | 24,334,003 |   | 23,693,418 |   | 21,231,412 |   | 10,153,711 |   |
| Dividends (3)                                                          |       | $                                                                                                  | —     |   | $ | — |   | $ | — |   | $ | 4,536 |   | $ | 33,266 |   |
| **Consolidated  Statement of Financial Conditions Data:**              |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                              |       | $                                                                                                  | 144,148    |   | $ | 105,161 |   | $ | 87,299 |   | $ | 63,707 |   | $ | 33,822 |   |
| Total assets (4)                                                       |       | $                                                                                                  | 576,137    |   | $ | 640,223 |   | $ | 374,809 |   | $ | 276,756 |   | $ | 304,293 |   |
| Total debt, including current portion                                  |       | $                                                                                                  | 31,247     |   | $ | 58,841 |   | $ | 47,997 |   | $ | 44,966 |   | $ | 62,815 |   |
| Redeemable convertible preferred stock                                 |       | —                                                                                             |       | $ | 30,043 |   | $ | 30,043 |   | $ | 30,043 |   | — |   |
| Total stockholders’ equity                                        |       | $                                                                                                  | 238,252    |   | $ | 53,369 |   | $ | 37,778 |   | $ | 23,142 |   | $ | 15,059 |   |
| **Selected  Statistical Data:**                                        |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| Brokerage personnel headcount (5)                                      |       | 777                                                                                                |       | 560 |   | 397 |   | 366 |   | 341 |   |
| Employees                                                              |       | 1,151                                                                                              |       | 868 |   | 668 |   | 655 |   | 572 |   |
| Number of brokerage desks (6)                                          |       | 150                                                                                                |       | 101 |   | 78 |   | 65 |   | 64 |   |
| Broker productivity for the period (7)                                 |       | $                                                                                                  | 778        |   | $ | 757 |   | $ | 648 |   | $ | 721 |   | $ | 685 |   |
| **Brokerage  Revenues by Geographic Region:**                          |       |                                                                                               |       |   |   |   |   |   |   |   |   |
| North America (8)                                                      |       | $                                                                                                  | 256,197    |   | $ | 170,438 |   | $ | 102,920 |   | $ | 108,505 |   | $ | 89,453 |   |
| Europe (8)                                                             |       | 211,125                                                                                            |       | 172,417 |   | 128,743 |   | 137,181 |   | 113,946 |   |
| Asia-Pacific                                                           |       | 38,678                                                                                             |       | 20,523 |   | 18,494 |   | 14,165 |   | 8,763 |   |
| Total                                                                  |       | $                                                                                                  | 506,000    |   | $ | 363,378 |   | $ | 250,157 |   | $ | 259,851 |   | $ | 212,162 |   |

 

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(1)             Other income for the year ended December 31, 2002included $1.4 million from the sale of our treasury repurchase agreementbrokerage desk, as well as the receipt during that period of $1.7 million ofinsurance proceeds resulting from business interruptions in connection with theSeptember 11, 2001 terrorist attacks in New York City.

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(2)             The impairment charge incurred in 2001 was taken inorder to reduce goodwill and an intangible asset associated with the Fenicsacquisition to their estimated fair value.

(3)             In 2002 and 2001, our subsidiary, GFI Group LLC, paiddividends of $4.5 million and $3.3 million, respectively, to JerseyPartners to compensate it for certain tax liabilities in those periods duringwhich Jersey Partners was the sole member of GFI Group LLC. The amount paid in2002 related to Jersey Partners’ tax liabilities for the 11-month periodended November 30, 2001. In addition, on October 1, 2001, GFI GroupLLC paid a dividend to Jersey Partners of $30.0 million in cash andaccounts receivable as part of the reorganization. We do not expect that eitherwe or our subsidiaries will pay dividends to our stockholders in theforeseeable future.

(4)             Total assets included receivables from brokers, dealersand clearing organizations of $208.9 million, $408.2 million,$192.7 million, $118.5 million and $157.5 million at December 31,2005, 2004, 2003, 2002 and 2001, 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.

(5)             Brokerage personnel headcount includes brokers,trainees and clerks. As of December 31, 2005, we employed 694 brokers.

(6)             A brokerage desk is defined as one or more individualbrokers working together at a single location that provide brokerage serviceswith respect to one or more specific financial instruments. Brokerage desks indifferent offices are considered separate desks even if they  focus on the same financial instrument.

(7)             We are presenting broker productivity to show theaverage amount of revenue generated per broker. Broker productivity iscalculated as brokerage revenues divided by average brokerage headcount for theperiod.

(8)             The North America region was previously referred to byus as U.S., which includes operations from offices located in the U.S. Europe,which was previously referred to by us as U.K, includes operations from theU.K. and, in future periods, will include Paris.

**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-Looking Statements” and “Risk Factors” for a discussion of some of theuncertainties, risks and assumptions associated with these statements.*

**Business Environment**

Our business generally benefits from robust tradingvolume 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, insurance companiesand financial institutions, investment funds, trading firms and, increasingly,hedge funds. In 2005, hedge funds numbered approximately 8,000 globally andmanaged more than $1.0 trillion at year-end, up from an estimated $400 millionin 2000. However, net inflows to hedge funds slowed considerably in 2005 to$47.0 billion from $73.6 billion in 2004, as lower 2005 hedge fund returns madeinvestors more selective in their investment decisions.

During 2005, the global business environment wasgenerally positive for our business, with satisfactory volume levels andgenerally modest volatility in global equity and foreign exchange markets, andinstances of more pronounced volatility in certain global credit and energymarkets. Market volatility is driven by a range of external and internalfactors, some of which are market specific and some of which are correlated tomacro-economic conditions.

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The credit marketsexperienced some marked volatility events in 2005 including credit downgradesand bankruptcy filings in the U.S. auto and auto parts, airline and selectedindustrial sectors; terrorist attacks in London; the devastation from Dennis,Katrina, Rita and other hurricanes; and the Federal Reserve Bank raisingshort-term interest rates a total of two percentage points by year-end.  Despite these events, bond prices remainedhigh and yields remained low. The 10-year Treasury note, a barometer forlong-term interest rates, increased slightly to 4.39% for year-end 2005 versus4.21% at the beginning of 2004. NASD TRACE, a reporting system that trackstrading activity in U.S. investment grade, high yield and convertible bonds,reported volumes decreased 19% from 2004. According to The Bond MarketAssociation, corporate bond issuance in the U.S. decreased 6.8% to $678.1billion in 2005, as strong corporate results reduced the need for debtfinancing. However, the size of the markets for over-the-counter (“OTC”) creditderivatives continued to expand as illustrated by the notional value of globaloutstanding OTC credit derivatives which increased 105% at year-end 2005 from$8.4 trillion to $17.3 trillion, according to the latest International Swapsand Derivatives Association (ISDA) market survey. The combination of stronggrowth in the OTC credit derivatives markets with instances of heightenedvolatility in certain corporate bond sectors in which we provide servicespositively affected both our credit derivatives and corporate bond revenues in2005.

More modest volatility inthe global foreign exchange markets during 2005 was likely attributable to anumber of factors including: significant economic damage from HurricanesDennis, Katrina and Rita which led to a short period of uncertainty regardingthe direction of the U.S. economy and short-term interest rates; the FederalReserve instituted rate increases throughout the year raising short-term ratesto 4.25% from 2.25%; and inflationary pressure due to high energy costs. Despitethese factors and a widening of the U.S. trade deficit, the U.S. Dollar enjoyedits best performance in four years as foreign capital sought to take advantageof higher relative interest rates, substantial multinational company profitrepatriation supported the currency and decreased the demand for the Euro dueto the European Union’s inability to reach consensus decreased the demand forthe Euro. According to the latest ISDA market survey, the value of notionalamounts outstanding for interest rate swaps and cross currency swaps grew 16%to $213.2 trillion at year-end 2005. The U.S. Dollar Index, which tracks U.S.Dollar movements versus a basket of six currencies, rose 12.6%.  The U.S. Dollar performed particularly wellversus the Japanese Yen and the Euro. Substantial volatility worldwide innon-U.S. currencies worldwide against the U.S. Dollar benefited our business.

Equity market volatilityincreased in 2005 as evidenced by increases in the Chicago Board OptionsExchange (“CBOE”) Standard & Poor (“S&P) 500 Volatility and CBOEDow Jones Industrial Average (“DJIA”) Volatility indices. Strong globalcorporate earnings gains and low interest rates in 2005 were partially offsetby higher oil prices, rising short-term interest rates and the economicaftermath of strong hurricanes in the U.S. Corporate restructuring in Europeand Japan helped push their stock markets higher, while strong economic growthbenefited Asian emerging markets and Latin American commodity producerscapitalized on higher natural resource prices. International stock marketsoutperformed the U.S. stock markets with the Dow Jones World Index increasing14.4% in 2005 versus 2004. In comparison, the S&P 500 index grew 3% whilethe DJIA retreated 0.6% over the same period. Trading volume of S&P 500 andDJIA stocks increased 10% and 14%, respectively. Similar volume increases werewitnessed on the major German and Japanese indices. The latest ISDA surveyindicated notional amounts outstanding for equity derivatives grew 34% over2005 to $5.6 trillion. Our equity business benefited from both the overallpositive global corporate results and the increase in the number of ourequities brokerage clients in the hedge fund sector.

More pronounced energymarket volatility in 2005 resulted from the combination of oil and natural gassupply disruptions caused by hurricanes, continued Middle-East tensions, andstrong overall demand. These factors drove oil product prices to record highs.Oil, natural gas and gold futures prices on the New York Mercantile Exchange (“NYMEX”)increased substantially in 2005 versus 2004. NYMEX crude oil 

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futures,crude oil options and natural gas futures contracts increased 12.8%, 21.8% and283.8%, respectively, in 2005 versus 2004. Similarly, the IntercontinentalSecurities Exchange reported Brent crude-oil contract volume up 20% versus 2004.Many of the factors above contributed to our revenue increases in oil, naturalgas, and other commodity products.

**Financial Overview**

Ourrevenues have grown from $265.8 million for the year ended December 31,2003 to $533.6 million for the year ended December 31, 2005. The mainfactors contributing to our growth were:

·       the net addition of 85brokerage desks during the three year period ended December 31,**2005, resulting in an increase inbrokerage personnel (consisting of brokers, trainees and clerks) from 366brokerage personnel at January 1, 2003 to 777 brokerage personnel at December 31,2005;

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

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

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

·       the development of our dataand analytical products.

**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 revenuesrepresent revenues generated from our brokerage transactions. We providebrokerage services to our clients in the form of either agency or principaltransactions. In agency transactions, we charge a commission for connectingbuyers and sellers and assisting in the negotiation of the price and othermaterial terms of the transaction. After all material terms of a transactionare agreed upon, we identify the buyer and seller to each other and they thensettle the trade directly. Commissions charged to our clients in agencytransactions vary across the products for which we provide brokerage services.Commissions from agency transactions represented approximately 77%, 72%, and74% of our total brokerage revenue for the years ended December 31, 2005,2004 and 2003, respectively. Commissions from agency transactions arerecognized on the date on which the related trade is made. However, we do notreceive our commissions until our invoice is paid by the client. Clients areinvoiced on a monthly basis.

We generate revenue from principaltransactions on the spread between the buy and sell price of the security thatis brokered. Our principal transactions revenue is primarily derived frommatched principal transactions. In matched principal transactions, we act as amiddleman by serving as counterparty for an identified buyer and an identifiedseller in matching reciprocal back-to-back trades. Because the buyer and sellereach settle their transactions with us rather than with each other, the partiesare able to maintain their anonymity. A very limited number of our brokeragedesks are allowed to enter into unmatched principal transactions to facilitatea customer’s execution needs for transactions initiated by such customers orfor the purpose of proprietary trading to arbitrage the value between anexchange traded fund and its component securities. These unmatched positionsare intended to be held short term. Revenues from principal transactions arerecognized on the date on which the trade is made. Generally, we do not receiveour net proceeds until the settlement date of the transaction, typically one tothree business days after the trade date. Revenue from principal transactionshas been growing in total dollars but decreasing as a percentage of our totalbrokerage revenue and comprised approximately 23%, 28% and 26% of our totalbrokerage revenue for the years ended December 31, 2005, 2004 and 2003,respectively. The decrease in 

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principaltransactions as a percent of total brokerage revenues in 2005 was primarily dueto significant growth in credit derivatives, financial and commodity revenues,all of which are primarily agency transactions.

The performance of ourbrokerage desks is largely dependent on a number of factors, including marketdevelopments affecting the products we broker, the size of transactions, thelocation of the markets, the terms of the instruments brokered, the currency ofthe instruments brokered, commission structure, competition, recruitment ordeparture of key brokers or customers, volatility and the level of tradingactivity in the various products that we broker. Additionally, as marketsmature and have more participants, the resulting competition generally leads tolower commissions or spreads. Accordingly, our strategy is to continually seeknew markets in which we can charge higher commissions, increase our marketshare and trading volumes in existing illiquid markets, and provide electroniccapabilities to more liquid and commoditized markets in order to offset thispotential downward pressure on our brokerage revenues.

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

| ** **                | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(dollars in thousands)**                         | ** ** |
| **BROKERAGE REVENUES:**   |       |                                                         |       |   |   |   |   |
| Credit                    |       | $                                                            | 219,317    |   | $ | 153,089 |   | $ | 115,371 |   |
| Financial                 |       | 116,137                                                      |       | 84,709 |   | 69,101 |   |
| Equity                    |       | 98,795                                                       |       | 71,473 |   | 27,226 |   |
| Commodity                 |       | 71,751                                                       |       | 54,107 |   | 38,459 |   |
| Total brokerage revenues  |       | $                                                            | 506,000    |   | $ | 363,378 |   | $ | 250,157 |   |
| **BROKERAGE  REVENUES:**  |       |                                                         |       |   |   |   |   |
| Credit                    |       | 43.3                                                         | %          | 42.1 | % | 46.1 | % |
| Financial                 |       | 23.0                                                         |       | 23.3 |   | 27.6 |   |
| Equity                    |       | 19.5                                                         |       | 19.7 |   | 10.9 |   |
| Commodity                 |       | 14.2                                                         |       | 14.9 |   | 15.4 |   |
| Total brokerage  revenues |       | 100.0                                                        | %          | 100.0 | % | 100.0 | % |

 

As the chart aboveindicates, our brokerage operations in the credit product category produced asignificant percentage of our total brokerage revenues in each of the lastthree years. We expect that revenues from credit brokerage operations willcontinue to constitute the largest percentage of our total brokerage revenuesfor the foreseeable future. For the year ended December 31, 2005, thepercentage of revenues from the credit product category increased slightly fromthe prior year due to factors including the increase in the number of brokeragepersonnel on our credit desks, the robust credit derivative business, ourinvestment in and sectorization of both credit derivatives and corporate bonds,and continued customer development of correlation trading strategies. 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 the effects of bankruptcies and creditdowngrades in the auto and auto supplies sectors on our corporate bond andcredit derivatives business, and the success of initiatives by us to increaseour presence in certain markets, such as the recent increase in the number ofour equity brokerage desks to capitalize on correlation trading opportunities,the Starsupply transaction and the distribution of our latest CreditMatch®platform in Europe.

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*Credit*

We provide our brokerageservices in a wide range of markets for credit instruments, including creditderivatives, investment grade corporate bonds, high-yield bonds and emergingmarket bonds. The markets for credit derivatives, generally, and the market forcredit default swaps, specifically, have experienced strong growth in the lastthree years. As a result, more competitors have entered these markets.Increased competition has placed downward pressure on the commissions that wecan charge, resulting in lower commission rates. We expect this trend tocontinue in the markets for more widely traded credit derivative products, suchas single-entity credit default swaps. Partially in response to this trend, wehave sought to establish and increase our presence in markets for newer creditderivative products that have fewer competitors and allow for highercommissions, and have developed the CreditMatch® platform to expand ourpresence in the more liquid existing credit derivatives products. We have alsosought to support an increasing movement among our clients to integrate transactionsinvolving certain credit derivatives with other related or correlated financialinstruments. We believe this trend, together with our existing presence in thecredit derivatives market, may permit us to expand our presence in the marketsfor these related or correlated financial instruments, some of which are in thecredit products area and others of which are in the financial and equityproduct areas.

*Financial*

Our financial productsbrokerage services cover a wide range of markets for financial instruments,including foreign exchange options, bond options and repurchase agreements. Ourcustomers increased their trading of foreign exchange options in 2005 due tothe increased volatility from higher short-term interest rates, a stronger thanexpected U.S. Dollar, and economic and inflationary uncertainty caused byhurricanes Dennis, Katrina and Rita. Over the past few years, we have expandedour presence in the financial products area by adding brokerage desks inmarkets for emerging market foreign exchange options, regional interest ratederivatives and non-deliverable forwards contracts. In addition, we expandedour operations in Tokyo, in part, to capitalize on the growth trend in theAsia-Pacific markets for financial products.

*Equity*

We provide brokerageservices in a range of markets for equity products, including U.S. equity,international equity, equity derivatives and GDRs and ADRs. Recently, ourclients have begun to integrate their trading of certain equity and creditderivative products, in an effort to exploit arbitrage opportunities that mayarise from the volatility in price fluctuations of debt and equity instrumentsissued by a company. In response to this trend and our relatively lightpresence in the equity product area compared to our other product categories,we added thirteen new equity brokerage desks globally during 2005 to increaseour presence in the equity product market and expect our brokerage revenues inthis area to increase as a result of the expansion in our product base.

*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, emissionsand pulp and paper. Wet and dry freight derivatives, emissions and pulp andpaper are examples of new product markets in which we have participated in thelast few years as we continue to develop new markets.

Enron Corp. and itsaffiliates were active participants in several of the energy product areas inwhich we provide brokerage services. The bankruptcies of Enron Corp. and otherenergy companies in late 2001 and 2002 caused a disruption in the global energymarkets, which resulted in, among other things, several market participantsceasing or reducing their level of trading activity. This decrease in energymarket 

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participantsbegan to fully evidence itself in the second half of 2002 and was primarilyresponsible for the approximately 37% decrease in our brokerage revenues fromour commodity products area for the year ended December 31, 2003 comparedto 2002. Since 2003, we have seen an increase in activity in the energy marketsin the U.S. and Europe as large financial institutions, primarily investmentbanks, entered the markets and some of the large energy firms recommended theirtrading of energy products.

***Analytics andMarket Data***

In addition to revenuesfrom our brokerage services, we also earn revenues from the sale of ouranalytics and market data products. We offer our clients analytics and marketdata products which are used to build pricing models, develop tradingstrategies and price and revalue their derivative positions. Our Fenics FXcalculator is a widely-used analytical tool in 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.

***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 andEmployee Benefits***

Our principal operatingcost is our compensation and employee benefits expense, which includessalaries, sign-on bonuses, incentive compensation and related employee benefitsand taxes. Our employees can be allocated into three general categories:brokerage employees, data and analytics products employees and administrativeand support employees, which include our executive officers. The mostsignificant component of our overall compensation and employee benefits expenseis the employment costs of our brokerage personnel.

Our compensation andemployee benefits expense for all employees has both a fixed and variablecomponent. Base salaries and benefit costs are primarily fixed for allemployees. Employees also receive bonuses, which constitute the variableportion of our compensation and employee benefits expense. Bonuses forbrokerage personnel are primarily based on the operating results of theirrelated brokerage desk as well as their individual performance. For many of ourbrokerage employees, their bonus constitutes a significant component of theiroverall compensation. Bonuses for other employees generally are more broadlybased on our overall performance. For most of these employees, the bonus istypically a smaller component of their overall compensation than is the casefor our brokerage personnel. Accordingly, bonus 

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costs,and therefore compensation and employee benefits expense, are variable andnormally 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. Bonusesexpensed to all employees represented 50%, 49% and 45% of total compensationand employee benefits expense for the years ended December 31, 2005, 2004and 2003, respectively. Included in these amounts are guaranteed bonuses, whichrepresented 5%, 1% and 1% of total bonuses for the years ended December 31,2005, 2004 and 2003, respectively.

Additionally, we grantsign-on bonuses for certain newly-hired brokers or for certain of our existingbrokers who agree to long-term employment agreements. These sign-on bonuses maybe paid in the form of cash, restricted stock units (“RSUs”) or forgivableloans and are typically amortized over the term of the related employmentagreement, which is generally two to four years. These employment agreementstypically contain repayment or forfeiture provisions for unvested RSUs or allor a portion of the sign-on bonus and forgivable loan should the employeevoluntarily terminate his or her employment or if the employee’s employment isterminated for cause during the initial term of the agreement. Sign-on bonusesexpensed to all employees represented 4%, 4% and 2% of total compensation andemployee benefits expense for the years ended December 31, 2005, 2004 and2003, respectively.

We believe that in certainsituations, we can expand our business into strategic product areas throughrecruitment of experienced brokers who can build successful brokerage desks.Such recruitment may cause us to incur upfront signing bonuses which increasecurrent and future compensation expense as such compensation expense isgenerally recognized over a two to four year period. During 2005, we incurredincreased compensation expense for sign-on bonuses in order to recruit keybrokers for the strategic expansion of our brokerage operations in the equityand credit product areas. Compensation expenses relating to sign-on bonuseshave increased in 2005 to a level that is substantially higher than historicallevels as we further expanded into new product areas. In the current period andthe foreseeable future, we intend to continue to pursue strategic expansionopportunities by using our cash or common stock or a combination thereof tohire brokers or acquire brokerage businesses.

We pay the brokeragepersonnel in our U.K. office in British Pounds. As a result, we are exposed tomovements in foreign currency exchange rates because most of the revenuesassociated with our U.K. operations are received in Euros and U.S. Dollars. Wehave attempted to mitigate this exposure by introducing a policy in 2004 whichprovides that bonuses earned for all brokerage personnel in our U.K. officewill be calculated in U.S. Dollars but paid in foreign currency equivalents.

Compensation and employeebenefits expense also includes expenses related to employee stock options andRSUs. Options issued prior to January 1, 2003 under our 2000 Stock OptionPlan were accounted for using the intrinsic method with compensation expensearising upon issuance of options with exercise prices below the fair marketvalue of the stock at the date of grant and totaling approximately$0.03 million and $0.04 million, for the years ended December 31,2004 and 2003, respectively. The options issued under our 2002 Stock OptionPlan were not exercisable until the consummation of the IPO on January 31,2005. All options issued prior to January 1, 2003 under our 2002 StockOption Plan were modified in the second quarter of 2004 to extend the term ofeach option. Options issued or modified on or after January 1, 2003 areaccounted for using the fair value method provided by Statement of FinancialAccounting Standards No. 123, pursuant to which we expense the fair valuemeasured at the date of grant, or incremental fair value measured at the dateof modification, over the related vesting period. As these options were notexercisable until consummation of the IPO, the fair value calculated as of thedate of grant or modification was recorded in January 2005 to the extentvested. For the year ended December 31, 2005, a total non-cashcompensation charge of approximately $1.3 million was recorded related tostock options granted under the 2002 Stock Option Plan. Additionally, during2005, we issued RSUs to compensate our employees in connection with certainperformance and sign-on bonuses. The RSUs issued were measured at fair valuebased on the market value of our common stock at the date of grant and the 

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relatedcompensation expenses is recognized over their respective vesting term, whichis generally over three years. For the year ended December 31, 2005, atotal non-cash compensation charge of approximately $2.7 million was recordedrelated to RSUs.

***Communications andQuotes***

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. However, we have seen a general reduction intelecommunications rates in recent years, which we attribute to competition inthe telecommunications industry.

Our quote systems expenseconsists primarily of fees for access to market data and related services,primarily provided by Reuters and Bloomberg. Many of these costs are fixedbecause these systems are required regardless of transaction volume. Further,many of our quote systems vendors require one- to two-year service contracts.We have expanded our presence in certain equity products which require greaterusage of information data systems and trade reporting systems. As a result, weexpect quote systems expense to increase 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 brokerage desk to an amount consistent with therevenue productivity of that brokerage desk. This is accomplished by deductingany excess travel and promotion expense from the calculation of bonuscompensation for many of our desks.

***Rent and Occupancy***

Our rent and occupancyexpenses include the costs of leasing, furnishing and maintaining our officesin the North America, Europe and the Asia-Pacific region, including maintainingour technology infrastructure in these offices. During 2005, we substantiallycompleted the move of our U.K. personnel to the new London office space,assumed Starsupply’s North American leases, executed a lease for our premisesin Paris and expanded our operations in Tokyo. Our rent and occupancy expenseincreased in 2005 as a result of these new leases. We incurred $2.0 million induplicate rent and related charges on the new London office space, which webegan occupying in the fourth quarter of 2005. As we expand our business withinexisting locations or to new locations, our rent and occupancy expenses willlikely 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 systems and related support software products, the amortizationof software inventory developed in connection with analytics products to bemarketed to third parties and the amortization of acquired intangible assetswith definite lives. Over the past few years, we have incurred significantcosts in the development of software for internal use as well as for softwareto be marketed externally. As a result, depreciation and amortization expensehas increased over this period. Software developed for internal use isdepreciated once the software is ready for its intended use. Software inventorydeveloped for external sales is amortized once the product is available forgeneral release to clients. We expect that depreciation and amortizationexpense will continue to increase because we continue to incur significantcosts in the development of software for internal use as well as software to bemarketed externally. Additionally, we expect that depreciation and amortizationexpense will increase in connection with purchases of property and equipmentand leasehold improvements resulting from the additional leases we entered intoduring the year.

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***Professional Fees***

Our professional feesinclude fees paid to consultants and other professionals who are engaged tosupport our strategic development of new and existing businesses andtechnologies. Our accounting and legal fees are also included in these costs.As a public company, we are subject to various reporting and corporategovernance requirements, including the requirements of the Sarbanes-Oxley Actof 2002 and the SEC rules and regulations implementing that Act, as wellas recent changes to the Nasdaq National Market rules. We expect ourprofessional fees will increase due to our continuous effort to comply withthese requirements.

***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 generally fluctuates based ontransaction volumes and has increased in recent years due to an increase in thevolume of principal transactions that we executed. We expect our clearing feeswill increase in the future due to the new desks that commenced operations in2005 that largely provide services in the form of principal transactions.

***Interest Expense***

Our interest expenseconsists of interest charged by lenders to us in connection with our loans andlines of credit provided by our 2004 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 the changes in the fair value of the Fenics purchaseobligation (see “Liquidity and Capital Resources” and Note 16 to ourConsolidated Financial Statements for additional detail on the Fenics purchaseobligation), irrecoverable Value Added Tax (“VAT”) incurred in connection withour brokerage and data and analytics operations in the U.K., litigationreserves, general office expenses and other miscellaneous operating expenses.In addition, in 2005, other expenses included a payment in connection with newly-hiredbrokerage personnel in Singapore to buy-out their employment contracts. IrrecoverableVAT represents the portion of VAT we pay in connection with purchases ofservices and products in Europe which cannot be claimed as a credit on our VATreturn. Irrecoverable VAT amounts are determined based on a computed VATrecovery rate.

***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 below and Note 23 to our Consolidated Financial Statements forfurther details.

***Provision for Income Taxes***

Our provision for incometaxes consists of current and deferred tax provisions relating to federal, stateand local taxes, as well as applicable taxes related to foreign subsidiaries.We file a consolidated federal income tax return and combined state andlocal income tax returns. The difference between the statutory income tax rateand our effective tax rate for a given period is primarily a reflection of thetax effects of our foreign operations, general business credits and thenon-deductibility of certain expenses.

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**Results of Operations**

Thefollowing table sets forth our consolidated results of operations for theperiods indicated:

| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**       | ** ** |
| **REVENUES:**                             |       |                                       |       |   |   |   |   |
| Brokerage revenues:                       |       |                                       |       |   |   |   |   |
| Agency commissions                        |       | $                                          | 391,583    |   | $ | 262,039 |   | $ | 184,920 |   |
| Principal transactions                    |       | 114,417                                    |       | 101,339 |   | 65,237 |   |
| Total brokerage revenues                  |       | 506,000                                    |       | 363,378 |   | 250,157 |   |
| Analytics and market data                 |       | 17,395                                     |       | 16,081 |   | 13,143 |   |
| Interest income                           |       | 4,637                                      |       | 1,578 |   | 1,167 |   |
| Other income                              |       | 5,560                                      |       | 3,983 |   | 1,377 |   |
| Total revenues                            |       | 533,592                                    |       | 385,020 |   | 265,844 |   |
| **EXPENSES:**                             |       |                                       |       |   |   |   |   |
| Compensation and employee benefits        |       | 327,345                                    |       | 241,847 |   | 166,276 |   |
| Communications and quotes                 |       | 25,860                                     |       | 20,536 |   | 16,512 |   |
| Travel and promotion                      |       | 24,652                                     |       | 19,511 |   | 14,301 |   |
| Rent and occupancy                        |       | 15,450                                     |       | 10,669 |   | 10,645 |   |
| Depreciation and amortization             |       | 15,284                                     |       | 13,856 |   | 10,297 |   |
| Professional fees                         |       | 10,700                                     |       | 9,468 |   | 7,793 |   |
| Clearing fees                             |       | 13,683                                     |       | 9,816 |   | 3,668 |   |
| Interest                                  |       | 3,635                                      |       | 3,159 |   | 2,470 |   |
| Other expenses                            |       | 13,890                                     |       | 10,353 |   | 6,533 |   |
| Lease termination costs to affiliate      |       | (1,196                                     | )          | 2,651 |   | — |   |
| Total expenses                            |       | 449,303                                    |       | 341,866 |   | 238,495 |   |
| Income before  provision for income taxes |       | 84,289                                     |       | 43,154 |   | 27,349 |   |
| Provision for income taxes                |       | 36,186                                     |       | 20,031 |   | 12,885 |   |
| Net income                                |       | $                                          | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |

 

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

| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **REVENUES:**                             |       |                                       |       |   |   |   |   |
| Brokerage  revenues:                      |       |                                       |       |   |   |   |   |
| Agency commissions                        |       | 73.4                                       | %          | 68.0 | % | 69.6 | % |
| Principal transactions                    |       | 21.4                                       |       | 26.3 |   | 24.6 |   |
| Total brokerage revenues                  |       | 94.8                                       |       | 94.3 |   | 94.2 |   |
| Analytics and market data                 |       | 3.3                                        |       | 4.2 |   | 4.9 |   |
| Interest income                           |       | 0.9                                        |       | 0.4 |   | 0.4 |   |
| Other income                              |       | 1.0                                        |       | 1.1 |   | 0.5 |   |
| Total revenues                            |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| **EXPENSES:**                             |       |                                       |       |   |   |   |   |
| Compensation and employee benefits        |       | 61.3                                       | %          | 62.8 | % | 62.5 | % |
| Communications and quotes                 |       | 4.8                                        |       | 5.3 |   | 6.2 |   |
| Travel and promotion                      |       | 4.6                                        |       | 5.1 |   | 5.4 |   |
| Rent and occupancy                        |       | 2.9                                        |       | 2.8 |   | 4.0 |   |
| Depreciation and amortization             |       | 2.9                                        |       | 3.6 |   | 3.9 |   |
| Professional fees                         |       | 2.0                                        |       | 2.5 |   | 2.9 |   |
| Clearing fees                             |       | 2.6                                        |       | 2.5 |   | 1.4 |   |
| Interest                                  |       | 0.7                                        |       | 0.8 |   | 0.9 |   |
| Other expenses                            |       | 2.6                                        |       | 2.7 |   | 2.5 |   |
| Lease termination costs to affiliate      |       | (0.2                                       | )          | 0.7 |   | 0.0 |   |
| Total expenses                            |       | 84.2                                       | %          | 88.8 | % | 89.7 | % |
| Income before  provision for income taxes |       | 15.8                                       | %          | 11.2 | % | 10.3 | % |
| Provision for income taxes                |       | 6.8                                        |       | 5.2 |   | 4.8 |   |
| Net income                                |       | 9.0                                        | %          | 6.0 | % | 5.5 | % |

 

**Yearended 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 aresult of 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. Principaltransactions increased by $13.1 million, or 12.9%, to $114.4 million for theyear ended December 31, 2005 from $101.3 million for the year ended December 31,2004. Of the total increase in brokerage revenues of $142.6 million,approximately $119.6 million was attributable to revenues generated from ourexisting desks across all product areas. Revenues increased in each of ourproduct categories with most of the increase in our credit product category.

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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. A “restructured” brokerage deskgenerally refers to a brokerage desk that has been created out of a part of anexisting desk in order to allow the brokers on that restructured desk to focuson one or more specific financial instrument or market sector for which theexisting brokerage desk had previously provided brokerage services. Ourinvestment in and development of credit products was highlighted by a creditproduct brokerage personnel increase of 39 to 223 employees at December 31,2005 from 184 employees at December 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 and inflationary fears due to high energy costs,and investment in our foreign exchange and interest rate derivatives business,particularly in Asia. The increase in our financial product brokerage revenueswas generated 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. Ourexisting equity product desks contributed $18.9 million of the total increasein equity product brokerage revenues. The remaining $8.4 million increase inequity product brokerage revenues was attributable to the addition of thirteennew or restructured equity product desks since December 31, 2004. Ourinvestment in and development of equity products was highlighted by an equityproduct brokerage personnel increase of 24 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. Ourexisting 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.

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*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 arrangements in 2005 which deferredcertain compensation costs, would have been 63.4% for the year ended December 31,2005. Although we expect to continue to use share-based compensationarrangements, we expect the decrease we experienced in total compensation andemployee benefits as a percentage of total revenues in 2005 to diminish overthe next several years.

*Communications andQuotes*

Communications and quotesincreased by $5.4 million, or 26.3%, to $25.9 million for the year ended December 31,2005 from $20.5 million from the year ended December 31, 2004. Theincrease was primarily attributable to the increase in brokerage desks andbrokerage 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. This expense,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.

49

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*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. SeeNote 16 to the Consolidated Financial Statements for further discussion of theU.K. lease.

*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. See Note 23 to ourConsolidated Financial Statements for further discussion of the U.K. lease. Anotherfactor that contributed to the increase in depreciation and amortizationexpense was the increase of amortization of intangibles as a result of theacquisition of Starsupply 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.

*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 2004 Credit Agreement resulting from a decrease inborrowings.

*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 the Fenicspurchase obligations offset by a decrease in irrecoverable VAT relating topurchases in communications and quotes in the U.K. and a decrease in othergeneral office and miscellaneous expenses.

50

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*Lease TerminationCosts to Affiliate*

Lease termination costs decreased by $3.9 million, or144.4%, to a gain of $1.2 million for the year ended December 31, 2005from $2.7 million in expense for the year ended December 31, 2004. Leasetermination costs to affiliate represents the estimated lease termination costsin connection with the termination of the lease for our former primary officein the U.K., which we leased from an affiliate. In December 2004, weentered 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). InApril 2005, the Company and the affiliate executed an amendment to thelease termination agreement entered into in December 2004. The amendmentaccelerated termination of the lease to April 2005 and required theCompany to pay a termination charge of £0.2 million (or $0.4 million). As aresult of the amendment, in the second quarter of 2005, the Company reduced itslease termination liability by approximately £1.2 million (or $2.3 million).Further, the Company signed a new eighteen-month sublease agreement with theaffiliate with 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, due to a higher level ofpre-tax income, the effects of non-deductible expenses were reduced.

**Yearended December 31, 2004 Compared to the Year Ended December 31, 2003**

***Overview***

Net income for the yearended December 31, 2004 was $23.1 million as compared to net incomeof $14.5 million for the year ended December 31, 2003, an increase of$8.6 million or approximately 59.3%. Total revenues increased by$119.2 million, or 44.8%, to $385.0 million for the year ended December 31,2004 from $265.8 million for the prior year. Our increased revenues wereprimarily due to increased brokerage revenues across each of our productcategories. Total expenses increased by $103.4 million, or 43.3%, to$341.9 million for the year ended December 31, 2004 from$238.5 million for the prior year. Expenses increased primarily because ofincreased compensation expense, which was attributable to an increase inperformance-based bonuses as a result of higher revenues, and higher sign-onbonuses for the year ended December 31, 2004.

***Revenues***

*Brokerage Revenues*

Total brokerage revenues increased by$113.2 million or 45.2%, to $363.4 for the year ended December 31,2004 from $250.2 million for the year ended December 31, 2003. Agencycommissions increased by $77.1 million, or 41.7% to $262.0 millionfor the year ended December 31, 2004 as compared to $184.9 millionfor the year ended December 31, 2003. Principal transactions increased by$36.1 million, or 55.4%, to $101.3 million for the year ended December 31,2004 from $65.2 million for the year ended December 31, 2003. Of thetotal increase in brokerage revenues of $113.2 million, approximately$52.2 million was attributable to the addition of thirty-four new orrestructured brokerage desks across all 

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product areas since thebeginning of the year. Revenues increased in each of our product categorieswith most of the increase in our equity product category.

The increase in equity products brokerage revenues ofapproximately $44.2 million was primarily attributable to the addition often new or restructured brokerage desks that generated approximately$25.3 million of brokerage revenues for the year ended December 31,2004. The remaining increase of $18.9 million in brokerage revenues forthe equity products was generated from our existing brokerage desks with ourequity derivative desks alone accounting for the majority of this increase.

The increase in credit product brokerage revenues ofapproximately $37.7 million was attributable to $17.9 million inbrokerage revenues generated by the addition of twelve new or restructuredbrokerage desks and continued revenue generated by our existing brokeragedesks, primarily our credit derivatives and corporate bond desks.

The increase in commodity products brokerage revenuesof approximately $15.6 million was primarily due to the increase of fournew brokerage desks that generated $7.2 million in brokerage revenues andincreased brokerage revenues generated by existing desks as a result of thecontinuing recovery in the energy product markets and the expansion of our wetshipping desk.

The increase in financialproducts brokerage revenues of approximately $15.6 million was primarilyattributable to the performance from both new or restructured and existingbrokerage desks, primarily non-deliverable forward, interest rate and swaptionsdesks.

*Analytics andMarket Data*

Revenues from ouranalytics and market data products increased by $3.0 million, or 22.9%, to$16.1 million for the year ended December 31, 2004 from$13.1 million for the year ended December 31, 2003. This increase wasprimarily attributable to our data distribution agreement with a third party,which generated $2.7 million in revenues for the year ended December 31,2004 as compared to $1.6 million for the year ended December 31,2003.

*Interest Income*

Interest income increasedby $0.4 million, or 33.3%, to $1.6 million for the year ended December 31,2004 as compared to $1.2 million for the year ended December 31,2003. The increase was mainly attributable to the higher level of average cashbalances during the year.

*Other Income*

Other income increased by$2.6 million to $4.0 million for the year ended December 31,2004 as compared to $1.4 million for the year ended December 31,2003. Other income for the year ended December 31, 2004 mainly consistedof transactional net gains (losses) based on foreign currency fluctuations, netgains (losses) on foreign exchange derivative contracts and proceeds receivedby us from a litigation settlement related to an employment contract disputewith one of our competitors.

***Expenses***

*Compensation andEmployee Benefits*

Compensation and employee benefits expenses increasedby $75.5 million, or 45.4%, to $241.8 million for the year ended December 31,2004 from $166.3 million for the year ended December 31, 2003. Theincrease was primarily attributable to an increase in the number of brokeragepersonnel from 397 at December 31, 2003 to 560 at December 31, 2004,an increase in performance-related brokerage bonuses of $40.9 million andan increase in expense related to sign-on bonuses of $6.2 million. Totalincrease in sign-

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on bonuses for newly hiredbrokers in 2004 resulted from the expansion of our brokerage operations inequity, credit and commodity products.

Total compensation andemployee benefits as a percentage of total revenues increased slightly to 62.8%at December 31, 2004 from 62.5% at December 31, 2003.

*Communications andQuotes*

Communications and quotesincreased by $4.0 million, or 24.2%, to $20.5 million for the yearended December 31, 2004 from $16.5 million from the year ended December 31,2003. The increase was primarily attributable to the increase in brokeragedesks and brokerage personnel.

*Travel andPromotion*

Travel and promotionincreased by $5.2 million, or 36.4%, to $19.5 million for the yearended December 31, 2004 from $14.3 million for year ended December 31,2003. This expense, as a percentage of our total brokerage revenues for theyear ended December 31, 2004 decreased slightly to 5.4% from 5.7% for theyear ended December 31, 2003. We believe this decrease was due to theimplementation of a policy that seeks to limit travel and promotion expenseattributable to each brokerage desk to an amount consistent with the revenueproductivity of that desk.

*Rent and Occupancy*

Rent and occupancyincreased slightly to $10.7 million for the year ended December 31, 2004from $10.6 million for the year ended December 31, 2003.

*Depreciation andAmortization*

Depreciation andamortization expense increased by $3.6 million, or 35.0%, to$13.9 million for the year ended December 31, 2004 from$10.3 million for the year ended December 31, 2003. This increasereflects depreciation of capitalized development costs of several softwareprojects that we began amortizing at the end of 2003 and the first quarter of2004 and $0.6 million of accelerated depreciation related to certainlong-lived assets to be abandoned as a result of the early termination of ourprimary U.K. lease.

*Professional Fees*

Professional feesincreased by $1.7 million, or 21.8%, to $9.5 million for the yearended December 31, 2004 from $7.8 million for the year ended December 31,2003. This increase was primarily due to the increase in information technologyconsulting, audit, tax, internal audit outsourcing and legal fees.

*Clearing Fees*

Clearing fees increased by$6.1 million, or 164.9%, to $9.8 million for the year ended December 31,2004 from $3.7 million for the year ended December 31, 2003. Thisincrease was due to a higher volume in the number of principal transactionsexecuted during the year ended December 31, 2004 as compared to the yearended December 31, 2003. Principal transactions are generally settledthrough third party clearing organizations that charge us a fee for theirservices. Fees paid to floor brokers are included in clearing fees.

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*Interest Expense*

Interest expense increased by $0.7 million, or28.0%, to $3.2 million for the year ended December 31, 2004 from$2.5 million for the year ended December 31, 2003. The increase wasprimarily due to increased interest charges on third party clearing accountsrelated to our brokerage operations.

*Other Expenses*

Other expenses increasedby $3.9 million, or 60.0%, to $10.4 million for the year ended December 31,2004 from $6.5 million for the year ended December 31, 2003. Theincrease was primarily attributable to an increase in fair value of the Fenicspurchase obligation, the write-off of certain unrealizable asset balances andan increase in other general office and miscellaneous expenses, such ascharitable contributions, dues and subscriptions and bank charges.

*Lease TerminationCosts to Affiliate*

Lease termination costs toaffiliate for the year ended December 31, 2004 were $2.7 million.These costs represent the estimated lease termination costs in connection withour primary lease in the U.K., which we leased from an affiliate. See above forfurther discussion.

*Provision forIncome Taxes*

Our provision for incometaxes totaled $20.0 million for the year ended December 31, 2004 and$12.9 million for the year ended December 31, 2003. Our effective taxrate was approximately 46.4% for the year ended December 31, 2004 ascompared to 47.1% for the year ended December 31, 2003. The reduction inthe effective tax rate was primarily due to decreases in state and local incometaxes and promotion expenses, as well as increases in business tax credits,offset by an increase in taxes related to foreign operations.

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**Quarterly Results of Operations**

Thefollowing table sets forth, by quarter, our unaudited statement of operationsdata for the period from January 1, 2004 to December 31, 2005.Results of any period are not necessarily indicative of results for a fullyear.

| ** **           | ** ** | **Quarter Ended**               | ** ** |
|----------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **December 31,  2005**          | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| ** **           | ** ** | **(dollars in thousands)** | ** ** |
| **Revenues**         | ** ** |                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage  revenues: |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |

| Agency commissions (a)                      |   |   | $       | 104,335 |   |   |    | $      | 98,559 |    |   | $      | 100,718 |   |   | $      | 87,971  |       |   |   | $      | 73,366     | ** ** |   |   | $          | 69,705 | ** ** |   |       | $      | 60,589 | ** ** |   |   | $ | 58,379 | ** ** |   |
|---------------------------------------------|--------|--------|---------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|---------|------------|--------|--------|--------|------------|------------|--------|--------|------------|--------|------------|--------|------------|--------|--------|------------|--------|--------|---|--------|------------|--------|
| Principal transactions (a)                  |   |   | 31,250  |    |   |   | 27,420  |   |   | 27,635  |   |   | 28,112  |   |   |   | 25,627  | ** ** |   |   | 24,977 | ** ** |       |   | 26,978 | ** ** |   |       | 23,757 | ** ** |   |
| Total brokerage revenues                    |   |   | 135,585 |    |   |   | 125,979 |   |   | 128,353 |   |   | 116,083 |   |   |   | 98,993  | ** ** |   |   | 94,682 | ** ** |       |   | 87,567 | ** ** |   |       | 82,136 | ** ** |   |
| Analytics and market data                   |   |   | 3,388   |    |   |   | 3,894   |   |   | 4,711   |   |   | 5,402   |   |   |   | 3,732   | ** ** |   |   | 3,664  | ** ** |       |   | 4,012  | ** ** |   |       | 4,673  | ** ** |   |
| Interest income                             |   |   | 1,458   |    |   |   | 1,236   |   |   | 883     |   |   | 1,060   |   |   |   | 776     | ** ** |   |   | 356    | ** ** |       |   | 170    | ** ** |   |       | 276    | ** ** |   |
| Other income (loss)                         |   |   | (145    | )       |   |   | (420    | )      |   | 6,376   |   |   | (251    | )      |   |   | 1,597   | ** ** |   |   | 1,077  | ** ** |       |   | 701    | ** ** |   |       | 608    | ** ** |   |
| Total revenues                              |   |   | 140,286 |    |   |   | 130,689 |   |   | 140,323 |   |   | 122,294 |   |   |   | 105,098 | ** ** |   |   | 99,779 | ** ** |       |   | 92,450 | ** ** |   |       | 87,693 | ** ** |   |
| **Expenses**                                |   |   |    |    |   |   |    |   |   |    |   |   |    |   |   |   |    | ** ** |   |   |   | ** ** |       |   |   | ** ** |   |       |   | ** ** |   |
| Compensation and employee benefits (b) |   |   | 89,511  |    |   |   | 81,461  |   |   | 80,896  |   |   | 75,477  |   |   |   | 66,224  | ** ** |   |   | 62,062 | ** ** |       |   | 58,475 | ** ** |   |       | 55,086 | ** ** |   |
| Communications and quotes                   |   |   | 7,064   |    |   |   | 6,656   |   |   | 6,341   |   |   | 5,799   |   |   |   | 5,341   | ** ** |   |   | 5,196  | ** ** |       |   | 5,325  | ** ** |   |       | 4,674  | ** ** |   |
| Travel and promotion                        |   |   | 7,017   |    |   |   | 5,833   |   |   | 6,041   |   |   | 5,761   |   |   |   | 6,251   | ** ** |   |   | 4,382  | ** ** |       |   | 4,930  | ** ** |   |       | 3,948  | ** ** |   |
| Rent and occupancy                          |   |   | 3,447   |    |   |   | 4,662   |   |   | 3,913   |   |   | 3,428   |   |   |   | 2,479   | ** ** |   |   | 2,861  | ** ** |       |   | 2,756  | ** ** |   |       | 2,573  | ** ** |   |
| Depreciation and amortization (b)           |   |   | 4,159   |    |   |   | 3,434   |   |   | 3,599   |   |   | 4,092   |   |   |   | 4,060   | ** ** |   |   | 3,411  | ** ** |       |   | 3,243  | ** ** |   |       | 3,142  | ** ** |   |
| Professional fees                           |   |   | 2,507   |    |   |   | 2,797   |   |   | 2,927   |   |   | 2,469   |   |   |   | 2,676   | ** ** |   |   | 2,848  | ** ** |       |   | 2,178  | ** ** |   |       | 1,766  | ** ** |   |
| Clearing fees                               |   |   | 3,858   |    |   |   | 3,480   |   |   | 2,974   |   |   | 3,371   |   |   |   | 3,623   | ** ** |   |   | 2,743  | ** ** |       |   | 2,385  | ** ** |   |       | 1,065  | ** ** |   |
| Interest expenses                           |   |   | 1,016   |    |   |   | 778     |   |   | 597     |   |   | 1,244   |   |   |   | 1,076   | ** ** |   |   | 838    | ** ** |       |   | 666    | ** ** |   |       | 579    | ** ** |   |
| Other expenses                              |   |   | 1,855   |    |   |   | 2,217   |   |   | 5,809   |   |   | 4,009   |   |   |   | 3,343   | ** ** |   |   | 2,299  | ** ** |       |   | 2,686  | ** ** |   |       | 2,025  | ** ** |   |
| Lease termination costs to affiliate        |   |   | 1,070   |    |   |   | —  |   |   | (2,266  | )      |   | —  |   |   |   | 2,651   | ** ** |   |   | — | ** ** |       |   | — | ** ** |   |       | — | ** ** |   |
| Total expenses                              |   |   | 121,504 |    |   |   | 111,318 |   |   | 110,831 |   |   | 105,650 |   |   |   | 97,724  | ** ** |   |   | 86,640 | ** ** |       |   | 82,644 | ** ** |   |       | 74,858 | ** ** |   |
| Income before  provision for taxes          |   |   | 18,782  |    |   |   | 19,371  |   |   | 29,492  |   |   | 16,644  |   |   |   | 7,374   | ** ** |   |   | 13,139 | ** ** |       |   | 9,806  | ** ** |   |       | 12,835 | ** ** |   |
| Provision for  income taxes                 |   |   | 7,363   |    |   |   | 8,523   |   |   | 12,810  |   |   | 7,490   |   |   |   | 4,017   | ** ** |   |   | 5,266  | ** ** |       |   | 4,716  | ** ** |   |       | 6,032  | ** ** |   |
| Net income                                  |   |   | $       | 11,419  |   |   |    | $      | 10,848 |    |   | $      | 16,682  |   |   | $      | 9,154   |       |   |   | $      | 3,357      | ** ** |   |   | $          | 7,873  | ** ** |   |       | $      | 5,090  | ** ** |   |   | $ | 6,803  | ** ** |   |

 

 

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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,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| **Revenues**                                | ** ** |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Brokerage  revenues:                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency commissions (a)                 |       |                        | 74.4       | % |   |   | 75.4 | % |   |   | 71.8 | % |   |   | 72.0 | % |   |   | 69.8 | % |   |   | 69.9 | % |   |   | 65.5 | % |   |   | 66.6 | % |   |
| Principal transactions (a)             |       |                        | 22.3       |   |   |   | 21.0 |   |   |   | 19.7 |   |   |   | 23.0 |   |   |   | 24.4 |   |   |   | 25.0 |   |   |   | 29.2 |   |   |   | 27.1 |   |   |
| Total brokerage revenues                    |       |                        | 96.7       |   |   |   | 96.4 |   |   |   | 91.5 |   |   |   | 95.0 |   |   |   | 94.2 |   |   |   | 94.9 |   |   |   | 94.7 |   |   |   | 93.7 |   |   |
| Analytics and market data                   |       |                        | 2.4        |   |   |   | 3.0 |   |   |   | 3.4 |   |   |   | 4.4 |   |   |   | 3.6 |   |   |   | 3.6 |   |   |   | 4.3 |   |   |   | 5.3 |   |   |
| Interest income                             |       |                        | 1.0        |   |   |   | 0.9 |   |   |   | 0.6 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |   | 0.4 |   |   |   | 0.2 |   |   |   | 0.3 |   |   |
| Other income (loss)                         |       |                        | (0.1       | ) |   |   | (0.3 | ) |   |   | 4.5 |   |   |   | (0.2 | ) |   |   | 1.5 |   |   |   | 1.1 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |
| Total revenues                              |       |                        | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **Expenses**                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and employee benefits (b) |       |                        | 63.8       | % |   |   | 62.3 | % |   |   | 57.6 | % |   |   | 61.7 | % |   |   | 63.1 | % |   |   | 62.2 | % |   |   | 63.3 | % |   |   | 62.8 | % |   |
| Communications and quotes                   |       |                        | 5.0        |   |   |   | 5.1 |   |   |   | 4.6 |   |   |   | 4.8 |   |   |   | 5.1 |   |   |   | 5.2 |   |   |   | 5.8 |   |   |   | 5.3 |   |   |
| Travel and promotion                        |       |                        | 5.0        |   |   |   | 4.5 |   |   |   | 4.3 |   |   |   | 4.7 |   |   |   | 5.9 |   |   |   | 4.4 |   |   |   | 5.4 |   |   |   | 4.5 |   |   |
| Rent and occupancy                          |       |                        | 2.5        |   |   |   | 3.6 |   |   |   | 2.8 |   |   |   | 2.8 |   |   |   | 2.4 |   |   |   | 2.9 |   |   |   | 3.0 |   |   |   | 2.9 |   |   |
| Depreciation and amortization (b)           |       |                        | 3.0        |   |   |   | 2.6 |   |   |   | 2.6 |   |   |   | 3.3 |   |   |   | 3.9 |   |   |   | 3.4 |   |   |   | 3.5 |   |   |   | 3.6 |   |   |
| Professional fees                           |       |                        | 1.8        |   |   |   | 2.1 |   |   |   | 2.1 |   |   |   | 2.0 |   |   |   | 2.5 |   |   |   | 2.9 |   |   |   | 2.4 |   |   |   | 2.0 |   |   |
| Clearing fees                               |       |                        | 2.8        |   |   |   | 2.7 |   |   |   | 2.1 |   |   |   | 2.8 |   |   |   | 3.4 |   |   |   | 2.7 |   |   |   | 2.6 |   |   |   | 1.2 |   |   |
| Interest expenses                           |       |                        | 0.7        |   |   |   | 0.6 |   |   |   | 0.4 |   |   |   | 1.0 |   |   |   | 1.0 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |   | 0.7 |   |   |
| Other expenses                              |       |                        | 1.3        |   |   |   | 1.7 |   |   |   | 4.1 |   |   |   | 3.3 |   |   |   | 3.2 |   |   |   | 2.3 |   |   |   | 2.9 |   |   |   | 2.3 |   |   |
| Lease termination costs to affiliate   |       |                        | 0.8        |   |   |   | — |   |   |   | (1.6 | ) |   |   | — |   |   |   | 2.5 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total expenses                              |       |                        | 86.7       | % |   |   | 85.2 | % |   |   | 79.0 | % |   |   | 86.4 | % |   |   | 93.0 | % |   |   | 86.8 | % |   |   | 89.6 | % |   |   | 85.3 | % |   |
| Income before provision for taxes           |       |                        | 13.3       |   |   |   | 14.8 |   |   |   | 21.0 |   |   |   | 13.6 |   |   |   | 7.0 |   |   |   | 13.2 |   |   |   | 10.4 |   |   |   | 14.7 |   |   |
| Provision for income taxes                  |       |                        | 5.2        |   |   |   | 6.5 |   |   |   | 9.1 |   |   |   | 6.1 |   |   |   | 3.8 |   |   |   | 5.3 |   |   |   | 5.1 |   |   |   | 6.9 |   |   |
| Net income                                  |       |                        | 8.1        | % |   |   | 8.3 | % |   |   | 11.9 | % |   |   | 7.5 | % |   |   | 3.2 | % |   |   | 7.9 | % |   |   | 5.3 | % |   |   | 7.8 | % |   |

 

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(a)              During the fourth quarter 2005, we became aware thatrevenues generated by certain desks were not properly classified between agencycommissions and  principal transactionsfor the first three quarters of 2005. Consequently, we have properlyreclassified the agency commissions and principal transactions for thesequarters. Agency commissions, as previously reported, were $89,479, $99,279 and$89,675 for first, second and third quarter of 2005, respectively. Principaltransactions, as previously reported, were $26,604, $29,074 and $36,304 forfirst, second and third quarter of 2005, respectively. There was no impact ontotal brokerage revenues.

(b)             During the fourth quarter 2005, we identified certainsoftware development costs that were expensed as compensation and employeebenefits in prior quarters of 2005 rather than capitalized. We have properlycapitalized these expenses in the fourth quarter, resulting in a reduction of$1,999 in compensation and employee benefits expense and an increase inamortization of $136. Of the $1,999 reduction in compensation and employeebenefits expense, approximately $416, $752 and $831 was related to the first,second and third quarter of 2005, respectively.

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

| ** **               | ** ** | **Quarter Ended**               | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **December 31,  2005**          | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 30,  2004** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
| **Brokerage  Revenues:** | ** ** |                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
|                          |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Credit                    |   |   | $      | 55,443  |   |   |   | $      | 51,472  |   |   | $      | 60,749  |   |   | $      | 51,653  |   |   |   | $      | 36,304 |   |   |   | $      | 42,315 |   |   | $ | 37,247 |   |   | $ | 37,223 |   |   |
|---------------------------|--------|--------|--------|---------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|---|--------|--------|--------|
| Financial                 |   |   | 29,213 |    |   |   | 30,804 |   |    | 29,835 |   |   | 26,285  |   |   |   | 24,870  |   |   |   | 20,377 |   |   | 18,922 |   |   | 20,540 |   |   |
| Equity                    |   |   | 29,931 |    |   |   | 25,993 |   |    | 21,869 |   |   | 21,002  |   |   |   | 21,753  |   |   |   | 18,656 |   |   | 18,515 |   |   | 12,549 |   |   |
| Commodity                 |   |   | 20,998 |    |   |   | 17,710 |   |    | 15,900 |   |   | 17,143  |   |   |   | 16,066  |   |   |   | 13,334 |   |   | 12,883 |   |   | 11,824 |   |   |
| Total brokerage  revenues |   |   | $      | 135,585 |   |   |   | $      | 125,979 |   |   | $      | 128,353 |   |   | $      | 116,083 |   |   |   | $      | 98,993 |   |   |   | $      | 94,682 |   |   | $ | 87,567 |   |   | $ | 82,136 |   |   |
| **Brokerage  Revenues:**  |   |   |        |    |   |   |        |   |    |        |   |   |    |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                    |   |   | 40.9   | %       |   |   | 40.8   | %      |    | 47.3   | %      |   | 44.5    | %      |   |   | 36.7    | %      |   |   | 44.7   | %      |   | 42.6   | %      |   | 45.3   | %      |   |
| Financial                 |   |   | 21.5   |    |   |   | 24.5   |   |    | 23.2   |   |   | 22.6    |   |   |   | 25.1    |   |   |   | 21.5   |   |   | 21.6   |   |   | 25.0   |   |   |
| Equity                    |   |   | 22.1   |    |   |   | 20.6   |   |    | 17.0   |   |   | 18.1    |   |   |   | 22.0    |   |   |   | 19.7   |   |   | 21.1   |   |   | 15.3   |   |   |
| Commodity                 |   |   | 15.5   |    |   |   | 14.1   |   |    | 12.4   |   |   | 14.8    |   |   |   | 16.2    |   |   |   | 14.1   |   |   | 14.7   |   |   | 14.4   |   |   |
| Total brokerage  revenues |   |   | 100.0  | %       |   |   | 100.0  | %      |    | 100.0  | %      |   | 100.0   | %      |   |   | 100.0   | %      |   |   | 100.0  | %      |   | 100.0  | %      |   | 100.0  | %      |   |

 

**Liquidity and Capital 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. In August 2004, we enteredinto the 2004 Credit Agreement that provided for a revolving credit facility ina principal amount of $80.0 million, which included a letter of credit facilitythat has a sub-limit of $30.0 million. The 2004 Credit Agreement could havebeen increased to $100.0 million with the consent of the lenders. Borrowingsunder the 2004 Credit Agreement were used to repay in full our outstandingborrowings under our previous credit facility (the “2002 Credit Facility”). In February 2006, we amended and restated our2004 Credit Agreement. See Note 24 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, 2005, we had $144.1 million of cash and cash equivalentscompared to $105.2 million and $87.3 million at December 31, 2004 and2003, 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,

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash provided by  operating activities              |       | $        | 15,653     |     | $          | 15,212   |       | $ | 28,924 |   |
| Cash used in  investing activities                  |       | (35,735  | )          | (7,795   | )          | (7,804   | )          |
| Cash provided by  financing activities              |       | 58,889   |       | 10,574   |       | 2,761    |       |
| Effects of  foreign currency translation adjustment |       | 180      |       | (129     | )          | (289     | )          |
| Increase in cash and  cash equivalents              |       | $        | 38,987     |     | $          | 17,862   |       | $ | 23,592 |   |

 

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. Cashprovided by 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. The $56.1million 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 

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accrued compensation andother liabilities. Cash provided by operating activities was $15.2 million forthe year ended December 31, 2004 and consisted of net income of $23.1million adjusted for non-cash items of $14.0 million and $21.9 million ofworking capital. Cash provided by operating activities was $28.9 million forthe year ended December 31, 2003 and consisted of net income of $14.5million adjusted for non-cash items of $9.2 million and $5.3 million of workingcapital.

Cash used in investing activities was $35.4 millionfor the year ended December 31, 2005 as compared to $7.8 million for eachof the years ended December 31, 2004 and 2003. The increase in cash usedin investing activities during 2005 as compared to 2004 and 2003 was primarilyattributable to the cash used for the acquisition of assets and certainliabilities of Starsupply, the acquisition of the minority interest in Fenicsand the purchase of property, equipment and leasehold improvements, offset byproceeds received from foreign exchange derivative contracts.

Cash provided by financing activities was $58.9million for the year ended December 31, 2005 as compared to $10.6 millionfor the year ended December 31, 2004. The cash provided by financingactivities for the year ended December 31, 2005 reflected net proceeds of$73.7 million received from the IPO and $13.3 million from the exercise ofstock options and warrant, offset by the repayment of a $9.3 million loan notepayable to JPI and $68.5 million of net repayments of amounts under our 2004Credit Facility. Cash provided by financing activities was $10.6 million forthe year ended December 31, 2004 as compared to $2.8 million for the yearended December 31, 2003. Net borrowing under the revolving portion of our 2002 Credit Facility decreased by $3.5million for the year ended December 31, 2004 as compared to the year endedDecember 31, 2003, which was offset by the repayment of the loan notepayable to JPI and the net repayments of amounts under our Credit Facility.

On February 24, 2006, we amended and restated theterms of our 2004 Credit Agreement with the Bank of America and certainlenders, which we refer to as the 2006 Credit Agreement. The 2006 CreditAgreement provides for maximum borrowings to be increased from $80.0 millionunder the 2004 Credit Agreement to $135.0 million under the 2006 CreditAgreement and extends the expiration date from August 23, 2007 toFebruary 24, 2011. Under the 2006 Credit Agreement, loans will bear interestof the London Interbank Offered Rate LIBOR plus a margin determined by ourconsolidated leverage ratio as defined in the 2006 Credit Agreement. The 2006Credit Agreement contains covenants which restricts, among other things, ourability to borrow, pay dividends, distribute assets, guarantee debts of othersand lend funds to affiliated companies and contains criteria on the maintenanceof certain financial statement amounts and ratios, all as defined in theagreement. At December 31, 2005, there were $31.8 million in outstandingborrowings and $6.5 million pursuant to letters of credit under our 2004 CreditAgreement. At December 31, 2005, we had $41.7 million of availabilityunder the 2004 Credit Agreement and we were in compliance with all of our obligationsunder the 2004 Credit Agreement, as amended. We are currently in compliancewith all of our obligations under the 2006 Credit Agreement.

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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 and GFI Group PTE Ltd. These operatingsubsidiaries are subject to minimum capital requirements and/or licensing andfinancial requirements imposed by their respective market regulators that areintended to ensure general financial soundness and liquidity based on certainminimum capital, licensing and financial requirements. U.S. and U.K.regulations prohibit a registered broker-dealer from repaying borrowingsof its parent or affiliates, paying cash dividends, making loans to its parentor affiliates or otherwise entering into transactions that result in asignificant reduction in its regulatory net capital position without priornotification or approval from its principal regulator. Our non-regulatedsubsidiaries are not subject to these restrictions. The capital structures ofeach of our broker-dealer subsidiaries are designed to provide each withcapital and liquidity consistent with its business and regulatory requirements.

GFI Securities LLC is subject to the net capital rules underthe Exchange Act and the Commodity Exchange Act in the U.S. As of December 31,2005, GFI Securities LLC had Net Capital, as defined under the Exchange Act, of$44.7 million, which was $44.5 million in excess of its required minimum netcapital 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 31,2005, GFI Securities Limited had financial resources, as defined by theFSA, of $23.9 million, which was $9.8 million in excess of its requiredfinancial resources of $14.1 million. As of December 31, 2005, GFIBrokers Limited had financial resources, as defined by the FSA, of $14.1million, which was $5.6 million in excess of its required financial resourcesof $8.5 million.

GFI Securities Limited’s Japanese branch is requiredto maintain “brought-in” capital, as defined, of 50,000 Japanese Yen as part ofits licensing requirement, in accordance with the Foreign Securities Firms Law.Additionally, GFI Securities Limited is subject to the JSDA’s financialrequirement that revenue plus “brought-in” capital exceed a ratio of 120.0% ofrelevant expenditure. At December 31, 2005, GFI Securities Limited met thelicensing requirement by maintaining “brought-in” capital of 50,000 JapaneseYen (approximately $424) as part of the Foreign Securities Firms Law.Additionally, GFI Securities Limited’s revenue plus “brought-in” capital ratiowas 656%, which exceeded the JSDA’s financial requirement by approximately536%.

GFI Securities Limited’s Paris branch was establishedthrough the exercise of its passport right to open a branch in an EEA state. Thisbranch commenced operation on February 1, 2006. The establishment of thebranch was approved by FSA and acknowledged by Banque de France in France. Thebranch 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 to holdan Australian financial services license under the Australian Securities andInvestments 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, 2005, GFI (HK)Securities LLC had net capital of approximately $1.1 million, which was $0.7million in excess of its required minimum net capital of $0.4 million.

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, 2005, GFI Group PTE Ltd had stockholders’equity of 4.2 million Singapore dollars (approximately $2.5 

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million), which was 1.2million Singapore dollars (approximately $0.7) in excess of its requiredstockholders’ equity.

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

We believe that, based on current levels of operationsand anticipated growth, our cash from operations, together with cash currentlyavailable and our ability to borrow under our 2006 Credit Agreement, will besufficient to fund our operations for at least the next twelve months. Poorfinancial results, unanticipated expenses, unanticipated acquisitions orunanticipated strategic investments could give rise to additional financingrequirements sooner than we expect. There can be no assurance that equity ordebt 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.

In January 2005, wecompleted our IPO and received net proceeds of $73.7****million after deducting the underwriting discount andexpenses of the offering. We used a portion of the net proceeds from the IPO torepay in full the outstanding principal plus accrued interest of$9.7 million on the note held by Jersey Partners. In February 2005,we used a portion of the net proceeds from the IPO to pay down in full theoutstanding balance plus accrued interest of $52.6 million under our 2004Credit Agreement. We also used $4.2 million of the net proceeds from the IPO topurchase the remaining Fenics Limited shares not currently owned by us. Further,we used $3.2 million of the net proceeds from the IPO in connection withnewly-hired brokerage personnel in Singapore to buy-out their employmentcontracts with their former employers and $4.0 million for capitalcontributions to certain subsidiaries in Asia to be used for investments in keypersonnel recruitment and for working capital purposes. As of September 30,2005, we had fully utilized our net proceeds from the IPO.

**ContractualObligations and Commitments**

Thefollowing table summarizes certain of our contractual obligations as of December 31,2005:

| ** **                   | ** ** | **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)            |       | $                                         | 31,924     |   |   | $ | 31,924 |   |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Operating Leases  (2)        |       | 48,983                                    |       |   | 4,659 |   |   | 15,831 |   | 13,307 |   |   | 15,186 |   |   |
| Purchase  Obligations (3)    |       | 9,255                                     |       |   | 6,570 |   |   | 2,685 |   | — |   |   | — |   |   |
| **Total**                    |       | $                                         | 90,162     |   |   | $ | 43,153 |   |   | $ | 18,516 |   | $ | 13,307 |   |   | $ | 15,186 |   |   |

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(1)          Amounts listed underNotes Payable represent outstanding borrowings under our 2004 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,it included interest due of $119 which was paid in January 2006. In February 2006,we amended and restated our 2004 Credit Agreement. See Notes 10 and 24 to theConsolidated Financial Statements for further details regarding the 2004 CreditAgreement and the 2006 Credit Agreement, respectively.

(2)          Amounts listed under Operating Leases includethe future minimum rental commitments relating to our Christopher Street leasein London, which premises we vacated in February 2006. The future minimumrental commitments include obligations for the period covering January 2006through February 2008, at which time we can terminate the lease without apenalty. See Note 24 to the 

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Consolidated FinancialStatements for further details. Additionally, it includes the future minimumrental commitments relating to our Hewett Street lease in London. We vacatedthe Hewett Street premises in November 2005; however, we are obligated topay the remaining rent plus other related charges through October 2006. SeeNote 23 to our Consolidated Financial Statements for further details.

(3)          Amountslisted under Purchase Obligations include agreements for quotes with variousinformation service providers.  Additionally, it includes purchase commitmentsfor capital expenditures relating to our primary lease in the U.K. and thelease for our Tokyo office.

**Off-Balance Sheet Entities**

We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes.

**CriticalAccounting Policies 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 believed are reasonable under the circumstances. Webelieve that the accounting estimates employed and the resulting balances arereasonable; however, actual results may differ from these estimates underdifferent assumptions or conditions.

An accounting policy isdeemed to be critical if it requires an accounting estimate to be made based onassumptions about matters that are highly uncertain at the time the estimate ismade; if different estimates reasonably could have been used; or if changes inthe estimate that are reasonably likely to occur periodically could materiallyimpact the financial statements. We believe the following critical accountingpolicies reflect the significant estimates and assumptions used in thepreparation of the Consolidated 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. These unmatched positionsare intended to be held short term. Brokerage revenues and related expensesfrom agency and principal transactions are recognized on a trade date basis. Wedo not 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 ofour allowance for doubtful accounts based on the financial condition of ourclients, the length of time receivables are past due and our historicalexperience with the particular client. 

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Also, ifwe know of a client’s inability to meet its financial obligations, we record aspecific provision for doubtful accounts for estimated losses resulting fromthe inability of that client to make payments. The amount of the provision willbe charged against the amounts due to reduce the receivable to the amount wereasonably believe will be collected. If the financial condition of one of ourclients were to deteriorate, resulting in an impairment of its ability to makepayments, an additional provision could be required. Due to changing economicbusiness and market conditions, we review the provision monthly and makechanges to the provision as appropriate. Our allowance for doubtful accounts atDecember 31, 2005 was $3.2 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,  *Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed*.SFAS No. 86 provides for the capitalization of computer software that isto be used as an integral part of a product or process to be sold or leased,after technological feasibility has been established for the software and allresearch and development activities for the other components of the product orprocess have been completed. We cease capitalizing costs when the product isavailable for general release to our customers. Software inventory is stated atthe lower of cost or net realizable value, which is based on projected revenues.We amortize the costs based on the greater of the ratio of current year revenueto current year revenue plus projected revenue or straight-line, generally overthree years. Amortization begins when a product is available for generalrelease to customers.

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 acharge to our operating results.

*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 such projects.Capitalized costs are ratably amortized, using the straight-line method, overthe estimated useful lives which are typically over three years. Our judgmentas to which costs to capitalize, when to begin capitalizing such costs and whatperiod to amortize the costs over, may materially affect our results of operations.If management determines that the fair value of the software is less than thecarrying value, an impairment loss would be recognized in an amount equal tothe 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 

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that thefair value of the intangible asset is less than its carrying value, animpairment loss would be recognized in an amount equal to the differencebetween 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. Considerablejudgment is necessary to estimate the probability and amount of any loss fromsuch contingencies. An accrual is made when it is probable that a liability hasbeen incurred or an asset has been impaired and the amount of loss can bereasonably estimated. We accrue a liability for the estimated costs ofadjudication or settlement of asserted and unasserted claims existing as of thebalance sheet date. We have recorded reserves for certain contingencies towhich we may have exposure, such as reserves for certain income tax and litigationcontingencies and contingencies related to the employer portion of NationalInsurance Contributions in the U.K. We disclose asserted claims when it is atleast reasonably possible that an asset had been impaired or a liability hadbeen incurred as of the date of the financial statements and unasserted claimswhen it 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.

**Income Taxes**

In accordance with SFAS No. 109,  *Accountingfor Income Taxes*, we provide for income taxes using the asset and liabilitymethod under which deferred income taxes are recognized for the estimatedfuture tax effects attributable to temporary differences and carry-forwardsthat result from events that have been recognized either in the financialstatements or the income tax returns, but not both. The measurement of currentand deferred income tax liabilities and assets is based on provisions ofenacted tax laws. Valuation allowances are recognized if, based on the weightof available evidence, it is more likely than not that some portion of thedeferred tax assets will not be realized. Our interpretation of complex tax lawmay impact our measurement of current and deferred income taxes.

We are subject to regular examinations by the InternalRevenue Service, taxing authorities in foreign countries, and states in whichwe have significant business operations. We regularly assess the likelihood ofadditional assessments in each taxing jurisdiction resulting from on-going andsubsequent years’ examinations. Included in our current tax expense are chargesto 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 our effectivetax rate.

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**Recent Accounting Pronouncements**

In March 2005, the SEC staff issued StaffAccounting Bulletin (“SAB”) No. 107 to provide guidance on SFAS No. 123(R),Share-Based Payments, (SFAS No. 123(R)). SAB No. 107 provides thestaff’s view regarding the valuation of share-based payment arrangements forpublic companies. In particular, SAB No. 107 provides guidance related toshare-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions suchas expected volatility and expected term), the accounting for certainredeemable financial instruments issued under share-based payment arrangements,the classification of compensation expense, non-GAAP financial measures, firsttime adoption of SFAS No. 123(R), the modification of employee shareoptions prior to the adoption of SFAS No. 123(R) and disclosure inManagement’s Discussion and Analysis subsequent to the adoption of SFAS No. 123(R).SAB No. 107 became effective March 29, 2005. In April 2005, theSEC modified the effective date of SFAS No. 123(R) to be as of thefirst reporting period of the first fiscal year beginning after June 15,2005. The SEC’s modification of the effective date did not change theaccounting required by SFAS No. 123(R).

Effective January 1, 2006, the Company adoptedSFAS No. 123(R) using the modified prospective application transitionmethod. The adoption of SFAS No. 123(R) did not have a significantimpact on the Company’s financial position or results of operations. Prior tothe adoption of SFAS No. 123(R), benefits of tax deductions in excess ofrecognized compensation costs were reported as operating cash flows. SFAS No. 123(R) requiresthe excess tax benefits be reported as financing cash flow rather than as a reductionof taxes paid.

Upon the adoption of SFAS No. 123(R), the Companywill recognize a net gain of approximately $0.1 million as a cumulative effectof a change in accounting principle in the first quarter of 2006 resulting fromthe requirement to estimate forfeitures at the date of grant instead ofrecognizing them as incurred. The Company estimated the forfeiture rates basedon historical experience.

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*(“FIN 47”). FIN 47clarifies that the term conditional asset retirement obligation as used in SFASNo. 143, refers to a legal obligation to perform an asset retirementactivity in which the timing and/or method of settlement are conditional on afuture event that may or may not be within the control of the entity. Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. The liability for the conditional asset retirementobligation should be recognized when incurred. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 is effectivefor fiscal periods beginning after December 15, 2005. The adoption of FIN47 will not have a significant impact on the Company’s results of operations orfinancial position.

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISLOSURE ABOUTMARKET 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.

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**Foreign Currency Exposure 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, *Accountingfor Derivative Instruments and Hedging Activities*, as amended.  The gain or loss on derivatives designated ascash flow hedges is included in other comprehensive income in the period thatchanges in fair value occur and is reclassified to income in the same periodthat the hedged item affects income. At December 31, 2005, we hadoutstanding Foreign Exchange Derivative Contracts to purchase and sell foreigncurrency with notional amounts translated into U.S. Dollars of $73.9 million.We would have received $2.2 million at December 31, 2005 to settle thesecontracts, which represents the fair value. At December 31, 2005, if theEuro strengthened by 10% against the U.S. Dollar, it would decrease the fairvalue of these contracts and, as a result, accumulated other comprehensiveincome would decrease by approximately $3.8 million, net of tax.

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 trade 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 strengthened by 10% against the U.S.Dollar and the U.S. Dollar strengthened by 10% against the British Pound, thenet impact to our net income would have been a reduction of approximately $1.5million as of December 31, 2005.

**Interest Rate Risk**

We had $31.8 million invariable-rate debt outstanding at December 31, 2005. 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 $0.1 million.

**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 principal andagency businesses. Our brokers may only execute transactions for clients thathave been approved by our credit committee following review by our creditdepartment. Our credit approval process generally includes verification of keyfinancial information and operating data and anti-money laundering verificationchecks. Our credit review process includes consideration of independent creditagency reports and a visit to the entity’s premises, if necessary. We havedeveloped and utilize a proprietary, electronic credit 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 

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creditsupport. Counterparties are reviewed for continued credit approval on at leastan annual basis, and the results are provided to the credit committee.Maintenance procedures include reviewing current audited financial statementsand publicly available information on the client, collecting data from creditrating agencies where available and reviewing any changes in ownership, titleor capital of the client. In the last five years, we have had no materiallosses due to the nonpayment of commissions receivable.

**Principal Transactions**

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 by physical delivery of the underlying instrument.

Our matched principal trades have continued to grow ascompared to the 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 and clearingorganizations and payables to brokers, dealers and clearing organizations onour consolidated statement of financial condition primarily represent thesimultaneous purchase and sale of the securities associated with those matchedprincipal transactions that have not settled as of their stated settlementdates. Our experience has been that substantially all of these transactionsultimately 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 orsecurities it is obligated to deliver. Our focus on less liquid and over thecounter markets exacerbates this risk for us because transactions in thesemarkets are less likely to settle on a timely basis. Adverse movements in theprices of securities that are the subject of these transactions can increaseour risk. In addition, widespread technological or communication failures, suchas those which occurred as a result of the terrorist attacks on September 11,2001 and the blackout in the eastern portion of the United States in August 2003,as well as actual or perceived credit difficulties or the insolvency of one ormore large or visible market participants, could cause market-wide creditdifficulties or other market disruptions. These failures, difficulties ordisruptions could result in a large number of market participants not settlingtransactions or otherwise 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 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 principal transactions,miscommunications and other errors by our clients or us can arise whereby atransaction 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 

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market movements prior todisposition. Although out trades usually become known at the time of, or lateron the day of, the trade, it is possible that they may not be discovered untillater in the settlement process. When out trades are discovered, our policy isto have the unmatched position disposed of promptly, whether or not thisdisposition would result in a loss to us. The occurrence of out tradesgenerally rises with increases in the volatility of the market and, dependingon their number and amount, such out trades have the potential to have amaterial adverse effect on our financial condition and results of operations.Transactions done on an agency 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 or for the purpose of proprietary trading to arbitrage thevalue between an exchange traded fund and its component securities. As aresult, we have market risk exposure on these unmatched principal transactions.Our exposure varies based on the size of the overall positions, the terms ofthe instruments brokered, and the amount of time the positions are held beforewe dispose of the position. We do not track our exposure to unmatched positionson an intra-day basis; however, we attempt to mitigate our market risk on thesepositions by hedging our exposure. These unmatched positions are intended to beheld short term. . However, due to a number of factors, including the nature ofthe position and access to the market on which it trades, we may not be able tomatch the position or effectively hedge our exposure 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 thesepositions to market.

We attempt to manage our market risk exposure from anyproprietary trading activities through the establishment and monitoring oftrading policies, which include limiting those brokerage desks that areauthorized to enter into unmatched positions, limiting types of transactionsthat may be executed on an unmatched basis and by setting position and capitalat risk limits.

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 credit monitoring system, which provides management with twice dailycredit reports that analyze credit concentration.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEPENDENT AUDITORS’ REPORT**

**Table of Contents**

| Report of Independent  Registered Public Accounting Firm         |   | 69 |   |
|------------------------------------------------------------------|--------|----|--------|
| Consolidated Statements of Financial Position                    |   | 70 |   |
| Consolidated Statements of Income                                |   | 71 |   |
| Consolidated Statements of Comprehensive Income                  |   | 72 |   |
| Consolidated Statements  of Cash Flows                           |   | 73 |   |
| Consolidated Statements of Changes in Stockholders’  Equity |   | 74 |   |
| Notes  to Consolidated Financial Statements                      |   | 75 |   |

 

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**REPORT OF INDEPENDENT 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, 2005 and 2004, 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, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on the financial statements based onour 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. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of GFI Group Inc. and subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005, inconformity with accounting principles generally accepted in the United Statesof America.

/s/ Deloitte & Touche LLP

New York, New YorkMarch 22, 2006

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**GFI GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF FINANCIAL CONDITION(Dollars in thousands except share and per share amounts)**

| ** **                                                                                                                                                                                                                                                                                | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                |       |                 |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                 |       | $                    | 144,148    |   | $ | 105,161 |   |
| Deposits with clearing organizations                                                                                                                                                                                                                                                      |       | 7,824                |       | 8,833 |   |
| Accrued commissions receivable, net of allowance for  doubtful accounts                                                                                                                                                                                                                   |       | 89,727               |       | 50,665 |   |
| Receivables from brokers, dealers and clearing  organizations                                                                                                                                                                                                                             |       | 208,938              |       | 408,241 |   |
| Property, equipment and leasehold improvements, net                                                                                                                                                                                                                                       |       | 31,674               |       | 25,449 |   |
| Software inventory, net                                                                                                                                                                                                                                                                   |       | 5,687                |       | 3,495 |   |
| Goodwill                                                                                                                                                                                                                                                                                  |       | 26,683               |       | 11,482 |   |
| Intangible assets, net                                                                                                                                                                                                                                                                    |       | 2,355                |       | 1,439 |   |
| Other assets                                                                                                                                                                                                                                                                              |       | 59,101               |       | 25,458 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                              |       | $                    | 576,137    |   | $ | 640,223 |   |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                    |       |                 |       |   |   |
| LIABILITIES                                                                                                                                                                                                                                                                               |       |                 |       |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                      |       | $                    | 88,628     |   | $ | 64,097 |   |
| Accounts payable and accrued expense                                                                                                                                                                                                                                                      |       | 22,455               |       | 21,560 |   |
| Payables to brokers, dealers and clearing  organizations                                                                                                                                                                                                                                  |       | 165,766              |       | 376,065 |   |
| Notes payable, net                                                                                                                                                                                                                                                                        |       | 31,247               |       | 49,591 |   |
| Loan note payable                                                                                                                                                                                                                                                                         |       | —               |       | 9,250 |   |
| Income taxes payable                                                                                                                                                                                                                                                                      |       | —               |       | 10,336 |   |
| Other liabilities                                                                                                                                                                                                                                                                         |       | 28,914               |       | 23,041 |   |
| Lease termination payable to affiliate                                                                                                                                                                                                                                                    |       | 875                  |       | 2,871 |   |
| Total Liabilities                                                                                                                                                                                                                                                                         |       | $                    | 337,885    |   | $ | 556,811 |   |
| Commitments and  contingencies                                                                                                                                                                                                                                                            |       |                 |       |   |   |
| Series C redeemable convertible preferred stock,  $0.01 par value; none authorized and outstanding at December 31, 2005;  35,373,704 shares authorized; 3,723,545 shares outstanding at  December 31, 2004 (liquidation value of $41.5 million at  December 31, 2004) |       | —               |       | 30,043 |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                                                                                                                                                |       |                 |       |   |   |
| Convertible preferred stock, $0.01 par value; none  authorized and outstanding at December 31, 2005; (liquidation value of  $29.6 million at December 31, 2004)                                                                                                                 |       | —               |       | 29,069 |   |
| Preferred stock,  $0.01 par value; 5,000,000 shares authorized none outstanding at  December 31, 2005; none authorized or outstanding at December 31,  2004                                                                                                                     |       |                 |       |   |   |
| Class A common stock, $0.01 par value; none  authorized and outstanding at December 31, 2005; 100,000,000 authorized;  5,893,846 outstanding at December 31, 2004                                                                                                          |       | —               |       | 59 |   |
| Common stock, $0.01 par value; 100,000,000 shares  authorized and 27,904,568 shares outstanding at December 31, 2005;  300,000,000 shares authorized; 10,155,809 outstanding at December 31,  2004                                                                                   |       | 279                  |       | 102 |   |
| Additional paid in capital                                                                                                                                                                                                                                                                |       | 195,360              |       | 35,162 |   |
| Retained earnings (accumulated deficit)                                                                                                                                                                                                                                                   |       | 44,790               |       | (3,313 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                      |       | (2,177               | )          | (7,710 | ) |
| Total Stockholders’ Equity                                                                                                                                                                                                                                                           |       | 238,252              |       | 53,369 |   |
| TOTAL LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                  |       | $                    | 576,137    |   | $ | 640,223 |   |

 

See notes to consolidated financial statements

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

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUES:                                    |       |                                       |       |   |   |   |   |
| Brokerage  revenues:                         |       |                                       |       |   |   |   |   |
| Agency commissions                           |       | $                                          | 391,583    |   | $ | 262,039 |   | $ | 184,920 |   |
| Principal transactions                       |       | 114,417                                    |       | 101,339 |   | 65,237 |   |
| Total brokerage revenues                     |       | 506,000                                    |       | 363,378 |   | 250,157 |   |
| Analytics and market data                    |       | 17,395                                     |       | 16,081 |   | 13,143 |   |
| Interest income                              |       | 4,637                                      |       | 1,578 |   | 1,167 |   |
| Other income                                 |       | 5,560                                      |       | 3,983 |   | 1,377 |   |
| Total revenues                               |       | 533,592                                    |       | 385,020 |   | 265,844 |   |
| EXPENSES:                                    |       |                                       |       |   |   |   |   |
| Compensation and employee benefits           |       | 327,345                                    |       | 241,847 |   | 166,276 |   |
| Communications and quotes                    |       | 25,860                                     |       | 20,536 |   | 16,512 |   |
| Travel and promotion                         |       | 24,652                                     |       | 19,511 |   | 14,301 |   |
| Rent and occupancy                           |       | 15,450                                     |       | 10,669 |   | 10,645 |   |
| Depreciation and amortization                |       | 15,284                                     |       | 13,856 |   | 10,297 |   |
| Professional fees                            |       | 10,700                                     |       | 9,468 |   | 7,793 |   |
| Clearing fees                                |       | 13,683                                     |       | 9,816 |   | 3,668 |   |
| Interest                                     |       | 3,635                                      |       | 3,159 |   | 2,470 |   |
| Other expenses                               |       | 13,890                                     |       | 10,353 |   | 6,533 |   |
| Lease termination costs to affiliate         |       | (1,196                                     | )          | 2,651 |   | — |   |
| Total Expenses                               |       | 449,303                                    |       | 341,866 |   | 238,495 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES     |       | 84,289                                     |       | 43,154 |   | 27,349 |   |
| PROVISION FOR  INCOME TAXES                  |       | 36,186                                     |       | 20,031 |   | 12,885 |   |
| NET INCOME                                   |       | $                                          | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| EARNINGS PER SHARE                           |       |                                       |       |   |   |   |   |
| Basic                                        |       | $                                          | 1.80       |   | $ | 1.01 |   | $ | 0.63 |   |
| Diluted                                      |       | $                                          | 1.74       |   | $ | 0.95 |   | $ | 0.61 |   |
| WEIGHTED AVERAGE SHARES  OUSTANDING BASIC    |       |                                       |       |   |   |   |   |
| Class A common stock                    |       | 484,426                                    |       | 5,893,846 |   | 5,893,846 |   |
| Common stock                                 |       | 25,761,202                                 |       | 10,155,809 |   | 10,155,809 |   |
| WEIGHTED AVERAGE SHARES  OUTSTANDING DILUTED |       | 27,699,325                                 |       | 24,334,003 |   | 23,693,418 |   |

 

See notes to consolidated financial statements

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

| ** **                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| NET INCOME                                                                    |       | $                                          | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                           |       |                                       |       |   |   |   |   |
| Unrealized gain  (loss) on foreign derivative exchange contracts, net  of tax |       | 5,353                                      |       | (7,598 | ) | 417 |   |
| Foreign currency  translation adjustment, net of tax                          |       | 180                                        |       | (129 | ) | (289 | ) |
| COMPREHENSIVE INCOME                                                          |       | $                                          | 53,636     |   | $ | 15,396 |   | $ | 14,592 |   |

 

See notes to consolidated financial statements

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

| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 15,284                                     |       | 13,856 |   | 10,297 |   |
| Amortization of loan fees                                                          |       | 400                                        |       | 270 |   | 142 |   |
| Provision for doubtful accounts                                                    |       | 649                                        |       | 815 |   | (559 | ) |
| Loss on disposal of fixed assets                                                   |       | —                                     |       | — |   | 86 |   |
| Deferred compensation                                                              |       | 4,110                                      |       | 195 |   | 44 |   |
| (Benefit) provision for deferred taxes                                             |       | 9,666                                      |       | (4,344 | ) | (771 | ) |
| Loss on foreign currency exchange for notes payable                                |       | 93                                         |       | - |   | 128 |   |
| Loss (gain) on Fenics Purchase Obligation                                          |       | 2,030                                      |       | 570 |   | (198 | ) |
| Gain on foreign exchange derivative contracts                                      |       | (7,344                                     | )          | — |   | — |   |
| Lease termination payable to affiliate                                             |       | (1,195                                     | )          | 2,651 |   | — |   |
| (Increase)  decrease in operating assets:                                          |       |                                       |       |   |   |   |   |
| Deposits with clearing organizations                                               |       | 1,009                                      |       | (888 | ) | (845 | ) |
| Accrued commissions receivable                                                     |       | (40,098                                    | )          | (22,981 | ) | 838 |   |
| Receivables from brokers, dealers and clearing  organizations                      |       | 199,303                                    |       | (215,562 | ) | (74,130 | ) |
| Software inventory                                                                 |       | (3,215                                     | )          | (1,584 | ) | (1,755 | ) |
| Other assets                                                                       |       | (40,788                                    | )          | (6,941 | ) | 692 |   |
| Increase (decrease) in  operating liabilities:                                     |       |                                       |       |   |   |   |   |
| Accrued compensation                                                               |       | 24,531                                     |       | 21,521 |   | (3,111 | ) |
| Accounts payable and accrued expenses                                              |       | 516                                        |       | (486 | ) | 1,995 |   |
| Payables to brokers, dealers and clearing  organizations                           |       | (210,298                                   | )          | 198,375 |   | 77,547 |   |
| Income taxes payable                                                               |       | (169                                       | )          | 4,070 |   | 1,651 |   |
| Other liabilities                                                                  |       | 13,769                                     |       | 2,552 |   | 2,409 |   |
| Cash paid to affiliate for lease termination                                       |       | (703                                       | )          | — |   | — |   |
| Cash provided by operating activities                                              |       | 15,653                                     |       | 15,212 |   | 28,924 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Cash used for business acquisitions and intangible  assets                         |       | (19,631                                    | )          | — |   | (198 | ) |
| Purchase of property, equipment and leasehold  improvements                        |       | (18,740                                    | )          | (7,795 | ) | (7,626 | ) |
| Disposal of property and equipment                                                 |       | —                                     |       | — |   | 20 |   |
| Proceeds from foreign exchange derivative contracts                                |       | 2,636                                      |       | — |   | — |   |
| Cash used in investing activities                                                  |       | (35,735                                    | )          | (7,795 | ) | (7,804 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                                       |       |   |   |   |   |
| Repayment of notes payable                                                         |       | (68,500                                    | )          | (3,000 | ) | (7,500 | ) |
| Proceeds from notes payable                                                        |       | 49,712                                     |       | 14,500 |   | 18,000 |   |
| Repayment of loan notes payable                                                    |       | (9,250                                     | )          | — |   | (7,739 | ) |
| Payment of loan fees                                                               |       | —                                     |       | (926 | ) | — |   |
| Issuance of common stock                                                           |       | 73,651                                     |       | — |   | — |   |
| Proceeds from exercises of stock options and a  warrant                            |       | 13,276                                     |       | — |   | — |   |
| Cash provided by financing activities                                              |       | 58,889                                     |       | 10,574 |   | 2,761 |   |
| Effects of foreign currency translation adjustment                                 |       | 180                                        |       | (129 | ) | (289 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS                                              |       | 38,987                                     |       | 17,862 |   | 23,592 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |       | 105,161                                    |       | 87,299 |   | 63,707 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                                          | 144,148    |   | $ | 105,161 |   | $ | 87,299 |   |
| SUPPLEMENTAL DISCLOSURE:                                                           |       |                                       |       |   |   |   |   |
| Interest paid                                                                      |       | $                                          | 3,540      |   | $ | 3,036 |   | $ | 1,943 |   |
| Income taxes paid,  net of refunds                                                 |       | $                                          | 33,211     |   | $ | 20,907 |   | $ | 12,581 |   |

 

See notes to consolidated financial statements

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**GFI GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF 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, 2003      |       |                              | $          | 29,069                          |       |              |       | $                                     | 59         |                                           |       |                                                  | $          | 102       |       |   |   | $ | 34,923 |   |   |   | $ | (40,900 | ) |   |   | $ | (111 | ) |   | $ | 23,142 |   |
| Foreign currency  translation |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| adjustment                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       |      | —     |   |   |   | — |   |   |   | (289 | ) |   | (289 | ) |
| Unrealized gains on           |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| foreign  derivative           |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| exchange contracts            |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   | 417 |   |   | 417 |   |
| Deferred compensation         |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       |      | 44         |   |   |   | — |   |   |   | — |   |   | 44 |   |
| Net income                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       |      | —     |   |   |   | 14,464 |   |   |   | — |   |   | 14,464 |   |
| BALANCE, DECEMBER 31, 2003    |       |                              | 29,069     |                            |       |              | 59         |                                  |       |                                           | 102        |                                                  |       |      | 34,967     |   |   |   | (26,436 | ) |   |   | 17 |   |   | 37,778 |   |
| Foreign currency  translation |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| adjustment                    |       |                              | —     |                            |       |              | —     |                                  |       |                                           | —     |                                                  |       |      | —     |   |   |   | — |   |   |   | (129 | ) |   | (129 | ) |
| Unrealized losses 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 |   |
| 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  derivative           |       |                              |       |                            |       |              |       |                                  |       |                                           |       |                                                  |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| exchange 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 |   |

 

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 financial statements include theaccounts of GFI Group Inc. and its subsidiaries (collectively the “Company”).The Company, through its sole wholly-owned subsidiary GFInet inc. (“GFInet”),provides brokerage services, market data and analytics software products toinstitutional clients in markets for a range of credit, financial, equity andcommodity instruments. The Company complements its brokerage capabilities withvalue-added services, such as data and analytics products for decision support,which it licenses to the financial services industry and other corporations. TheCompany’s principal operating subsidiaries include: GFI Securities LLC, GFIBrokers LLC, GFI Group LLC, GFI Securities Limited, GFI Brokers Limited, GFI(HK) Securities LLC, GFI Group PTE Ltd. and Fenics Limited and subsidiaries (“Fenics”).As of December 31, 2005, Jersey Partners, Inc. (“JPI”) is the largestshareholder of the Company’s common shares.

On January 31, 2005, the Company completed itsinitial public offering (the “IPO”), selling 3,947,369 shares of common stockat $21.00 per share. Net proceeds to the Company from the IPO after deductingunderwriters’ discounts and expenses were $73,651.

In January 2005, allshares of Class A Common Stock, Series A Preferred Stock, Series BPreferred Stock and Series C Preferred Stock were automatically convertedinto Class B Common Stock. Each share of Class A Common Stock, Series APreferred Stock and Series C Preferred Stock converted into one share of Class BCommon Stock. Each share of Series B Preferred Stock converted intoapproximately 1.0017 shares of Class B Common Stock resulting in anadditional 9,852 shares. Class B Common Stock was renamed Common Stock.

**2.**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Basis ofPresentation******—***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 financial statementsare reasonable and prudent. Actual results could differ materially from theseestimates.

All material intercompany transactions and balanceshave been eliminated.

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

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

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

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

***Agency Commissions******—***In agency transactions,the Company charges commissions for executing transactions between buyers andsellers. Agency commissions revenues and related expenses are recognized on atrade date basis.

***PrincipalTransactions******—***Principaltransaction revenue is primarily derived from matched principal transactions.In matched principal transactions, the Company simultaneously agrees to buyinstruments from one customer and sell them to another customer. A very limitednumber of brokerage desks are allowed to enter into unmatched principaltransactions to facilitate a customer’s execution needs for transactionsinitiated by such customers or for the purpose of proprietary trading toarbitrage the value between an exchange traded fund and its componentsecurities. These unmatched positions are intended to be held short term. TheCompany earns revenue from principal transactions on the spread between the buyand sell price of the security that is brokered.

Additionally, from time to time, under thecircumstances described above or if a transaction fails to settle on a timelybasis, the Company may hold securities positions overnight. These positions aremarked to market on a daily basis. Principal transactions revenues and relatedexpenses are recognized on a trade date basis.

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

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

***Property, Equipmentand Leasehold Improvements******—***Property,equipment and leasehold improvements are stated at cost, less accumulateddepreciation and amortization. Depreciation and amortization are calculatedusing the straight-line method generally over three to seven years. Propertyand equipment 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, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*,and are amortized on a straight-line basis over the estimated useful life ofthe software, generally three years. General and administrative costs relatedto developing or obtaining such software are expensed as incurred.

***Construction TypeContract******—At*** December 31,2005, the Company had a construction-type contract whereby the Company woulddevelop an online currency trading system and customize it for a customer. TheCompany will own the back-end portion of the online currency trading system andthis technology will 

76

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

be available to license toother third parties. The contract is accounted for using the completed-contractmethod in accordance 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* as the Company is unable to makereasonably dependable estimates of progress towards completion*.*Under this method, revenues and expensesare deferred and netted on the balance sheet until such time when the projectis substantially complete. As of December 31, 2005, the net asset includedin other assets was $134, comprised of costs to date of $4,076 net of billingsto date of $3,942. The Company does not anticipate a loss on this contract.

Additionally, in conjunction with the productdevelopment and customization contract, the Company provides hosting servicesto the customer. Revenue for hosting services is recognized as earned on theportion relating to the rendering of future hosting services. Furthermore, theCompany recognizes the deferred portion of the hosting services over thehosting period.

***Software Inventory******—***Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 86,*Accounting for the Costs of Computer Softwareto be Sold, Leased or Otherwise Marketed,*the 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 andIntangible Assets******—***Goodwillrepresents the excess of the purchase price allocation over the fair value oftangible and identifiable intangible net assets acquired. In accordance withSFAS No. 142 *Goodwill and IntangibleAssets* (“SFAS 142”), goodwill and intangible assets withindefinite lives are no longer amortized, but instead are tested for impairmentannually or more frequently if circumstances indicate impairment may haveoccurred. In the event the Company determines that the value of goodwill hasbecome impaired, it will incur a charge for the amount of impairment during thefiscal quarter in which such determination is made. The Company has selected January 1st as the date to perform the annual impairmenttest. Intangible assets with definite lives are amortized on a straight-linebasis over their estimated useful lives.

***Prepaid Bonuses andForgivable 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 haveapproximate market interest rates of up to 4.5%. The Company expects to fullyrecover the prepaid bonuses and forgivable loans when employees terminate theiremployment prior to the expiration of the contract.  The prepaid bonuses and forgivable loans areincluded in the Consolidated Statements of Financial Condition in other assets.

***DerivativeFinancial Instruments******—The*** Companyuses foreign exchange derivative contracts to reduce the effects offluctuations in the receivables from commissions denominated in foreigncurrencies. Certain contracts qualify as foreign currency cash flow hedgesunder SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities*, as amended (“SFAS No. 133”).The Company reclassifies gains and 

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

losses on the foreignexchange derivative contracts included in accumulated other comprehensive lossinto earnings at the time the hedged transactions are recognized. The Companymeasures effectiveness by assessing the changes in the expected future cashflows of the hedged items. The ineffective portion of the hedges, if any, isincluded in other income. There is no portion of the derivative instruments’gains or losses that has been excluded from the assessment of effectiveness. Forforeign exchange derivative contracts that do not qualify for hedge accountingunder SFAS No. 133, the Company records these contracts at fair value andall realized and unrealized gains and losses are included in other income inthe Consolidated Statement of Income.

***Income Taxes******—***Inaccordance with SFAS No. 109, *Accountingfor Income Taxes*, the Company provides for income taxes using theasset and liability method under which deferred income taxes are recognized forthe estimated future tax effects attributable to temporary differences andcarry-forwards that result from events that have been recognized eitherin the financial statements or the income tax returns, but not both. Themeasurement of current and deferred income tax liabilities and assets is basedon provisions of enacted tax laws. Valuation allowances are recognized if,based on the weight of available evidence, it is more likely than not that someportion of the deferred tax assets will not be realized.

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

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

***Stock-BasedCompensation******—Our*** share-basedcompensation consists of stock options and restricted stock units (“RSUs”).Effective January 1, 2003, the Company adopted the fair value recognitionprovisions of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”), as amended by SFAS No. 148,*Accounting for Stock-Based Compensation—Transitionand Disclosure*, prospectively to all awards granted, modified, orsettled after January 1, 2003. Pursuant to this method, the Companyexpenses the grant-date fair value of options issued to employees on or after January 1,2003 over the related vesting period and the compensation expense related tomodifications of outstanding options is calculated as the difference betweenfair value of the existing and modified options on the date of modification.Prior to January 1, 2003, the Company used the intrinsic method asprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB25”), as permitted by SFAS No. 123. For RSUs, the fair value at thedate of grant is recorded as deferred compensation and is amortized tocompensation expense over the vesting period of the grants.

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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 had the fair value method been applied for all periods presented. SeeNote 15 for assumptions used in estimating fair value.

| ** **                                                                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income- as  reported                                                                 |       | $                                          | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| Add:                                                                                     |       |                                       |       |   |   |   |   |
| Effect of stock-based  employee compensation included in reported net income, net of tax |       | 2,561                                      |       | 33 |   | 44 |   |
| Deduct:                                                                                  |       |                                       |       |   |   |   |   |
| Total stock-based  employee compensation determined under fair value method, net of tax  |       | (2,690                                     | )          | (328 | ) | (433 | ) |
| Net income- pro  forma                                                                   |       | $                                          | 47,974     |   | $ | 22,828 |   | $ | 14,075 |   |
| Basic earnings per share—as reported                                                |       | $                                          | 1.80       |   | $ | 1.01 |   | $ | 0.63 |   |
| Basic earnings  per share—pro forma                                                 |       | $                                          | 1.79       |   | $ | 1.00 |   | $ | 0.62 |   |
| Diluted earnings  per share—as reported                                             |       | $                                          | 1.74       |   | $ | 0.95 |   | $ | 0.61 |   |
| Diluted earnings per  share—pro forma                                               |       | $                                          | 1.73       |   | $ | 0.94 |   | $ | 0.60 |   |

 

***Recent AccountingPronouncements******—In*** March 2005,the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB No. 107”)to provide guidance on SFAS No. 123(R), *Share-BasedPayment* (“SFAS No. 123(R)”), which is a revision of SFAS No. 123.SAB No. 107 provides the staff’s view regarding the valuation ofshare-based payment arrangements for public companies. In particular, this SABprovides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods (including assumptions such as expected volatility and expected term),the accounting for certain redeemable financial instruments issued undershare-based payment arrangements, the classification of compensation expense,non-GAAP financial measures, first time adoption of SFAS No. 123(R), themodification of employee share options prior to the adoption of SFAS No. 123(R) anddisclosure in Management’s Discussion and Analysis subsequent to the adoptionof SFAS No. 123(R). SAB No. 107 became effective March 29, 2005.In April 2005, the SEC modified the effective date of SFAS No. 123(R) tobe as of the first reporting period of the first fiscal year beginning after June 15,2005. The SEC’s modification of the effective date did not change theaccounting required by SFAS No. 123(R).

Effective January 1, 2006, the Company adoptedSFAS No. 123(R) using the modified prospective application transitionmethod. The adoption of SFAS No. 123(R) did not have a significantimpact on the Company’s financial position or results of operations. Prior tothe adoption of SFAS No. 123(R), benefits of tax deductions in excess ofrecognized compensation costs were reported as operating cash flows. SFAS No. 123(R) requiresthe excess tax benefits be reported as financing cash flow rather than as areduction of taxes paid.

Upon the adoption of SFAS No. 123(R), the Companywill recognize a net gain of approximately $81 as a cumulative effect of achange in accounting principle in the first quarter of 2006 resulting from therequirement to estimate forfeitures at the date of grant instead of recognizingthem as incurred. The Company estimated the forfeiture rates based onhistorical experience.

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

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*(“FIN 47”). FIN 47clarifies that the term conditional asset retirement obligation as used in SFASNo. 143, refers to a legal obligation to perform an asset retirementactivity in which the timing and/or method of settlement are conditional on afuture event that may or may not be within the control of the entity. Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. The liability for the conditional asset retirementobligation should be recognized when incurred. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 is effectivefor fiscal periods beginning after December 15, 2005. The adoption of FIN47 will not have a significant impact on the Company’s results of operations orfinancial position.

**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 otherfinancial and nonfinancial institutions for the execution of securities,commodities, foreign exchange and derivative brokerage transactions. Accruedcommissions receivable are presented net of allowance for doubtful accounts ofapproximately $3,202 and $2,879 as of December 31, 2005 and 2004,respectively. The allowance is based on management’s estimate and is reviewedon a periodic basis based on the aging of outstanding receivables andcounterparty exposure.

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

| ** **                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Receivables from  brokers, dealers and clearing organizations: |       |                  |       |   |   |
| Contract value of fails to deliver                             |       | $                     | 161,069    |   | $ | 376,452 |   |
| Balance receivable from clearing organizations                 |       | 47,869                |       | 31,789 |   |
| Total                                                          |       | $                     | 208,938    |   | $ | 408,241 |   |
| Payables to  brokers, dealers and clearing organizations:      |       |                  |       |   |   |
| Contract value of fails to receive                             |       | $                     | 148,971    |   | $ | 357,349 |   |
| Balance payable to clearing organizations                      |       | 466                   |       | 11,643 |   |
| Payable to financial institutions                              |       | 16,329                |       | 7,073 |   |
| Total                                                          |       | $                     | 165,766    |   | $ | 376,065 |   |

 

Substantially all openfail to deliver and fail to receive transactions at December 31, 2005 and2004 have subsequently settled at the contracted amounts.

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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,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Software                                                                                        |       | $                                          | 45,303     |   | $ | 40,357 |   |
| Computer  equipment                                                                             |       | 13,003                                     |       | 13,474 |   |
| Leasehold  improvements                                                                         |       | 13,357                                     |       | 7,387 |   |
| Communications  equipment                                                                       |       | 7,981                                      |       | 7,785 |   |
| Furniture and  fixtures                                                                         |       | 3,954                                      |       | 3,093 |   |
| Automobiles                                                                                     |       | 181                                        |       | 181 |   |
| Total                                                                                           |       | 83,779                                     |       | 72,277 |   |
| Accumulated  depreciation and amortization                                                      |       | (52,105                                    | )          | (46,828 | ) |
| Property, equipment, and  leasehold improvements less accumulated depreciation and amortization |       | $                                          | 31,674     |   | $ | 25,449 |   |

 

During the year ended December 31, 2005, theCompany removed from its consolidated financial statements $7,530 of fullydepreciated fixed assets that are no longer in use and related accumulateddepreciation. Depreciation and amortization for the years ended December 31,2005, 2004 and 2003 was $12,807, $12,424, and $9,234, respectively.

In the fourth quarter, theCompany identified certain internal use software development costs that wereexpensed as compensation in prior quarters in 2005 rather than capitalized. TheCompany capitalized these expenses in the fourth quarter of 2005, resulting ina reduction of $1,999 in compensation expense and an increase of $136 indepreciation and amortization expense recognized in the quarter. The impact ofthis correction was not material to the net income of the Company for anyquarter presented and had no impact on net income for the year ended December 31,2005.

**7.**   SOFTWAREINVENTORY

| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Software inventory,  cost |       |                  |       |   |   |
| Work in process           |       | $                     | 4,295      |   | $ | 2,732 |   |
| Finished goods            |       | 3,295                 |       | 1,643 |   |
|                      |       | 7,590                 |       | 4,375 |   |
| Accumulated amortization  |       | (1,903)               |       | (880 | ) |
| Software  inventory, net  |       | $                     | 5,687      |   | $ | 3,495 |   |

 

Amortization for the yearsended December 31, 2005, 2004 and 2003 was $1,023, $625 and $255,respectively.

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

**8.**   GOODWILLAND INTANGIBLE ASSETS

In March 2005, theCompany made an offer to purchase for $8.37 per share all of the ordinaryshares in Fenics Limited that were not owned by the Company for a totalpurchase price of $4,454. In April 2005, the Company legally became thesole shareholder of Fenics Limited. During the second and third quarters of2005, Fenics minority shareholders were paid for 505,869 shares tendered to theCompany, or approximately 95% of the outstanding minority shares. The remainingminority shares will be paid for when they are tendered to the Company. Theacquisition of the Fenics minority shares resulted in an increase in goodwillof $1,378 during the second and third quarters of 2005.

On September 15,2005, the Company completed the acquisition of substantially all of the assetsand certain liabilities of Starsupply Petroleum LLC (“Starsupply”). The resultsof Starsupply’s operations have been included in the consolidated financialstatements since that date. Starsupply was a leading broker of oil products andrelated derivative and option contracts. As a result of the acquisition, theCompany acquired several energy-related desks, including petroleum feedstocks,petroleum products, crude oil, petrochemicals, product derivatives, crudederivatives, crude and product options, fuel oil and gas liquids.

The Starsupply acquisitionwas accounted for as a purchase business combination. Assets acquired wererecorded at their fair value as of September 15, 2005. The purchase pricewas $15,347 in cash including $221 of direct transaction costs related to theacquisition, consisting primarily of legal and other professional fees.Management determined the fair value of the identifiable intangible assets acquiredbased upon an independent valuation model. The purchase price was allocated asfollows:

| ** **                                  | ** ** | ** ** | ** ** | **Useful Life**       | ** **        |
|---------------------------------------------|------------|------------|------------|----------------------------|-------------------|
| *Assets:*                                   |       |       |       |                       |              |
| Property, plant and equipment               |       | $          | 292        |                       | 3 – 7  Years |   |
| Intangible assets  subject to amortization- |       |       |       |                       |              |
| Trade name                                  |       | 380        | ** ** | 1  Year                    | ** **        |
| Customer relationships                      |       | 1,440      | ** ** | 6  Years                   | ** **        |
| Covenants not to compete                    |       | 550        |       | 3.5  Months – 5 Years |              |
| Goodwill                                    |       | 13,823     |       | —                     |              |
| Total assets  acquired                      |       | $          | 16,485     |                       |              |   |
| *Liabilities:*                              |       |       |       |                       |              |
| Accrued liabilities                         |       | $          | 378        |                       | —            |   |
| Above market employment contracts           |       | 760        | ** ** | 2  Years                   | ** **        |
| Total liabilities assumed                   |       | 1,138      |       |                       |              |
| Net Assets  Acquired                        |       | $          | 15,347     |                       |              |   |

 

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

Changesin the carrying amount of the Company’s goodwill for the year ended December 31,2004 and 2005 were as follows:

| Goodwill:                             |   |   |   |
|---------------------------------------|--------|--------|--------|
| Balance as of December 31, 2003  |   | $      | 11,482 |   |
| Goodwill acquired during the year     |   | — |   |
| Balance as of December 31, 2004  |   | 11,482 |   |
| Goodwill acquired during the year     |   | 15,201 |   |
| Balance as of  December 31, 2005 |   | $      | 26,683 |   |

 

Based on the results of its annual impairment tests,the Company determined that no impairment of goodwill existed as of January 1,2005, 2004 and 2003. 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,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Gross intangible  assets       |       |                  |       |   |   |
| Customer base/relationships    |       | $                     | 2,490      |   | $ | 1,050 |   |
| Trade name                     |       | 1,750                 |       | 1,370 |   |
| Core technology                |       | 3,230                 |       | 3,230 |   |
| Covenants not to compete       |       | 550                   |       | — |   |
| Patent                         |       | 34                    |       | 34 |   |
| Total gross  intangible assets |       | 8,054                 |       | 5,684 |   |
| Accumulated amortization       |       | 5,699                 |       | 4,245 |   |
| Net intangible assets          |       | $                     | 2,355      |   | $ | 1,439 |   |

 

Amortization for the years ending December 31,2005, 2004 and 2003 was $1,454, $808 and $808, respectively.

At December 31,2005, expected amortization expense for the definite lived intangible assets isas follows:

| 2006  |   | $   | 1,034  |   |
|-------|--------|-----|--------|--------|
| 2007  |   | 361 |   |
| 2008  |   | 260 |   |
| 2009  |   | 260 |   |
| 2010  |   | 255 |   |
| Total |   | $   | 2,170  |   |

 

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

**9. OTHER ASSETS**

Otherassets consisted of the following:

| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Prepaid bonuses            |       | $                     | 31,107     |   | $ | 5,077 |   |
| Forgivable  employee loans |       | 2,582                 |       | — |   |
| Income taxes  receivable   |       | 7,540                 |       | — |   |
| Deferred tax  assets       |       | 2,242                 |       | 11,464 |   |
| Other assets               |       | 15,630                |       | 8,917 |   |
| Total Other Assets         |       | $                     | 59,101     |   | $ | 25,458 |   |

 

**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 provides for a multicurrencyrevolving cash facility in a principal amount of $80,000, which includes aletter of credit facility with a sub-limit of $30,000. The 2004 CreditAgreement can be increased to $100,000 with the consent of the lenders. The2004 Credit Agreement matures on August 23, 2007. Revolving loans may beeither base rate loans or currency rate loans. Currency rate loans and theletters of credit bear interest at the annual rate of LIBOR plus the applicablemargin in effect for that interest period. Base rate loans bear interest at arate per annum equal to a base rate plus the applicable margin in effect forthat interest period. As long as no default has occurred under the 2004 CreditAgreement, the applicable margin for both the base rate and currency rate loansis based on a matrix that varies with a ratio of outstanding debt to EBITDA, asdefined in the 2004 Credit Agreement. At December 31, 2005, the applicablemargin is 1% and the one-month LIBOR is 4.39%. Amounts outstanding under the2004 Credit Agreement are secured by substantially all the assets of theCompany and certain assets of the Company’s subsidiaries.

In February 2005,a portion of the proceeds from the IPO was used to pay down the currentoutstanding borrowings and interest under the 2004 Credit Agreement.

| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Loan Available  (1)            |       | $                                     | 80,000     |   | $ | 80,000 |   |
| Loans Outstanding              |       | $                                     | 31,805     |   | $ | 50,500 |   |
| Letters of Credit  Outstanding |       | $                                     | 6,500      |   | $ | 6,500 |   |

 

----

(1)          Amounts availableinclude up to $30,000 for letters of credit.

As of December 31, 2005, the combined aggregatematurities for all outstanding notes payable were $31,805, which is due in2006.

At December 31, 2005 and 2004, notes payable wererecorded net of unamortized loan fees of $558 and $909, respectively.

The 2004 Credit Agreementcontains certain financial and other covenants. Effective December 31,2005, the Company amended one of its restrictive covenants related to a fixedcharge ratio. The Company 

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

was incompliance with all applicable covenants, as amended, at December 31, 2005and 2004. In addition, in February 2006, the Company amended and restatedthe 2004 Credit Agreement. See Note 24 for further details.

**11. INCOME TAXES**

Theprovision for income taxes consists of the following:

| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current  Provision:                 |       |                                       |       |   |   |   |   |
| Federal                             |       | $                                          | 9,883      |   | $ | 6,690 |   | $ | 426 |   |
| Foreign                             |       | 12,369                                     |       | 14,212 |   | 9,906 |   |
| State and local                     |       | 4,268                                      |       | 3,473 |   | 3,324 |   |
| Total current  provision            |       | 26,520                                     |       | 24,375 |   | 13,656 |   |
| Deferred  Provision (Benefit):      |       |                                       |       |   |   |   |   |
| Federal                             |       | 3,136                                      |       | (1,295 | ) | 2,455 |   |
| Foreign                             |       | 5,703                                      |       | (2,257 | ) | (3,475 | ) |
| State and local                     |       | 827                                        |       | (792 | ) | 249 |   |
| Total deferred  provision (benefit) |       | 9,666                                      |       | (4,344 | ) | (771 | ) |
| Total                               |       | $                                          | 36,186     |   | $ | 20,031 |   | $ | 12,885 |   |

 

The Company had pre-tax income from foreign operationsof  $46,773, $26,429 and $18,286 for theyears ended December 31, 2005, 2004 and 2003, respectively. Pre-tax incomefrom domestic operations was $37,516, $16,725 and $9,063 for the years ended December 31,2005, 2004 and 2003, respectively.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except per 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,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **Deferred  tax assets:**                  |       |                                  |       |   |   |
| Net  operating/capital loss carryforwards  |       | $                                     | 6,860      |   | $ | 3,514 |   |
| Deferred  compensation                     |       | 2,451                                 |       | 101 |   |
| Foreign deferred  items                    |       | 2,405                                 |       | 5,565 |   |
| Liability  reserves                        |       | 1,217                                 |       | 681 |   |
| Prepaid expenses                           |       | 781                                   |       | 785 |   |
| Foreign tax  credits                       |       | 686                                   |       | 1,830 |   |
| Deferred revenue                           |       | 436                                   |       | — |   |
| Unrealized loss  on currency hedging       |       | —                                |       | 3,244 |   |
| Basis difference  in foreign subsidiary    |       | —                                |       | 1,389 |   |
| Other                                      |       | 1,287                                 |       | 444 |   |
| Valuation  allowance                       |       | (5,939                                | )          | (3,514 | ) |
| Total deferred tax assets                  |       | $                                     | 10,184     |   | $ | 14,039 |   |
| **Deferred tax liabilities:**              |       |                                  |       |   |   |
| Depreciation/amortization                  |       | $                                     | (7,689     | ) | $ | (2,408 | ) |
| Prepaid  compensation                      |       | (2,697                                | )          | — |   |
| Unrealized gain  on currency hedging       |       | (635                                  | )          | — |   |
| Other                                      |       | (118                                  | )          | (167 | ) |
| Total deferred  tax liabilities            |       | $                                     | (11,139    | ) | $ | (2,575 | ) |
| **Net deferred tax  assets/(liabilities)** |       | $                                     | (955       | ) | $ | 11,464 |   |

 

Cumulative undistributed earnings of foreignsubsidiaries were approximately $30,481 at December 31, 2005. 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 andunpaid intra-group royalties and interest. Additionally, during 2005, thevaluation allowance was increased by $2,426, primarily due to an increase inforeign net operating loss carryforwards. At December 31, 2005, theCompany had U.S. net operating loss / capital loss carryforwards of $8,918 andforeign net operating loss of $14,507. The U.S. amounts are subject to annuallimitations on utilization and will begin to expire in various years after2005. The foreign amounts are primarily Singapore carryforwards that aresubject to annual limitations on utilization, but can be carried forwardindefinitely. Further, the Company has $686 of foreign tax credit carryforwardsat December 31, 2005 that will expire in 2012.

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**GFI GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except per 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,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| 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 |       | 4.1                   |       | 4.8 |   | 8.5 |   |
| Foreign  operations                                            |       | 2.8                   |       | 3.3 |   | (2.4 | ) |
| Non-deductible  expenses                                       |       | 2.0                   |       | 4.1 |   | 5.1 |   |
| General business  credit                                       |       | (1.0                  | )          | (1.0 | ) | (0.2 | ) |
| Tax-Exempt Income                                              |       | (0.3                  | )          | — |   | — |   |
| Other                                                          |       | 0.3                   |       | 0.2 |   | 1.1 |   |
| Effective income tax  rate                                     |       | 42.9                  | %          | 46.4 | % | 47.1 | % |

 

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 taxing jurisdiction resulting from on-goingand subsequent years’ examinations. Included in current tax expense are chargesto 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. SERIES CREDEEMABLE CONVERTIBLE PREFERRED STOCK**

In January 2005, all outstanding shares of Series CRedeemable Convertible Preferred Stock (“Series C Preferred Stock”) wereautomatically converted into common stock. Each share of Series CPreferred Stock converted into one share of common stock. At December 31,2005, there were no authorized or issued shares of Series C PreferredStock. The Company had 3,723,545 outstanding shares of Series C PreferredStock at December 31, 2004. The Series C Preferred Stock had thefollowing terms prior to conversion:

*Redemption:*   Atany time, and from time to time, after the fifth anniversary of the Series CPreferred Stock issuance date, holders of a majority of the outstanding sharesof the Series C Preferred Stock could have requested redemption of all orany part of the outstanding shares of Series C Preferred Stock. Theredemption price per share of Series C Preferred Stock would have been anamount equal to the Series C Preferred Stock issuance price multiplied byone and one-half (1.5).

*Conversion:*   Eachshare of Series C Preferred Stock was convertible at the option of theholder thereof at any time into shares of Common Stock at an initial conversionrate of one share of Common Stock for each share of Series C PreferredStock. Upon completion of our IPO in January 2005, each share of the Series CPreferred Stock was converted into Common Stock at a conversion rate ofone-to-one based on the IPO price per share to the public.

*Dividends:*   Beforethe payment of any dividends in respect of any shares of GFI Common Stock, theholders of the Series C Preferred Stock (on an as-if-converted to GFICommon Stock basis) would have been entitled to share ratably with the holdersof GFI Common Stock in certain dividends declared on the Common Stock.

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

*VotingRights:*   The holders of the Series CPreferred Stock, voting separately as a class, had certain voting and vetorights, including the right to elect two of the directors of the Company. Inaddition, the holders of Series C Preferred Stock had the right to vote,together with holders of Common Stock as a single class, on all matters uponwhich the holders of Common Stock (other than the election of directors) wereentitled to vote pursuant to applicable Delaware law or GFI’s Certificate ofIncorporation.

*LiquidationPreference:*   In the event of any voluntary orinvoluntary liquidation, dissolution or winding-up of GFI, before any paymentor distribution of the assets of, or the proceeds thereof, may be made or setapart for the holders of any stock ranking junior to the Series C PreferredStock upon liquidation, the holders of Series C Preferred Stock would havebeen entitled to receive, a liquidating distribution in an amount equal togreater of (a) the Series C Preferred Stock issuance price plus anamount equal to 8% of the Series C Preferred Stock issuance pricecompounded annually, or (b) sum of the Series C Preferred Stockissuance price plus the net distributable proceeds that the holders of the Series CPreferred Stock would have been entitled to receive for each share of Series CPreferred Stock upon a liquidation event assuming a hypothetical conversioninto Common Stock immediately prior to such liquidation event.

*Rank:*   TheSeries C Preferred Stock ranked senior to the GFI Common Stock as well asthe Company’s Series A and B Preferred Stock, as to payment of dividends,voting, distributions of assets upon liquidation, dissolution or winding-up,whether voluntary or involuntary, or otherwise.

*Purchase Price Adjustment:*   Inthe event that an IPO or certain other corporate events set forth in the Series CPreferred Stock purchase agreement had not taken place prior to the thirdanniversary of the issuance of the Series C Preferred Stock and theCompany had not met certain earnings thresholds, the Company would have beenrequired to issue to the then-current holders of the Series C PreferredStock 449,592 shares of Common Stock, subject to adjustment, for each ofthe three years following the Series C Preferred Stock issuance date inwhich the thresholds were not met. Such shares of Common Stock, if and whenissued, would have been subject to redemption on similar terms as set forthabove for the Series C Preferred Stock.

**13. STOCKHOLDERS’ EQUITY**

*Conversion—*During 2005, all shares of Class A common stockand Series A and B preferred stock were converted into Class B commonstock and Class B common stock was renamed Common Stock. See Note 1 formore details.

| ** **                              | ** ** | **Class A  Common Stock  Shares** | ** ** | **Common  Stock  Shares** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| Authorized (at  December 31, 2005) |       |                                        | —     |                      |       | 100,000,000 |   |
| Outstanding:                            |       |                                        |       |                      |       |   |   |
| January 1, 2003                    |       |                                        | 5,893,846  |                      |       | 10,155,809 |   |
| December 31, 2003                  |       |                                        | 5,893,846  |                      |       | 10,155,809 |   |
| December 31, 2004                  |       |                                        | 5,893,846  |                      |       | 10,155,809 |   |
| December 31, 2005                  |       |                                        | —     |                      |       | 27,904,568 |   |
| Par value per share                     |       |                                        | $          | 0.01                      |       |   | $ | 0.01 |   |
|                                         |            |                                             |            |                           |            |  |  |  |  |

 

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

**Share Issuance**

During 2005, the Companyissued 3,947,369 common shares in connection with its IPO (See Note 1),12,648,277 shares of common stock upon the conversions of Class A CommonStock, Series A Convertible Preferred Stock (“Series A Preferred Stock”),Series B Convertible Preferred Stock (Series B Preferred Stock”) andSeries C Preferred Stock, 105,263 shares in connection with the exerciseof a warrant and 1,047,850 shares of common stock in connection with theexercises of stock options. The warrant was issued in 2000 with an exerciseprice of $9.50 and was exercised in June 2005, resulting in proceedsof  $1,000 to the Company. Additionally,the Company received total cash proceeds of $12,276 in connection with theexercises of stock options.

**Common Stock**

Eachholder of GFI Common Stock is entitled to one vote per share on all matterssubmitted to a vote of stockholders. Subject to the rights of holders of theCompany’s preferred stock, the holders of GFI Common Stock are entitled toreceive dividends when, as and if declared by GFI’s board of directors. Exceptas described below, the shares of GFI Common Stock do not have any preemptiveor other subscription rights, conversion rights or redemption or sinking fundprovisions.

| ** **             | ** ** | **Preferred Stock** | ** ** | **Series A  Preferred Stock** | ** ** | **Series B  Preferred Stock** | ** ** |
|------------------------|------------|--------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Shares**               | ** ** | **Amount**                              | ** ** | **Shares**                              | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Authorized             |       | 5,000,000                |       |                                    | —     |                                    |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Outstanding:           |       |                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2003 |       | —                   |       |                                    | —     |                                    |       | 2,842,093 |   |   | 26,209 |   |   | 178,941 |   |   | 2,860 |   |   |
| December 31, 2004 |       | —                   |       |                                    | —     |                                    |       | 2,842,093 |   |   | 26,209 |   |   | 178,941 |   |   | 2,860 |   |   |
| December 31, 2005 |       | —                   |       |                                    | —     |                                    |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Par value per share    |       | $                        | 0.01       |                                    |       | —                                  |       |   | $ | 0.01 |   |   | — |   |   | $ | 0.01 |   |   | — |   |   |
|                        |            |                          |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Preferred Stock**

Upon the completion of theIPO in January 2005, the Company had one class of preferred stock with5,000,000 shares authorized and none issued. The Series A Preferred Stockand the Series B Preferred Stock were converted into Common Stock in January 2005.

**Series A Preferred Stock**

The Series A Preferred Stock was undesignatedupon the completion of the IPO in January 2005. Prior to the IPO, the Series APreferred Stock had the following terms:

*Conversion:*   Eachshare of Series A Preferred Stock was convertible at the option of theholder thereof at any time into shares of Class B Common Stock of theCompany at an initial conversion rate of one share of Class B Common Stockfor each share of Series A Preferred Stock. Upon completion of the Company’sIPO in January 2005, each share of Series A Preferred Stock wasautomatically converted into one share of Common Stock.

*Dividends:*   Beforethe payment of any dividends in respect of any shares of GFI Common Stock, theholders of the Series A Preferred Stock (on an as-if-converted to GFI Class BCommon Stock basis) would 

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

have been entitled toshare ratably with the holders of GFI Common Stock in certain dividendsdeclared on the Class B Common Stock.

*VotingRights:*   The holders of GFI’s Series APreferred Stock, voting separately as a class, had certain voting and vetorights, including the right to elect one of the directors of the Company. Inaddition, the holders of Series A Preferred Stock had the right to vote,together with holders of Class B Common Stock as a single class, on allmatters upon which the holders of Class B Common Stock (other than theelection of directors) were entitled to vote pursuant to applicable Delawarelaw or GFI’s Certificate of Incorporation.

*LiquidationPreference:*   In the event of any voluntary orinvoluntary liquidation, dissolution or winding-up of GFI, before any paymentor distribution of the assets of GFI, or the proceeds thereof, might be made orset apart for the holders of any stock ranking junior to the Series APreferred Stock upon liquidation, the holders of Series A Preferred Stockwould have been entitled to receive a liquidating distribution of $9.50 pershare, subject to adjustment, plus any accrued and unpaid dividends.

*Rank:*   TheSeries A Preferred Stock ranked senior to the GFI Common Stock and onparity with the Series B Preferred Stock as to payment of dividends,voting, distributions of assets upon liquidation, dissolution or winding-up,whether voluntary or involuntary, or otherwise.

**Series B Preferred Stock**

The Series B Preferred Stock was converted uponthe completion of the IPO in January 2005. Prior to the IPO, the Series BPreferred Stock had the following terms:

*Conversion:*   Eachshare of Series B Preferred Stock was automatically convertible intoshares of Class B Common Stock, immediately prior to the closing of anIPO, at an initial conversion rate of one share of Class B Common Stockfor each share of Series B Preferred Stock.

*Dividends:*   Beforethe payment of any dividends in respect of any shares of GFI Common Stock, theholders of the Series B Preferred Stock (on an as-if-converted to GFI Class BCommon Stock basis) would have been entitled to share ratably with the holdersof GFI Common Stock in certain dividends declared on the Class B Common.

*VotingRights:*   Except as provided by law, the Series BPreferred Stock generally did not have any voting rights. To the extent the Series BPreferred Stock had voting rights, such stock was required to be voted equallywith the shares of Class B Common Stock, and not as a separate class.

*LiquidationPreference:*   In the event of any voluntary orinvoluntary liquidation, dissolution or winding-up of GFI, before any paymentor distribution of the assets of GFI, or the proceeds thereof, might be made orset apart for the holders of any stock ranking junior to the Series BPreferred Stock upon liquidation, the holders of Series B Preferred Stockwould have been entitled to receive a liquidating distribution of $14. 25 pershare, plus any accrued and unpaid dividends.

*Rank:*   TheSeries B Preferred Stock ranked senior to the GFI Common Stock and onparity with the Series A Preferred Stock as to payment of dividends,voting, distributions of assets upon liquidation, dissolution or winding-up,whether voluntary or involuntary, or otherwise.

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

**14. EARNINGS PER SHARE**

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 plusthe dilutive effect of convertible preferred stock using the “if-converted”method, contingently issuable shares of Common Stock to the Series CPreferred Stockholders (See Note 12) and outstanding stock options and warrantusing the “treasury stock” method.

Basicand diluted earnings per share for the years ended December 31, 2005, 2004and 2003 were as follows:

| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Basic  earnings per share**                                                              |       |                  |       |   |   |   |   |
| Net income applicable to stockholders                                                      |       | $                     | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| Income allocated to participating preferred  stockholders                                  |       | (903                  | )          | (6,842 | ) | (4,280 | ) |
| Income available to common stockholders                                                    |       | $                     | 47,200     |   | $ | 16,281 |   | $ | 10,184 |   |
| Weighted average common shares outstanding:                                                |       |                  |       |   |   |   |   |
| Class A common stock                                                                  |       | 484,426               |       | 5,893,846 |   | 5,893,846 |   |
| Common stock                                                                               |       | 25,761,202            |       | 10,155,809 |   | 10,155,809 |   |
| Weighted average common shares outstanding                                                 |       | 26,245,628            |       | 16,049,655 |   | 16,049,655 |   |
| Basic earnings per share—Class A and Common  stock                               |       | $                     | 1.80       |   | $ | 1.01 |   | $ | 0.63 |   |
| **Diluted earnings per share**                                                             |       |                  |       |   |   |   |   |
| Net income applicable to stockholders                                                      |       | $                     | 48,103     |   | $ | 23,123 |   | $ | 14,464 |   |
| Weighted average common shares outstanding                                                 |       | 26,245,628            |       | 16,049,655 |   | 16,049,655 |   |
| Effect of dilutive shares:                                                                 |       |                  |       |   |   |   |   |
| Options, warrant and RSUs                                                                  |       | 899,348               |       | 190,993 |   | — |   |
| Convertible preferred shares                                                               |       | 248,304               |       | 3,021,034 |   | 3,021,034 |   |
| Redeemable convertible preferred shares                                                    |       | 306,045               |       | 3,723,545 |   | 3,723,545 |   |
| Effect of contingently issuable shares subject to  Series C purchase price adjustment |       | —                |       | 1,348,776 |   | 899,184 |   |
| Weighted average shares outstanding and common stock  equivalents                          |       | 27,699,325            |       | 24,334,003 |   | 23,693,418 |   |
| Diluted earnings per share                                                                 |       | $                     | 1.74       |   | $ | 0.95 |   | $ | 0.61 |   |

 

Options and a warrant topurchase 24,658, 263,079, and 1,674,882 shares with exercise prices greaterthan the average market prices of common stock, as estimated by management,were outstanding during 2005, 2004 and 2003, respectively, and were excludedfrom the respective computations of diluted earnings 

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

pershare because their effect would be anti-dilutive. Options to purchase1,248,191, and 803,552 shares were outstanding under the GFI Group Inc.2002 Stock Option Plan (“GFI Group 2002 Plan”) at December 31, 2004 and2003, respectively, and were excluded from the computation of diluted earningsper share for the respective periods because the contingency related to theexercisability of these options was not met. This contingency was met upon theCompany’s IPO, which occurred in January 2005. Consequently, optionsgranted under the GFI Group 2002 Plan have been included in dilutedearnings per share to the extent they are dilutive. Further, 198,754 RSUs werealso excluded from the computation of diluted earnings per share for the yearended December 31, 2005 because their effect would have beenanti-dilutive.

**15. SHARE-BASED COMPENSATION**

In October 2004 the Company adopted the GFI GroupInc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”). This planpermits the grant of non-qualified stock options, stock appreciation rights,shares of restricted stock, restricted stock units and performance units toemployees, non-employee directors or consultants. Subject to certain adjustmentprovisions in this plan, 3,000,000 shares of our common stock, or any othersecurity issued by the Company in substitution or exchange therefore, areavailable for grants of awards under this plan.  There were no grants under the 2004 EquityIncentive Plan during 2004.

Thefollowing activity relating to the RSUs has occurred under the Company’s 2004Equity Incentive Plan during 2005:

| Outstanding  December 31, 2004 |   | —  |   |
|-------------------------------------|--------|---------|--------|
| Granted                             |   | 608,359 |   |
| Vested                              |   | (6,333  | )      |
| Cancelled                           |   | (2,801  | )      |
| Outstanding  December 31, 2005 |   | 599,225 |   |

 

The weighted average fair value per each RSU grantedduring the year was $31.91.

As of December 31, 2005, 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 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 

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

after January 1, 2003are measured at fair value at the date of grant. All options modified after January 1,2003 are measured at the incremental fair value of the options calculated onthe date of modification, in addition to the amount calculated as fair value onthe date of grant. For options issued on or modified after January 1,2003, compensation expense measured on the date of grant or modification wererecorded upon our IPO in January 2005 to the extent such options werevested with the remaining compensation expense to be recorded over theremaining 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.

Thefollowing compensation expense was recognized for the years ended December 31,2005, 2004 and 2003:

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| GFInet 2000 Plan            |       | $        | 64         |     | $          | 195      |       |   | $ | 44 |   |   |
| GFI Group 2002  Plan        |       | 1,315    |       | —   |       |     | —     |   |   |
| 2004 Equity  Incentive Plan |       | 2,731    |       | —   |       |     | —     |   |   |
| Total                       |       | $        | 4,110      |     | $          | 195      |       |   | $ | 44 |   |   |

 

The weighted average fair value of the stock optionsgranted or modified during the years ended December 31, 2004 and 2003 was$1.68 and $0, respectively, utilizing the weighted average assumptionsdescribed below. The fair value of the options granted or modified under boththe GFI Group 2002 Plan and GFInet 2000 Plan was estimated on the date of grantor modification using the Black-Scholes option pricing model with thefollowing assumptions: (i) dividend yield of 0%; (ii) expected termof five years; (iii) volatility of 0% (until the filing of the Company’sinitial registration statement on June 16, 2004); and (iv) an averagerisk-free interest rate of 3.4% and 2.9% for the years ended December 31,2004 and 2003, respectively. In estimating the fair value of options grantedsubsequent to the filing of its initial registration statement on June 16,2004, the Company assumed an average volatility of 33% based on the averagevolatilities of comparable public entities. Options under both plans vestratably over a period of two to four years.

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

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

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, 2003   |       | 648,236                                |       |                                       | $          | 11.88 |   |   | 1,734,492 |   |   | $ | 12.36 |   |   |
| Granted                             |       | 208,316                                |       |                                       | 11.88      |   |   | — |   |   | — |   |   |
| Terminated                          |       | (53,000                                | )          |                                       | 11.88      |   |   | (164,873 | ) |   | 14.64 |   |   |
| Outstanding  December 31, 2003 |       | 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 |   |   |

 

Thefollowing table summarizes information about the GFI Group 2002 Plan options asof December 31, 2005:

|                         | ** ** | **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                                   |       |                                                |       | 757,461 |   |   |   | 8.48 |   |   |   | $ | 11.88 |   |   |   | 499,751 |   |   |   | $ | 11.88 |   |   |
|                    | 21.00      |                                    |       |                                                | 195,976    |   |   |   | 8.78 |   |   |   | 21.00 |   |   |   | 42,341 |   |   |   | 21.00 |   |   |

 

Thefollowing table summarizes information about the GFInet 2000 Plan options as ofDecember 31, 2005:

|                         | ** ** | **Stock Options Outstanding** | ** ** | **Stock Options Exercisable**             | ** ** |
|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Options  Outstanding**                | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                         | $          | 9.50                                    |       |                                                |       | 451,392 |   |   |   | 4.42 |   |   |   | $ | 9.50 |   |   |   | 451,392 |   |   |   | $ | 9.50 |   |   |
|                    | 11.88      |                                    |       |                                                | 54,238     |   |   |   | 6.57 |   |   |   | 11.88 |   |   |   | 54,238 |   |   |   | 11.88 |   |   |
|                         | 14.25      |                                    |       |                                                | 23,890     |   |   |   | 4.99 |   |   |   | 14.25 |   |   |   | 23,890 |   |   |   | 14.25 |   |   |
|                    | 19.00      |                                    |       |                                                | 108,386    |   |   |   | 5.09 |   |   |   | 19.00 |   |   |   | 108,386 |   |   |   | 19.00 |   |   |
|                         | 23.75      |                                    |       |                                                | 20,756     |   |   |   | 4.54 |   |   |   | 23.75 |   |   |   | 20,756 |   |   |   | 23.75 |   |   |

 

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

**16. COMMITMENTS AND CONTINGENCIES**

**Operating****Leases**** – **TheCompany has non-cancelable operating leases for computer hardware and software,communications equipment, and office space that expire on various dates through2016. At December 31, 2005, the future minimum rental commitments undersuch leases are as follows:

| 2006       |   | $      | 4,659  |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 3,964  |   |
| 2008       |   | 5,789  |   |
| 2009       |   | 6,078  |   |
| 2010       |   | 6,577  |   |
| Thereafter |   | 21,916 |   |
| Total      |   | $      | 48,983 |   |

 

In November 2005, the Company ceased using itsleased office space located on Hewett Street. However, the Company is obligatedto pay the remaining rent plus other related charges through October 2006.As such, the Company includes the remaining rent related to Hewett Street inthe future minimum rental commitments. The total minimum rental commitmentsunder this leased totaled $919, all of which are due within the next twelvemonths. See Note 23 for further details. In February 2006, the Companyalso vacated from its leased office space located on Christopher Street inLondon. The lease provides for an early termination option without a penalty inFebruary 2008. Consequently, the Company includes the future minimumrental commitments related to this lease for the period from January 2006through February 2008. The total minimum rental commitments under thisleased totaled $447, all of which are due within three years. See Note 24 forfurther details.

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. The accompanying consolidated statements of incomereflect all rent expense on a straight-line basis over the term of the leases. Rentexpense under the leases for the years ended December 31, 2005, 2004, and2003 was $8,194, $4,300, and $3,990, respectively.

**Purchase Obligations**—The Company has various unconditional purchaseobligations. These obligations are for the purchase of quotes from a number ofinformation service providers during the normal course of business. As of December 31,2005, the Company had total purchase commitment for quotes of approximately$7,772, with $5,087 due within the next twelve months and $2,685 due betweenone to two years. Additionally, the Company has purchase commitments forcapital expenditures related to its U.K. primary lease of £562 (approximately$966) and $517 related to the office relocation and expansion in Japan. All ofthese purchase commitments for capital expenditures are due within the nexttwelve months.

**Contingencies**—**In the normal course of business, theCompany and certain subsidiaries included in the consolidated financialstatements have been named as defendants in various lawsuits and proceedingsand have been involved in certain regulatory examinations. Additional actions,investigations or proceedings may be brought from time to time in the future.We are subject to the possibility of losses from these various contingencies.Considerable judgment is necessary to estimate the probability and amount ofany loss from such contingencies. An accrual is made when it is probable that aliability has been**

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

**incurredor an asset has been impaired and the amount of loss can be reasonablyestimated. The Company accrues a liability for the estimated costs ofadjudication or settlement of asserted and unasserted claims existing as of thebalance 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 the employerportion of National Insurance Contributions in the U.K.

It is not presently possible to determine the Company’sultimate exposure to these matters and there is no assurance that theresolution of these matters will not significantly exceed the reserves accruedby the Company. It is the opinion of the Company’s management 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 Company primarily generatesits revenues by executing and facilitating transactions for counterparties.Revenues for these services are transaction based. As a result, the Company’srevenues could vary based upon the transaction volume of securities,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.

**17. RETIREMENT PLANS**

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 Retirement IncomeSecurity Act of 1974. Employees may voluntarily contribute a portion of theircompensation, not to exceed the statutory limit. The Company did not make anycontributions to the plan for the years ended December 31, 2005, 2004, or2003.

In the U.K. the Company has established two definedcontribution plans pursuant to the applicable laws in the U.K. Employees of theU.K. subsidiaries may voluntarily designate a portion of their monthlycompensation to be contributed, which the Company matches up to a certainpercentage. The GFI Group Personal Pension Plans are open to all U.K. employeesafter the completion of three months of employment. Additionally, there is anOccupational Pension Plan which is available only to senior employees. TheCompany also matches contributions made under this plan. The Company has madeaggregate contributions of $1,198, $1,166, and $959 in 2005, 2004 and 2003,respectively, for the GFI Group Personal Pension Plans and Occupational PensionPlan.

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

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

The Company, throughGFInet and GLLC and their primary subsidiaries, operates as an inter-dealerbroker. In this role, the Company is interposed between buyers and sellers(“counterparties”). Agency brokerage transactions facilitated by the Companyare settled between the counterparties on a give-up basis. Principaltransactions are cleared through various clearing organizations. In the eventof counterparty nonperformance, the Company may be required to purchase or sellfinancial instruments at unfavorable market prices, which may result in a lossto the Company. The Company does not anticipate nonperformance bycounterparties. The Company monitors its credit risk daily and has a policy ofreviewing regularly the credit standing of counterparties with which itconducts business.

Unsettled transactions(i.e., securities failed-to-receive and securities failed-to-deliver) areattributable to matched-principal transactions executed by subsidiariesand are recorded 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.

**19. FINANCIALINSTRUMENTS**

*Derivative FinancialInstrument—The* Company is exposed to changes in theU.S. Dollar compared to the British Pound and the Euro for anticipated salesand expenses in those currencies. The risk management policy of the Company isto manage transactional foreign exchange exposure through the use of foreignexchange forward and foreign exchange collar contracts (“Foreign ExchangeDerivative Contracts”). Certain of these Foreign Exchange Derivative Contractsare 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 Operations.

In March 2005, theCompany discontinued hedge accounting for a foreign exchange derivativecontract that was previously designated and qualified as a hedge under SFAS No. 133.The de-designation of this contract was necessary because the Companyrenegotiated the exchange rates in the contract that resulted in itstermination and the execution of a new contract. Subsequent to suchde-designation, the Company discontinued prospectively hedge accounting for theoriginal contract. Unrealized losses on the original contract will remain inaccumulated other comprehensive loss and will be reclassified into earningsover the term of the original contract. Since de-designation, $2,281 ($1,597after-tax) was reclassified from accumulated other comprehensive loss intoearnings. In addition, at December 31, 2005, there was $4,533 before tax($3,173 after-tax) in accumulated other comprehensive loss, which representsthe remaining unrealized loss related to the de-designated foreign exchangederivative contract, that will be recognized over the next twelve months. Thenew foreign exchange derivative contract did not qualify for hedge accountingunder SFAS No. 133. Accordingly, this contract was recorded at fair valueand all realized and unrealized gains and losses were included in earnings. Thecontract was settled at June 30, 2005 for a realized gain of $1,131. Fromthe inception of this new contract through June 30, 2005, the Companyrecorded a net gain in other income of $7,805 related to these two contracts.

For the years ended December 31,2005, 2004 and 2003, there was no hedge ineffectiveness. For the years ended December 31,2005, 2004 and 2003, unrealized gains (losses) before tax totaling $7,813,$(11,141) and $716, respectively, were recorded as other comprehensive income(loss). The Company estimates that $1,827 of net derivative losses included inaccumulated other comprehensive loss will be 

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

reclassifiedinto earnings within the next twelve months. There has been no discontinuanceof cash flow hedges that would require a reclassification of gains intoearnings. Management does not anticipate any events or transactions that wouldresult in the reclassification into earnings of gains and losses that arereported in accumulated other comprehensive income due to hedge discontinuance.

The Company does not holdor issue derivative financial instruments for trading purposes. The counterpartieswith whom the Company trades foreign exchange contracts are major internationalfinancial institutions. The Company monitors its positions with and the creditquality of these financial institutions and does not expect nonperformance bythe counterparties.

*Fair Value of FinancialInstruments—*Substantially all of the Company’s assetsand 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 31,2005 and 2004. 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 Statement of Financial Condition as ofDecember 31, 2005 and 2004 are as follows:

| **Asset/(Liabilities)**                 | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Foreign Exchange  Derivative Contracts: |       |       |       |     |       |
| Assets                                  |       | $          | 2,196      |     | $          | —   |       |
| Liabilities                             |       | (79        | )          | (10,812  | )          |
| Fenics Purchase Obligation              |       | (144       | )          | (1,022   | )          |
|                                         |            |            |            |          |            |          |            |  |  |

 

The fair value of theForeign Exchange Derivative Contracts were estimated based on quoted marketprices of comparable instruments. The fair value of the Fenics PurchaseObligation was estimated using an exchange option model that includedassumptions of management’s estimate of the fair value of the common stock ofthe Company and the common stock of Fenics, volatility, correlation and theexpected life of the obligation.

**20. REGULATORYREQUIREMENTS**

GFI Securities LLC is a registered broker-dealerwith the Securities and Exchange Commission and the National Association ofSecurities Dealers, Inc. (“NASD”). GFI Securities LLC is also a registeredintroducing broker with the National Futures Association and the CommodityFutures Trading Commission. Accordingly, GFI Securities LLC is subject to the NetCapital rules under the Securities Exchange Act of 1934 and the CommodityExchange Act. Under these rules, GFI Securities LLC is required to maintainminimum Net Capital of not less than the greater of $250 or 2% of aggregatedebits, as defined.

At December 31, 2005,GFI Securities LLC had Net Capital and Excess Net Capital as follows:

| ** **          | ** ** | **GFI Securities LLC** | ** ** |
|---------------------|------------|----------------------------------|------------|
| Net Capital         |       |                             | $          | 44,697 |   |   |
| Minimum Net Capital |       |                             | 250        |   |   |
| Excess Net Capital  |       |                             | $          | 44,447 |   |   |

 

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

GFIBrokers Limited and GFI Securities Limited are subject to the capitalrequirements of the Financial Services Authority in the United Kingdom. Underthis rule, minimum capital, as defined, must be maintained as follows at December 31,2005:

| ** **                    | ** ** | **GFI Brokers** | ** ** | **GFI Securities** | ** ** |
|-------------------------------|------------|----------------------|------------|-------------------------|------------|
| Net Capital                   |       |                 | $          | 14,169                  |       |   |   | $ | 23,908 |   |   |
| Minimum Net  Capital Required |       |                 | 8,541      |                    |       |   | 14,099 |   |   |
| Excess Net Capital            |       |                 | $          | 5,628                   |       |   |   | $ | 9,809 |   |   |

 

GFI (HK) Securities LLC issubject to the capital requirements of the Securities and Futures Commission inHong Kong, which require that GFI (HK) Securities LLC maintain minimum capital,as defined, of approximately $423. At December 31, 2005 GFI (HK)Securities LLC had capital of approximately $1,123 which exceeded the minimumrequirement by approximately $700.

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

GFI Securities Limited’sJapanese branch is required to maintain “brought-in” capital, as defined, of50,000 Japanese Yen as part of its licensing requirement, in accordance withthe Foreign Securities Firms Law. Additionally, GFI Securities Limited issubject to the Japan Securities Dealers Association’s (“JSDA”) financialrequirement that revenue plus “brought-in” capital exceed a ratio of 120.0% ofrelevant expenditure. At December 31, 2005, GFI Securities Limited met thelicensing requirement by maintaining “brought-in” capital of 50,000 JapaneseYen (approximately $424) as part of the Foreign Securities Firms Law.Additionally, GFI Securities Limited’s revenue plus “brought-in” capital ratiowas 656%, which exceeded the JSDA’s financial requirement by approximately536%.

GFI Securities Limited’sParis branch was established through the exercise of its passport right to opena branch in an EEA state. This branch commenced operation on February 1,2006. The establishment of the branch was approved by FSA and acknowledged byBanque de France in France. The branch will be subject to the conduct ofbusiness rules of AMF when dealing with resident customers of France andwill be regulated, in part, by the FSA.

GFI Brokers Limited’sSydney branch is registered as a foreign corporation in Australia and isconditionally exempt from the requirement to hold an Australian financialservices license under the Australian Securities and Investments CommissionCorporations Act 2001 in respect of the financial services it provides inAustralia. This exemption applies to foreign companies regulated by the FSA inaccordance with U.K. regulatory standards.

Regulatory rules mayrestrict the Company’s ability to withdraw capital from its regulatedsubsidiaries. The Company’s regulated subsidiaries were in compliance with allminimum net capital requirements as of December 31, 2005.

**21. GEOGRAPHIC INFORMATION**

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

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

Informationregarding revenue for the years ended December 31, 2005, 2004 and 2003,and information regarding long-lived assets (defined as property, equipment,leasehold improvements and software inventory) in geographic areas as of December 31,2005 and 2004 are as follows:

| ** **    | ** ** | **For the year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:     |       |                                                         |       |   |   |   |   |
| North America |       | $                                                            | 268,101    |   | $ | 170,661 |   | $ | 101,666 |   |
| Europe        |       | 225,013                                                      |       | 191,831 |   | 143,911 |   |
| Asia-Pacific  |       | 40,478                                                       |       | 22,528 |   | 20,267 |   |
| Total         |       | $                                                            | 533,592    |   | $ | 385,020 |   | $ | 265,844 |   |

 

| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Long-lived  Assets, as defined: |       |                                  |       |   |   |
| North America                   |       | $                                     | 25,200     |   | $ | 24,686 |   |
| Europe                          |       | 10,645                                |       | 3,304 |   |
| Asia-Pacific                    |       | 1,516                                 |       | 954 |   |
| Total                           |       | $                                     | 37,361     |   | $ | 28,944 |   |

 

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

**22. OTHERCOMPREHENSIVE INCOME (LOSS)**

| ** **                                                           | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Unrealized  gain (loss) on foreign exchange derivative contracts** |       |                                                         |       |   |   |   |   |
| Current Period Change:                                               | ** ** | ** **                                                   |       |   |   |   |   |
| Before Tax Amount                                                    |       | $                                                            | 7,813      |   | $ | (11,141 | ) | $ | 716 |   |
| Tax Expense (Benefit)                                                |       | (2,460                                                       | )          | 3,543 |   | (299 | ) |
| After Tax Amount                                                     |       | $                                                            | 5,353      |   | $ | (7,598 | ) | $ | 417 |   |
| **Foreign  currency translation adjustment**                         |       |                                                         |       |   |   |   |   |
| Before Tax Amount                                                    |       | $                                                            | 341        |   | $ | (284 | ) | $ | (496 | ) |
| Tax Expense (Benefit)                                                |       | (161                                                         | )          | 155 |   | 207 |   |
| After Tax Amount                                                     |       | $                                                            | 180        |   | $ | (129 | ) | $ | (289 | ) |

 

**23. RELATED PARTY TRANSACTIONS**

**Officelease arrangements with affiliates**

The Company, through its subsidiary GFIHoldings Ltd., previously leased its primary U.K. office space under alease agreement with a wholly owned subsidiary of JPI, which was due to expirein 2016. In December 2004, the Company and this affiliate entered into alease termination agreement whereby both parties agreed to terminate this leaseeffective September 2005 and to make certain termination and otherpayments upon such termination. The Company accrued £1,500 (approximately$2,871) for the estimated costs to terminate the lease. In April 2005, theCompany and the affiliate amended the Lease Termination Agreement. Theamendment accelerated the termination of the lease to April 2005 andreduced the 

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

termination charge to £200(approximately $381), thus reducing the Company’s termination liability byapproximately £1,200 (or $2,266). In return, GFI Holdings Ltd. signeda new sublease with the subsidiary of JPI for an eighteen-month period withrent of £500 (approximately $895) per annum plus related costs, such asutilities, real estate taxes and service charges. However, in November 2005,the Company vacated the premise, with one year remaining on the sublease, andaccrued £535 (approximately $919) which represented the approximated fair valueof the for the remaining rent plus other related charges at year-end. Includedin this amount was £127 (approximately $218) which will be paid to thirdparties.

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 to Employees**

The Company periodicallyprovides forgivable employee loans in the form of sign-on as part of employmentagreements. See Notes 2 and 9 for further details.

**24. SUBSEQUENT EVENTS**

In January 2006, the Company granted 131,015 RSUsunder the 2004 Equity Incentive Plan with a grant date fair value of $54.59. Substantiallyall of these RSUs vest over three years and convert into an equal number ofunrestricted shares of common stock upon vesting.

In February 2006, the Company vacated its leasedpremises located on Christopher Street and moved all remaining employees to itsnew office in London. The lease for Christopher Street is expected to expire inFebruary 2013. Inaddition, this lease provides for an early termination option without apenalty, which is set in February 2008. Under FASB 146, *Accounting for Costs Associated with Exit or Disposal Activities,*aliability for other costs that will continue to be incurred under a contractfor its remaining term without economic benefit to the entity should berecognized and measured at its fair value when the entity ceases using theright conveyed by the contract. Therefore, during the first quarter of 2006,the Company recorded an accrual for thefair value of remaining rents and plus other related charges in the amount of £441 (or approximately $783).

In February 2006, we amended and restated theterms of our 2004 Credit Agreement. The amended and restated credit facility(the “2006 Credit Agreement”) provides for maximum borrowings of $135,000 andhas an expiration date of February 24, 2011. Under the 2006 CreditAgreement, loans will bear interest of the London Interbank Offered Rate LIBORplus a margin determined by our consolidated leverage ratio as defined in theamended and restated credit facility. The 2006 Credit Agreement containscovenants which restricts, among other things, our ability to borrow, paydividends, distribute assets, guarantee debts of others and lend funds toaffiliated companies and contains criteria on the maintenance of certainfinancial statement amounts and ratios, all as defined in the agreement. Amountsoutstanding under the 2006 Credit Agreement are secured by substantially allthe assets of the Company and certain assets of the Company’s subsidiaries.

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**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALISCLOSURE**

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

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

In addition, the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the Company’s internal controls over financial reportingand determined that there have been no changes in our internal controls overfinancial reporting during the fourth quarter of 2005 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

**ITEM 9B. OTHER INFORMATION**

None.

**PART III**

**ITEM 10.**      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

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 2006 Annual Meeting of Stockholders to beheld on May 31, 2006, 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 “Investor Relations—Corporate Governance” and are filed asexhibits to this Annual Report of Form 10-K. In the event theCompany substantively amends or waives a provision of its Codes of BusinessConduct and Ethics, the Company intends to disclose the amendment or waiver onthe Company’s website as well.

**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.

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**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

The information requiredto be furnished pursuant to this item will be set forth under the caption “CertainRelationships and Related Party Transactions” in the Proxy Statement, and isincorporated 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) FinancialStatements.****  **SeeIndex to Financial Statements on page 68.

**(a)(2) FinancialStatement 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.**   Thefollowing Exhibits are filed as part of this Report as required by RegulationS-K. Exhibits 10.5 through 10.14 are management contracts or compensatory plansor arrangements.
| Number     | ** ** | ** **                                                                                                                                                                                                                                                   | ** ** | Description | ** ** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|
|  3.1* |       | Second Amended  and Restated Certificate of Incorporation of the Registrant. (Filed as  Exhibit 3.1 to the Company’s Form 10-K, File No. 000-51103).                                                                                     |
|  3.2* |       | Second Amended  and Restated Bylaws of the Registrant. (Filed as Exhibit 3.2 to the  Company’s Form 10-K, 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 the Company’s Registration  Statement on Form S-1, File No. 333-116517)                                                                                                            |
|  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  the Company’s Registration Statement on Form S-1, File  No. 333-116517) |

 

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| Number     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | Description | ** ** | ** ** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|
|  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 the Company’s Registration Statement on Form S-1,  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 the  Company’s Registration Statement on Form S-1, File No. 333-116517)                                                                                                                                                                                                                                                                                                                                 |
|  4.7* |       | Warrant dated June 15, 2000 issued to Newnetco LLC. (Filed  as Exhibit 4.7 to the Company’s Registration Statement on Form S-1,  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 Current Report on Form 8-K  filed on February 28, 2006)                                                              |
| 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.                                                                                                                                                                                                                                                                                                 |
| 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 the Company’s  Registration Statement on Form S-1, 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.                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4*      |       | Disability  Agreement, dated as of December 30, 2004, between the Registrant and  Michael A. Gooch. (Filed as Exhibit 10.4 to the Company’s  Registration Statement on Form S-1, 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 10.5 to the Company’s Registration  Statement on Form S-1, File No. 333-116517)                                                                                                                                                                                                                                                                    |

 

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| Number | ** ** | ** **                                                                                                                                                                                                                            | ** ** | Description | ** ** | ** ** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|
| 10.6*  |       | Employment Agreement, dated as of May 1, 2002,  between the GFI Holdings Limited and Stephen McMillan. (Filed as  Exhibit 10.6 to the Company’s Registration Statement on Form S-1,  File No. 333-116517)    |
| 10.7*  |       | Employment  Agreement, dated as of November 18, 2002, between the Registrant and  James A. Peers. (Filed as Exhibit 10.7 to the Company’s  Registration Statement on Form S-1, 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 the Company’s  Registration Statement on Form S-1, File No. 333-116517) |
| 10.9*  |       | 2002 Stock Option Plan. (Filed as Exhibit 10.9 to the  Company’s Registration Statement on Form S-1, File No. 333-116517)                                                                                         |
| 10.10* |       | 2000 Stock Option Plan. (Filed as Exhibit 10.10 to the  Company’s Registration Statement on Form S-1, File No. 333-116517)                                                                                        |
| 10.11* |       | GFI Group Occupational Pension Plan. (Filed as  Exhibit 10.11 to the Company’s Registration Statement on Form S-1,  File No. 333-116517)                                                                          |
| 10.12* |       | Guardian Trust of GFI Brokers Limited. (Filed as  Exhibit 10.12 to the Company’s Registration Statement on Form S-1,  File No. 333-116517)                                                                        |
| 10.13* |       | 2004 Equity Incentive Plan. (Filed as Exhibit 10.13 to the  Company’s Registration Statement on Form S-1, File No. 333-116517)                                                                                    |
| 10.14* |       | Senior Executive Annual Bonus Plan. (Filed as  Exhibit 10.14 to the Company’s Registration Statement on Form S-1,  File No. 333-116517)                                                                           |
| 14.1*  |       | GFI Group Inc.  Code of Business Conduct and Ethics. (Filed as Exhibti 14.1 to the Company’s  Form 10-K, File No. 000-51103)                                                                                           |
| 14.2*  |       | GFI Group Inc.  Code of Business Conduct and Ethics for Senior Financial Officers. (Filed as  Exhibit 14.2 to the Company’s Form 10-K, File No. 000-51103)                                                        |
| 21.1*  |       | List of subsidiaries of the Registrant. (Filed as  Exhibit 21.1 to the Company’s Registration Statement on Form S-1,  File No. 333-116517)                                                                        |
| 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).                                                                                         |
| 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.

105

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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, 2005 to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 23rd day of March, 2006.

|        | 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 23,  2006 |
| Michael Gooch        |          | Officer (principal  executive officer)            |       |                 |
| /s/ COLIN HEFFRON    |          | President and  Director                           |       | March 23,  2006 |
| Colin Heffron        |          |                                              |       |                 |
| /s/ JAMES A. PEERS   |          | Chief Financial  Officer (principal financial and |       | March 23,  2006 |
| James A. Peers       |          | accounting officer)                               |       |                 |
| /s/ GEOFFREY KALISH  |          | Director                                          |       | March 23,  2006 |
| Geoffrey Kalish      |          |                                              |       |                 |
| /s/ CHRISTOPHER PIKE |          | Director                                          |       | March 23,  2006 |
| Christopher Pike     |          |                                              |       |                 |
| /s/ JOHN W. WARD     |          | Director                                          |       | March 23,  2006 |
| John W. Ward         |          |                                              |       |                 |
| /s/ MARISA CASSONI   |          | Director                                          |       | March 23,  2006 |
| Marisa Cassoni       |          |                                              |       |                 |

 

 

106

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**ScheduleI**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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, 2005 and 2004, and for each of the three years in theperiod ended December 31, 2005, and have issued our report thereon dated March 22,2006; such report is included elsewhere in this Form 10-K. Ouraudits also included the financial statement schedule of the Company listed inItem 15. This financial statement schedule is the responsibility of the Company’smanagement. Our responsibility is to express an opinion based on our audits. Inour opinion, such financial statement schedule, when considered in relation tothe basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

/s/ Deloitte & ToucheLLP

NewYork, New York

March 22, 2006

I-1

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**GFIGROUP INC.**

**(Parent CompanyOnly)**

**CONDENSEDSTATEMENTS OF FINANCIAL CONDITION**

**DECEMBER 31, 2005 AND 2004(In thousands)**

| ** **                                                                               | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Assets:**                                                                              | ** ** | ** **           | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                |       | $                    | 5,230      |   | $ | 25 |   |
| Investments in subsidiaries, equity basis                                                |       | 105,146              |       | 64,059 |   |
| Advances to subsidiaries                                                                 |       | 145,531              |       | 65,687 |   |
| Other assets                                                                             |       | 3,022                |       | 3,376 |   |
| Total assets                                                                             |       | $                    | 258,929    |   | $ | 133,147 |   |
| **Liabilities,  Redeemable Convertible Preferred Stock and Stockholders’ Equity:**  | ** ** | ** **           | ** ** | ** ** | ** ** |
| Notes payable, net                                                                       |       | $                    | 19,442     |   | $ | 49,591 |   |
| Other liabilities                                                                        |       | 1,235                |       | 144 |   |
|                                                                                     |       | 20,677               |       | 49,735 |   |
| Redeemable convertible preferred stock                                                   |       | —               |       | 30,043 |   |
| Stockholders’ equity                                                                |       | 238,252              |       | 53,369 |   |
| Total liabilities,  redeemable convertible preferred stock and stockholders’ equity |       | $                    | 258,929    |   | $ | 133,147 |   |

 

See notes to condensed financial statements.

I-2

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**GFIGROUP INC.**

**(Parent CompanyOnly)**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31,2005, 2004 AND 2003(In thousands)**

| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| REVENUES:                               |       |     |       |     |       |     |       |
| Equity in income from subsidiaries      |       | $        | 50,682     |     | $          | 24,299   |       | $ | 15,297 |   |
| Interest income                         |       | 247      |       | 23       |       | 138      |       |
| Total revenues                          |       | 50,929   |       | 24,322   |       | 15,435   |       |
| EXPENSES:                               |       |     |       |     |       |     |       |
| Interest expense                        |       | 1,116    |       | 1,642    |       | 1,489    |       |
| Other expenses                          |       | 3,651    |       | 576      |       | 183      |       |
| Total expenses                          |       | 4,767    |       | 2,218    |       | 1,672    |       |
| INCOME BEFORE BENEFIT FROM INCOME TAXES |       | 46,162   |       | 22,104   |       | 13,763   |       |
| BENEFIT FROM  INCOME TAXES              |       | 1,941    |       | 1,019    |       | 701      |       |
| NET INCOME                              |       | $        | 48,103     |     | $          | 23,123   |       | $ | 14,464 |   |

 

See notes to condensed financial statements.

I-3

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**GFI GROUP INC.**

**(Parent CompanyOnly)**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDEDDECEMBER 31, 2005, 2004 AND 2003(In thousands)**

| ** **                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities                                         |       |     |       |     |       |     |       |
| Net income                                                                    |       | $        | 48,103     |     | $          | 23,123   |       | $ | 14,464 |   |
| Adjustments to  reconcile net income to net cash used in operating activities |       |     |       |     |       |     |       |
| Noncash transactions in net income                                            |       | (52,072  | )          | (24,853  | )          | (15,809  | )          |
| Changes in operating assets and liabilities                                   |       | 3,386    |       | (2,111   | )          | 97       |       |
| Cash used in  operating activities                                            |       | (583     | )          | (3,841   | )          | (1,248   | )          |
| Cash flows used  in investing activities                                      |       | (50,590  | )          | (18,490  | )          | (14,535  | )          |
| Cash flows  provided by financing activities                                  |       | 56,378   |       | 10,574   |       | 10,500   |       |
| Increase  (decrease) in cash and cash equivalents                             |       | 5,205    |       | (11,757  | )          | (5,283   | )          |
| Cash and cash  equivalents, beginning of year                                 |       | 25       |       | 11,782   |       | 17,065   |       |
| Cash and cash  equivalents, end of year                                       |       | $        | 5,230      |     | $          | 25       |       | $ | 11,782 |   |

 

See notes to condensed financial statements.

I-4

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

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

** YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(In thousands)**

**1. BASIS OF PRESENTATION**

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, 2005, 2004 and 2003are 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. ADVANCES TO SUBSIDIARIES**

As of December 31,2005 and 2004, GFI Group Inc. had receivables from subsidiaries of $145,531 and$65,687 related primarily to the allocation of funds received, from notespayable and issuance of equity securities, to subsidiaries to fund workingcapital.

**4. NOTES PAYABLE**

As of December 31, 2005 and 2004, GFI Group Inc.had notes payable of $19,442 and $49,591 related to a credit agreement withBank of America N.A. and certain other lenders (the “2004 Credit Agreement”). Thenotes payable were recorded net of unamortized loan fees of $558 and $909 foryears ended December 31, 2005 and 2004, respectively. In addition, GFIGroup Inc. guarantees borrowings under the 2004 Credit Agreement made bycertain of its subsidiaries. As of December 31, 2005, there was borrowingsof $11,805 outstanding by a subsidiary subject to such guarantee.

I-5

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