**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

** **
| **ý**                                                                                                                                                                                                                                           | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                 |       |                                                                                          |
| **For the quarterly period ended June 30, 2005**                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                 |       |                                                                                          |
| **OR**                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                 |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                 |       |                                                                                          |
| **For the transition period from                    to                  ** |

 

**Commission FileNumber 001-15251**

 

**LABRANCHE & CO INC.**

(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **13-4064735**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**One ExchangePlaza, New York, New York 10006**

(Addressof principal executive offices)

 

**(212) 425-1144**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Formername, former address and former fiscal year,if changed since last report)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý              Noo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý       Noo

 

The number of shares of the registrant’s common stock outstanding as ofAugust 5, 2005 was 60,623,819.

 

 

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**TABLE OF CONTENTS**

 
| PART I FINANCIAL INFORMATION | 3                                                                                                   |
|------------------------------|-----------------------------------------------------------------------------------------------------|
|                         |                                                                                                |   |
|                         | Item 1. Financial Statements                                                                        | 3 |
|                         |                                                                                                |   |
|                         | CONDENSED CONSOLIDATED  STATEMENTS OF OPERATIONS                                                    | 3 |
|                         |                                                                                                |   |
|                         | CONDENSED CONSOLIDATED  STATEMENTS OF FINANCIAL CONDITION                                           | 4 |
|                         |                                                                                                |   |
|                         | CONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS                                                    | 5 |
|                         |                                                                                                |   |
|                         | NOTES TO CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS                                               | 6 |
|                         |                                                                                                |   |
|                         | Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14 |
|                         |                                                                                                |   |
|                         | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                 | 30 |
|                         |                                                                                                |   |
|                         | Item 4. Controls  and Procedures                                                                    | 36 |
|                         |                                                                                                |   |
| PART II OTHER  INFORMATION   | 38                                                                                                  |
|                         |                                                                                                |   |
|                         | SIGNATURES                                                                                          | 41 |
|                              |                                                                                                     |  |  |  |

 

2

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# **PART I**       FINANCIAL INFORMATION

 

# **Item 1.**           Financial Statements.

 

**LaBRANCHE & CO INC. and SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

**(000’s omitted except per share data)**

 
| ** **                                                                       | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(unaudited)**                          | ** ** | **(unaudited)**                        | ** ** | **(unaudited)** | ** ** | **(unaudited****)** | ** ** |
| REVENUES:                                                                        |       |                                     |       |                                   |       |   |   |   |   |
| Net gain on principal transactions                                               |       | $                                        | 47,871     |                                   | $          | 40,445 |   | $ | 87,912 |   | $ | 92,743 |   |
| Commissions                                                                      |       | 21,190                                   |       | 23,725                                 |       | 44,753 |   | 49,248 |   |
| Net unrealized gain on non-marketable investments                                |       | 230                                      |       | 24,683                                 |       | 322 |   | 24,348 |   |
| Other                                                                            |       | 8,454                                    |       | 1,849                                  |       | 12,061 |   | 4,276 |   |
| Total revenues                                                                   |       | 77,745                                   |       | 90,702                                 |       | 145,048 |   | 170,615 |   |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| EXPENSES:                                                                        |       |                                     |       |                                   |       |   |   |   |   |
| Employee compensation and related benefits                                       |       | 24,877                                   |       | 22,645                                 |       | 46,780 |   | 50,436 |   |
| Interest                                                                         |       | 18,781                                   |       | 19,336                                 |       | 35,364 |   | 31,694 |   |
| Exchange, clearing and brokerage fees                                            |       | 9,892                                    |       | 9,689                                  |       | 19,886 |   | 18,583 |   |
| Lease of exchange memberships                                                    |       | 983                                      |       | 3,954                                  |       | 1,995 |   | 8,097 |   |
| Depreciation and amortization of  intangibles                                    |       | 3,039                                    |       | 3,051                                  |       | 6,092 |   | 6,106 |   |
| Exchange memberships impairment                                                  |       | 3⁄4                                   |       | 18,327                                 |       | 3⁄4 |   | 18,327 |   |
| Debt repurchase premium                                                          |       | 3⁄4                                   |       | 49,028                                 |       | 3⁄4 |   | 49,028 |   |
| Other                                                                            |       | 10,159                                   |       | 9,954                                  |       | 21,205 |   | 19,985 |   |
| Total expenses                                                                   |       | 67,731                                   |       | 135,984                                |       | 131,322 |   | 202,256 |   |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| Income (loss) before minority interest and  provision (benefit) for income taxes |       | 10,014                                   |       | (45,282                                | )          | 13,726 |   | (31,641 | ) |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| MINORITY INTEREST                                                                |       | 3⁄4                                   |       | 195                                    |       | 3⁄4 |   | 370 |   |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| Income (loss) before provision (benefit)  for income taxes                       |       | 10,014                                   |       | (45,477                                | )          | 13,726 |   | (32,011 | ) |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| PROVISION (BENEFIT) FOR INCOME TAXES                                             |       | 1,272                                    |       | (20,976                                | )          | 2,738 |   | (15,424 | ) |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| Net income (loss)                                                                |       | 8,742                                    |       | (24,501                                | )          | 10,988 |   | (16,587 | ) |
| Preferred dividends and discount accretion                                       |       | 3⁄4                                   |       | 1,056                                  |       | 3⁄4 |   | 2,112 |   |
| Net income (loss) applicable to common  stockholders                             |       | $                                        | 8,742      |                                   | $          | (25,557 | ) | $ | 10,988 |   | $ | (18,699 | ) |
|                                                                             |       |                                     |       |                                   |       |   |   |   |   |
| Weighted-average common shares outstanding:                                      |       |                                     |       |                                   |       |   |   |   |   |
| Basic                                                                            |       | 60,624                                   |       | 59,822                                 |       | 60,610 |   | 59,814 |   |
| Diluted                                                                          |       | 60,688                                   |       | 59,822                                 |       | 60,870 |   | 59,814 |   |
| Earnings (loss) per share:                                                       |       |                                     |       |                                   |       |   |   |   |   |
| Basic                                                                            |       | $                                        | 0.14       |                                   | $          | (0.43 | ) | $ | 0.18 |   | $ | (0.31 | ) |
| Diluted                                                                          |       | $                                        | 0.14       |                                   | $          | (0.43 | ) | $ | 0.18 |   | $ | (0.31 | ) |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

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**LaBRANCHE & CO INC. and SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION**

**(UNAUDITED)**

**(000’s omitted except per share data)**

 
| ** **                                                                                                                                                                  | ** ** | **As of**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                                                                                                                                                        | ** ** | **(unaudited)**    | ** ** | **(audited)** | ** ** |
| **ASSETS**                                                                                                                                                                  |       |               |       |   |   |
|                                                                                                                                                                        |       |               |       |   |   |
| Cash and cash equivalents                                                                                                                                                   |       | $                  | 429,849    |   | $ | 444,446 |   |
| Cash and securities segregated under  federal regulations                                                                                                                   |       | 4,267              |       | 13,511 |   |
| Securities purchased under agreements to  resell                                                                                                                            |       | 113,000            |       | 87,000 |   |
| Receivable from brokers, dealers and  clearing organizations                                                                                                                |       | 517,234            |       | 158,421 |   |
| Receivable from customers                                                                                                                                                   |       | 6,195              |       | 10,555 |   |
| Securities owned, at market value:                                                                                                                                          |       |               |       |   |   |
| Corporate equities                                                                                                                                                          |       | 481,624            |       | 319,378 |   |
| Options                                                                                                                                                                     |       | 188,031            |       | 110,705 |   |
| Exchange-traded funds                                                                                                                                                       |       | 444,757            |       | 128,214 |   |
| U.S. Government obligations                                                                                                                                                 |       | 8                  |       | 8 |   |
| Commissions receivable                                                                                                                                                      |       | 4,687              |       | 5,428 |   |
| Exchange memberships contributed for use,  at market value                                                                                                                  |       | 19,680             |       | 9,450 |   |
| Exchange memberships owned, at adjusted  cost (market value of $97,636 and $41,696, respectively)                                                                           |       | 59,657             |       | 59,332 |   |
| Office equipment and leasehold  improvements, at cost, less accumulated depreciation and amortization of  $11,556 and $10,655, respectively                                 |       | 3,053              |       | 3,459 |   |
| Intangible assets, net of accumulated  amortization:                                                                                                                        |       |               |       |   |   |
| Specialist stock lists                                                                                                                                                      |       | 356,016            |       | 361,204 |   |
| Trade name                                                                                                                                                                  |       | 25,011             |       | 25,011 |   |
| Goodwill                                                                                                                                                                    |       | 250,569            |       | 250,569 |   |
| Other assets                                                                                                                                                                |       | 41,774             |       | 68,406 |   |
| Total assets                                                                                                                                                                |       | $                  | 2,945,412  |   | $ | 2,055,097 |   |
|                                                                                                                                                                        |       |               |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                              |       |               |       |   |   |
| ** **                                                                                                                                                                  |       |               |       |   |   |
| Liabilities:                                                                                                                                                                |       |               |       |   |   |
| Payable to brokers and dealers                                                                                                                                              |       | $                  | 47,466     |   | $ | 120,434 |   |
| Payable to customers                                                                                                                                                        |       | 7,331              |       | 3,830 |   |
| Securities sold, but not yet purchased, at  market value:                                                                                                                   |       |               |       |   |   |
| Corporate equities                                                                                                                                                          |       | 775,491            |       | 265,078 |   |
| Options                                                                                                                                                                     |       | 170,812            |       | 92,580 |   |
| Exchange-traded funds                                                                                                                                                       |       | 205,702            |       | 142,735 |   |
| U.S. Government obligations                                                                                                                                                 |       | 304,421            |       | 3⁄4 |   |
| Accrued compensation                                                                                                                                                        |       | 25,383             |       | 38,195 |   |
| Accounts payable and other accrued expenses                                                                                                                                 |       | 19,990             |       | 18,245 |   |
| Other liabilities                                                                                                                                                           |       | 12,703             |       | 12,510 |   |
| Income taxes payable                                                                                                                                                        |       | 4,100              |       | 1,671 |   |
| Deferred tax liabilities                                                                                                                                                    |       | 152,500            |       | 156,294 |   |
| Short term debt                                                                                                                                                             |       | 3⁄4             |       | 2,000 |   |
| Long term debt                                                                                                                                                              |       | 481,467            |       | 481,448 |   |
| Subordinated liabilities:                                                                                                                                                   |       |               |       |   |   |
| Exchange memberships contributed for use,  at market value                                                                                                                  |       | 19,680             |       | 9,450 |   |
| Other subordinated indebtedness                                                                                                                                             |       | 12,395             |       | 17,285 |   |
| Total liabilities                                                                                                                                                           |       | 2,239,441          |       | 1,361,755 |   |
|                                                                                                                                                                        |       |               |       |   |   |
| Minority interest                                                                                                                                                           |       | 3⁄4             |       | 356 |   |
|                                                                                                                                                                        |       |               |       |   |   |
| Commitments and contingencies                                                                                                                                               |       |               |       |   |   |
|                                                                                                                                                                        |       |               |       |   |   |
| Common stock, $.01 par value, 200,000,000  shares authorized; 60,623,819 and 60,532,080 shares issued and outstanding at  June 30, 2005 and December 31, 2004, respectively |       | 606                |       | 605 |   |
| Additional paid-in capital                                                                                                                                                  |       | 689,036            |       | 687,040 |   |
| Retained earnings                                                                                                                                                           |       | 16,329             |       | 5,341 |   |
| Total stockholders’ equity                                                                                                                                             |       | 705,971            |       | 692,986 |   |
| Total liabilities and stockholders’ equity                                                                                                                             |       | $                  | 2,945,412  |   | $ | 2,055,097 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**LaBRANCHE & CO INC. and SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

**(000’s omitted)**

 
| ** **                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                             | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Net income (loss)                                                                     |       | $                             | 10,988     |   | $ | (16,587 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                          |       |   |   |
| Depreciation and amortization of  intangibles                                         |       | 6,092                         |       | 6,106 |   |
| Amortization of debt issuance costs and  bond discount                                |       | 849                           |       | 6,568 |   |
| Net unrealized gain on non-marketable  investments                                    |       | 3⁄4                        |       | (24,348 | ) |
| Minority interest in consolidated  subsidiary                                         |       | 3⁄4                        |       | 370 |   |
| Compensation expense related to stock-based  compensation                             |       | 1,998                         |       | 2,357 |   |
| Deferred taxes, net                                                                   |       | 18,021                        |       | 28,447 |   |
| Exchange memberships impairment                                                       |       | 3⁄4                        |       | 18,327 |   |
| Changes in operating assets and  liabilities:                                         |       |                          |       |   |   |
| Cash and securities segregated under  federal regulations                             |       | 9,244                         |       | 618 |   |
| Securities purchased under agreements to  resell                                      |       | (26,000                       | )          | (17,000 | ) |
| Receivable from brokers, dealers and  clearing organizations                          |       | (358,813                      | )          | (123,426 | ) |
| Receivable from customers                                                             |       | 4,360                         |       | (2,293 | ) |
| Securities owned, at market value:                                                    |       |                          |       |   |   |
| Corporate equities                                                                    |       | (162,246                      | )          | (18,679 | ) |
| Options                                                                               |       | (77,326                       | )          | (31,672 | ) |
| Exchange-traded funds                                                                 |       | (316,543                      | )          | (270,889 | ) |
| U.S. Government obligations                                                           |       | 3⁄4                        |       | (249 | ) |
| Commissions receivable                                                                |       | 741                           |       | (108 | ) |
| Income taxes receivable                                                               |       | 3⁄4                        |       | (30,776 | ) |
| Other assets                                                                          |       | 3,985                         |       | (11,258 | ) |
| Payable to brokers and dealers                                                        |       | (72,968                       | )          | 77,173 |   |
| Payable to customers                                                                  |       | 3,501                         |       | (3,195 | ) |
| Securities sold, but not yet purchased, at  market value:                             |       |                          |       |   |   |
| Corporate equities                                                                    |       | 510,413                       |       | 150,850 |   |
| Options                                                                               |       | 78,232                        |       | 22,224 |   |
| Exchange-traded funds                                                                 |       | 62,967                        |       | 164,090 |   |
| U.S. Government obligations                                                           |       | 304,421                       |       | 6,704 |   |
| Accrued compensation                                                                  |       | (12,812                       | )          | (13,665 | ) |
| Accounts payable and other accrued expenses                                           |       | 1,745                         |       | (76,331 | ) |
| Other liabilities                                                                     |       | 193                           |       | (1,768 | ) |
| Income taxes payable                                                                  |       | 2,429                         |       | (8,588 | ) |
| Net cash used in operating activities                                                 |       | (6,529                        | )          | (166,998 | ) |
|                                                                                  |       |                          |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                             | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Payments for purchases of office equipment  and leasehold improvements                |       | (497                          | )          | (302 | ) |
| Payments for purchases of exchange  memberships                                       |       | (325                          | )          | (340 | ) |
| Net cash used in investing activities                                                 |       | (822                          | )          | (642 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                             | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Payment to minority interest holder                                                   |       | (356                          | )          | (322 | ) |
| Principal payments of subordinated debt                                               |       | (4,890                        | )          | (3,000 | ) |
| Proceeds from issuance of long term debt                                              |       | 3⁄4                        |       | 460,000 |   |
| Repayment of short term and long term debt                                            |       | (2,000                        | )          | (329,503 | ) |
| Net cash provided by (used in) financing  activities                                  |       | (7,246                        | )          | 127,175 |   |
| Decrease in cash and cash equivalents                                                 |       | (14,597                       | )          | (40,465 | ) |
| CASH AND CASH EQUIVALENTS, beginning of  period                                       |       | 444,446                       |       | 491,885 |   |
| CASH AND CASH EQUIVALENTS, end of period                                              |       | $                             | 429,849    |   | $ | 451,420 |   |
| ** **                                                                            | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING  THE PERIOD FOR:**                      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Interest                                                                              |       | $                             | 25,695     |   | $ | 29,399 |   |
| Income taxes                                                                          |       | $                             | 228        |   | $ | 39 |   |
|                                                                                  |       |                          |       |   |   |
| **SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES:**            |       |                          |       |   |   |
| Net increase in additional paid-in capital  related to stock-based awards             |       | $                             | 1,998      |   | $ | 2,357 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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**LaBRANCHE& CO INC. and SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

** **

**1.**                                      ORGANIZATION AND DESCRIPTION OF BUSINESS

 

The condensed consolidated financial statementsinclude the accounts of LaBranche & Co Inc., a Delaware corporation (the “HoldingCompany”), and its subsidiaries, LaBranche & Co. LLC, a New York limitedliability company, LaBranche Financial Services, Inc., a New York corporation (“LFSI”),LaBranche Structured Products, LLC, a New York limited liability company (“LSP”),LaBranche Structured Products Specialists, LLC, a New York limited liabilitycompany (“LSPS”), LaBranche Structured Products Europe Limited, a UnitedKingdom single member private company (“LSPE”), LABDR Services, Inc., aDelaware corporation (“LABDR”), and LaBranche & Co. B.V., a Netherlandsprivate limited liability company (“BV” and collectively with the HoldingCompany, LaBranche & Co. LLC, LFSI, LSP, LSPS, LSPE and LABDR, the “Company”).The Holding Company is the sole member of LaBranche & Co. LLC, LSP andLSPS, the 100% stockholder of LFSI and LABDR, and the sole owner of BV. LSP isthe sole owner of LSPE.  LaBranche &Co. LLC is a registered broker-dealer that operates primarily as a specialistin equity securities and rights listed on the New York Stock Exchange (“NYSE”)and in equity securities on the American Stock Exchange (“AMEX”). LFSI is aregistered broker-dealer and a member of the NYSE and other exchanges, andprovides securities execution, securities clearing and other related servicesto its own customers and customers of introducing brokers. LFSI also providesdirect-access floor brokerage services to institutional customers. LSP is aregistered broker-dealer that operates as a specialist in options, futures andExchange-Traded Funds (“ETFs”) on several exchanges, and as a market-marker inoptions, ETFs and futures on several exchanges. LSPS is a registeredbroker-dealer that operates as a specialist in ETFs traded on the NYSE. LSPEwas organized to operate as a market-maker for ETFs in Europe, and is in theprocess of registering as a broker-dealer with the United Kingdom’s FinancialSecurities Authority. LABDRprovides disaster recovery services and back-up facilities to other HoldingCompany subsidiaries. BV represents LaBranche & Co. LLC in European marketsand provides client services to LaBranche & Co. LLC’s European listedcompanies.

 

**2.**                                      INTERIM CONDENSED CONSOLIDATED FINANCIALSTATEMENTS AND FINANCIAL INFORMATION

** **

The unaudited interim condensed consolidated financialinformation as of June 30, 2005 and for the three and six months ended June 30,2005 and 2004 is presented in the accompanying condensed consolidated financialstatements. The unaudited interim condensed consolidated financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by U.S. generally accepted accountingprinciples for complete financial information. The unaudited interim condensedconsolidated financial information reflects all adjustments which are, in theopinion of management, necessary for a fair presentation of the results forsuch periods. The preparation of condensed consolidated

 

6

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financial statements in conformity with U.S. generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the condensed consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results coulddiffer from these estimates and assumptions. The unaudited interim condensedconsolidated financial information as of June 30, 2005 should be read inconjunction with the audited consolidated financial statements and notesthereto as of December 31, 2004 included in the Company’s Annual Report on Form10-K for the year ended December 31, 2004 filed with the Securities andExchange Commission (“SEC”) on March 16, 2005, as amended on April 15, 2005(the “2004 10-K”). Results of the second quarter 2005 interim period are notnecessarily indicative of results to be obtained for the full fiscal year.

 

## **3.**                                      INCOMETAXES

 

The Company accounts for income taxes in accordancewith SFAS No. 109, “Accounting for Income Taxes,” which requires therecognition of tax benefits or expenses based on the estimated future taxeffects of temporary differences between the financial statement and tax basesof its assets and liabilities. Deferred tax assets and liabilities primarilyrelate to tax basis differences on stock-based compensation, other compensationaccruals, net operating loss carryforwards, amortization periods of certainintangible assets and differences between the financial statement and tax basesof assets acquired.

 

In the second quarter of 2005, the Company reduced itsincome tax accrual rate from 45.0% to 43.5% primarily as a result of favorableeffects of state and local income tax apportionment and the application of astate tax law change.  During the quarterended June 30, 2005, the Company recognized $2.9 million in tax benefitsresulting from this tax rate change and $0.3 million from the state tax lawchange for a total of $3.2 million for the 2005 second quarter. The Companyexpects to recognize approximately $3.6 million of additional tax benefitsthroughout the remainder of 2005, for a total benefit from changes in taxestimates of $7.0 million for the 2005 fiscal year. The Company expects thatits effective tax rate will be in the range of 20.0%-22.0% for the year endingDecember 31, 2005.

 

The components of the provision (benefit) for incometaxes reflected on the condensed consolidated statements of operations are setforth below (000’s omitted):

 
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current federal, state and local taxes     |       | $                               | 5,486      |                          | $          | (42,745 | ) | $ | (15,283 | ) | $ | (43,871 | ) |
| Deferred tax provision (benefit)           |       | (4,214                          | )          | 21,769                        |       | 18,021 |   | 28,447 |   |
| Total provision (benefit) for income taxes |       | $                               | 1,272      |                          | $          | (20,976 | ) | $ | 2,738 |   | $ | (15,424 | ) |

 

**4.**                                      CAPITAL AND NET LIQUID ASSET REQUIREMENTS

** **

LaBranche & Co. LLC, as a specialist and member ofthe NYSE and AMEX, is subject to the provisions of SEC Rule 15c3-1, as adoptedand administered by the SEC, NYSE and

 

7

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AMEX. LaBranche & Co. LLC is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined.

 

As of June 30, 2005 and December 31, 2004, LaBranche& Co. LLC’s net capital, as defined under SEC Rule 15c3-1, was $460.5million and $455.1 million, respectively, which exceeded the minimumrequirements by $459.0 million and $453.2 million, respectively. LaBranche& Co. LLC’s aggregate indebtedness to net capital ratio on those dates was..05 to 1 and .06 to 1, respectively.

 

The NYSE generally requires itsspecialist firms to maintain a minimum dollar regulatory capital amount inorder to establish that they can meet, with their own net liquid assets, theirposition requirement.As of June 30, 2005 and December 31, 2004, LaBranche & Co. LLC’s and LSPS’NYSE minimum required combined dollar amount of net liquid assets, as defined,was $447.0 million. LaBranche & Co. LLC’s actual net liquid assets, asdefined, were $455.7 million and $458.7 million as of June 30, 2005 andDecember 31, 2004, respectively. As of June 30, 2005 and December 31, 2004,LaBranche & Co. LLC’s actual net liquid assets exceeded the combined netliquid assets requirement of LaBranche & Co. LLC and LSPS. Both LaBranche& Co. LLC and LSPS thus satisfied their respective net liquid assetrequirements as of those dates.

 

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of (a) $1.0 millionor (b) an amount sufficient to assume a position of sixty trading units of eachsecurity in which the equity specialist is registered. As of June 30, 2005 andDecember 31, 2004, LaBranche & Co. LLC satisfied the AMEX equity specialistliquid asset requirements.

 

As a registered broker-dealer and member firm of theNYSE, LFSI is also subject to SEC Rule 15c3-1, as adopted and administered bythe SEC and the NYSE. Under the alternative method permitted by this rule, theminimum required net capital is equal to the greater of $1.5 million or 2.0% ofaggregate debit items, as defined. As of June 30, 2005 and December 31, 2004,LFSI’s net capital, as defined, was $10.6 million and $12.5 million,respectively, which exceeded minimum requirements by $9.1 million and $11.0million, respectively.

 

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by the SEC. Asof June 30, 2005, there was no reserve requirement under this rule.As of January 4, 2005, to comply with its December 31, 2004 requirement,cash and U.S. Treasury Bills in the amount of $0.1 million were segregated in aspecial reserve account for the exclusive benefit of customers, thus exceedingactual requirements by $0.1 million. In addition, the Proprietary Accounts ofIntroducing Brokers (“PAIB”) Calculation is computed in order for correspondentfirms to classify their assets held by LFSI as allowable assets in thecorrespondents’ net capital calculation. As of July 5, 2005, to comply with LFSI’s June 30, 2005 requirement,cash and U.S. Treasury Bills in the amount of $4.6 million were segregated in aspecial reserve account for the exclusive benefit of customers, thus exceedingactual requirements by $3.0 million. As of January 4, 2005, to comply with LFSI’sDecember 31, 2004 requirement, cash and U.S. Treasury Bills in the amount of$4.4 million were segregated

 

8

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in a special reserve accountfor the exclusive benefit of customers, thus exceeding actual requirements by$3.4 million.

 

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by the SEC andthe AMEX. LSP is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of June 30, 2005 and December 31,2004, LSP’s net capital, as defined, was $35.5 million and $23.8 million,respectively, which exceeded minimum requirements by $34.7 million and $23.2million, respectively.

 

LSPS, as a specialist and member of the NYSE, issubject to the provisions of SEC Rule 15c3-1, as adopted and administered bythe SEC and NYSE. LSPS is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of June 30, 2005 and December 31,2004, LSPS’ net capital, as defined, was $3.0 million and $4.4 million,respectively, which exceeded the minimum requirements by $2.9 million and $4.3million, respectively. LSPS’ aggregate indebtedness to net capital ratio onthose dates was .32 to 1 and .13 to 1, respectively.

 

## **5.**                                      EARNINGS(LOSS) PER SHARE

 

Earnings (loss) per share are computed in accordancewith SFAS No. 128, “Earnings Per Share.” Basic earnings (loss) per share iscalculated by dividing net income (loss) applicable to common stockholders bythe weighted-average number of common shares outstanding. Diluted earnings(loss) per share includes the determinants of basic earnings (loss) per shareand, in addition, gives effect to dilutive potential common shares for periodsin which there is net income available to common stockholders.

 

The computations of basic and diluted earnings (loss)per share are set forth below (000’s omitted, except per share data): 

 
| ** **                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                                                     |       | $                                | 8,742      |                           | $          | (24,501 | ) | $ | 10,988 |   | $ | (16,587 | ) |
| Less: preferred dividends and discount  accretion                                                                     |       | 3⁄4                           |       | 1,056                          |       | 3⁄4 |   | 2,112 |   |
| Numerator for basic and diluted earnings  (loss) per share – net income (loss) applicable to common stockholders |       | $                                | 8,742      |                           | $          | (25,557 | ) | $ | 10,988 |   | $ | (18,699 | ) |
| Denominator for basic earnings (loss) per  share – weighted-average number of common shares outstanding          |       | 60,624                           |       | 59,822                         |       | 60,610 |   | 59,814 |   |
| Dilutive shares:                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Restricted stock units                                                                                                |       | 64                               |       | 3⁄4                         |       | 260 |   | 3⁄4 |   |
| Denominator for diluted earnings (loss) per  share – weighted-average number of common shares outstanding        |       | 60,688                           |       | 59,822                         |       | 60,870 |   | 59,814 |   |
| Earnings (loss) per share:                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                 |       | $                                | 0.14       |                           | $          | (0.43 | ) | $ | 0.18 |   | $ | (0.31 | ) |
| Diluted                                                                                                               |       | $                                | 0.14       |                           | $          | (0.43 | ) | $ | 0.18 |   | $ | (0.31 | ) |

 

9

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Options to purchase an aggregate of 1,969,778 and2,724,223 shares of common stock were outstanding during the three and sixmonths ended June 30, 2005 and 2004, respectively, but were not included in thecomputation of diluted earnings per share because the options’ exercise priceswere greater than the average market price of the Company’s common stock.  In addition, potential common shares relatingto restricted stock and restricted stock units for the three months ended June30, 2005 and 2004 totaling 1,123,237 and 566,164 shares, respectively, and sixmonths ended June 30, 2005 and 2004 totaling 926,945 and 548,618 shares,respectively, were antidilutive.  Thecalculation of diluted earnings per share does not include the antidilutiveeffect of these stock-based awards.

 

## **6.**                                      EMPLOYEEINCENTIVE PLANS

 

Effective January 1, 2003, the Company began toaccount for stock-based employee compensation in accordance with theprospective method prescribed by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure, an Amendment of FASB Statement No. 123.”Under this method, compensation expense is recognized over the period that an employeeprovides service in exchange for the award, based on the grant date fair valueof stock options and restricted stock units granted to employees on or afterJanuary 1, 2003.

 

Compensation expense resulting from stock-based awardsgranted for the year ended December 31, 2002 and prior years is accounted forunder the intrinsic value-based method prescribed by APB No. 25, “Accountingfor Stock Issued to Employees,” as permitted by SFAS No. 123, “Accountingfor Stock-Based Compensation.” In accordance with APB No. 25, nocompensation expense is recognized for stock options issued for years prior tofiscal 2003 that had no intrinsic value on the date of grant. In addition,compensation expense was not recognized for those stock options issued in connectionwith the Company’s acquisition of ROBB PECK McCOOEY Financial Services, Inc. (“RPM”)in March 2001. Such options were treated as part of the purchase price of RPMin accordance with the rules of purchase accounting.

 

Had the Company recognized compensation expense overthe relevant service period under the fair value-based method of SFASNo. 123 with respect to stock options granted for the year ended December31, 2002 and prior years, net income (loss) applicable to common stockholderswould have been reduced, resulting in pro forma net income (loss) applicable tocommon stockholders and earnings per share as presented below:

 

10

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| ** **                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(000’s omitted, except per  share data)**                                                  | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) applicable to common  stockholders, as reported                                 |       | $                                | 8,742      |                           | $          | (25,557 | ) | $ | 10,988 |   | $ | (18,699 | ) |
| Add: Stock-based compensation expense  included in reported net income (loss) (net of tax effect) |       | 474                              |       | 532                            |       | 1,004 |   | 1,164 |   |
| Less: Stock-based compensation expense  under SFAS 123 (net of tax effect)                        |       | (474                             | )          | (1,891                         | )          | 1,198 |   | (4,031 | ) |
| Pro forma net income (loss) applicable to  common stockholders                                    |       | $                                | 8,742      |                           | $          | (26,916 | ) | $ | 10,794 |   | $ | (21,566 | ) |
| Diluted earnings (loss) per share, as  reported                                                   |       | $                                | 0.14       |                           | $          | (0.43 | ) | $ | 0.18 |   | $ | (0.31 | ) |
| Pro forma diluted earnings (loss) per share                                                       |       | $                                | 0.14       |                           | $          | (0.45 | ) | $ | 0.18 |   | $ | (0.36 | ) |

 

The effect of applying SFAS No. 123 in the proforma disclosure above may not be representative of the potential effectstock-based compensation could have on net income in future periods.

 

## **7.**                                      BUSINESSSEGMENTS

 

Segment information is presented in accordance withSFAS No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation.” The Company’s business segments are based on the nature of thefinancial services provided, their revenue source and the Company’s managementorganization.

 

The Company’s Specialist segment operates as aspecialist in equities, rights and ETFs listed on the NYSE, as a specialist inequities, options, ETFs and futures on several exchanges,****andas a market-maker in ETFs, futures and options on several exchanges. Thissegment also provides support services for the NYSE specialist activities. TheSpecialist segment currently includes the operations of LaBranche & Co.LLC, LSP, LSPS, LABDR and BV.

 

The Company’s Execution and Clearing segment providessecurities execution, securities clearing and other related services to its owncustomers and customers of introducing brokers. This segment also providesdirect-access floor brokerage services to institutional customers. TheExecution and Clearing segment currently includes the operations of LFSI.

 

Revenues and expenses directly associated with each segmentare included in determining its operating results. Other expenses, includingcorporate overhead, which are not directly attributable to a particularsegment, generally are allocated to each segment based on its resource usagelevels or other appropriate measures. Interest with respect to the Company’s$473.5 million aggregate principal amount of senior notes and seniorsubordinated notes outstanding, certain administrative expenses, corporateoverhead expenses and other sources of revenues are not specifically allocatedby management when reviewing the Company’s segments’ performance, and appear inthe “Other” section. Selected financial information for each segment is setforth below (000’s omitted):

 

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| ** **                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Specialist Segment:**                           |       |                            |       |                          |       |   |   |   |   |
| Revenues                                          |       | $                               | 66,083     |                          | $          | 54,429 |   | $ | 120,571 |   | $ | 120,773 |   |
| Operating expenses                                |       | 37,714                          |       | 30,832                        |       | 69,806 |   | 65,213 |   |
| Exchange memberships impairment                   |       | 3⁄4                          |       | 16,300                        |       | 3⁄4 |   | 16,300 |   |
| Depreciation and amortization of  intangibles     |       | 2,894                           |       | 2,909                         |       | 5,808 |   | 5,812 |   |
| Income before minority interest  and taxes        |       | 25,475                          |       | 4,388                         |       | 44,957 |   | 33,448 |   |
| Segment goodwill                                  |       | 250,569                         |       | 289,593                       |       | 250,569 |   | 289,593 |   |
| Segment assets                                    |       | $                               | 2,755,096  |                          | $          | 2,140,348 |   | $ | 2,755,096 |   | $ | 2,140,348 |   |
|                                              |       |                            |       |                          |       |   |   |   |   |
| **Execution and Clearing Segment:**               |       |                            |       |                          |       |   |   |   |   |
| Revenues                                          |       | $                               | 10,792     |                          | $          | 11,571 |   | $ | 22,987 |   | $ | 24,811 |   |
| Operating expenses                                |       | 11,561                          |       | 13,295                        |       | 24,361 |   | 27,426 |   |
| Exchange memberships impairment                   |       | 3⁄4                          |       | 2,027                         |       | 3⁄4 |   | 2,027 |   |
| Depreciation and amortization of  intangibles     |       | 113                             |       | 117                           |       | 223 |   | 244 |   |
| Loss before minority interest  and taxes          |       | (882                            | )          | (3,868                        | )          | (1,597 | ) | (4,886 | ) |
| Segment assets                                    |       | $                               | 48,587     |                          | $          | 53,241 |   | $ | 48,587 |   | $ | 53,241 |   |
|                                              |       |                            |       |                          |       |   |   |   |   |
| **Other****(1):**                                 |       |                            |       |                          |       |   |   |   |   |
| Revenues                                          |       | $                               | 870        |                          | $          | 24,702 |   | $ | 1,490 |   | $ | 25,031 |   |
| Operating expenses                                |       | 15,417                          |       | 21,451                        |       | 31,063 |   | 36,157 |   |
| Debt repurchase premium                           |       | 3⁄4                          |       | 49,028                        |       | 3⁄4 |   | 49,028 |   |
| Depreciation and amortization of  intangibles     |       | 32                              |       | 25                            |       | 61 |   | 49 |   |
| Loss before minority interest  and taxes          |       | (14,579                         | )          | (45,802                       | )          | (29,634 | ) | (60,203 | ) |
| Segment assets                                    |       | $                               | 141,729    |                          | $          | 197,793 |   | $ | 141,729 |   | $ | 197,793 |   |
|                                              |       |                            |       |                          |       |   |   |   |   |
| **Total:**                                        |       |                            |       |                          |       |   |   |   |   |
| Revenues                                          |       | $                               | 77,745     |                          | $          | 90,702 |   | $ | 145,048 |   | $ | 170,615 |   |
| Operating expenses                                |       | 64,692                          |       | 65,578                        |       | 125,230 |   | 128,796 |   |
| Exchange memberships impairment                   |       | 3⁄4                          |       | 18,327                        |       | 3⁄4 |   | 18,327 |   |
| Debt repurchase premium                           |       | 3⁄4                          |       | 49,028                        |       | 3⁄4 |   | 49,028 |   |
| Depreciation and amortization of  intangibles     |       | 3,039                           |       | 3,051                         |       | 6,092 |   | 6,105 |   |
| Income (loss) before minority  interest and taxes |       | 10,014                          |       | (45,282                       | )          | 13,726 |   | (31,641 | ) |
| Goodwill                                          |       | 250,569                         |       | 289,593                       |       | 250,569 |   | 289,593 |   |
| Assets                                            |       | $                               | 2,945,412  |                          | $          | 2,391,382 |   | $ | 2,945,412 |   | $ | 2,391,382 |   |

 

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**(1)**                                 *Other* is comprised primarily of the intereston the Holding Company’s indebtedness, unallocated corporate administrativeexpenses, including professional and legal costs, unallocated revenues(primarily interest income and net gains from non-marketable investments) andelimination entries.

 

## **8.**                                      CONTINGENCIES

 

There have been no material new developments in theCompany’s legal proceedings since the filing of the Company’s Form 10-Q for thequarter ended March 31, 2005, filed May 10, 2005 (the “First Quarter 10-Q”),which updated the legal proceedings disclosed in the 2004 10-K, except asfollows:

 

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LastAtlantis/Rule. In an order dated May 9, 2005, the court denied plaintiffs’ motion forreconsideration with respect to their antitrust claims but granted plaintiffsleave to seek to re-assert their securities law claims (Section 10(b) of theExchange Act and Rule 10b-5).  In anorder dated June 9, 2005, the court clarified its ruling on the motion forreconsideration, granting plaintiffs leave to seek to re-assert their breach ofcontract, common law fraud, breach of fiduciary duty, Illinois consumer fraudand deceptive business practices statute and tortious interference withplaintiffs’ business claims.  On June 1,2005, plaintiffs filed an amended complaint asserting securities law (Section10(b) of the Exchange Act and Rule 10b-5), breach of contract, common lawfraud, breach of fiduciary duty, Illinois consumer fraud and deceptive businesspractices statute and tortious interference with plaintiffs’ business claims.  Despite the court’s ruling on the motion forreconsideration, plaintiffs’ amended complaint also asserted federal antitrustlaw claims (Section 1 of the Sherman Act). On June 24, 2005, plaintiffs filed a motion for leave to file a secondamended complaint, which does not include antitrust claims, but does assertsecurities law (Section 10(b) of the Exchange Act and Rule 10b-5), breach ofcontract, common law fraud, breach of fiduciary duty, Illinois consumer fraudand deceptive business practices statute, tortious interference with plaintiffs’business, and tortious interference with contracts claims, and purports to jointwo additional parties that allege they are purchasers and sellers of optionsas plaintiffs.

 

On July 15,2005, the Court dismissed the Rule action due to plaintiffs’ failure to serveprocess on the defendants in the matter.

 

The Companybelieves that the claims asserted against it by the plaintiffs in the pendingproceedings described in the 2004 10-K, the First Quarter 10-Q and above arewithout merit, and the Company denies all allegations of wrongdoing.  There can be no assurance, however, as to theoutcome or timing of the resolution of these proceedings.  The Company therefore is unable to estimatethe amount or potential range of any loss that may arise out of theseproceedings.  The range of possibleresolutions could include determinations and judgments against the Company orsettlements that could require substantial payments by the Company that couldhave a material adverse effect on the Company’s financial condition, results ofoperations and cash flows.

 

In addition to the proceedings described in the 2004 10-K, the FirstQuarter 10-Q and above, the Company and its operating subsidiaries have beenthe target, from time to time, of various claims, lawsuits and regulatoryinquiries in the ordinary course of their respective businesses. While theultimate outcome of those claims and lawsuits which currently are pendingcannot be predicted with certainty, the Company believes, based on itsunderstanding of the facts of these proceedings, that their ultimate resolutionwill not, in the aggregate, have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows.

 

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## **Item2.**           Management’s Discussionand Analysis of Financial Condition and Results of Operations.

 

*Unless the contextotherwise requires, the “Company” or “we” shall mean LaBranche & Co Inc.and its wholly-owned subsidiaries.*

* *

*This Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with our Annual Report on Form 10-K for the fiscal yearended December 31, 2004 (the “2004 10-K”) and our Condensed ConsolidatedFinancial Statements and the Notes thereto contained in this report.*

* *

***ExecutiveOverview***

* *

*Our net income available to common stockholders was$8.7 million, or $0.14 per diluted share, for the second quarter of 2005,compared to a net loss applicable to common stockholders of $25.6 million, or$0.43 per diluted share, for the same period last year. Our 2005 second quarterresults include a tax benefit of $3.2 million, or $0.05 per diluted share,relating to a reduction in our income tax accrual rate and the application of arecent state tax law change. The 2004 second quarter results, however, includeda $24.6 million appreciation in fair value of an investment, as well as chargesof $55.9 million in connection with the May 2004 refinancing of our debt and anon-cash charge of $18.3 million associated with the impairment of our NYSEexchange memberships. Our 2005 second quarter results reflect increasedprincipal trading revenues from higher share volumes and dollar value traded ofour NYSE-listed company stocks, continued expansion of our structured productstrading activities, and higher interest income from increases in interest ratesand our cash balances.*

* *

*Our netincome available to common stockholders for the six months ended June 30, 2005was $11.0 million, or $0.18 per diluted share, compared to a net lossapplicable to common stockholders of $18.7 million, or $0.31 per diluted share,for the same period last year. Our 2005 year-to-date results include a taxbenefit of $3.4 million, or $0.06 per diluted share, relating to the income taxaccrual rate and tax law changes described above.  Our results for the first half of 2005, ascompared to the same period of 2004, reflect a decrease in our net gain onprincipal transactions, primarily from lower volatility and increased programtrading throughout the period. These two key drivers of our NYSE equityspecialist operations resulted in fewer opportunities to commit our capital forprincipal trades. However, our expanded trading of ETFs, futures and optionspartially offset the performance of our equity specialist trading.*

* *

*Notwithstandingthe announcement of the planned merger between the NYSE and ArchipelagoHoldings, Inc. (currently expected to be consummated in 2006), SEC approval ofRegulation NMS and NYSE hybrid model initiatives, there have been nosubstantive changes to NYSE market structure or the role of the specialist.Currently, there is only speculation as to how the NYSE specialists willinteract with the general marketplace while conducting trading in their listedcompany stocks on the floor of the NYSE once the planned merger is consummated.Although there may be changes in this regard, we expect that the specialistwill continue to be an integral part of the NYSE market structure. Further, theNYSE and its senior*

 

14

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*executiveshave confirmed that the specialists will continue to be an integral part of themarket model of the new NYSE Group following the proposed merger withArchipelago*.

* *

*We also continue to expand ourproduct offerings in our specialist segment by not only increasing ourparticipation as a specialist in U.S-listed ETFs, but by seeking to expand ouroperations outside the United States.  Webelieve that these efforts will continue to diversify our product offerings andrevenue streams, while maintaining our business focus and strategy on theactivities we do best—acting as a specialist and market-maker inexchange-traded securities and other products.*

* *

*We continue to focus our strategic initiatives ondeveloping the best possible technology to address the needs of investorswithin the NYSE’s current and future market structure and, in particular, thedelivery of orders to the point of sale. Despite the current migration to an expanded electronic tradingplatform, equity exchanges aim to offer investors quality of execution and bestprice. We believe that this service can best be delivered by specialists whoeffectively manage market imbalances in stock prices of, and provide liquidityto, NYSE-listed companies.*

* *

*Ourbusiness, by its nature, does not produce predictable earnings. In any givenperiod, our results can be materially affected by general economic and otherconditions, especially those directly related to securities trading.*

* *

On March 29, 2004, we entered into an agreement with the NYSE and theSEC to settle their investigations concerning our NYSE specialist tradingactivity and agreed to comply with the undertakings described in our 2004 10-K.Our compliance with these undertakingshas enhanced, and will continue to improve, our risk management activitiesrelated to our specialist trading activity.

 

**NewAccounting Developments**

 

In December 2004, the FASB issued a revision to SFASNo. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123(R), “ShareBased Payment.” SFAS No. 123(R) will require compensation costs related toshare-based payment transactions to be recognized in the financial statementsover the period that an employee provides service in exchange for the award.SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Effective April 15, 2005, the SEC issuedfinal rule No. 33-8568, which amended the date for compliance with SFAS No.123(R) for registrants that do not file as small business issuers to the firstinterim or annual reporting period of the registrant’s fiscal year beginning onor after June 15, 2005, which for us is January 1, 2006. We do notexpect the adoption of SFAS No. 123(R) to have a material impact on ourfinancial condition or results of operations.

 

15

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**CriticalAccounting Estimates**

 

*Goodwill and Other IntangibleAssets*

 

We determine the fair value of each of our reportingunits and the fair value of each reporting unit’s goodwill under the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets.”  In determiningfair value, we use standard analytical approaches to business enterprisevaluation (“BEV”), such as the market comparable approach and the incomeapproach. The market comparable approach is based on comparisons of the subjectcompany to similar companies engaged in an actual merger or acquisition or topublic companies whose stocks are actively traded.  As part of this process, multiples of valuerelative to financial variables, such as earnings or stockholders’ equity, aredeveloped and applied to the appropriate financial variables of the subjectcompany to indicate its value.  The incomeapproach involves estimating the present value of the subject company’s futurecash flows by using projections of the cash flows that the business is expectedto generate, and discounting these cash flows at a given rate of return. Eachof these BEV methodologies requires the use of management estimates andassumptions. For example, under the market comparable approach, we assign acertain control premium to the public market price of our common stock as ofthe valuation date in estimating the fair value of our specialist reportingunit.  Similarly, under the incomeapproach, we assume certain growth rates for our revenues, expenses, earningsbefore interest, income taxes, depreciation and amortization, returns onworking capital, returns on other assets and capital expenditures, amongothers.  We also assume certain discountrates and certain terminal growth rates in our calculations.  Given the subjectivity involved in selectingwhich BEV approach to use and in determining the input variables for use in ouranalyses, it is possible that a different valuation model and the selection ofdifferent input variables could produce a materially different estimate of fairvalue of our goodwill.

 

We review the reasonableness of the carrying value ofour goodwill annually as of December 31, unless an event or change incircumstances requires an interim reassessment of impairment. During the sixmonths ended June 30, 2005, there were no changes in circumstances thatnecessitated goodwill impairment testing. We cannot provide assurance thatfuture goodwill impairment testing will not result in impairment charges insubsequent periods.

 

Our other intangible asset, as defined under SFAS No.142, is our trade name. We determine the fair value of our trade name byapplying the income approach using the royalty savings methodology. This methodassumes that the trade name has value to the extent we are relieved of theobligation to pay royalties for the benefits received from it.  Application of this methodology requires estimatingan appropriate royalty rate, which is typically expressed as a percentage ofrevenue. Estimating an appropriate royalty rate includes reviewing evidencefrom comparable licensing agreements and considering qualitative factorsaffecting the trade name. Given the subjectivity involved in selecting whichBEV approach to use and in determining the input variables for use in ouranalyses, it is possible that a different valuation model and the selection ofdifferent input variables could produce a materially different estimate of fairvalue of our trade name.

 

We review the reasonableness of the carrying amount ofour trade name on an annual basis in conjunction with our goodwill impairmentassessment. We cannot provide assurance that future trade name impairmenttesting will not result in impairment charges in subsequent periods.

 

16

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*Exchange Memberships*

 

The determination of the fair value of our exchangememberships is a critical accounting estimate. Exchange memberships owned by usare originally carried at cost, pursuant to the American Institute of CertifiedPublic Accountants (“AICPA”) *Audit and AccountingGuide—Brokers and Dealers in Securities*.  Adjustments to carrying value are made if wedeem that an “other-than-temporary” decline in value, as defined in (a)Emerging Issues Task Force (“EITF”) Issue No. 03-1, *TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,*and (b) Section M of Topic 5 of the SEC staff accountingbulletin series (“SAB No. 59”), has occurred. In determining whether thevalue of our owned exchange memberships is impaired (*i.e*.,fair market value is below cost) and whether such impairment is temporary orother-than-temporary, we consider many factors, including, but not limited to,information regarding recent sale and lease prices of exchange memberships,historical trends of sale and lease prices of memberships on a particularexchange and their duration, the current condition of the particular exchange’smarket structure, legal and regulatory developments affecting the particularexchange’s market structure and earnings capability, trends in new listings onthe particular exchange, general global and national economic factors and ourknowledge and judgment of the specialist and execution and clearing industriesand the securities market as a whole. As a result of our analysis of the above-mentionedfactors for the six months ended June 30, 2005, the carrying values of ourowned exchange memberships were not impaired.

 

We cannot provide assurance that the consistentapplication of this accounting policy to future reporting periods will notresult in further adjustments to the carrying value of our exchangememberships.

 

**Results of Operations**

** **

# **Specialist Segment Operating Results**

 
| ** **                                 | ** ** | **For the Three** | ** ** | **For the Six**  | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** |
|--------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **Months Ended**  | ** ** | **Months Ended** | ** ** | **2005 vs. 2004** | ** ** | **2005 vs. 2004** | ** ** |
| ** **                                 | ** ** | **June 30,**      | ** ** | **June 30,**     | ** ** | **Percentage**    | ** ** | **Percentage**    | ** ** |
| **(000’s omitted)**                   | ** ** | **2005**          | ** ** | **2004**         | ** ** | **2005**          | ** ** | **2004**          | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                       |       |              |       |             |       |              |       |              |       |   |   |   |   |
| Revenues:                                  |       |              |       |             |       |              |       |              |       |   |   |   |   |
| Net gain on principal transactions         |       | $                 | 47,871     |             | $          | 40,445            |       | $                 | 87,912     |   | $ | 92,743 |   | 18.4 | % | (5.2 | )% |
| Commissions                                |       | 10,596            |       | 12,311           |       | 22,153            |       | 24,818            |       | (13.9 | ) | (10.7 | ) |
| Other                                      |       | 7,616             |       | 1,673            |       | 10,506            |       | 3,212             |       | 355.2 |   | 227.1 |   |
| Total segment revenues                     |       | 66,083            |       | 54,429           |       | 120,571           |       | 120,773           |       | 21.4 |   | (0.2 | ) |
|                                       |       |              |       |             |       |              |       |              |       |   |   |   |   |
| Exchange memberships impairment            |       | 3⁄4            |       | 16,300           |       | 3⁄4            |       | 16,300            |       | (100.0 | ) | (100.0 | ) |
| Operating expenses                         |       | 40,608            |       | 33,741           |       | 75,614            |       | 71,025            |       | 20.4 |   | 6.5 |   |
|                                       |       |              |       |             |       |              |       |              |       |   |   |   |   |
| Income before minority interest  and taxes |       | $                 | 25,475     |             | $          | 4,388             |       | $                 | 44,957     |   | $ | 33,448 |   | 480.6 | % | 34.4 | % |

 

 

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Revenues from our Specialist segment consist primarilyof net gain earned from principal transactions in securities for which we actas specialist and market-maker. Net gain on principal transactions representstrading gains, net of trading losses and SEC transaction fees, whereapplicable, and are earned by us when we act as principal buying and sellingour specialist stocks, rights, options, ETFs and futures. Also included in netgain on principal transactions are (a) net gains and losses resulting from ourmarket-making activities in ETFs, options and futures, (b) net gains and lossesresulting from trading of foreign currencies, futures, equities and fixedincome instruments underlying the rights, ETFs and options for which we act asspecialist or market-maker, (c) accrued dividends receivable or payable on ourequity positions and (d) accrued interest receivable/payable on our fixedincome positions. These revenues are primarily affected by changes in sharevolume traded and fluctuations in the prices of stocks, rights, options, ETFsand futures in which we are the specialist or in which we make a market.

 

Commissions revenue consists primarily of fees earnedwhen our specialists act as agents by executing, after a specified period oftime, limit orders in equities on behalf of brokers, professional traders andbroker-dealers. We do not earn commissions when we match market orders or whenwe act as a market-maker.

 

Other revenue at our Specialist segment consistsprimarily of interest income earned on cash balances and short terminvestments, rebate income earned on stock borrow transactions, proprietarytrading gains or losses, and gains or losses from an investment in a hedgefund.

 

***Key Metrics of our NYSE EquitySpecialist Business—***When assessing the performance and financial results of a specificperiod, management examines certain metrics to ascertain their impact on ourNYSE equity specialist’s financial results. Some of the key metrics that wereview, and their values for the three and six month periods ended June 30,2005 and 2004, are as follows:

 
| ** **                                                                           | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** | **Three  Months  2005 vs.  2004  Percentage** | ** ** | **Six  Months  2005 vs.  2004  Percentage** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                                                 |       |                                      |       |                                    |       |                                          |       |                                        |       |   |   |   |   |
| NYSE average daily share volume (in  millions)                                       |       | 1,569.4                                   |       | 1,461.2                                 |       | 1,598.5                                       |       | 1,500.2                                     |       | 7.4 | % | 6.6 | % |
| LAB share volume on the NYSE (in billions)                                           |       | 24.7                                      |       | 23.3                                    |       | 49.9                                          |       | 49.2                                        |       | 6.0 |   | 1.4 |   |
| LAB dollar value on the NYSE (in billions)                                           |       | $                                         | 804.1      |                                    | $          | 696.2                                         |       | $                                           | 1,617.6    |   | $ | 1,439.6 |   | 15.5 |   | 12.4 |   |
| Share volume of principal shares traded (in  billions)                               |       | 4.7                                       |       | 5.3                                     |       | 9.9                                           |       | 11.8                                        |       | (11.3 | ) | (16.1 | ) |
| Dollar value of principal shares traded (in  billions)                               |       | $                                         | 166.4      |                                    | $          | 168.3                                         |       | $                                           | 343.0      |   | $ | 364.3 |   | (1.1 | ) | (5.8 | ) |
| Average closing price of the CBOE  Volatility Index                                  |       | 13.4                                      |       | 16.2                                    |       | 13.1                                          |       | 16.5                                        |       | (17.3 | ) | (20.6 | ) |
| Program trading as an approximate  percentage of NYSE average daily share volume (1) |       | 58.7                                      | %          | 52.2                                    | %          | 57.3                                          | %          | 47.3                                        | %          | 6.5 | (2) | 10.0 | (2) |

 

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(1)   The programtrading percentage is determined using the average of weekly percentagesthroughout the appropriate time periods. Due to the weekly basis of our sourcedata, the values indicated do not exactly coincide with our three and six-monthreporting periods.

 

(2)          Changerepresents percentage points.

 

Generally, an increase in the average daily sharevolume on the NYSE, an increase in volatility (as measured by the averageclosing price of the Chicago Board of Options Exchange’s Volatility Index®, orthe “VIX”), an increase in the dollar value and share volume of stocks in whichspecialists trade, or a decline in the level of program trading enables thespecialist to increase its level of principal trading participation and thusits ability to realize gains on principal transactions. While we monitor thesemetrics each period, they are not the sole indicators or factors that determineour level of revenues, profitability or overall performance in any givenperiod. Other factors, such as extreme price movements, unanticipated listedcompany news and events and other uncertainties may influence our financialperformance either positively or negatively.

 

## **Three Months Ended June 30, 2005 versus June 30, 2004**

 

Net gain onprincipal transactions for the second quarter of 2005 increased as a result ofstrong performances by our equities, options and ETF specialist activities, andour options, futures and ETF market-making activities. The increase in the NYSEaverage daily share volume, along with increases in share volume and dollarvalue traded of our NYSE specialist stocks, provided our NYSE equityspecialists with more opportunities to participate in trades as principal,which contributed to our increase in net gain on principal transactions.  Partially mitigating these results were lowervolatility and increased program trading. Net gain on principal transactions from our specialist and market-makingactivities also increased as a result of an increase in the number anddiversity of derivative products we trade, as well as the size of our positionsin these products.

 

Commission revenue during the second quarter of 2005 decreased as aresult of a decrease in share volume of transactions with respect to which aspecialist commission may be charged. Despite the increase in share volume on the NYSE and in our NYSE specialiststocks, the increase in program trading, which facilitates fast executions, hasreduced the number of limit orders and therefore decreased our commissionrevenue.

 

The increase in other revenue was attributable primarily to higherinterest income on short term investments and stock-borrow transactions.Interest income on our short term investments increased due to higher interestrates during the three months ended June 30, 2005 as compared to the sameperiod in 2004, as well as increases in excess cash balances. Stock-borrowrebate income was higher due primarily to increased stock borrow positions andhigher interest rates during the 2005 second quarter, as compared to the 2004second quarter.

 

19

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## **Six Months Ended June 30, 2005 versus June 30, 2004**

 

The decline inour net gain on principal transactions reflects a decrease in our equityspecialist principal trading revenue for the six months ended June 30, 2005 ascompared to the same period in 2004, which was primarily attributable toreduced opportunities for our NYSE specialists to participate in trades asprincipal during the first three months of 2005.  These reduced opportunities were a reflectionof lower volatility and higher levels of program trading for the first half of2005, as compared to the 2004 period. Partially offsetting this decrease was anincrease in net gain on principal transactions from our specialist andmarket-making activities as a result of an increase in the number and diversityof derivative products we trade, as well as the size of our positions in theseproducts.

 

Commission revenue during the first half of 2005 decreased as a resultof a decrease in share volume of transactions with respect to which aspecialist commission may be charged. Despite the increase in share volume on the NYSE and in our NYSEspecialist stocks, the increase in program trading, which facilitates fastexecutions, has reduced the number of limit orders and therefore decreased ourcommission revenue.

 

The increase in other revenue was attributable primarily to higherinterest income on short term investments and stock-borrow transactions.Interest income on our short term investments increased due to higher interestrates during the six months ended June 30, 2005 as compared to the same periodin 2004 as well as increases in excess cash balances. Stock-borrow rebateincome was higher due primarily to increased stock borrow positions and higherinterest rates during the first half of 2005, as compared to the first half of2004.

 

For a discussion of operating expenses, see “OurOperating Expenses” below.

 

Execution andClearing Segment Operating Results

 
| ** **                               | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** | **Three Months  2005 vs. 2004  Percentage** | ** ** | **Six Months  2005 vs. 2004  Percentage** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **(000’s omitted)**                 | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                     |       |                                      |       |                                    |       |                                        |       |                                      |       |   |   |   |   |
| Revenues:                                |       |                                      |       |                                    |       |                                        |       |                                      |       |   |   |   |   |
| Commissions                              |       | $                                         | 10,594     |                                    | $          | 11,413                                      |       | $                                         | 22,600     |   | $ | 24,429 |   | (7.2 | )% | (7.5 | )% |
| Other                                    |       | 198                                       |       | 158                                     |       | 387                                         |       | 382                                       |       | 25.3 |   | 1.0 |   |
| Total segment revenues                   |       | 10,792                                    |       | 11,571                                  |       | 22,987                                      |       | 24,811                                    |       | (6.7 | ) | (7.4 | ) |
|                                     |       |                                      |       |                                    |       |                                        |       |                                      |       |   |   |   |   |
| Exchange memberships impairment          |       | 3⁄4                                    |       | 2,027                                   |       | 3⁄4                                      |       | 2,027                                     |       | (100.0 | ) | (100.0 | ) |
| Operating expenses                       |       | 11,674                                    |       | 13,412                                  |       | 24,584                                      |       | 27,670                                    |       | (13.0 | ) | 11.2 |   |
|                                     |       |                                      |       |                                    |       |                                        |       |                                      |       |   |   |   |   |
| Loss before minority interest  and taxes |       | $                                         | (882       | )                                       | $          | (3,868                                      | )          | $                                         | (1,597     | ) | $ | (4,886 | ) | (77.2 | )% | (67.3 | )% |

 

Our Execution and Clearing segment’s commissionsrevenue includes fees charged to customers for execution, clearance anddirect-access floor brokerage services and net gains from riskless principaltransactions.

 

20

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Our Execution and Clearing segment’s other revenuesconsist of interest income earned on customer margin balances, short term U.S.Treasury Bill investments and stock-borrow transactions.

 

## **Three Months Ended June 30, 2005 versus June 30, 2004**

 

Commission revenuesdecreased as a result of a decline in direct-access floor broker order flow andreduced trade volume from clearance customers.

 

## **Six Months Ended June 30, 2005 versus June 30, 2004**

## ** **

Commission revenue decreased as a result of declinesin (a) our direct-access commissions, due to reduced order flow and (b) ourretail clearing commissions, due to lower transaction volumes. This decreasewas partially offset by the growth of our institutional execution group’srevenues as a result of general growth and expansion of its customer base.

 

For a discussion of operating expenses, see “OurOperating Expenses” below.

 

# **Other Segment Operating Results**

 
| ** **                               | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Three Months  2005 vs. 2004  Percentage** | ** ** | **Six Months  2005 vs. 2004  Percentage** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **(000’s omitted)**                 | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                     |       |                                     |       |                                   |       |                                        |       |                                      |       |   |   |   |   |
| Other revenue                            |       | $                                        | 870        |                                   | $          | 24,702                                      |       | $                                         | 1,490      |   | $ | 25,031 |   | (96.5 | )% | (94.0 | )% |
| Total segment revenues                   |       | 870                                      |       | 24,702                                 |       | 1,490                                       |       | 25,031                                    |       | (96.5 | ) | (94.0 | ) |
|                                     |       |                                     |       |                                   |       |                                        |       |                                      |       |   |   |   |   |
| Debt repurchase premium                  |       | 3⁄4                                   |       | 49,028                                 |       | 3⁄4                                      |       | 49,028                                    |       | (100.0 | ) | (100.0 | ) |
| Operating expenses                       |       | 15,449                                   |       | 21,476                                 |       | 31,124                                      |       | 36,206                                    |       | (28.1 | ) | (14.0 | ) |
|                                     |       |                                     |       |                                   |       |                                        |       |                                      |       |   |   |   |   |
| Loss before minority interest  and taxes |       | $                                        | (14,579    | )                                      | $          | (45,802                                     | )          | $                                         | (29,634    | ) | $ | (60,203 | ) | (68.2 | )% | (50.8 | )% |

 

The portion of our revenues that is not generated fromour two principal business segments consists primarily of interest income andnet gains or losses from non-marketable investments.

 

## **Three Months Ended June 30, 2005 versus June 30, 2004**

 

Other revenue decreased primarily as a result of the $24.6 millionappreciation in fair value of our investment in Lava in June 2004.  Partially offsetting this decrease was anincrease in our short term interest income due to higher interest rates andexcess cash balances for the three months ended June 30, 2005 as compared tothe same period in 2004.

 

For a discussion of operating expenses, see “OurOperating Expenses” below.

 

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## **Six Months Ended June 30, 2005 versus June 30, 2004**

 

Other revenue decreased primarily as a result of the$24.6 million appreciation in fair value of our investment in Lava in June2004.  Partially offsetting this decreasewas an increase in our short term interest income for the six months ended June30, 2005 as compared to the same period in 2004, due to higher interest ratesand excess cash balances.

 

# **Our Operating Expenses**

 
| ** **                                         | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Three  months  2005 vs.  2004  Percentage** | ** ** | **Six months  2005 vs.  2004  Percentage** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| **(000’s omitted)**                           | ** ** | **2005**                                  | ** ** | **2004**                               | ** ** | **2005**                                      | ** ** | **2004**                                   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | ** **                                | ** ** | ** **                             | ** ** | ** **                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expenses:                                          |       |                                      |       |                                   |       |                                          |       |                                       |       |   |   |   |   |
| Employee compensation and related benefits         |       | $                                         | 24,877     |                                   | $          | 22,645                                        |       | $                                          | 46,780     |   | $ | 50,436 |   | 9.9 | % | (7.2 | )% |
| Interest                                           |       | 18,781                                    |       | 19,336                                 |       | 35,364                                        |       | 31,694                                     |       | (2.9 | ) | 11.6 |   |
| Exchange, clearing and brokerage fees              |       | 9,892                                     |       | 9,689                                  |       | 19,886                                        |       | 18,583                                     |       | 2.1 |   | 7.0 |   |
| Lease of exchange memberships                      |       | 983                                       |       | 3,954                                  |       | 1,995                                         |       | 8,097                                      |       | (75.1 | ) | (75.4 | ) |
| Exchange memberships impairment                    |       | 3⁄4                                    |       | 18,327                                 |       | 3⁄4                                        |       | 18,327                                     |       | (100.0 | ) | (100.0 | ) |
| Debt repurchase premium                            |       | 3⁄4                                    |       | 49,028                                 |       | 3⁄4                                        |       | 49,028                                     |       | (100.0 | ) | (100.0 | ) |
| Other                                              |       | 13,198                                    |       | 13,005                                 |       | 27,297                                        |       | 26,091                                     |       | 1.5 |   | 4.6 |   |
|                                               |       |                                      |       |                                   |       |                                          |       |                                       |       |   |   |   |   |
| Total expenses before minority interest and  taxes |       | 67,731                                    |       | 135,984                                |       | 131,322                                       |       | 202,256                                    |       | (50.2 | ) | (35.1 | ) |
|                                               |       |                                      |       |                                   |       |                                          |       |                                       |       |   |   |   |   |
| Provision (benefit) for income taxes               |       | $                                         | 1,272      |                                   | $          | (20,976                                       | )          | $                                          | 2,738      |   | $ | (15,424 | ) | (106.1 | )% | (117.8 | )% |

 

Our Specialist segment’s employee compensation andrelated benefits consists of salaries, wages and performance-based compensationpaid to our traders and related support staff. The employee compensation andrelated benefits associated with our Execution and Clearing segment consists ofsalaries, wages and performance-based compensation paid to our execution andclearing professionals, as well as incentive-based compensation paid to varioustrading professionals, which is based on their earned commissions.Performance-based compensation may include cash compensation and stock-basedcompensation granted to managing directors, trading professionals and otheremployees based on our operating results.

 

Interest expense is attributable primarily to our outstanding9.5% $199.9 million aggregate principal amount of senior notes due May 2009(the “2009 Notes”) and 11.0% $260.0 million aggregate principal amount ofsenior notes due May 2012 (the “2012 Notes” and, together with the 2009 Notes,the “Senior Notes”). Interestexpense at our Specialist segment consists mainly of margin interest on derivatives trading positions and interest onsubordinated indebtedness. Customers’ free credit balances, bank loans andstock loans generate interest expense at our Execution and Clearing segment.

 

Exchange, clearing and brokerage fees expense at ourSpecialist segment consists of fees paid by us to the NYSE, AMEX, otherexchanges, the Depository Trust Clearing

 

22

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Corporation (“DTCC”) and third-party execution andclearing companies. These fees are based primarily on the volume oftransactions executed by us as principal and as agent, a fee based on exchangeseat use, an allocation fee requiring specialist firms to share the cost ofnewly-allocated listings, exchange access and usage fees, a flat annual fee andexecution and clearing fees. Our Execution and Clearing segment’s exchange,clearing and brokerage fees expense consists of floor brokerage fees paid todirect-access floor brokers and fees paid to various exchanges.

 

## **Three Months Ended June 30, 2005 versus June 30, 2004**

 

Employeecompensation and related benefits increased primarily as a result of higherperformance-based compensation at our specialist segment, which is a result ofimproved revenues and operating results, and an increase in salaries for ourstructured products employees. Partially offsetting these increases weredecreases in salaries and related benefits for our NYSE cash equity specialistemployees and our Execution and Clearing segment employees due to a reductionin headcount in these groups from 457 at June 30, 2004 to 386 at June 30, 2005.

 

The decrease in interest expense for the 2005 second quarter was due tothe charges we incurred during the second quarter of 2004 in connection withthe May 2004 refinancing of our debt. These charges included the accelerationof the debt issuance cost and discount accretion on the portion of the notes werepurchased during the second quarter of 2004. Partially offsetting thisdecrease was higher margin interest expense in our structured products tradingactivities, which is a result of an increase in interest rates, as well as thesize of our positions in these products, and a complete quarter in 2005 of thehigher interest costs on our Senior Notes.

 

Lease of exchange memberships expense decreased due to lower averageannual lease prices of our NYSE leased memberships for the second quarter of2005 versus the 2004 comparable period. Average annual lease cost of an NYSEmembership declined to approximately $70,000 for the three months ended June30, 2005 from $235,000 for the 2004 comparable period.  Additionally, we leased twelve fewer NYSEmemberships as of June 30, 2005 than we did as of June 30, 2004.

 

## **Six Months Ended June 30, 2005 versus June 30, 2004**

 

Employee compensation and related benefits decreased primarily as aresult of a decrease in salaries and related benefits for our NYSE cash equityspecialist employees and our Execution and Clearing segment employees,primarily attributable to lower headcount in these groups.  Also contributing to the decrease was theexpiration and payment of a retention bonus plan liability during the firsthalf of 2004 and a decrease in deferred compensation expense, both related to aprior acquisition. Partially offsetting this decrease were higher employeesalaries, performance-based compensation and stock-based compensation for ourstructured products employees due to higher revenues and increases in tradingand support personnel.

 

Interest expense increased for the six months ended June 30, 2005 fromthe same period in 2004 mainly due to the increase in margin interest in ourstructured products trading

 

23

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activities as a result ofhigher margin interest rates, coupled with an increase in the size of ourpositions in these products. Additionally, with the refinancing of our debt inMay 2004, the first and second quarters of 2005 reflect the higher interestcosts on our Senior Notes as compared to the first half of 2004. Partially offsettingthese increases were charges we incurred during the second quarter of 2004relating to the aforementioned refinancing of our debt. These charges includedthe acceleration of the debt issuance cost and discount accretion on theportion of the notes repurchased.

 

Exchange, clearing and brokerage fees increased for the six monthsending June 30, 2005 as compared to the same period in 2004 due to increasedtrading activity at our Specialist segment. Contributing to this change was an increase in NYSE allocation fees, oddlot fees, and higher commissions as a result of increased structured productstrading activity.  Offsetting theseincreases was a decline at our Execution and Clearing segment of floorbrokerage expenses relating to direct-access commissions.

 

Lease of exchange memberships expense decreased due to the loweraverage annual lease prices of our NYSE leased memberships for the first halfof 2005 versus the 2004 comparable period. Average annual lease cost of an NYSEmembership declined to approximately $70,000 for the six months ended June 30,2005 from $236,000 for the 2004 comparable period.  Additionally, we leased twelve fewer NYSEmemberships as of June 30, 2005 than we did as of June 30, 2004.

 

## **Liquidity and Capital Resources**

 

*Financial Overview*

 

Given the nature of our specialist, market-making,execution and clearing activities, certain line items on our balance sheet mayfluctuate considerably from time to time. Our total assets at June 30, 2005increased to $2,945.4 million from $2,055.1 million at December 31, 2004. Theincrease was primarily attributable to increases in receivable from brokers,dealers and clearing organizations, and securities owned at market value(principally, our corporate equities and ETF positions), partially offset bydecreases in deferred tax assets, cash and cash equivalents, and cashsegregated under federal regulations. Of our total assets at June 30, 2005,$547.1 million consisted of cash and short-term investments, primarily ingovernment obligations maturing within three months, cash and securitiessegregated under federal regulations and overnight repurchase agreements. Ourtotal capital base, which consists of long term obligations (inclusive ofsubordinated debt, other than those related to contributed exchangememberships) and total stockholders’ equity, increased to $1,199.8 million atJune 30, 2005 from $1,191.7 million at December 31, 2004. This change wasmainly due to an increase in equity associated with higher additional paid-incapital and retained earnings, partially offset by a decrease in othersubordinated indebtedness.

 

To date, we have financed our operations primarilywith retained earnings from operations and proceeds from our debt and equityofferings. Due to the nature of the securities business and our role as aspecialist, market-maker and execution and clearing agent, the amount of ourcash and short-term investments, as well as operating cash flow, may vary

 

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considerably from period to period due to a number offactors, including but not limited to the dollar value of our positions asprincipal, whether we are net buyers or sellers of securities, the dollarvolume of executions by our customers and clearing house requirements. Certainregulatory requirements constrain the use of a portion of our liquid assets forfinancing, investing or operating activities. Similarly, the nature of ourbusiness lines, the capital necessary to maintain current operations and ourcurrent funding needs subject our cash and cash equivalents to differentrequirements and uses.

 

*CapitalResources*

 

Our outstanding Senior Noteswere issued pursuant to an indenture, which includes certain covenants that,among other things, limit our ability to make certain investments, engage intransactions with stockholders and affiliates, create liens on our assets andsell assets or engage in mergers and consolidations, except in accordance withcertain specified conditions.****Inaddition, our ability to take certain actions, including incurring additionalindebtedness (other than certain “permitted indebtedness”), or making certain “restrictedpayments (such as paying dividends, redeeming stock or repurchasingsubordinated indebtedness prior to maturity), is limited if our consolidatedfixed charge coverage ratio—calculated on a four-quarter trailing basis—is ator below a threshold of 2.00:1. The “consolidated fixed charge coverage ratio”reflects a comparison between (1) our consolidated earnings before interest,taxes, depreciation and amortization expenses, or “EBITDA,” and (2) the sum ofour consolidated interest expense and a tax-effected multiple of any dividendpayments that we might make with respect to preferred stock.  As of June 30, 2005, our consolidated fixed chargecoverage ratio was approximately 1.72:1, thereby limiting our ability to makethese “restricted payments.”  Under the indenture, however, we arepermitted to make “restricted payments” of up to an aggregate amount of $15.0million over the life of the indenture, regardless of our consolidated fixedcharge coverage ratio or the amount of our cumulative consolidated net incomesince July 1, 2004.

 

In addition, under the indenture governing the SeniorNotes, even if our our consolidated fixed charge coverage ratio is 2.00:1 orgreater, we cannot make any such “restricted payments” if doing so will causeour cumulative “restricted payments” since May 18, 2004 to be greater than thesum of (A) 50.0% of our cumulative consolidated net income since July 1, 2004(or, if such calculation is a loss, minus 100.0% of such loss) and (B) 100.0%of the net cash proceeds received from any issuance or sale of our capitalstock since July 1, 2004 and certain other amounts.In the event this restriction were to limit us frommaking restricted payments in the future, we also would be entitled to makesuch payments up to an aggregate of $15.0 million over the life of theindenture, as described above. Although we have not made any restrictedpayments since May 18, 2004, we cannot be sure if, when or to what extent thecovenants in the indenture will prevent us from making restricted paymentshigher than $15.0 million in the future.

 

The indenture also permitsus to redeem some or all of the 2009 Senior Notes on or after May 15, 2007 andsome or all of the 2012 Senior Notes on or after May 15, 2008 at varyingredemption prices, depending on the date of redemption.  In addition, we have the option to redeem upto 33.0% of the aggregate principal amount of the 2009 Senior Notes at a

 

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redemption price of 109.5%and up to 33.0% of the aggregate principal amount of the 2012 Senior Notes at aredemption price of 111.0% using the proceeds of certain equity offerings whichwe may complete on or prior to May 15, 2007; however, we have no currentintention of conducting any equity offerings. Under the terms of the indenture, if we sell substantially all ourassets or experience specific kinds of changes in control, we will be requiredto offer to repurchase Senior Notes, on a pro rata basis, at a price in cashequal to 101.0% of their principal amount, plus accrued and unpaid interest, ifany, to the date of purchase.

 

In connection with the saleof our investment in Lava Trading Inc. (“Lava”) pursuant to an acquisition ofLava in August 2004, we received cash of approximately $39.0 million at theclosing. Additional consideration of approximately $9.5 million is being heldin escrow to secure our indemnification obligations as a former stockholder ofLava under the merger agreement, and may be released in whole or in part onOctober 2, 2005 (15 months after the closing of the Lava transaction), subject to the final determination ofany then-outstanding indemnification claims and any claims regarding taxes.  Under the terms of the indenture governingthe Senior Notes, wewere required, on or before the 361st day after our consummation ofthe Lava transaction to offer to purchase from all the holders of Senior Notes,on a pro rata basis, an aggregate principal amount of Senior Notes equal to100.0% of the “net cash proceeds” (as defined in the Indenture) received fromthe Lava transaction which we did not use, within 360 days to repay certain ofour secured indebtedness, repay certain indebtedness of our subsidiaries, oracquire “replacement assets” (as defined in the Indenture), plus accrued andunpaid interest up to, but not including, the payment date of such offer.  Based on the $39.0 million we received inAugust 2004 in the Lava transaction, the amount of “net cash proceeds” wasapproximately $18.2 million. Accordingly, on July 29, 2005, we commenced anoffer to purchase Senior Notes in the aggregate principal amount of up to $18.2million. This proceeds offer is scheduled to expire on August 25, 2005, unlessextended by us. In the event we receive tenders for the full $18.2 millionprincipal amount of Senior Notes, the total amount of funds required by us topurchase tendered Senior Notes, before accrued and unpaid interest, will be$18.2 million. We intend to this offer with available cash on hand.

 

We also have outstanding$13.6 million aggregate principal amount of 12.0% senior subordinated notes due2007 (the “2007 Notes”) that were not tendered for repurchase in connectionwith our May 2004 debt refinancing. Until their maturity on March 2, 2007, the2007 Notes will continue to accrue interest at a rate of 12.0% per annum.

 

As of June 30, 2005, thesubordinated indebtedness of LaBranche & Co. LLC (excluding subordinatedliabilities related to contributed exchange memberships) aggregated $12.4million. This subordinated debt is comprised of senior subordinated notes andjunior subordinated notes, which mature on various dates between February 2006and June 2008 and bear interest at annual rates ranging from 7.7% to 10.0%. The senior subordinated notes wereoriginally issued in the aggregate principal amount of $15.0 million, and, inaccordance with their terms, $3.0 million in principal amount must be repaid onJune 3 of each of 2004, 2005, 2006, 2007 and 2008. On June 3, 2005, LaBranche& Co. LLC repaid $3.0 million principal amount of this senior subordinatedindebtedness, plus accrued interest, thus leaving $9.0 million principal amountof this senior subordinated indebtedness outstanding.  LaBranche & Co. LLC may prepay, at apremium, all or any part of these remaining senior subordinated

 

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notes at any time, provided that the amount prepaid isnot less than 5.0% of the aggregate principal amount of such seniorsubordinated notes then outstanding. Upon the occurrence of a change ofcontrol, LaBranche & Co. LLC may, but is not required to, make oneirrevocable separate offer to each holder of the senior subordinated notes toprepay all the senior subordinated notes then held by that holder. Theoccurrence of a change of control also constitutes an event of accelerationunder the senior subordinated notes.  The juniorsubordinated notes, which aggregate $3.4 million principal amount, have anautomatic rollover provision, which extends the maturity for an additionalyear, unless the lender provides at least seven months advance notice of itsintention not to renew at maturity. LaBranche & Co. LLC is entitled toprepay—with written consent from the NYSE—the junior subordinated notes withoutpenalty under the terms of the agreements relating thereto.

 

As of June 30, 2005, $8.0 million of our outstandingindebtedness consisted of eight separate notes, each in the principal amount of$1.0 million, which mature in August 2007 and bear interest at an annual rateof 9.0%.

 

A potential source ofliquidity for LaBranche & Co. LLC is the $200.0 million committed line ofcredit that it maintains with a bank, which expires on October 28, 2005, unlessrenewed. Amounts outstanding under this credit facility would be secured by ourinventory of specialist stocks and bear interest at the bank’s broker loanrate. This facility can only be used to finance inventory requirements atLaBranche & Co. LLC. In order to maintain the availability of funds underthis credit facility, we must comply with certain financial and othercovenants.

 

*RegulatedSubsidiaries*

 

As a specialist andmarket-maker, we are required to maintain certain levels of capital and liquidassets as promulgated by various regulatory agencies, which regulate ourbusiness. As part of our overall risk management procedures (for furtherdiscussion, refer to Part I, Item 3. “Quantitative and Qualitative Disclosuresabout Market Risk”), we balance our responsibility as specialist, market-makerand broker-dealer with our overall capital resources. These requirements mayrestrict our ability to make use of cash and other liquid assets for corporateactions, such as repaying our debt, repurchasing stock or making acquisitions.

 

As a broker-dealer,LaBranche & Co. LLC is subject to regulatory requirements intended toensure the general financial soundness and liquidity of broker-dealers andrequiring the maintenance of minimum levels of net capital, as defined in SECRule 15c3-1. LaBranche & Co. LLC is required to maintain minimum netcapital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits abroker-dealer from repaying subordinated borrowings, paying cash dividends,making loans to any parent, affiliates or employees or otherwise entering intotransactions which would result in a reduction of its total net capital to lessthan 150.0% of its required minimum capital. Moreover, broker-dealers arerequired to notify the SEC prior to repaying subordinated borrowings, payingdividends and making loans to any parent, affiliates or employees, or otherwiseentering into transactions which, if executed, would result in a reduction of30.0% or more of their excess net capital (net capital less minimumrequirement). The SEC has the

 

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ability to prohibit orrestrict such transactions if the result is deemed detrimental to the financialintegrity of the broker-dealer. As of June 30, 2005, LaBranche & Co. LLC’snet capital, as defined, was $460.5 million, which exceeded the minimumrequirements by $459.0 million.

 

TheNYSE generally requires its specialist firms to maintain a minimum dollarregulatory capital amount in order to establish that they can meet, with theirown net liquid assets, their position requirement. As of June 30, 2005, LaBranche & Co. LLC’s and LSPS’minimum required combined dollar amount of net liquid assets, as defined, was$447.0 million. LaBranche& Co. LLC’s actual net liquid assets, as defined, were $455.7 million as ofJune 30, 2005. As of June 30, 2005, since LaBranche & Co. LLC’s actual netliquid assets exceeded the combined net liquid assets requirement of LaBranche& Co. LLC and LSPS, both LaBranche & Co. LLC and LSPS satisfied theirrespective net liquid asset requirements. In addition, as of June 30, 2005,LaBranche & Co Inc. had an additional $113.0 million invested in overnightrepurchase agreements, which is notsubject to regulatory capital requirements.

 

On May 26, 2005, the NYSE filed with the SECa proposal to establish a new method of calculating its net liquid assetrequirements for specialists such as LaBranche & Co. LLC.  Current rules, based partly on classes ofallocated securities, would be replaced by a focus on market risk, volatilityand market share.  Although the proposednew rule would likely reduce LaBranche & Co. LLC’s net liquid assetrequirement, the extent of any such reduction has not been finallydetermined.  A reduction in LaBranche& Co. LLC’s net liquid asset requirement would be phased in over anine-month period in four tranches and would allow funds no longer needed forpurposes of satisfying the net liquid asset requirement to be used for othercorporate purposes.

 

The AMEX generally requiresits equities specialist firms to maintain a cash or liquid asset position ofthe greater of (a) $1.0 million or (b) an amount sufficient to assume aposition of sixty trading units of each security in which the specialist isregistered. As of June 30, 2005, LaBranche & Co. LLC satisfied the AMEXequities specialist liquid asset requirements.

 

As a registeredbroker-dealer and member firm of the NYSE, LFSI also is subject to SEC Rule15c3-1, as adopted and administered by the NYSE and the SEC. Under thealternative method permitted by the rule, the minimum required net capital ofLFSI as of June 30, 2005 was equal to the greater of $1.5 million or 2.0% ofaggregate debit items, as defined. As of June 30, 2005, LFSI’s netcapital, as defined, was $10.6 million, which exceeded its minimum net capitalrequirement by $9.1 million.

 

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by the SEC. Asof June 30, 2005, there was no reserve requirement under this rule.In addition, the Proprietary Accounts of Introducing Brokers (“PAIB”)Calculation is computed in order for correspondent firms to classify theirassets held by LFSI as allowable assets in the correspondents’ net capitalcalculation.  As of July 5, 2005, tocomply with LFSI’s June 30, 2005 requirement, cash and U.S. Treasury Bills inthe amount of $4.6 million were segregated in a special reserve account for theexclusive benefit of customers, thus exceeding actual requirements by $3.0million.

 

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As a registeredbroker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1, asadopted and administered by the AMEX and the SEC. LSP is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. As of June 30, 2005, LSP’s netcapital, as defined, was $35.5 million, which exceeded its minimum net capitalrequirement by $34.7 million.

 

As a specialist and member of the NYSE, LSPS issubject to the provisions of SEC Rule 15c3-1, as adopted and administered bythe SEC and NYSE. LSPS is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 of aggregateindebtedness, as defined. As of June 30, 2005, LSPS’ net capital, asdefined under SEC Rule 15c3-1, was $3.0 million, which exceeded the minimumrequirement by $2.9 million.

 

Failure by any of ourbroker-dealer subsidiaries to maintain its required net capital and net liquidassets, where applicable, may subject it to suspension or revocation of its SECregistration or its suspension or expulsion by the NYSE, the AMEX and/or anyother exchange of which it is a member firm.

 

As evidenced by the foregoingrequirements, our broker-dealer subsidiaries require a substantial amount ofcapital. In particular, LaBranche & Co. LLC’s and LSPS’ combined net liquidasset requirement of $447.0 million limits our ability to utilize a substantialportion of our liquid assets for other corporate purposes. Although a portionof the combined net liquid asset requirement of $447.0 million is met byLaBranche & Co. LLC’s and LSPS’ securities positions, pending trades andother assets associated with its equities, options, futures and ETF specialistactivities, a substantial portion of LaBranche & Co. LLC’s cash and cashequivalents as of June 30, 2005 was used to meet their combined net liquidasset requirement.

 

*OtherContractual Obligations*

 

In connection with our acquisitionof ROBB PECK McCOOEY Financial Services, Inc. (“RPM”) in March 2001, we assumedits liabilities and obligations under its deferred compensation plan. Thedeferred compensation plan provides for the payment, on or before December 15,2007, of approximately $30.2 million, plus interest at a rate of 8.0% per year,to certain former employees of RPM. While the payment of benefits under thisdeferred compensation plan may be accelerated in certain circumstances, no morethan $6.0 million in deferred compensation benefits (including interest) may bepaid in any 12 consecutive month period beginning March 15, 2001. After takinginto account all payments of deferred compensation plan benefits through June 30, 2005,approximately $14.1 million, plus interest, remains payable under the RPMdeferred compensation plan.  Our board ofdirectors is entitled to terminate the deferred compensation plan at anytime.  Upon any such termination, thedeferred compensation benefits (including interest) of all participants in theplan—to the extent not previously paid—must be distributed immediately to theparticipants in one lump sum.

 

*CashFlows*

 

Our cash and cash equivalents during the six-monthperiod ended June 30, 2005 decreased $14.6 million to $429.8 million. Thedecrease was the result of (a) $6.5 million used

 

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in our operating activities primarily from increasesin our securities sold, but not yet purchased, decreases in accrued compensation and payable to brokers and dealers,partially offset by decreases in receivable from brokers, dealers and clearingorganizations and securities owned, at market value; (b) $0.8 million used ininvesting activities for capital expenditures and purchases of exchangememberships; and (c) $7.2 million used in financing activities primarily frompayments on short term debt and subordinated debt.

 

Wecurrently anticipate that we will be able to meet our working capital,regulatory capital and capital expenditure requirements through at least thenext twelve months.

 

**Credit Ratings**

 

Following our May 2004 debt refinancing, $13.6million aggregate principal amount of our 2007 Notes remain outstanding. These2007 Notes are publicly held but are no longer rated. The following table setsforth the credit ratings on our Senior Notes as of June 30, 2005:

 
| ** **        | ** ** | **Moody’s  Investors Service** | ** ** | **Standard &  Poor’s** | ** ** |
|-------------------|------------|-------------------------------------|------------|---------------------------------|------------|
|              |       |                                |       |                            |       |
| 2009 Senior Notes |       | Ba1                                 |       | B                               |       |
|              |       |                                |       |                            |       |
| 2012 Senior Notes |       | Ba1                                 |       | B                               |       |

 

## **Item3.    Quantitative and QualitativeDisclosures about Market Risk.**

 

Because our equity specialist activities on the NYSEand AMEX expose our capital to significant risks, managing these risks is aconstant priority for us. Our central role in the auction process helps us tomanage risks by incorporating up-to-date market information in the managementof our inventory, subject to our specialist obligations. We have developed arisk management process that is designed to balance our ability to profit fromour specialist activities with our exposure to potential losses.

 

*Compliance Risk*

 

Our LaBranche & Co. LLC risk management processincludes participation by our corporate compliance committee, executiveoperating committee, floor management committee, post managers, floor captainsand specialists. These parties’ roles are as follows:

 

*CorporateCompliance Committee*.  Our corporate compliance committee was establishedin February 2002 and consists of representatives from executive and seniormanagement, compliance personnel, including our on-floor compliance officer,our general counsel and several additional senior floor specialists, known aspost managers. The role of the corporate compliance committee is to implement,monitor and report to senior management on the statutory and regulatorycompliance efforts of our specialist business. The corporate compliance committee also establishes, reviews and revisesour policies and procedures governing LaBranche & Co. LLC’s regulatorycompliance structure.

 

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*Executive Operating Committee.* Our executive operating committee is composed of two executive officersof LaBranche & Co. LLC. This committee is responsible for approving allrisk management procedures and trading guidelines for our specialist stocks,after receiving recommendations from our floor management committee. Inaddition, our executive operating committee reviews all unusual situationsreported to it by our floor management committee.

 

*Floor Management Committee.* Our floor management committee is composed of six post managers. Thiscommittee is responsible for formulating and overseeing our overall riskmanagement procedures and trading guidelines for each of our specialist stocks.In determining these procedures and guidelines, our floor management committeeconsiders the recommendations of our floor captains. Our post managers meetwith their respective floor captains on a weekly basis to review and, ifnecessary, revise the risk management procedures and trading guidelines forLaBranche & Co. LLC and/or for particular specialist stocks. In addition,post managers are always available on the trading floor to review and assistwith any unusual trading situations reported by any floor captain. Our floormanagement committee reports to our executive operating committee about each ofthese unusual trading situations as they occur.

 

*Floor Captains.* We have thirteen floor captains who monitor the activities of LaBranche& Co. LLC’s specialists throughout the trading day from various positionsat their trading posts. The floor captains observe trades and constantly reviewtrading activities on a real-time basis. In addition, the floor captains arereadily available to assist LaBranche & Co. LLC’s specialists indetermining when to deviate from our procedures and guidelines in reacting toany unusual situations or market conditions. The floor captains report theseunusual situations and any deviations from our procedures and guidelines totheir respective post managers. Floor captains meet with each specialist atleast once a week to evaluate each specialist’s adherence to our riskmanagement procedures and trading guidelines. Floor captains also meet toreview risk procedures and guidelines and, if appropriate, make recommendationsto the floor management committee.

 

*Specialists.* LaBranche & Co. LLC’s specialists conduct auctions of our specialiststocks based upon the conditions of the marketplace. In doing so, specialistsobserve our risk management procedures and trading guidelines in tandem withtheir responsibility to create and maintain a fair and orderly market.Specialists immediately notify a floor captain of any unusual situations ormarket conditions requiring a deviation from our procedures and guidelines.

 

We believe that theenhancements we have made to our compliance procedures and guidelines inconnection with the undertakings set forth in the March 2004 settlement of theSEC and NYSE investigation of our specialist trading activities have improvedour risk management process.

 

Our equities specialist operations on the AMEX areconducted by various equities specialists. Our post manager(s) on the AMEXmonitor the trading activities of the AMEX equities specialists by observingtrades and reviewing positions on a real-time basis. As members of the floormanagement committee, post managers regularly communicate with other

 

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members of the floor management committee regardingany deviations from the AMEX procedures and guidelines established by LaBranche& Co. LLC’s executive operating committee.

 

*Circuit Breaker Rules.* The NYSE and AMEX have certain circuit breaker rules intended to halttrading in all NYSE/AMEX listed stocks in the event of a severe market decline.The circuit breaker rules impose temporary halts in trading when the Dow JonesIndustrial Average drops a certain number of points. Current circuit breakerlevels are set quarterly at 10, 20 and 30 percent of the Dow JonesIndustrial Average closing values of the previous month, rounded to the nearest50 points. These rules provide investors extra time to respond to severe marketdeclines and provide us an additional opportunity to assure compliance with ourrisk management procedures.

 

*Equity Market Risk*

 

We have developed a risk management process, which isintended to balance our ability to profit from our equity specialist activitieswith our exposure to potential losses. We have invested substantial capital,along with the NYSE, in real-time, on-line systems which give our managementinstant access to specific trading information at any time during the tradingday, including our aggregate long and short positions and our capital andprofit-and-loss information on an aggregate or per issue basis.  Subject to the specialist’s obligation tomaintain a fair and orderly market and to applicable regulatory requirements,we constantly seek to manage our trading positions relative to existing marketconditions.

 

A high concentration of LaBranche & Co. LLC’sprincipal trading revenue is generated from its ten and twenty-five mostprofitable NYSE specialist stocks. The percentage of LaBranche & Co. LLC’scash equity specialist trading revenue generated from its ten most profitablespecialist stocks has increased slightly from 17.7% to 18.0% of total principaltrading revenue for the six months ended June 30, 2004 and 2005, respectively.The percentage of LaBranche & Co. LLC’s cash equity specialist tradingrevenue generated from its twenty-five most profitable specialist stocks hasalso slightly increased from 34.5% to 34.8% of total principal trading revenuefor the six months ended June 30, 2004 and 2005, respectively.  Despite these increases, LaBranche & Co.LLC is not overly reliant on a particular group of specialist stocks, as thecomposition of its ten and twenty-five most profitable specialist stockschanges frequently.

 

Our cash equity specialist trading activities aresubject to a number of risks, including risks of price fluctuations, rapidchanges in the liquidity of markets and foreign exchange risk related toAmerican Depositary Receipts (“ADRs”). In any period, we may incur tradinglosses in our specialist stocks for a variety of reasons, including pricefluctuations of our specialist stocks and carrying out our specialistobligations. From time to time, we may have large position concentrations insecurities of a single issuer or issuers engaged in a specific industry. Ingeneral, because our inventory of securities is marked-to-market on a dailybasis, any significant price movement in these securities could result in areduction of our revenues and operating profits.

 

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*Derivatives Market Risk*

 

As a specialist in options, ETFs and futures, LSP hasa responsibility to maintain a fair and orderly market, and trades securitiesas principal out of both obligation and inclination. LSP’s options, ETFs,futures, fixed income instruments and foreign currency trading exposes it tocertain risks, such as price and interest rate fluctuations, volatility risk,credit risk, foreign currency movements and changes in the liquidity ofmarkets. LSP maintains a market-making capacity in options, ETFs and futuresand trades as principal out of inclination. In its market-making function, LSPbrings immediacy and liquidity to the markets when it chooses to participate.LSP’s market-making activities expose it to certain risks including, but notlimited to, price fluctuations and volatility.

 

As a specialist in ETFs on the NYSE, LSPS isresponsible for maintaining a fair and orderly market and trades ETFs asprincipal out of both obligation and inclination.  LSPS’ ETF trading exposes it to certainrisks, including price fluctuations, foreign currency movements and changes inthe liquidity of markets.

 

Certain members of LSP’s and LSPS’ management areresponsible for managing these risks. These individuals utilize a third-partysoftware application to monitor LSP’s and LSPS’ positions on a real-time basis.By monitoring actual and theoretical profit and loss, volatility and other standardrisk measures, these individuals seek to assure that all LSP and LSPS tradersoperate within the parameters set by management. LSP’s and LSPS’ traderspurchase and sell futures, options, the stocks underlying certain positions,fixed income instruments and foreign currencies in an attempt to hedge marketand foreign currency risk. LSP’s and LSPS’ aggregate risk is under constantevaluation by certain members of management and its traders, and allsignificant trading strategies and positions are closely monitored. LSP’s andLSPS’ options, futures and ETF trading is executed on national and foreignexchanges. These trades clear through the Options Clearing Corporation, theNational Securities Clearing Corporation or the applicable exchange clearing organization,thereby reducing potential credit risk.

 

The following chart illustrates how specifiedmovements in the underlying securities prices of LSP’s and LSPS’ entireportfolios would have impacted profits and losses from their tradingactivities: 

 
| ** **               | ** ** | **Profit or (Loss) if the underlying securities move:** | ** ** |
|--------------------------|------------|---------------------------------------------------------|------------|
| **(000’s omitted)** | ** ** | **-15.0%**                                              | ** ** | **-5.0%** | ** ** | **0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio as of:**     |       |                                                    |       |   |   |   |   |   |   |   |   |
| March 31, 2005           |       | $                                                       | (10,167    | ) | $ | 8,609 |   | $ | (20 | ) | $ | 6,028 |   | $ | 15,930 |   |
| June 30, 2005            |       | $                                                       | (20,676    | ) | $ | 13,324 |   | $ | (75 | ) | $ | 21,513 |   | $ | 53,516 |   |

 

The information in the above table is based on certaintheoretical assumptions, and thus does not fully represent the profit or lossexposure to certain market conditions, including, but not limited to, changesin volatility, interest rates and dividends. Other risk models may yielddifferent results.  The zero percentchange column represents the profit or loss LSP and LSPS would experience on adaily basis if the relevant market remained unchanged.

 

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*Foreign Currency Risk*

 

In connection with LaBranche & Co. LLC’s tradingof U.S.-registered shares of foreign issuers, it is exposed to varying degreesof foreign currency risk. The pricing of these securities is based on the valueof the ordinary securities as denominated in their local currencies. Thus, achange in a foreign currency rate relative to the U.S. dollar will result in achange in the value of U.S.-registered shares in which LaBranche & Co. LLCacts as the specialist.

 

LSP and LSPS trade international ETFs that aredenominated and settled in U.S. dollars, but the pricing of these ETFs is alsoaffected by changes in the relevant foreign currency rates. LSP and LSPS holdvarious foreign currencies in order to lessen the risks posed by changingforeign currency rates. In addition, LSP and LSPS trade derivatives denominatedin foreign currencies, which creates exposure to foreign currency risk forthese entities.

 

The following chart illustrates how the specifiedmovements in foreign currencies relative to the U.S. dollar to which LSP, LSPSand LaBranche & Co. LLC are exposed would have impacted profits and lossesfrom their trading activities:

 

| ** **               | ** ** | **Profit or (Loss) if the foreign currencies relative  to the U.S. dollar move:** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **(000’s omitted)** | ** ** | **-15.0%**                                                                        | ** ** | **-5.0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio as of:**     |       |                                                                              |       |   |   |   |   |   |   |
| March 31, 2005           |       | $                                                                                 | (1,487     | ) | $ | (496 | ) | $ | 496 |   | $ | 1,487 |   |
| June 30, 2005            |       | $                                                                                 | (532       | ) | $ | (177 | ) | $ | 177 |   | $ | 532 |   |

 

The information in the abovetable is based on certain assumptions and it does not fully represent theprofit and loss exposure to changes in security prices, volatility, interestrates and other related factors.

 

*Execution and Clearing Risk*

 

In connection with their specialist and market-makingactivities, LaBranche & Co. LLC, LSP and LSPS are engaged in varioussecurities trading and lending activities and assume positions in stocks,rights, options, ETFs, fixed income instruments, futures and foreign currenciesfor which they are exposed to credit risk associated with the nonperformance ofcounterparties in fulfilling their contractual obligations pursuant to thesesecurities transactions. LaBranche & Co. LLC, LSP and LSPS are also exposedto market risk associated with the sale of securities not yet purchased, whichcan be directly impacted by volatile trading on the NYSE, AMEX and otherexchanges. Additionally, in the event of nonperformance and unfavorable marketprice movements, LaBranche & Co. LLC, LSP and LSPS may be required topurchase or sell financial instruments at a loss.

 

LFSI’s execution and clearing activities require that LFSI executetransactions in accordance with customer instructions and accurately record andprocess the resulting transactions. Any failure, delay or error in executing,recording and processing transactions, whether due to human error or failure ofLFSI’s information or communication systems, could cause substantial losses forbrokers, customers and/or LFSI and could subject LFSI to claims for losses.

 

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Clearingactivities include settling each transaction with both the contra broker andthe customer. In connection with LFSI’s institutional and direct access floorbrokerage activities, a transaction is settled either when the customer paysfor securities purchased and takes delivery, or delivers securities sold forpayment. Settling transactions for retail customers and professional investorsinvolves financing the transaction until the customer makes payment or, formargin accounts, advancing credit to the customer within regulatory andinternal guidelines. Clearing direct access brokers’ transactions includesguaranteeing their transactions to the contra broker on the exchange floor.

 

These clearing activities may expose LFSI to off-balance sheet risk inthe event customers or brokers are unable to fulfill their contractualobligations and it is necessary to purchase or sell securities at a loss. Formargin transactions, LFSI may be exposed to off-balance sheet risk in the eventmargin requirements are not sufficient to fully cover losses that customers mayincur in their accounts.

 

The amount of risk related to LFSI’s execution and clearance activitiesis linked to the size of the transaction, market volatility and thecreditworthiness of customers and brokers. LFSI’s largest transactions involvethose for institutional and direct access floor brokerage customers.

 

LFSI systematically monitorsits open transaction risk starting when the transaction occurs and continuinguntil the designated settlement date. Transactions that remain unsettled aftersettlement date are scrutinized and necessary action to reduce LFSI’s risk istaken. Credit risk that could result from contra brokers defaulting isminimized since much of the settlement risk for transactions with brokers isessentially transferred to the National Stock Clearing Corporation. The creditrisk associated with institutional and direct access clearing customers isminimized since these customers have been qualified by the Depository TrustCompany (“DTC”) or the DTC participants or have met the prime brokerqualification standards at other brokerage firms. Before conducting businesswith a prospective customer, LFSI’s senior management, in conjunction with itscompliance department, reviews the prospective customer’s experience in thesecurities industry, financial condition and personal background, including abackground check with a risk reporting agency. For retail customers andprofessional investors, LFSI seeks to control the risks associated withcustomer activities by requiring customers to maintain margin collateral incompliance with various regulatory and internal guidelines. LFSI monitorsmargin levels daily pursuant to such guidelines and requires customers todeposit additional collateral or reduce positions when necessary.

 

*Operational Risk*

 

Operational risk relates to the risk of loss fromexternal events, and from failures in internal processes or informationsystems. In each of our business segments, we rely heavily on our informationsystems in managing our risk. Accordingly, working in conjunction with theNYSE, we have made significant investments in our trade processing andexecution systems. Our use of, and dependence on, technology has allowed us tosustain our growth over the past several years. Management members and floorcaptains at our NYSE and AMEX operations must constantly monitor our positionsand transactions in order to mitigate our risks and

 

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identify troublesome trends should they occur. Thesubstantial capital we have invested, along with the NYSE, in real-time,on-line systems affords management instant access to specific tradinginformation at any time during the trading day, including:

 

•                  our aggregate long and shortpositions;

 

•                  the various positions of each of ourtrading professionals;

 

•                  our overall position in a particularstock; and

 

•                  capital and profit-and-lossinformation on an aggregate, per specialist or per issue basis.

 

Our information systems send and receive data from theNYSE and AMEX through dedicated data feeds. The NYSE supplies us withspecialist position reporting system terminals both on the trading floor and inour offices. These terminals allow us to monitor our NYSE trading profits andlosses, as well as our positions. For our AMEX equity operations, our in-housetechnology staff has developed applications to monitor our current positionsand profits and losses. Our derivative trading operation utilizes a third-partysoftware application to monitor its positions and profits and losses on areal-time basis.

 

We have developed and implemented a businesscontinuity plan, which includes a comprehensive disaster recovery plan. We haveback-up disaster recovery centers in New York and New Jersey.

 

*Legal and Regulatory Risk*

 

Substantial legal liability or a significantregulatory action against us could have a material adverse effect on ourfinancial condition or cause significant harm to our reputation, which in turncould negatively affect our business prospects.

 

As registered broker-dealers, LaBranche & Co. LLC,LFSI, LSP and LSPS are subject to certain regulatory requirements intended toinsure their general financial soundness and liquidity. These subsidiaries aresubject to SEC Rules 15c3-1, 15c3-3 and other requirements adopted andadministered by both the NYSE and AMEX.

 

The USA PATRIOT Act of 2001 requires U.S. financialinstitutions, including banks, broker-dealers, futures commission merchants andinvestment companies, to implement policies, procedures and controls which arereasonably designed to detect and report instances of money laundering and thefinancing of terrorism. We actively monitor and update our anti-moneylaundering practices.

 

## **Item4.    Controls and Procedures**

## ** **

As of the end of the period covered by this report, an evaluation ofthe effectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934) was performed under thesupervision and with the participation of our

 

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management, including our ChiefExecutive Officer and Chief Financial Officer. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures were effective as of the end of the periodcovered by this report. In addition, no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934) occurred during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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## **PART II OTHER INFORMATION**

 

## **Item 1.    LegalProceedings**

 

There have been no material new developmentsin our legal proceedings since the filing of our Form 10-Q for the quarterended March 31, 2005, filed May 10, 2005 (the “First Quarter 10-Q”), whichupdated the legal proceedings disclosed in our 2004 10-K, except as follows:

 

LastAtlantis/Rule. In an order dated May 9, 2005, the court denied plaintiffs’ motion forreconsideration with respect to their antitrust claims but granted plaintiffsleave to seek to re-assert their securities law claims (Section 10(b) of theExchange Act and Rule 10b-5).  In anorder dated June 9, 2005, the court clarified its ruling on the motion forreconsideration, granting plaintiffs leave to seek to re-assert their breach ofcontract, common law fraud, breach of fiduciary duty, Illinois consumer fraudand deceptive business practices statute and tortious interference withplaintiffs’ business claims.  On June 1,2005, plaintiffs filed an amended complaint asserting securities law (Section10(b) of the Exchange Act and Rule 10b-5), breach of contract, common lawfraud, breach of fiduciary duty, Illinois consumer fraud and deceptive businesspractices statute and tortious interference with plaintiffs’ businessclaims.  Despite the court’s ruling onthe motion for reconsideration, plaintiffs’ amended complaint also assertedfederal antitrust law claims (Section 1 of the Sherman Act).  On June 24, 2005, plaintiffs filed a motionfor leave to file a second amended complaint, which does not include antitrustclaims, but does assert securities law (Section 10(b) of the Exchange Act andRule 10b-5), breach of contract, common law fraud, breach of fiduciary duty,Illinois consumer fraud and deceptive business practices statute, tortiousinterference with plaintiffs’ business, and tortious interference withcontracts claims, and purports to join two additional parties that allege theyare purchasers and sellers of options as plaintiffs.

 

On July 15,2005, the Court dismissed the Rule action due to plaintiffs’ failure to serveprocess on the defendants in the matter.

 

Webelieve that the claims asserted against us by the plaintiffs in the pendingproceedings described in the 2004 10-K, the First Quarter 10-Q and above arewithout merit, and we deny all allegations of wrongdoing.  There can be no assurance, however, as to theoutcome or timing of the resolution of these proceedings.  We therefore are unable to estimate theamount or potential range of any loss that may arise out of these proceedings.  The range of possible resolutions couldinclude determinations and judgments against us or settlements that couldrequire substantial payments by us that could have a material adverse effect onour financial condition, results of operations and cash flows.

 

Inaddition to the proceedings described in the 2004 10-K, the First Quarter 10-Qand above, we and our operating subsidiaries have been the target, from time totime, of various claims, lawsuits and regulatory inquiries in the ordinarycourse of our and their respective businesses. While the ultimate outcome ofthose claims and lawsuits which currently are pending cannot be predicted withcertainty, we believe, based on our understanding of the facts

 

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ofthese proceedings, that their ultimate resolution will not, in the aggregate,have a material adverse effect on our financial condition, results ofoperations or cash flows.

 

## **Item 4. Submission of Matters to a Vote ofSecurity Holders.**

## ** **

Our Annual Meeting of Stockholders was held on May 17,2005. The following proposals were adopted by the margins indicated:

 

1.             To elect one Class III director, who isto serve for a term of three years.

 
| ** **       | ** ** | **Number of Shares** | ** ** |
|------------------|------------|----------------------|------------|
| ** **       | ** ** | **For**              | ** ** | **Withheld Authority** | ** ** |
|             |       |                 |       |   |   |
| Thomas E. Dooley |       | 49,025,000           |       | 4,751,714 |   |

 

In addition to the director elected at the AnnualMeeting, the terms of the following directors continued after the AnnualMeeting: George M.L. LaBranche, IV, Alfred O. Hayward, Jr., Donald E. Kiernanand David A. George.

 

2.             To approve our appointment of KPMG LLP asour independent registered public accounting firm for the fiscal year endingDecember 31, 2005.

 
| ** **  | ** ** | **Number of Shares** | ** ** |
|-------------|------------|----------------------|------------|
| **For**     |       | 53,654,292           |       |
| **Against** |       | 52,650               |       |
| **Abstain** |       | 69,765               |       |

 

## **Item 5.    OtherInformation.**

## ** **

*Wehave included in this Form 10-Q filing, and from time to time our managementmay make, statements which may constitute “forward-looking statements” withinthe meaning of the safe harbor provisions of The Private Securities LitigationReform Act of 1995. Our quarterly and annual operating results are affected bya wide variety of factors that could materially and adversely affect actualresults, including a decrease in trading volume on the NYSE or the AMEX,excessive volatility in the equity securities market and changes in the valueof our securities positions. As a result of these and other factors, we mayexperience material fluctuations in future operating results on a quarterly orannual basis, which could materially and adversely affect our business,financial condition, operating results and stock price. An investment in usinvolves various risks, including those mentioned above and those that aredetailed from time to time in our SEC filings.*

* *

Certain statements contained in this report, includingwithout limitation, statements containing the words “believe,” “intend,” “expect,”“anticipate” and words of similar import, also may constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Readers are cautioned that any such forward-looking statements are notguarantees of future performance, and since such statements involve risks

 

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and uncertainties, our actual results and performanceand the performance of the specialist industry as a whole, may turn out to bematerially different from the results expressed or implied by suchforward-looking statements. Given these uncertainties, readers are cautionednot to place undue reliance on such forward-looking statements. We alsodisclaim any obligation to update our view of any such risks or uncertaintiesor to publicly announce the result of any revisions to the forward-lookingstatements made in this report.

 
| **Item 6.** | ** ** | **Exhibits.** |
|-------------|------------|---------------|
|        |       |          |
|        |       | 31.1          |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|        |       |          |   |   |
|        |       | 31.2          |   | Certification of Jeffrey M. Chertoff, Senior Vice President and Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |       |          |   |   |
|        |       | 32.1          |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002, regarding the information contained in LaBranche & Co Inc.’s  Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
|        |       |          |   |   |
|        |       | 32.2          |   | Certification of Jeffrey M. Chertoff, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  regarding the information contained in LaBranche & Co Inc.’s Quarterly  Report on Form 10-Q for the period ended June 30, 2005. |
|        |       |          |   |   |
|        |       |          |   |   |
|        |       |          |   | All other items  of this report are inapplicable. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| August 8, 2005 | LABRANCHE & CO INC. |
|----------------|-------------------------|
|           |                    |
|           |                    |
|           | By:                     | /s/ Jeffrey M. Chertoff |   |
|           | Name:                   | Jeffrey M. Chertoff |
|           | Title:                  | Senior Vice President and Chief |
|           |                    | Financial Officer |

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                         |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                               |
| 31.1            |       | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                               |
| 31.2            |       | Certification of Jeffrey M. Chertoff, Senior Vice President and Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                               |
| 32.1            |       | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002, regarding the information contained in LaBranche & Co Inc.’s  Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
|            |       |                                                                                                                                                                                                                                                                                               |
| 32.2            |       | Certification of Jeffrey M. Chertoff, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  regarding the information contained in LaBranche & Co Inc.’s Quarterly  Report on Form 10-Q for the period ended June 30, 2005.     |

 

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