**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| x                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                | ** **                                                                                              |
| For the  quarterly period ended March 31, 2006 |
|                                                |                                                                                                    |
| OR                                                  |
|                                                |                                                                                                    |
| o                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                      to                   **

**Commission File Number:001-15251**

**LABRANCHE & CO INC.**

(Exact name of registrant as specified in its charter)

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

 

**One Exchange Plaza, NewYork, New York 10006**(Address of principalexecutive offices)       (Zip Code)

**(212) 425-1144**(Registrant’s telephonenumber, including area code)

**Not Applicable**(Former name, former address and former fiscal year, ifchanged 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 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x   No o

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

Large acceleratedfiler o      Acceleratedfiler x      Non-accelerated filer o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o   No x

The number of shares ofthe registrant’s common stock outstanding as of May 8, 2006 was60,733,889.

 

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

 

2

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**PART IFINANCIAL INFORMATION**

# **Item 1.    FinancialStatements.**

**LaBRANCHE & CO INC. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(000’s omitted except per share data)**
| ** **                                              | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **(unaudited)**                                                    | ** ** | **(unaudited)** | ** ** |
| REVENUES:                                               |       |                                                               |       |   |   |
| Net gain on principal transactions                      |       | $                                                                  | 64,965     |   | $ | 40,041 |   |
| Commissions                                             |       | 20,144                                                             |       | 23,563 |   |
| Net gain on non-marketable investments                  |       | 263                                                                |       | 92 |   |
| Net gain on NYX transaction                             |       | 178,981                                                            |       | 3⁄4 |   |
| Stock Borrow Interest                                   |       | 26,411                                                             |       | 2,076 |   |
| Other Interest                                          |       | 5,176                                                              |       | 2,632 |   |
| Other                                                   |       | 596                                                                |       | (1,101 | ) |
| Total revenues                                          |       | 296,536                                                            |       | 67,303 |   |
|                                                    |       |                                                               |       |   |   |
| EXPENSES:                                               |       |                                                               |       |   |   |
| Employee compensation and related benefits              |       | 34,141                                                             |       | 21,903 |   |
| Margin Interest                                         |       | 26,554                                                             |       | 3,297 |   |
| Other Interest                                          |       | 13,499                                                             |       | 13,286 |   |
| Exchange, clearing and brokerage fees                   |       | 10,010                                                             |       | 9,994 |   |
| Lease of exchange memberships and trading license  fees |       | 1,051                                                              |       | 1,012 |   |
| Depreciation and amortization of intangibles            |       | 2,982                                                              |       | 3,053 |   |
| Other                                                   |       | 10,488                                                             |       | 11,046 |   |
| Total expenses                                          |       | 98,725                                                             |       | 63,591 |   |
|                                                    |       |                                                               |       |   |   |
| Income before  provision for income taxes               |       | 197,811                                                            |       | 3,712 |   |
|                                                    |       |                                                               |       |   |   |
| PROVISION FOR  INCOME TAXES                             |       | 85,522                                                             |       | 1,466 |   |
|                                                    |       |                                                               |       |   |   |
| Net income  available to common stockholders            |       | $                                                                  | 112,289    |   | $ | 2,246 |   |
|                                                    |       |                                                               |       |   |   |
| Weighted-average common  shares outstanding:            |       |                                                               |       |   |   |
| Basic                                                   |       | 60,691                                                             |       | 60,596 |   |
| Diluted                                                 |       | 61,296                                                             |       | 60,866 |   |
| Earnings per share:                                     |       |                                                               |       |   |   |
| Basic                                                   |       | $                                                                  | 1.85       |   | $ | 0.04 |   |
| Diluted                                                 |       | $                                                                  | 1.83       |   | $ | 0.04 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

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**LaBRANCHE & CO INC. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(UNAUDITED)(000’s omitted except per share data)**
| ** **                                                                                                                                                                              | ** ** | **As of**           | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(unaudited)**          | ** ** | **(audited)** | ** ** |
| **ASSETS**                                                                                                                                                                              |       |                     |       |   |   |
| Cash and cash  equivalents                                                                                                                                                              |       | $                        | 417,028    |   | $ | 427,284 |   |
| Cash and  securities segregated under federal regulations                                                                                                                               |       | 6,893                    |       | 6,554 |   |
| Securities  purchased under agreements to resell                                                                                                                                        |       | 86,000                   |       | 79,000 |   |
| Receivable from  brokers, dealers and clearing organizations                                                                                                                            |       | 589,076                  |       | 658,631 |   |
| Receivable from  customers                                                                                                                                                              |       | 7,995                    |       | 3,659 |   |
| Financial instruments  owned, at fair value:                                                                                                                                            |       |                     |       |   |   |
| Corporate equities, not readily marketable                                                                                                                                              |       | 223,026                  |       | 3⁄4 |   |
| Corporate equities                                                                                                                                                                      |       | 2,135,553                |       | 1,128,999 |   |
| Options                                                                                                                                                                                 |       | 478,332                  |       | 411,887 |   |
| Exchange-traded funds                                                                                                                                                                   |       | 791,833                  |       | 815,250 |   |
| Government and corporate bonds                                                                                                                                                          |       | 1,111                    |       | 8 |   |
| Commissions  receivable                                                                                                                                                                 |       | 4,661                    |       | 4,337 |   |
| Exchange  memberships contributed for use, at market value                                                                                                                              |       | 3⁄4                   |       | 24,500 |   |
| Exchange  memberships owned, at adjusted cost (market value of $2,864 and $138,768,  respectively)                                                                                 |       | 1,216                    |       | 59,664 |   |
| Office equipment  and leasehold improvements, at cost, less accumulated depreciation and  amortization of $12,757 and $12,364, respectively                                             |       | 4,615                    |       | 2,695 |   |
| Intangible assets, net  of accumulated amortization:                                                                                                                                    |       |                     |       |   |   |
| Specialist stock lists, less accumulated  amortization of $57,956 and $55,362, respectively                                                                                             |       | 348,234                  |       | 350,828 |   |
| Trade name                                                                                                                                                                              |       | 25,011                   |       | 25,011 |   |
| Goodwill                                                                                                                                                                                |       | 250,569                  |       | 250,569 |   |
| Other assets                                                                                                                                                                            |       | 40,845                   |       | 35,419 |   |
| Total assets                                                                                                                                                                            |       | $                        | 5,411,998  |   | $ | 4,284,295 |   |
|                                                                                                                                                                                    |       |                     |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                          |       |                     |       |   |   |
| Liabilities:                                                                                                                                                                            |       |                     |       |   |   |
| Payable to brokers and dealers                                                                                                                                                          |       | $                        | 98,741     |   | $ | 79,646 |   |
| Payable to customers                                                                                                                                                                    |       | 13,650                   |       | 4,858 |   |
| Financial  instruments sold, but not yet purchased, at fair value:                                                                                                                      |       |                     |       |   |   |
| Corporate equities                                                                                                                                                                      |       | 2,325,638                |       | 1,845,234 |   |
| Options                                                                                                                                                                                 |       | 547,190                  |       | 418,315 |   |
| Exchange-traded funds                                                                                                                                                                   |       | 775,528                  |       | 392,713 |   |
| Government and corporate bonds                                                                                                                                                          |       | 12,245                   |       | 77,263 |   |
| Accrued compensation                                                                                                                                                                    |       | 15,115                   |       | 22,722 |   |
| Accounts payable and other accrued expenses                                                                                                                                             |       | 31,369                   |       | 21,133 |   |
| Other liabilities                                                                                                                                                                       |       | 15,876                   |       | 11,859 |   |
| Income taxes payable                                                                                                                                                                    |       | 5,250                    |       | 10,513 |   |
| Deferred tax liabilities                                                                                                                                                                |       | 230,376                  |       | 148,263 |   |
| Short term debt                                                                                                                                                                         |       | 16,599                   |       | 3,000 |   |
| Long term debt                                                                                                                                                                          |       | 467,837                  |       | 481,425 |   |
|                                                                                                                                                                                    |       |                     |       |   |   |
| Subordinated  liabilities:                                                                                                                                                              |       |                     |       |   |   |
| Exchange memberships contributed for use, at market  value                                                                                                                              |       | 3⁄4                   |       | 24,500 |   |
| Other subordinated indebtedness                                                                                                                                                         |       | 9,395                    |       | 9,395 |   |
| Total  liabilities                                                                                                                                                                      |       | 4,564,809                |       | 3,550,839 |   |
|                                                                                                                                                                                    |       |                     |       |   |   |
| Commitments and  contingencies                                                                                                                                                          |       |                     |       |   |   |
|                                                                                                                                                                                    |       |                     |       |   |   |
| Common stock,  $.01 par value, 200,000,000 shares authorized; 60,733,889 and 60,623,819  shares issued and outstanding at March 31, 2006 and December 31,  2005, respectively |       | 607                      |       | 606 |   |
| Additional paid-in  capital                                                                                                                                                             |       | 691,431                  |       | 689,988 |   |
| Retained  earnings                                                                                                                                                                      |       | 155,151                  |       | 42,862 |   |
| Total  stockholders’ equity                                                                                                                                                        |       | 847,189                  |       | 733,456 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                        |       | $                        | 5,411,998  |   | $ | 4,284,295 |   |

2

The accompanying notes are an integral part of these condensedconsolidated financial statements.

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**LaBRANCHE & CO INC. and SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)****(000’somitted)**
| ** **                                                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                                                                                    |       | $                                                    | 112,289    |   | $ | 2,246 |   |
| Adjustments to  reconcile net income to net cash (used) provided by operating activities:                                     |       |                                                 |       |   |   |
| Depreciation and amortization of intangibles                                                                                  |       | 2,982                                                |       | 3,053 |   |
| Amortization of debt issuance costs and bond  discount                                                                        |       | 463                                                  |       | 419 |   |
| Compensation expense related to stock-based  compensation                                                                     |       | 1,444                                                |       | 1,157 |   |
| Deferred taxes, net                                                                                                           |       | 75,573                                               |       | 22,235 |   |
| Net gain on NYX transaction                                                                                                   |       | (164,526                                             | )          | 3⁄4 |   |
| Changes in  operating assets and liabilities:                                                                                 |       |                                                 |       |   |   |
| Cash and securities segregated under federal  regulations                                                                     |       | (339                                                 | )          | 7,841 |   |
| Securities purchased under agreements to resell                                                                               |       | (7,000                                               | )          | (5,000 | ) |
| Receivable from brokers, dealers and clearing  organizations                                                                  |       | 69,555                                               |       | (233,048 | ) |
| Receivable from customers                                                                                                     |       | (4,336                                               | )          | 5,962 |   |
| Financial  instruments owned, at fair value:                                                                                  |       |                                                 |       |   |   |
| Corporate equities                                                                                                            |       | (1,006,554                                           | )          | (1,130 | ) |
| Options                                                                                                                       |       | (66,445                                              | )          | 5,454 |   |
| Exchange-traded funds                                                                                                         |       | 23,417                                               |       | (108,950 | ) |
| Government and corporate bonds                                                                                                |       | (1,103                                               | )          | 3⁄4 |   |
| Commissions receivable                                                                                                        |       | (324                                                 | )          | (92 | ) |
| Other assets                                                                                                                  |       | 662                                                  |       | (18,545 | ) |
| Payable to brokers and dealers                                                                                                |       | 19,095                                               |       | 17,549 |   |
| Payable to customers                                                                                                          |       | 8,792                                                |       | 1,287 |   |
| Financial  instruments sold, but not yet purchased, at fair value:                                                            |       |                                                 |       |   |   |
| Corporate equities                                                                                                            |       | 480,404                                              |       | 65,317 |   |
| Options                                                                                                                       |       | 128,875                                              |       | 15,336 |   |
| Exchange-traded funds                                                                                                         |       | 382,815                                              |       | 91,803 |   |
| Government and corporate bonds                                                                                                |       | (65,018                                              | )          | 151,912 |   |
| Accrued compensation                                                                                                          |       | (7,607                                               | )          | (20,421 | ) |
| Accounts payable and other accrued expenses                                                                                   |       | 10,236                                               |       | 10,242 |   |
| Other liabilities                                                                                                             |       | 4,017                                                |       | 195 |   |
| Income taxes payable                                                                                                          |       | (5,324                                               | )          | 3⁄4 |   |
| Net cash (used) provided by operating activities                                                                              |       | (7,957                                               | )          | 14,822 |   |
|                                                                                                                          |       |                                                 |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payments for purchases of office equipment and  leasehold improvements                                                        |       | (2,308                                               | )          | (344 | ) |
| Payments for purchases of exchange memberships                                                                                |       | (52                                                  | )          | (325 | ) |
| Net cash used in investing activities                                                                                         |       | (2,360                                               | )          | (669 | ) |
|                                                                                                                          |       |                                                 |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payment to minority interest holder                                                                                           |       | 3⁄4                                               |       | (356 | ) |
| Principal payments of subordinated debt                                                                                       |       | 3⁄4                                               |       | (1,890 | ) |
| Tax benefit from vesting of stock based compensation                                                                          |       | 61                                                   |       | 3⁄4 |   |
| Net cash provided by (used in) financing activities                                                                           |       | 61                                                   |       | (2,246 | ) |
| (Decrease) Increase in cash and cash equivalents                                                                              |       | $                                                    | (10,256    | ) | $ | 11,907 |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                                                               |       | 427,284                                              |       | 444,446 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                                                     |       | $                                                    | 417,028    |   | $ | 456,353 |   |
| ** **                                                                                                                    |       |                                                 |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  PAID DURING THE PERIOD FOR:**                                                              |       |                                                 |       |   |   |
| Interest                                                                                                                      |       | $                                                    | 28,083     |   | $ | 1,558 |   |
| Income taxes                                                                                                                  |       | $                                                    | 11,357     |   | $ | 168 |   |
|                                                                                                                          |       |                                                 |       |   |   |
| **SUPPLEMENTAL SCHEDULE OF NON  CASH INVESTING AND FINANCING ACTIVITIES:**                                                    |       |                                                 |       |   |   |
| Net increase in additional paid-in capital related  to stock-based awards                                                     |       | $                                                    | 1,443      |   | $ | 1,157 |   |
| Net increase in corporate equities, not readily  marketable from NYX exchange transaction       |       | $                                                    | (223,026)  |   | — |   |
| Net increase  from exchange of NYSE memberships for NYX common stock                                                          |       | $                                                    | 58,500     |   | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

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**LaBRANCHE & CO INC. and SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

**1.**                                      ORGANIZATION ANDDESCRIPTION OF BUSINESS

The condensedconsolidated financial statements include the accounts of LaBranche &Co Inc., a Delaware corporation (the “Holding Company”), and its subsidiaries,LaBranche & Co. LLC, a New York limited liability company, LaBrancheFinancial Services, Inc., a New York corporation (“LFSI”), LaBrancheStructured Holdings, Inc., a Delaware corporation (“LSHI”), LABDR Services, Inc.,a Delaware corporation (“LABDR”), and LaBranche & Co. B.V., aNetherlands private limited liability company (“BV”). The Holding Company isthe sole member of LaBranche & Co. LLC, the 100% stockholder of LFSI,LSHI and LABDR and the sole owner of BV. LSHI is a holding company that is thesole member of LaBranche Structured Products, LLC, a New York limited liabilitycompany (“LSP”), LaBranche Structured Products Specialists LLC, a New Yorklimited liability company (“LSPS”), LaBranche Structured Products EuropeLimited, a United Kingdom single member private company (“LSPE”) and LaBrancheStructured Products Hong Kong Limited, a Hong Kong single member privatecompany (“LSPH”), and LaBranche Structured Products Direct, Inc., a NewYork corporation (“LSPD”, and collectively with the Holding Company, LaBranche &Co. LLC, LFSI, LSHI, LABDR, LSP, LSPS, LSPE and LSPH the “Company”).  LaBranche & Co. LLC is a registeredbroker-dealer that operates primarily as a specialist in equity securities andrights listed on the New York Stock Exchange (“NYSE”) and in equity securitieson the American Stock Exchange (“AMEX”). LFSI is a registered broker-dealer anda member of the NYSE and other exchanges and provides securities execution,securities clearing and other related services to its own customers andcustomers of introducing brokers. LFSI also provides direct-access floorbrokerage services to institutional customers. LSP is a registeredbroker-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 registered broker-dealer thatoperates as a specialist in ETFs traded on the NYSE. LSPE is a UnitedKingdom-registered broker-dealer and operates as a market-maker for ETFs inEurope. LSPH was organized to operate as a market-maker for ETFs and engage inhedging transactions in Asia, and is in the process of registering as abroker-dealer with Hong Kong’s Securities and Futures Commission. LSPD is an NASD member firm that was acquiredby the Company in April 2006 and is in the process of obtaining anapproval from the NASD to become a market-maker on the NASDAQ system. LABDRprovides disaster recovery services and back-up facilities to other HoldingCompany subsidiaries. BV representsLaBranche & Co. LLC inEuropean markets and provides client services to LaBranche &Co. LLC’s European listed companies.

**2.**                                      INTERIM CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL INFORMATION

The unauditedinterim condensed consolidated financial information as of March 31, 2006and for the three months ended March 31, 2006 and 2005 is presented in theaccompanying condensed consolidated financial statements. The unaudited interimcondensed

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consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialinformation. The unaudited interim condensed consolidated financial informationreflects all adjustments which are, in the opinion of management, necessary fora fair presentation of the results for such periods. The preparation ofcondensed consolidated financial statements in conformity with U.S. generallyaccepted accounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thecondensed consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom these estimates and assumptions. The unaudited interim condensedconsolidated financial information as of March 31, 2006 should be read inconjunction with the audited consolidated financial statements and notesthereto as of December 31, 2005 included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005 filed with theSecurities and Exchange Commission (“SEC”) on March 16, 2006 (the “2005 10-K).Results of the first quarter 2006 interim period are not necessarily indicativeof results to be obtained for the full fiscal year.

**3.**                                      INCOME TAXES

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 unrealized gains on corporate equities, notreadily marketable, stock-based compensation, other compensation accruals,amortization periods of certain intangible assets and differences between thefinancial statement and tax bases of assets acquired.

The components of the provision for income taxesreflected on the condensed consolidated statements of operations are set forthbelow (000’s omitted):

|                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Current federal,  state and local taxes |       | $                                                    | 9,949      |   | $ | (20,769 | ) |
| Deferred tax  provision (benefit)       |       | 75,573                                               |       | 22,235 |   |
| Total provision  for income taxes       |       | $                                                    | 85,522     |   | $ | 1,466 |   |

 

**4.**                                      CAPITAL AND NETLIQUID ASSET REQUIREMENTS

LaBranche & Co. LLC, as a specialist andmember of the NYSE and AMEX, is subject to the provisions of SEC Rule 15c3-1,as adopted and administered by the SEC, NYSE and AMEX. LaBranche & Co.LLC is required to maintain minimum net capital, as defined, equivalent to thegreater of $100,000 or 1/15 of aggregate indebtedness, as defined.

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As of March 31, 2006 and December 31, 2005,LaBranche & Co. LLC’s net capital, as defined under SEC Rule 15c3-1,was $454.0 million and $459.8 million, respectively, which exceeded the minimumrequirements by $451.7 million and $458.1 million, respectively. LaBranche &Co. LLC’s aggregate indebtedness to net capital ratio on those dates was .07 to1 and .05 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 March 31, 2006 and December 31,2005, LaBranche & Co. LLC’s and LSPS’ NYSE minimum required combineddollar amount of net liquid assets, as defined, was $447.0 million. LaBranche &Co. LLC’s actual net liquid assets, as defined, were $455.8 million and $459.3million as of March 31, 2006 and December 31, 2005, respectively. Asof March 31, 2006 and December 31, 2005, LaBranche & Co. LLC’sactual net liquid assets exceeded the combined net liquid assets requirement ofLaBranche & Co. LLC and LSPS. Both LaBranche & Co. LLC andLSPS thus satisfied their respective net liquid asset requirements as of thosedates.

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of (a) $1.0million or (b) an amount sufficient to assume a position of sixty tradingunits of each security in which the equity specialist is registered. As of March 31,2006 and December 31, 2005, LaBranche & Co. LLC satisfied theAMEX equity specialist liquid asset requirements.

As a registered broker-dealer and member firm of theNYSE, LFSI is also subject to SEC Rule 15c3-1, as adopted andadministered by the SEC and the NYSE. Under the alternative method permitted bythis rule, the minimum required net capital is equal to the greater of $1.5million or 2.0% of aggregate debit items, as defined. As of March 31, 2006and December 31, 2005, LFSI’s net capital, as defined, was $19.5 millionand $19.7 million, respectively, which exceeded minimum requirements by $18.0million and $18.2 million, respectively.

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered bythe SEC. As of April 4, 2006, LFSI’s total debits exceeded total creditsfor purposes of the applicable formula and therefore LFSI was not required tosegregate customer funds at March 31, 2006. As of January 4, 2006, tocomply with its December 31, 2005 requirement, cash and U.S. TreasuryBills in the amount of $1.2 million were segregated in a special reserveaccount for the exclusive benefit of customers, exceeding actual requirementsby $1.2 million. 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 April 4, 2006, to comply with LFSI’s March 31,2006 requirement, cash and U.S. Treasury Bills in the amount of $5.1 millionwere segregated in a special reserve account for the exclusive benefit of customers,exceeding actual requirements by $3.2 million. As of January 4, 2006, to comply withLFSI’s December 31, 2005 requirement, cash and U.S. Treasury Bills in theamount of $5.7 million were segregated in a special reserve account for theexclusive benefit of customers, thus exceeding actual requirements by $2.0million.

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As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered bythe SEC and the AMEX. LSP is required to maintain minimum net capital, asdefined, equivalent to the greater of $100,000 or 1/15 of aggregate indebtedness, as defined. Asof March 31, 2006 and December 31, 2005, LSP’s net capital, asdefined, was $79.8 million and $56.8 million, respectively, which exceededminimum requirements by $78.8 million and $55.7 million, respectively.

LSPS, as a specialist and member of the NYSE, issubject to the provisions of SEC Rule 15c3-1, as adopted andadministered by the SEC and NYSE. LSPS is required to maintain minimum netcapital, as defined, equivalent to the greater of $100,000 or 1/15 of aggregate indebtedness, as defined. Asof March 31, 2006 and December 31, 2005, LSPS’ net capital, asdefined, was $11.9 million and $10.7 million, respectively, which exceeded theminimum requirements by $11.7 million and $10.6 million, respectively. LSPS’aggregate indebtedness to net capital ratio on those dates was .18 to 1 and .16to 1, respectively.

**5.**                                      EARNINGS PERSHARE

Earnings per share are computed in accordance withSFAS No. 128, “Earnings Per Share.” Basic earnings per share is calculatedby dividing net income available to common stockholders by the weighted-averagenumber of common shares outstanding. Diluted earnings per share includes thedeterminants of basic earnings per share and, in addition, gives effect topotentially dilutive common shares.

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

|                                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Numerator for  basic and diluted earnings per share — net income available to common  stockholders  |       | $                                                    | 112,289    |   | $ | 2,246 |   |
| Denominator for  basic earnings per share — weighted-average number of common shares  outstanding   |       | 60,691                                               |       | 60,596 |   |
| Dilutive shares:                                                                                         |       |                                                 |       |   |   |
| Stock options                                                                                            |       | 3⁄4                                               |       | 3⁄4 |   |
| Restricted stock units                                                                                   |       | 605                                                  |       | 270 |   |
| Denominator for  diluted earnings per share — weighted-average number of common shares  outstanding |       | 61,296                                               |       | 60,866 |   |
| Earnings per  share:                                                                                     |       |                                                 |       |   |   |
| Basic                                                                                                    |       | $                                                    | 1.85       |   | $ | 0.04 |   |
| Diluted                                                                                                  |       | $                                                    | 1.83       |   | $ | 0.04 |   |

 

Options to purchase an aggregate of 1,709,778 and2,319,167 shares of common stock were outstanding at March 31, 2006 and2005, respectively, but were not included in the computation of dilutedearnings per share because the options’ exercise prices were greater

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than the market price ofthe Company’s common stock. In addition, potential common shares relating torestricted stock and restricted stock units at March 31, 2006 and 2005totaling 1,026,932 and 931,398 shares, respectively, were dilutive. The calculationof diluted earnings per share includes the dilutive effect of these stock-basedawards.

**6.**                                      EMPLOYEEINCENTIVE PLANS

In December 2004, the FASB issued SFAS No. 123(R),“Share Based Payment.” SFAS No. 123(R) is a revision of SFAS No. 123,“Accounting for Stock-Based Compensation” and supersedes APB opinion No. 25,“Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statementof Cash Flows.” SFAS No. 123(R) requires compensation costs relatedto share-based payment transactions to be recognized in the financialstatements over the period that an employee provides service in exchange forthe award. SFAS No. 123(R)  was adopted as of January 1, 2006,using the modified prospective method. SFAS No. 123(R) requiresexpected forfeitures to be included in determining share-based employeecompensation expense. Prior to the adoption of SFAS No. 123(R), forfeiturebenefits were recorded as a reduction to compensation expense when an employeeleft the firm and forfeited the award. In the first quarter of 2006, werecorded a benefit for expected forfeitures on all outstanding share-basedawards. The transition impact of adopting SFAS No. 123(R) as of thefirst day of our 2006 fiscal year, including the effect of accruing forexpected forfeitures on outstanding share-based awards, was not material to ourfinancial condition, results of operations, earnings per share or cash flowsfor the first quarter of 2006.

The following disclosures are also being providedpursuant to the requirements of SFAS 123(R):

TheCompany sponsors one share-based employee incentive plan — the LaBranche &Co Inc. Equity Incentive Plan (the “Plan”). The fair value (which, due to the$0 strike price of the awards, equals the intrinsic value) of the restrictedstock awards is determined by using the closing price of the Company’s commonstock on the date on which the awards are granted. Amortization of compensationcosts for grants awarded under the Plan recognized during the quarters ended March 31,2006 and 2005 was approximately $1.4 million and $937,000, respectively. Thetax benefit realized in the Consolidated Statements of Operations for the Planwas approximately $628,000 and $408,000 for the quarters ended March 31,2006 and 2005.

At March 31,2006, unrecognized compensation cost related to the Company’s non-vested stockoption and restricted stock unit awards totaled $10.9 million. The cost ofthese non-vested awards is generally expected to be recognized over aweighted-average period of approximately three years.

SFAS 123(R) generallyrequires share-based awards granted to retirement-eligible employees to beexpensed immediately. The Company did not grant any share-based awards prior toour adoption of SFAS 123(R) to retirement-eligible employees or those withnon-substantive non-compete agreements. In addition, no grants of any stockoptions or RSUs were changed or amended after our adoption of SFAS 123(R) to reflect retirement eligibilityor non-compete agreements.

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Thetotal number of shares of the Company’s common stock that may be issued underthe Plan through fiscal 2009 may not exceed 7,687,500 shares. As of March 31,2006 and December 31, 2005, 2,851,238 shares and 3,499,472 shares,respectively, were available for grant under the Plan.

*Restricted StockUnits*

TheCompany issued restricted stock units to employees under the Plan, primarily inconnection with year-end compensation. All of the restricted stock unitsoutstanding as of March 31, 2006 and December 31, 2005 requiredfuture service as a condition to the delivery of  the underlying shares of common stock. In allcases, delivery of the underlying shares of common stock is conditioned on thegrantees’ satisfying certain requirements outlined in the agreements.Generally, the restricted stock units become fully vested if the grantee’semployment with the Company terminates by reason of death or disability priorto vesting. The grantee forfeits the unvested portion of the restricted stockunits upon the termination of employment for any reason other than death ordisability. When delivering the underlying shares of stock to employees, theCompany generally issues new shares of common stock, as opposed to reissuingtreasury shares.

The following table provides information about grantsof RSUs:

|                                                | ** ** | **Number of Shares** | ** ** | **Weighted  Average Price  per Share** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------|------------|
| RSUs Outstanding  as of December 31, 2005 |       | 1,093,666                      |       | $                                                | 8.76       |   |
| Granted                                        |       | 695,500                        |       | 10.68                                            |       |
| Vested                                         |       | (90,668                        | )          | 9.38                                             |       |
| Forfeited                                      |       | (66,666                        | )          | 8.38                                             |       |
| RSUs Outstanding as of  March 31, 2006    |       | 1,631,832                      |       | $                                                | 9.56       |   |

 

Under SFAS No. 123(R), the Company is required toestimate forfeitures of RSUs for purposes of determining the Company'sshare-based award expense.  Applying SFAS No. 123(R) as of March 31, 2006,for purposes of determining share-based award expense, RSUs with respect to1,428,169 shares of the Company's common stock were expected to vest, with aweighted average price of $9.44 per share.

*Stock Options*

As of December 31,2004, all stock options granted to employees were fully vested and exercisable.In general, all stock options expire on the tenth anniversary of grant,although they may be subject to earlier termination or cancellation in certaincircumstances under the Plan and the stock option agreement, such as death,disability or other termination of employment prior to the tenth anniversary ofgrant. The dilutive effect of the Company’s outstanding stock options isincluded in “Weighted Average Common SharesOutstanding — Diluted” on the Condensed Consolidated Statement of Operations.

The following table provides information about optionsto purchase the Company’s common stock:

|                                                   | ** ** | **Number of Shares** | ** ** | **Weighted  Average Exercise  Price per Share** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------|------------|
| Options  Outstanding as of December 31, 2005 |       | 1,709,778                      |       | $                                                              | 25.39      |   |
| Options Granted                                   |       | —                         |       | —                                                         |       |
| Options Exercised                                 |       | —                         |       | —                                                         |       |
| Options Forfeited                                 |       | —                         |       | —                                                         |       |
| Options  Outstanding as of March 31, 2006    |       | 1,709,778                      |       | $                                                              | 25.39      |   |
|                                              |       |                           |       |                                                           |       |
| Options Exercisable as  of:                       |       |                           |       |                                                           |       |
| December 31, 2005                            |       | 1,709,778                      |       | $                                                              | 25.39      |   |
| March 31,  2006                              |       | 1,709,778                      |       | $                                                              | 25.39      |   |

 

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The following table summarizes information about stockoptions outstanding as of March 31, 2006:

|                                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                            | ** ** |
|-----------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price  per Share** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  per Share** | ** ** |
| $11.00 - $20.99                         |       | 764,778                      |       | 3.81                                                    |       | $ | 13.93 |   | 764,778 |   | $ | 13.93 |   |
| 21.00 - 30.99                           |       | 75,000                       |       | 6.57                                                    |       | 27.50 |   | 75,000 |   | 27.50 |   |
| $31.00 - $40.99                         |       | 870,000                      |       | 5.75                                                    |       | $ | 35.29 |   | 870,000 |   | $ | 35.29 |   |
|                                    |       | 1,709,778                    |       |                                                    |       |   |   | 1,709,778 |   |   |   |

 

No options were exercised during the three months ended March 31,2006 and March 31, 2005.

**7.**                                      BUSINESS SEGMENTS

Segmentinformation is presented in accordance with SFAS No. 131, “DisclosuresAbout Segments of an Enterprise and Related Information.” The Company’sbusiness segments are based upon the nature of the financial services provided,their revenue source and the Company’s management organization.

TheCompany’s Specialist and Market-Making segment operates as a specialist inequities, ETFs and rights listed on the NYSE, as a specialist in equities,options, ETFs and futures on several exchanges, as well as a market-maker inETFs, futures and options on several exchanges. This segment also provides supportservices for the NYSE specialist activities. The Specialist andMarket-Making segment currently includes the operations of LaBranche &Co. LLC, LSP, LSPS, LSPE, LABDR and BV, and will include LSPH and LSPD upontheir commencement of operations, since they share similar economiccharacteristics.

TheCompany’s Execution and Clearing segment provides securities execution,securities clearing and other related services to its own customers andcustomers of introducing brokers. This segment also provides direct-accessfloor brokerage services to institutional customers. The Execution and Clearingsegment currently includes the operations of LFSI.

Revenues and expensesdirectly associated with each segment are included in determining its operatingresults. Other expenses, including corporate overhead, which are not directlyattributable to a particular segment, generally are allocated to each segmentbased on

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itsresource usage levels or other appropriate measures. Interest with respect tothe Company’s outstanding senior notes, certain administrative expenses,corporate overhead expenses and other sources of revenues are not specificallyallocated by management when reviewing the Company’s segments’ performance, andappear in the “Other” section. Selected financial information for each segmentis set forth below (000’s omitted):

|                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Specialist and Market-Making Segment:**     |       |                                                 |       |   |   |
| Revenues                                      |       | $                                                    | 271,327    |   | $ | 54,488 |   |
| Operating  expenses                           |       | 68,892                                               |       | 32,091 |   |
| Depreciation and  amortization of intangibles |       | 2,815                                                |       | 2,914 |   |
| Income before taxes                           |       | 199,620                                              |       | 19,483 |   |
| Segment goodwill                              |       | 250,569                                              |       | 250,569 |   |
| Segment assets                                |       | $                                                    | 5,210,676  |   | $ | 2,181,635 |   |
|                                          |       |                                                 |       |   |   |
| **Execution and Clearing Segment:**           |       |                                                 |       |   |   |
| Revenues                                      |       | $                                                    | 24,297     |   | $ | 12,195 |   |
| Operating  expenses                           |       | 10,764                                               |       | 12,801 |   |
| Depreciation and  amortization of intangibles |       | 102                                                  |       | 109 |   |
| Income (loss) before taxes                    |       | 13,431                                               |       | (715 | ) |
| Segment assets                                |       | $                                                    | 88,450     |   | $ | 59,787 |   |
|                                          |       |                                                 |       |   |   |
| **Other****(1):**                             |       |                                                 |       |   |   |
| Revenues                                      |       | $                                                    | 912        |   | $ | 620 |   |
| Operating expenses                            |       | 16,087                                               |       | 15,646 |   |
| Depreciation and  amortization of intangibles |       | 65                                                   |       | 30 |   |
| Loss before taxes                             |       | (15,240                                              | )          | (15,056 | ) |
| Segment assets                                |       | $                                                    | 112,872    |   | $ | 152,595 |   |
|                                          |       |                                                 |       |   |   |
| **Total:**                                    |       |                                                 |       |   |   |
| Revenues                                      |       | $                                                    | 296,536    |   | $ | 67,303 |   |
| Operating  expenses                           |       | 95,743                                               |       | 60,538 |   |
| Depreciation and  amortization of intangibles |       | 2,982                                                |       | 3,053 |   |
| Income before taxes                           |       | 197,811                                              |       | 3,712 |   |
| Goodwill                                      |       | 250,569                                              |       | 250,569 |   |
| Assets                                        |       | $                                                    | 5,411,998  |   | $ | 2,394,017 |   |

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**(1)****           ***Other* is comprised primarily of the interest on the HoldingCompany’s indebtedness, unallocated corporate administrative expenses,including professional and legal costs, unallocated revenues (primarilyinterest income) and elimination entries.

**8.**                                      NYSE GROUPRESTRICTED STOCK EXCHANGE TRANSACTION

As of December 31,2005, the Company owned 39 NYSE memberships out of a total 1,366 NYSEmemberships, representing a 2.9% ownership interest in the NYSE. The Companyhas accounted for its investment in these memberships under the adjusted costmethod since its

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inception. On March 7, 2006, theNYSE and Archipelago Holdings, Inc. combined their businesses and becamewholly-owned subsidiaries of NYSE Group, Inc. (“NYSE Group”), anewly-created, for-profit and publicly-traded holding company (the “NYSE Merger”).

In theNYSE Merger each NYSE membership became entitled to receive in exchange for theNYSE membership $300,000 in cash and 80,177 shares of NYSE Group common stock(the “NYX stock”). In addition, immediately prior to the consummation of theNYSE Merger, the NYSE announced a “permitted dividend” to be paid with respectto each NYSE membership in the amount of approximately $70,570 or $2.7 millionin total, which was equivalent to the membership’s pro rata portion of the NYSE’s“excess cash,” as defined in the NYSE Merger agreement governing the merger.The Company received the permitted dividend with respect to each of its 39 NYSEmemberships on March 14, 2006.

In theNYSE Merger, the Company’s 39 NYSE memberships were converted into the right toreceive an aggregate of $11.7 million cash (not including the permitteddividend) and 3,126,903 shares of NYX stock. The $11.7 million cashdistribution was treated as monetary consideration for which a realized gainwas recognized in the first quarter of 2006.

APB No. 29(as amended) provides guidance on exchanges of assets in a non-monetarytransfer. Accounting for non-monetary assets acquired in a substantiallynon-monetary exchange is at times based on cost or fair value of the assetsrelinquished and at times on the fair value of the assets received in the exchange.Based on the guidance under APB No. 29, the Company valued the shares ofNYX stock received immediately after the exchange at fair value, which wasdeemed to be the value of the shares on the first day trading commenced for NYXstock, or $67.00 per share. Based upon this interpretation the Company realizeda $130.1 million gain from the exchange of the NYSE memberships for 3.1 millionshares of NYX stock, which includes the effect of a valuation allowance due tothe restrictions on transfer applicable to the NYX stock.

 After the consummation of the NYSE Merger, theCompany accounts for its investment in the NYX stock as owned restricted stockand reflected at the estimated fair value of such restricted shares pursuant tothe American Institute of Certified Public Accountants *Audit andAccounting Guide—Brokers and Dealers in Securities.*At March 31,2006, the NYSE closing market price for the NYX stock was $79.25 per share. Assuch, this resulted in the Company’s recognition of an unrealized gain of $34.5million, which includes a valuation allowance due to the transfer restrictions.The shares of NYX stock received in the NYSE Merger are subject to athree-year restriction on transfer. The restriction will be removed in equalone-third installments on each March 7 of 2007, 2008 and 2009, unless therestrictions are removed earlier by the NYSE Group in its sole discretion.

 Prior to theclosing of the NYSE Merger, the Company participated in a “Dutch” auction fortrading licenses, successfully bidding for 95 trading licenses at an annual price of $49,290 each, the minimum bidaccepted by the NYSE. Thelicenses became effective for trading on the NYSE on March 8, 2006. Thecosts of the trading licenses for 2006 are approximately $1.2 million per quarter.

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**9.**                                      CONTINGENCIES

There have been no material new developments in our legal proceedingssince the March 16, 2006 filing of our 2005 10-K.

The Companybelieves that the claims asserted against it by the plaintiffs in the pendingproceedings described in the 2005 10-K are without merit, and the Companydenies all allegations of wrongdoing. There can be no assurance, however, as tothe outcome or timing of the resolution of these proceedings. Therefore, theCompany is unable to estimate the amount or potential range of any loss thatmay arise out of these proceedings. The range of possible resolutions couldinclude determinations and judgments against the Company or settlements thatcould require substantial payments by the Company that could have a materialadverse effect on the Company’s financial condition, results of operations andcash flows.

## In addition to the proceedings described inthe 2005 10-K, the Company and its operating subsidiaries have been thetarget, from time to time, of various claims, lawsuits and regulatory inquiriesin the ordinary course of their respective businesses. While the ultimateoutcome of those claims and lawsuits which are currently pending cannot bepredicted with certainty, the Company believes, based on its understanding ofthe facts of these proceedings, that their ultimate resolution will not, in theaggregate, have a material adverse effect on the Company’s financial condition,results of operations or cash flows.

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## **Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

*Unless the contextotherwise requires, the “Company” or “we” shall mean LaBranche & CoInc. 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 thefiscal year ended December 31, 2005 (the “2005 10-K”) and ourCondensed Consolidated Financial Statements and the Notes thereto contained inthis report.*

***ExecutiveOverview***

Earnings for our first quarter of 2006 were $112.3million, or $1.83 per diluted share, on revenues of $296.5 million. Theseresults include a pre-tax gain of $179.0 million as a result of the exchange ofour 39 NYSE memberships for approximately 3.1 million restricted shares of NYSEGroup common stock (the “NYX stock”) and approximately $14.4 million in cash inconnection with the merger between the NYSE and Archipelago Holdings, Inc.on March 7, 2006. After tax, this gain accounted for $102.0 million of our$112.3 million net income. Excluding the gain attributable to theNYSE/Archipelago merger, our earnings would have been $10.3 million, or $0.17per share, on revenues of $117.6 million. These results compare with $2.2million, or $0.04 per share, in the first quarter of 2005, on revenues of $67.3million.

Our pre-tax income has been trending higher over thepast year. Last year, our pre-tax income by quarter was $3.7 million in thefirst quarter, $10.0 million in the second quarter, $10.7 million in the thirdquarter and $17.0 million (excluding escrow proceeds from the disposition ofour investment in Lava Trading, Inc.) in the fourth quarter. Our pre-taxincome, excluding the gain attributable to the NYSE/Archipelago merger,increased to $18.8 million in the first quarter of 2006. Our Specialist andMarket-Making principal trading revenues increased year over year by 63 percentfrom $40.0 million in the first quarter of 2005 to $65.0 million in the firstquarter of 2006. The financial results of our Specialist and Market-Makingbusiness are highly dependent on trading volumes and volatility. Increasedtechnology has given us the ability to handle higher trading volumes withoutincreasing costs. We continue to devote significant resources to developing thehybrid model for the trading of cash equities. We believe that the hybridsystem will allow us to interact in a fast and more automated market, whileallowing us to add liquidity and mitigate unnecessary volatility.

There has been some speculation that the high volumestocks will trade completely electronically, thus bypassing the auction market.We believe that while the hybrid and new technology will improve themarketplace, it will not eliminate market imbalances. Therefore, our primaryresponsibility will still be to help counter those imbalances and we believethat we will continue to play an important role in stocks that trade in theauction market.

We have other opportunities to improve and expand ourbusiness. Interest in products such as ETFs continues to grow, as investors,both individual and institutional, increasingly are looking to ETFs as a meansof accessing markets, especially foreign markets. We have opened

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subsidiaries in London and Hong Kong and expect to be operating onexchanges in Europe and Asia to allow us to manage the growth in tradingnon-U.S. products. As a leading market-maker in ETFs, we will continue to workclosely with issuers to provide liquidity and help ensure the successful launchof new ETF products.

Since our bond refinancing in May 2004, we havegenerated a significant amount of cash which, along with other developments,have put us in a strong position to manage our capital costs. We can also nowdeploy more capital in other areas which will allow us to grow our business. Webelieve that a proposed reduction in the net liquid asset (“NLA”) requirementsapplicable to our Specialist and Market-Making business should be approved bythe SEC shortly. We believe this NLA reduction, along with our substantial cashgeneration, the cash we received in connection with the NYSE/Archipelago mergerand our ownership of 3.1 million shares of NYX stock will provide us withfinancial flexibility going forward.

*Regulation G Reconciliation ofNon-GAAP Financial Measures*

*In evaluating our financialperformance as described above in “Executive Overview,” management reviewsoperating results from operations, which excludes non-operating charges. Pro-formaearnings per share is a non-GAAP (generally accepted accounting principles)performance measure, but we believe that it is useful to assist investors ingaining an understanding of the trends and operating results for our corebusiness. Pro-forma earnings per share should be viewed in addition to, and notin lieu of our reported results under U.S. GAAP*.

The following is areconciliation of U.S. GAAP results to pro-forma results for the periodspresented:
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **Income as  originally  stated**               | ** ** | **Adjustments  (1)** | ** ** | **Pro forma  net income** | ** ** | **Income as  originally  stated** | ** ** | **Adjustments** | ** ** | **Pro forma  net income** | ** ** |
| Total revenues                                  |       | $                                                    | 296,536    |   | $ | (178,981 | ) | $ | 117,555 |   | $ | 67,303 |   | $ | 3⁄4 |   | $ | 67,303 |   |
| Total expenses                                  |       | 98,725                                               |       | 3⁄4 |   | 98,725 |   | 63,591 |   | 3⁄4 |   | 63,591 |   |
| Income before  provision for income taxes  |       | 197,811                                              |       | (178,981 | ) | 18,830 |   | 3,712 |   | 3⁄4 |   | 3,712 |   |
| Provision for  income taxes                     |       | 85,522                                               |       | (77,018 | ) | 8,504 |   | 1,466 |   | 3⁄4 |   | 1,466 |   |
| Earnings (loss)  per share                      |       | $                                                    | 112,289    |   | $ | (101,963 | ) | $ | 10,326 |   | $ | 2,246 |   | $ | 3⁄4 |   | $ | 2,246 |   |
| Basic                                           |       | $                                                    | 1.85       |   | $ | (1.68 | ) | $ | 0.17 |   | $ | 0.04 |   | $ | 3⁄4 |   | $ | 0.04 |   |
| Diluted                                         |       | $                                                    | 1.83       |   | $ | (1.66 | ) | $ | 0.17 |   | $ | 0.04 |   | $ | 3⁄4 |   | $ | 0.04 |   |

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(1)             Reflectsthe pre-tax net gain associated with the exchange of our NYSE memberships forapproximately 3.1 million shares of restricted NYX stock. and approximately$14.4 million in cash on March 7, 2006, and the subsequent increase infair market value of such stock.  Weexpect to recognize gains and losses in each future accounting period based onthe fair market value of NYX stock at the end of each such period.

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**New Accounting Developments**

The Company adopted the fair value recognitionprovisions for share-based awards pursuant to SFAS 123(R) effective January 1,2006. Please refer to Footnote 6, “Employee Incentive Plans” of ourconsolidated financial statements in this report for additional information anddisclosure.

**Critical Accounting Estimates**

*Goodwill and Other Intangible Assets*

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, “Goodwilland Other Intangible Assets.”  Indetermining fair value, we use standard analytical approaches to businessenterprise valuation (“BEV”), such as the market comparable approach and theincome approach. The market comparable approach is based on comparisons of thesubject company to similar companies engaged in an actual merger or acquisitionor to public companies whose stocks are actively traded. As part of thisprocess, multiples of value relative to financial variables, such as earningsor stockholders’ equity, are developed and applied to the appropriate financialvariables of the subject company to indicate its value. The income approachinvolves estimating the present value of the subject company’s future cashflows by using projections of the cash flows that the business is expected togenerate, and discounting these cash flows at a given rate of return. Each ofthese BEV methodologies requires the use of management estimates and assumptions.For example, under the market comparable approach, we assign a certain controlpremium to the public market price of our common stock as of the valuation datein estimating the fair value of our specialist reporting unit. Similarly, underthe income approach, we assume certain growth rates for our revenues, expenses,earnings before interest, income taxes, depreciation and amortization, returnson working capital, returns on other assets and capital expenditures, amongothers. We also assume certain discount rates and certain terminal growth ratesin our calculations. Given the subjectivity involved in selecting which BEVapproach to use and in determining the input variables for use in our analyses,it is possible that a different valuation model and the selection of differentinput variables could produce a materially different estimate of fair value ofour 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 threemonths ended March 31, 2006, 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 trade name is an intangible asset, as definedunder SFAS No. 142. 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 ofthis methodology requires estimating an appropriate royalty rate, which istypically expressed as a percentage of revenue. Estimating an appropriateroyalty rate includes reviewing evidence from comparable licensing agreementsand considering qualitative factors affecting the trade name.

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Given the subjectivityinvolved in selecting which BEV approach to use and in determining the inputvariables for use in our analyses, it is possible that a different valuationmodel and the selection of different input variables could produce a materiallydifferent estimate of fair value of our trade name.

Our stock listing rights arean intangible asset, as defined under SFAS No. 142. We amortize ouridentifiable intangible stock listing rights over their estimated useful livesin accordance with SFAS No. 142, and test for potential impairmentwhenever events or changes in circumstances suggest that an asset or assetgroup’s carrying value may not be fully recoverable in accordance with SFAS No. 144.An impairment loss, calculated as the difference between the estimated fairvalue and the carrying value of an asset or asset group is recognized if thesum of the estimated undiscounted cash flows relating to the asset or assetgroup is less than the corresponding carrying value. As a result of our testingand analysis for the year ended December 31, 2005, with the assistance ofan independent business valuation firm, we determined that there has been noimpairment of our stock listing rights under SFAS No. 144.

We review the reasonableness of the carrying amount ofour trade name and stock listing rights on an annual basis in conjunction withour goodwill impairment assessment. We cannot provide assurance that futuretrade name and stock listing rights impairment testing will not result inimpairment charges in subsequent periods.

*Valuation Allowance on Restricted NYX Shares*

**As part of the NYSE/Archipelago merger on March 7,2006, we received 3,126,903 restricted shares of NYX stock. We will mark tomarket these shares of NYX stock on a going-forward basis and apply theappropriate discount as long as the transfer restrictions are in effect. As aresult, we will be recognizing a loss or gain in each accounting period, basedon the fair market value of NYX stock as of the end of such accounting period.The fair market value of our shares of NYX stock at March 31, 2006includes a valuation allowance against the market price. The carrying value ofthe NYX stock as of March 31, 2006 is shown on our Balance Sheet under anew line item entitled “Corporate Equities, Not-Readily Marketable” with acarrying value of approximately $223.0 million. The valuation discountdescribed above required judgment by our management based on the market priceof the NYX stock and the restrictions on transfer applicable to our shares ofNYX stock. Although we have retained an independent valuation consultant in determiningthe valuation discount for our shares of NYX stock, it is possible that areasonable person, applying different factors or analysis to the value of therestricted shares of NYX stock, could reach different conclusions as to thevaluation discount to be applied to the NYX stock.**

**Use ofEstimates**

Theuse of generally accepted accounting principles requires management to makecertain estimates. In addition to the estimates we make in connection with fairvalue measurements and the accounting for goodwill and identifiable intangibleassets, the use of

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estimates is alsoimportant in determining provisions for potential losses that may arise fromlitigation, regulatory proceedings and tax audits.

We estimate andprovide for potential losses that may arise out of litigation, regulatoryproceedings and tax audits to the extent that such losses are probable and canbe estimated, in accordance with SFAS No. 5, “Accounting forContingencies.” Significant judgment is required in making these estimates andour final liabilities may ultimately be materially different. Our totalliability in respect of litigation and regulatory proceedings is determined ona case-by-case basis and represents an estimate of probable losses afterconsidering, among other factors, the progress of each case or proceeding, ourexperience and the experience of others in similar cases or proceedings, andthe opinions and views of legal counsel. Given the inherent difficulty ofpredicting the outcome of our litigation and regulatory matters, particularlyin cases or proceedings in which substantial or indeterminate damages or finesare sought, we cannot estimate losses or ranges of losses for cases orproceedings where there is only a reasonable possibility that a loss may beincurred. See “Legal Proceedings” in Part II, Item 1 of this QuarterlyReport on Form 10-Q for information on our judicial, regulatory andarbitration proceedings.

**Executionand Clearing Risk**

Our Execution andClearing segment, through the normal course of business, enters into varioussecurities transactions as agent. The execution, settlement and financing ofthese transactions can result in unrecorded market risk and concentration ofcredit risk. Our execution and clearing activities involve settlement andfinancing of various customer securities transactions on a cash or marginbasis. These activities may expose us to risk in the event the customer orother broker is unable to fulfill its contractual obligations and we have topurchase or sell securities at a loss. For margin transactions, we may beexposed to significant market risk in the event margin requirements are notsufficient to fully cover losses that customers may incur in their accounts.

**Resultsof Operations**

# Specialist and Market-Making Segment Operating Results

|                                     | ** ** | **For the Three  Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|
| **(000’s omitted)**       | ** ** | **2006**                                                       | ** ** | **2005**       | ** ** | **Change** | ** ** |
| Revenues:                           |       |                                                           |       |           |       |   |   |
| Net gain on  principal transactions |       | $                                                              | 64,965     |           | $          | 40,041 |   | 62.2 | % |
| Commissions                         |       | 10,104                                                         |       | 11,557         |       | (12.6 | ) |
| Stock borrow  interest              |       | 26,276                                                         |       | 2,024          |       | 1198.2 |   |
| Other interest                      |       | 3,872                                                          |       | 2,069          |       | 87.1 |   |
| Net gain on NYX  transaction        |       | 165,213                                                        |       | 3⁄4         |       | 100.0 |   |
| Other                               |       | 897                                                            |       | (1,203         | )          | (174.5 | ) |
| Total segment revenues              |       | 271,327                                                        |       | 54,488         |       | 398.0 |   |
|                                |       |                                                           |       |           |       |   |   |
| Operating expenses                  |       | 71,707                                                         |       | 35,005         |       | 104.8 |   |
|                                |       |                                                           |       |           |       |   |   |
| Income  before taxes                |       | $                                                              | 199,620    |           | $          | 19,483 |   | 924.6 | % |

 

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Revenuesfrom our Specialist and Market-Making segment consist primarily of net gainearned from principal transactions in securities for which we act as specialistand interest income. Net gain on principal transactions represents tradinggains net of trading losses and SEC transaction fees, where applicable, and areearned by us when we act as principal buying and selling our specialist stocks,rights, options, ETFs and futures. Also included in net gain on principaltransactions are net gains and losses resulting from our market-makingactivities in ETFs, options and futures, the net gains and losses resultingfrom trading of foreign currencies, futures and equities underlying the rights,ETFs and options for which we act as specialist, and accrued dividendsreceivable or payable on our equity positions. These revenues are primarilyaffected by changes in share volume traded and fluctuations in prices ofstocks, rights, options, ETFs and futures in which we are the specialist or inwhich we make a market.

Commissionsrevenue generated by our Specialist and Market-Making segment consistsprimarily of fees earned when our specialists act as agents by executing limitorders on behalf of brokers, professional traders and broker dealers after aspecified period of time; we do not earn commissions when we match marketorders or when we act as a market-maker.

Interestrevenue generated by our Specialist and Market-Making segment consists primarilyof interest earned in securities lending transactions and inventory financingin connection with our trading in options, futures and ETFs.

Net gain on the NYX transaction reflects the net gain associated with the exchange of the NYSE memberships owned in connection with our Specialist and Market-Making operations for shares of NYX stock and cash on March 7, 2006, and the subsequent increase in fair market value of such NYX stock.

Otherrevenue at our Specialist and Market-Making segment consists primarily ofproprietary trading gains or losses and gains or losses from an investment in ahedge fund.

***Key Metrics of our******Specialistand Market-Making Activities******—***When assessing the performance and financialresults of a specific period, management examines certain metrics to ascertaintheir impact on cash equity specialist financial results. Some of the keymetrics that we review, and their values for the three month periodsended March 31, 2006 and 2005, are as follows:
| ** **                                                                       | ** ** | **For the Three  Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                       | ** ** | **2006**                                                       | ** ** | **2005**       | ** ** | **Change** | ** ** |
| NYSE average  daily share volume (in millions)                                   |       | 1,749.2                                                        |       | 1,629.0        |       | 7.4 | % |
| LAB share volume  on the NYSE (in billions)                                      |       | 27.5                                                           |       | 25.2           |       | 9.1 | % |
| LAB dollar value  on the NYSE (in billions)                                      |       | $                                                              | 958.1      |           | $          | 813.6 |   | 17.8 | % |
| Share volume of  principal shares traded (in billions)                           |       | 5.2                                                            |       | 5.2            |       | 0.0 | % |
| Dollar value of  principal shares traded (in billions)                           |       | $                                                              | 196.3      |           | $          | 176.6 |   | 11.2 | % |
| Average closing  price of the CBOE Volatility Index                              |       | 12.2                                                           |       | 12.8           |       | (4.7 | )% |
| Program trading  as an approximate percentage of NYSE average daily share volume |       | 58.7                                                           | %          | 55.9           | %          | 5.0 | % |
| Number of  Specialist ETFs                                                       |       | 49                                                             |       | 23             |       | 113.0 | % |
| Number of  Specialist Options                                                    |       | 643                                                            |       | 504            |       | 27.6 | % |

 

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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 participation and thus itsability 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.

## **ThreeMonths Ended March 31, 2006 Compared to March 31, 2005**

Netgain on principal transactions for the first quarter of 2006 increased as aresult of strong performances by our equities, options and ETF specialistactivities, and our options, futures and ETF market-making activities. Theincrease in the NYSE average daily share volume, along with increases in sharevolume and dollar value traded of our NYSE specialist stocks, provided our NYSEequity specialists with more opportunities to participate in trades as principal,which contributed to our increase in net gain on principal transactions. Partiallymitigating these results were lower volatility and increased program trading. Netgain on principal transactions from our specialist and market-making activitiesalso increased as a result of an increase in the number and diversity ofderivative products we trade, as well as the size of our positions in theseproducts.

Commissionrevenue during the first quarter of 2006 decreased as a result of a decrease inshare volume of transactions with respect to which a specialist commission maybe charged. Despite the increase in share volume on the NYSE and in our NYSEspecialist stocks, there was an increase in program trading, which resulted infewer opportunities to participate in block trades.

Theincrease in stock borrow interest income was primarily due to increased stockborrow positions and higher interest rates during the 2006 first quarter, ascompared to the 2005 first quarter.

Interestincome on our short-term investments increased primarily due to a 2% increasein the Fed Funds rate year over year.

Netgain on the NYX transaction was the result of the consummation of the

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NYSE/Archipelagomerger in which the 36 NYSE memberships used in our Specialist and Market-Makingsegment were exchanged for approximately 2.9 million shares of NYSE Group, Inc.common stock and approximately $13.3 million in cash.

Otherrevenue is mainly comprised of non material proprietary trading gains or losseswhich vary from period to period.

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

# Execution and Clearing Segment Operating Results

|                               | ** ** | **For the Three  Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|
| **(000’s omitted)** | ** ** | **2006**                                                       | ** ** | **2005**       | ** ** | **Change** | ** ** |
|                          |       |                                                           |       |           |       |   |   |
| Revenues:                     |       |                                                           |       |           |       |   |   |
| Commissions                   |       | $                                                              | 10,040     |           | $          | 12,006 |   | (16.4 | )% |
| Stock borrow  interest        |       | 135                                                            |       | 52             |       | 159.6 |   |
| Other interest                |       | 283                                                            |       | 91             |       | 211.0 |   |
| Net gain on NYX  transaction  |       | 13,768                                                         |       | 3⁄4         |       | 100.0 |   |
| Other                         |       | 71                                                             |       | 46             |       | 54.3 |   |
| Total segment revenues        |       | 24,297                                                         |       | 12,195         |       | 99.2 |   |
|                          |       |                                                           |       |           |       |   |   |
| Operating expenses            |       | 10,866                                                         |       | 12,910         |       | (15.8 | ) |
|                          |       |                                                           |       |           |       |   |   |
| Income  (Loss) before taxes   |       | $                                                              | 13,431     |           | $          | (715 | ) | 1978.5.% |   |

 

Our Execution and Clearing segment’s commissionsrevenue includes fees charged to customers for execution, clearance anddirect-access floor brokerage activities.

Net gain on the NYXtransaction reflects the net gain associated with the exchange of the NYSEmemberships owned in connection with our Execution and Clearing operations forshares of NYX stock and cash on March 7, 2006, and the subsequent increasein fair market value of such NYX stock.

Our Execution and Clearing segment’s other revenues consist of interest income, proprietarytrading net gains or losses and fees charged to customers for use of ourproprietary front-end order execution system.

## **ThreeMonths Ended March 31, 2006 Compared to March 31, 2005**

Commissionrevenues decreased as a result of a decline in direct-access floor broker orderflow and reduced trade volume from clearance customers which was partiallyoffset by an increase in commissions earned from institutional customers.

Netgain on the NYX transaction was the result of the consummation of theNYSE/Archipelago merger in which the 3 NYSE memberships used in our Executionand Clearing segment were exchanged for approximately 0.2 million shares ofNYSE Group, Inc. common stock and approximately $1.1 million in cash.

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

# Other Segment Operating Results

|                               | ** ** | **For the Three  Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|
| **(000’s omitted)** | ** ** | **2006**                                                       | ** ** | **2005**       | ** ** | **Change** | ** ** |
|                          |       |                                                           |       |           |       |   |   |
| Interest                      |       | $                                                              | 1,021      |           | $          | 472 |   | 116.3 | % |
| Other                         |       | (109                                                           | )          | 148            |       | (173.6 | ) |
| Total segment revenues        |       | 912                                                            |       | 620            |       | 47.1 |   |
|                          |       |                                                           |       |           |       |   |   |
| Operating  expenses           |       | 16,152                                                         |       | 15,676         |       | 3.0 |   |
|                          |       |                                                           |       |           |       |   |   |
| Loss  before taxes            |       | $                                                              | (15,240    | )              | $          | (15,056 | ) | 1.2 | % |

 

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

## **ThreeMonths Ended March 31, 2006 Compared to March 31, 2005**

Interestrevenues increased primarily as a result of increases in interest income on ourshort term investments, as a result of higher interest rates.

Otherrevenues decreased as a result of a decline in the gains on our non-marketableinvestments.

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

# Our Operating Expenses

| ** **                                             | ** ** | **For the Three  Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|
| **(000’s omitted)**                          | ** ** | **2006**                                                       | ** ** | **2005**       | ** ** | **Change** | ** ** |
|                                                   |       |                                                           |       |           |       |   |   |
| Expenses:                                              |       |                                                           |       |           |       |   |   |
| Employee  compensation and related benefits            |       | $                                                              | 34,141     |           | $          | 21,903 |   | 55.9 | % |
| Margin interest                                        |       | 26,554                                                         |       | 3,297          |       | 705.4 |   |
| Other interest                                         |       | 13,499                                                         |       | 13,286         |       | 1.6 |   |
| Exchange,  clearing and brokerage fees                 |       | 10,010                                                         |       | 9,994          |       | 0.2 |   |
| Lease of  exchange memberships and tradinglicense fees |       | 1,051                                                          |       | 1,012          |       | 3.9 |   |
| Depreciation and  amortization of intangibles          |       | 2,982                                                          |       | 3,053          |       | (2.3 | ) |
| Other                                                  |       | 10,488                                                         |       | 11,046         |       | (5.1 | ) |
|                                                   |       |                                                           |       |           |       |   |   |
| Total expenses before minority interest and taxes      |       | 98,725                                                         |       | 63,591         |       | 55.2 |   |
|                                                   |       |                                                           |       |           |       |   |   |
| Provision for income  taxes                            |       | $                                                              | 85,522     |           | $          | 1,466 |   | 5733.7 | % |

 

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Our Specialist and Market-Making segment’s employeecompensation and related benefits expense consists of salaries, wages andperformance-based compensation paid to our traders and related support staff.The employee compensation and related benefits expense associated with ourExecution and Clearing segment consists of salaries, wages andperformance-based compensation paid to our execution and clearingprofessionals, as well as incentive-based compensation paid to various tradingprofessionals, which is based on their earned commissions. Performance-basedcompensation may include cash compensation and stock-based compensation grantedto managing directors, trading professionals and other employees based on ouroperating results.

Interest expense is attributable primarily to $199.8 million aggregate principal amount of our outstanding 9.5% Senior Notes due 2009 and$260.0 million aggregate principal amount of our outstanding 11.0% Senior Notes due 2012. The interest expense at ourSpecialist and Market-Making segment is primarily the result of inventoryfinancing costs relating to positions taken in connection with our options,futures and ETFs specialist and market-making operations and interest onsubordinated indebtedness that has been approved by the NYSE for inclusion inthe net capital of our LaBranche & Co. LLC subsidiary. Customers’ freecredit balances and bank loans generate interest expense at our Execution andClearing segment.

Exchange, clearing and brokerage fees expense at ourSpecialist and Market-Making segment consists primarily of fees paid by us tothe NYSE, AMEX, other exchanges, the Depository Trust Clearing Corporation (“DTCC”)and to third party execution and clearing companies. The fees paid by us tothese entities are primarily based on the volume of transactions executed by usas principal and as agent, a fee based on exchange seat use, an allocation feerequiring specialist firms to share the cost of newly allocated listings,technology fees, a flat annual fee and execution and clearing fees. OurExecution and Clearing segment’s exchange, clearing and brokerage fees expenseconsists of floor brokerage fees paid to direct-access floor brokers and feespaid to various exchanges.

## **ThreeMonths Ended March 31, 2006 Compared to March 31, 2005**

Employeecompensation and related benefits increased as a result of the increase inperformance-based compensation in both the Specialist and Market-Making Segmentand the Execution and Clearing segment based on improved operating results. Aslight increase in the number of personnel also contributed to the increase.

Margininterest expense increased primarily due to the growth and expansion of ourSpecialist and Market-Making segment’s trading activity in options, futures andETFs.

Leaseof exchange memberships and trading license fees remained flat at approximately$1.0 million for both the first quarter of 2005 and 2006. As a result of theconsummation of the NYSE/Archipelago merger, we exchanged our NYSE membershipsand terminated our NYSE lease arrangements and purchased 95 trading licensesfor $49,290 per license. Going forward, the quarterly expense for tradinglicense fees is estimated at approximately $1.2 million.

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Thedecrease in other operating expenses was primarily the result of decreasedcosts related to our compliance with the Sarbanes-Oxley Act of 2002. 

## Ourexpense for income taxes increased in the first quarter of 2006 to $85.5million, from $1.5 million in the first quarter of 2005, primarily due to ournet gain associated with the NYX transaction and our improved operatingresults. 

## **Liquidityand Capital Resources**

Given the natureof our specialist and market-making and execution and clearing activities, certainline items on our balance sheet may fluctuate considerably from time to time.Our total assets at March 31, 2006 increased to $5,412.0 million from$4,284.3 million at December 31, 2005. Of the $1.1 billion increase in thebalance sheet, $179 million was attributable to the exchange of our NYSEmemberships in connection with the NYSE/Archipelago merger for approximately3.1 million shares of NYX stock and $14.4 million in cash . The remainder wasdue to the increase in our inventory positions from March 31, 2005 as aresult of the growth in our specialist and market-making business. Our shortinventory similarly increased due to the growth in our ETFs, equities, optionsand futures positions. Our deferred tax liabilities increased $82.1 millionprimarily from the unrealized gains on the tax-free exchange of NYSEmemberships for NYX stock in the NYSE/Archipelago merger. Of our total assetsat March 31, 2006, $509.9 million consisted of cash and short-terminvestments, primarily in government obligations maturing within three months,cash and securities segregated under federal regulations and overnightrepurchase agreements. Our total capital base, which consists of long termobligations (inclusive of subordinated debt, other than those related to contributedexchange memberships), certain other liabilities and total stockholders’equity, increased to $1,369.2 million at March 31, 2006 from $1,259.9million at December 31, 2005. This change was mainly due to an increase inequity associated with higher additional paid-in capital and retained earnings,partially offset by a decrease in long term indebtedness. 

To date, we havefinanced our operations primarily with retained earnings from operations andproceeds from our debt and equity offerings. Due to the nature of thesecurities business and our role as a specialist, market-maker and executionand clearing agent, the amount of our cash and short-term investments, as wellas operating cash flow, may vary considerably from period to period due to anumber of factors, including but not limited to the dollar value of ourpositions as principal, whether we are net buyers or sellers of securities, thedollar volume of executions by our customers and clearing house requirements.Certain regulatory requirements constrain the use of a portion of our liquidassets for financing, investing or operating activities. Similarly, the natureof our business lines, the capital necessary to maintain current operations andour current funding needs subject our cash and cash equivalents to differentrequirements and uses. 

At March 31,2006, our net cash capital (as defined below) was $99.8 million. Fluctuationsin net cash capital are common and are a function of variability in our totalassets, balance sheet composition and total capital. We attempt to maintaincash capital sources in

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excessof the aggregate longer-term funding requirements (*i.e.*positive net cash capital.) Over the previous twelve months, our net cashcapital has averaged above $100 million. 

|                                       | ** ** | **($ millions)** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **3/31/06**           | ** ** | **12/31/05** | ** ** |
| **Cash Capital Available:**           |       |                  |       |   |   |
| Stockholders’ equity             |       | $                     | 847.2      |   | $ | 733.5 |   |
| Subordinated debt                     |       | 9.4                   |       | 9.4 |   |
| Long term debt > 1 year            |       | 467.8                 |       | 481.4 |   |
| Other holding company liabilities     |       | 44.8                  |       | 35.6 |   |
| Total cash capital available          |       | $                     | 1,369.2    |   | $ | 1,259.9 |   |
|                                  |       |                  |       |   |   |
| **Cash Capital Required:**            |       |                  |       |   |   |
| Regulatory capital                    |       | $                     | 449.1      |   | $ | 449.7 |   |
| Working capital                       |       | 153.8                 |       | 119.1 |   |
| Illiquid assets/long-term investments |       | 663.2                 |       | 582.2 |   |
| Subsidiary intercompany               |       | 3.3                   |       | 2.0 |   |
| Total Cash Capital Required           |       | $                     | 1,269.4    |   | $ | 1,153.0 |   |
| Net Cash Capital                      |       | $                     | 99.8       |   | $ | 106.9 |   |

 

“CashCapital Available” is mainly comprised of stockholders’ equity, long term debt,subordinated debt and other liabilities of our parent holding company which, inthe aggregate, constitute the currency used to purchase our assets and provideour working capital. This amount will principally be affected as debt maturesor is refinanced and as earnings are retained or paid as dividends. “CashCapital Required” mainly consists of the assets used in our businesses. Regulatorycapital is defined as capital required by the SEC and applicable exchanges tobe maintained by broker-dealers. It is principally comprised of cash, netequities, other investments and net receivables from other broker-dealers. Workingcapital constitutes liquid assets available to our subsidiaries in excess ofthe required regulatory capital. Illiquid assets and long term investmentsmainly are comprised of exchange memberships, intangible assets, such asgoodwill, tradename and stock listing rights, deposits, deferred taxes andnon-marketable investments. “Net Cash Capital” is considered to be the excessof Cash Capital Available over Cash Capital Required, or “free cash,” which wecan utilize to fund our business needs.

Wealso monitor alternative funding measures in addition to our available netcash. The alternative funding measures are significant transactions and actionswe could take in a short-term time frame to generate cash to meet debtmaturities or other business needs. More precisely, as of March 31, 2006,we have identified the following alternative funding measures to support futuredebt maturity requirements:

·                  Dispositionof net invested capital at certain subsidiaries.

·                  Reductionof excess capital at LaBranche & Co LLC to only required net liquidassets (excess NLA dividend).

·                  Proposedreduction of NLA requirements by the NYSE and SEC.

·                  Saleof our NYX shares, subject to transfer restrictions

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| Alternative Funding Measures as of March 31, 2006 | ** ** |
|--------------------------------------------------------------------------------------|------------|
| **$millions**                                                                        | ** ** |
| Net cash capital                                                                     |       | $ | 99.8 |   |
| Investment in  subsidiaries                                                          |       | 152.5 |   |
| Excess NLA  dividend at LLC                                                          |       | 8.1 |   |
| Proposed  reduction of NLA requirements                                              |       | 180.0 |   |
| NYX stock (1) (2)                                                                    |       | 140.0 |   |
| Total cash available from alternative funding measures                               |       | $ | 580.4 |   |

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(1)          Computed on an after-taxbasis

(2)          Based on the marketprice of  NYX stock of $79.25 per shareon March 31, 2006

Inaddition to the alternative funding measures above, we monitor the maturityprofile of our unsecured debt to minimize refinancing risk, we maintainrelationships with debt investors and bank creditors, and we periodically renewour secured committed credit facilities. Strong relationships with a diversebase of creditors and debt investors are critical to our liquidity. We alsomaintain available sources of short-term funding that exceed actualutilization, thus allowing us to accommodate changes in investor appetite andcredit capacity for our debt obligations.

 With respect to the management of refinancingrisk, the maturity profile of our long-term debt portfolio is monitored on anongoing basis and structured in the context of two significant debt trancheswith a significant spread of years between maturities (mid-term and long-term.)Thus, we have strategically negotiated debt terms due 2009 and 2012 for thesignificant debt tranches. In addition, the debt tranches have call provisionswhich allow pre-maturity retirements as early as 2007. The debt tranches haveavailable maturities and calls over the six year period 2007 through 2012 toallow us maximum flexibility in satisfying the debt maturities with paymentsand/or sufficient time to refinance the long-term debt as required. Thefollowing chart profiles our long-term debt maturity as of March 31, 2006:

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Our outstanding senior notes were issued pursuant to an indenture,which includes certain covenants that, among other things, limit our ability tomake certain investments, engage in transactions with stockholders andaffiliates, create liens on our assets and sell assets or engage in mergers andconsolidations, except in accordance with certain specified conditions.****In addition, our ability to take certainactions, including incurring additional indebtedness (other than certain “permittedindebtedness”), or making certain “restricted payments” (such as payingdividends, redeeming stock or repurchasing subordinated indebtedness prior tomaturity), is limited if our consolidated fixed charge coverageratio—calculated on a trailing four-quarter basis—is at or below a threshold of2.00:1. The “consolidated fixed charge coverage ratio” reflects the ratioof  (1) our consolidated earningsbefore interest, taxes, depreciation and amortization expenses, or “EBITDA,”and (2) the sum of our consolidated interest expense and a tax-effectedmultiple of any dividend payments that we might make with respect to preferredstock. As of March 31, 2006, our consolidated fixed charge coverage ratiowas approximately 2.60:1.

In addition, underthe indenture governing our outstanding senior notes, even if our consolidatedfixed charge coverage ratio is 2.00:1 or greater, we cannot make any such “restrictedpayments” if doing so will cause our cumulative “restricted payments” since May 18,2004 to be greater than the sum of (A) 50.0% of our cumulativeconsolidated net income 

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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. As of March 31,2006 this calculation yields a restricted payment allowance of $92.3 million.However, in the event this restriction were to limit us from making restrictedpayments in the future, we also would be entitled to make such payments up toan aggregate of $15.0 million over the life of the indenture, as describedabove. Although we have not made any restricted payments since May 18,2004, we cannot be sure if, when or to what extent the covenants in theindenture will prevent us from making restricted payments higher than $15.0million in the future. To the extent we repurchase any outstanding seniornotes in connection with future corporate strategic initiatives, our fixed-terminterest payments would be correspondingly reduced, and our fixed chargecoverage ratio under the indenture would thereby increase.

The indenture also permits us to redeem some or all of the Senior Notesdue 2009 on or after May 15, 2007 and some or all of the Senior Notes due2012 on or after May 15, 2008 at varying redemption prices, depending onthe date of redemption. In addition, we have the option to redeem up to 33.0%of the aggregate principal amount of the Senior Notes due 2009 at a redemptionprice of 109.5% and up to 33.0% of the aggregate principal amount of the SeniorNotes due 2012 at a redemption price of 111.0% using the proceeds of certainequity offerings which we may complete on or prior to May 15, 2007. Wehave no current intention of conducting any such equity offerings. Under theterms of the indenture, if we sell substantially all our assets or experiencespecific kinds of changes in control, we will be required to offer torepurchase our outstanding senior notes, on a pro rata basis, at a price incash equal to 101.0% of their principal amount, plus accrued and unpaidinterest, if any, to the date of purchase. 

We now recognize our outstanding $13.6 million aggregate principalamount of 12.0% senior subordinated notes due 2007 (the “2007 Notes”), thatwere not tendered for repurchase in connection with our May 2004 debtrefinancing, as short term debt. Until their maturity on March 2, 2007,the 2007 Notes will continue to accrue interest at a rate of 12.0% per annum. 

A potential source of liquidity for LaBranche & Co. LLC is thecommitted line of credit that it maintains with a bank. In October 2005,LaBranche & Co. LLC extended this $200.0 million committed creditagreement to October 27, 2006 on the same terms and conditions as theexpiring agreement. In connection with the credit agreement, we pay an annualfee of 0.25% of the total committed line of credit. Amounts outstanding underthis credit facility would be secured by our inventory of specialist stocks andbear interest at the bank’s broker loan rate. This facility can only be used tofinance inventory requirements at LaBranche & Co. LLC. To date, wehave not utilized this facility. In order to maintain the availability of fundsunder this credit facility, we must comply with certain financial and othercovenants. 

As of March 31, 2006, the subordinated indebtedness of LaBranche &Co. LLC (excluding subordinated liabilities related to contributed exchangememberships) aggregated $12.4 million. This subordinated debt is comprised ofsenior subordinated notes and junior subordinated notes, which mature onvarious dates between August 2006 and June 2008 and bear interest atannual rates ranging from 7.7% to 10.0%. The senior subordinated notes were originally issuedin the aggregate principal amount of $15.0 million, and, in accordance with

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theirterms, $3.0 million in principal amount must be repaid on June 3 of eachof 2004, 2005, 2006, 2007 and 2008. On June 3 of both 2004 and 2005,LaBranche & Co. LLC repaid $3.0 million principal amount of thissenior subordinated indebtedness, plus accrued interest, thus leaving $9.0million principal amount of this senior subordinated indebtedness outstanding. LaBranche &Co. LLC may prepay, at a premium, all or any part of these remaining seniorsubordinated notes at any time, provided that the amount prepaid is not lessthan 5.0% of the aggregate principal amount of such senior subordinated notesthen outstanding. The junior subordinated notes, which aggregate $3.4million principal amount, have an automatic rollover provision, which extendsthe maturity for an additional year, unless the lender provides at least sevenmonths advance notice of its intention not to renew at maturity. LaBranche &Co. LLC is entitled to prepay—with written consent from the NYSE—the juniorsubordinated notes without penalty under the terms of the agreements relatingthereto.

As of March 31, 2006, our outstanding indebtedness included eightseparate note obligations, each in the principal amount of $1.0 million, whichmature in August 2007 and bear interest at an annual rate of 9.0%.

As of March 31, 2006, we had a tax payable of $5.2 million whichincluded a pending tax liability of $2.5 million assessed in April 2005.

Our “Other liabilities” of $15.9 million reflected on the accompanying2006 consolidated statement of financial condition are comprised of legal andtax contingencies pursuant to SFAS 5. Such contingencies are considered longterm, as there is no present obligation to pay such liabilities in theforeseeable future.

*Regulated Subsidiaries*

As a specialist and market-maker, we are required to maintain certainlevels of capital and liquid assets as promulgated by various regulatoryagencies, which regulate our business. As part of our overall risk managementprocedures (for further discussion, refer to Part I, Item 3. “Quantitativeand Qualitative Disclosures about Market Risk”), we balance our responsibilityas specialist, market-maker and broker-dealer with our overall capitalresources. These requirements may restrict our ability to make use of cash andother liquid assets for corporate actions, such as repaying our debt,repurchasing stock or making acquisitions.

As a broker-dealer, LaBranche & Co. LLC is subject toregulatory requirements intended to ensure the general financial soundness andliquidity of broker-dealers and requiring the maintenance of minimum levels ofnet capital, as defined in SEC Rule 15c3-1. LaBranche & Co. LLCis required to maintain minimum net capital, as defined, equivalent to thegreater of $100,000 or 1/15 of aggregate indebtedness, as defined. NYSE Rule 326(c) alsoprohibits a broker-dealer from repaying subordinated borrowings, paying cashdividends, making loans to any parent, affiliates or employees or otherwiseentering into transactions which would result in a reduction of its total netcapital to less than 150.0% of its required minimum capital. Moreover,broker-dealers are required to notify the SEC prior to repaying subordinatedborrowings, paying dividends and making loans to any parent, affiliates oremployees, or otherwise entering into transactions which, if executed, wouldresult in a reduction of 30.0% or more of their excess net capital (net capitalless minimum requirement). The SEC has the 

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ability to prohibit or restrict such transactions ifthe result is deemed detrimental to the financial integrity of thebroker-dealer. As of March 31, 2006, LaBranche & Co. LLC’s netcapital, as defined, was $454.0 million, which exceeded the minimumrequirements by $451.7 million. 

The NYSE generally requires its specialist firmsto maintain a minimum dollar regulatory capital amount in order to establishthat they can meet, with their own net liquid assets, their positionrequirement. As of March 31, 2006, 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 $455.8 million as of March 31,2006. LSPS is not required to perform a net liquid assets calculation becauseLaBranche & Co. LLC’s actual net liquid assets exceed the combined netliquid assets requirement of LaBranche & Co. LLC and LSPS. The NYSE hasfiled a proposed rule with the SEC which seeks to reduce the required netliquid asset amounts for specialists such as LaBranche & Co. LLC.Based on the currently proposed rule, we expect a reduction in our required netliquid assets of approximately $180.0 million. This reduction is expected to beeffected in four equal quarterly installments commencing on the date the SECapproves the final rule. The timing and extent of any such reduction, however,has not been finally determined, and it is possible that the rule will notbe approved by the SEC at all. A reduction in LaBranche & Co. LLC’snet liquid assets requirement, however, would allow funds no longer needed fornet liquid assets purposes to be used for other corporate 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 assumea position of sixty trading units of each security in which the specialist isregistered. As of March 31, 2005, LaBranche & Co. LLC satisfiedthe AMEX equities specialist liquid asset requirements.

As a registeredbroker-dealer and member firm of the NYSE, LFSI also is subject to SEC Rule 15c3-1,as adopted and administered by the NYSE and the SEC. Under the alternativemethod permitted by the rule, the minimum required net capital of LFSI as of March 31,2006 was equal to the greater of $1.5 million or 2.0% of aggregate debit items,as defined. As of March 31, 2006, LFSI’s net capital, as defined, was$19.5 million, which exceeded its minimum net capital requirement by $18.0million. 

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by theSEC. As of April 4, 2006, LFSI’s total debits exceeded total credits forpurposes of the applicable formula and therefore LFSI was not required tosegregate customer funds at March 31, 2006. In addition, the ProprietaryAccounts of Introducing Brokers (“PAIB”) calculation is computed in order forcorrespondent firms to classify their assets held by LFSI as allowable assetsin the correspondents’ net capital calculation. As of April 4, 2006, tocomply with LFSI’s March 31, 2006 requirement, cash and U.S. TreasuryBills in the amount of $5.1 million were segregated in a special reserveaccount for the exclusive benefit of customers, thus exceeding actualrequirements by $3.2 million. 

As a registeredbroker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1,as adopted and administered by the AMEX and the SEC. LSP is required tomaintain

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minimum net capital, as defined, equivalent to thegreater of $100,000 or 1/15 of aggregate indebtedness, as defined. Asof March 31, 2006, LSP’s net capital, as defined, was $79.8 million, whichexceeded its minimum net capital requirement by $78.8 million.

As a specialist and member of the NYSE, LSPS issubject to the provisions of SEC Rule 15c3-1, as adopted and administeredby the SEC and NYSE. LSPS is required to maintain minimum net capital, asdefined, equivalent to the greater of $100,000 or 1/15 of aggregateindebtedness, as defined. As of March 31, 2006, LSPS’ net capital, as defined under SECRule 15c3-1, was $11.9 million, which exceeded the minimum requirement by$11.7 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 theforegoing requirements, our broker-dealer subsidiaries require a substantialamount of capital. In particular, LaBranche & Co. LLC’s and LSPS’combined net liquid asset requirement of $447.0 million limits our ability toutilize a substantial portion of our liquid assets for other corporatepurposes. Although a portion of the combined net liquid asset requirement of$447.0 million is met by LaBranche & Co. LLC’s and LSPS’ securitiespositions, pending trades and other assets associated with its equities,options, futures and ETF specialist activities, a substantial portion ofLaBranche & Co. LLC’s cash and cash equivalents as of March 31, 2006was used to meet their combined net liquid asset requirement. 

*Cash Flows*

Our cash and cash equivalents during the three monthperiod ended March 31, 2006 decreased $10.3 million to $417.0 million. Thedecrease was the result of (a) $8.0 million used for our operatingactivities primarily from increases in our financial instruments owned, at fairvalue, partially offset by increases in deferred taxes, receivable frombrokers, dealers and clearing organizations and financial instruments sold, butnot yet purchased. Also offsetting this amount is $14.4 million of cashreceived from the NYSE exchange; (b) $2.4 million used by investingactivities attributable to capital expenditures.

Wecurrently anticipate that we will be able to meet our working capital, regulatorycapital and capital expenditure requirements through at least the next twelvemonths.

**CreditRatings**

Our outstanding senior notes were originally sold inprivate sales to institutional investors on May 18, 2004, andsubstantially all these senior noted were subsequently exchanged forsubstantially identical senior notes registered under the Securities Act of1933, as amended, pursuant to the terms of our May 2004 debt refinancing.The senior subordinated notes that remain outstanding since our May 2004debt refinancing, in the aggregate principal amount of $13.6 million, arepublicly held but are no longer rated. The following table sets forth thecredit ratings on our registered outstanding senior notes as of March 31,2006:

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|                    | ** ** | **Moody’s  Investors Service** | ** ** | **Standard &  Poor’s** | ** ** |
|--------------------|------------|------------------------------------------|------------|--------------------------------------|------------|
| 2009 Senior  Notes |       | Ba2                                      |       | B                                    |       |
|               |       |                                     |       |                                 |       |
| 2012 Senior Notes  |       | Ba2                                      |       | B                                    |       |

 

## In August 2005, although Moody’sInvestor Services changed its credit rating of our outstanding senior notesfrom Ba1 to Ba2, it improved its outlook to stable due to our high qualitybalance sheet and improved liquidity. In September 2005, Standard &Poors also improved its outlook on our outstanding senior notes to stable,while affirming our B rating, due to our improved debt service and liquiditypositions.

**Off-BalanceSheet Arrangements**

We have no off-balancesheet arrangements that have a material current effect or that are reasonablylikely to have a material future effect on our financial position or results ofoperations.

**Contractual Obligations**

During the first threemonths of 2006, there were no significant changes in our reported payments dueunder contractual obligations and disclosed contingent contractual obligationsat December 31, 2005.

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

Due to regulatory requirements that prescribecommunication barriers between our broker-dealer subsidiaries, we employdifferent compliance risk management procedures at each such subsidiary. Theserisk processes are set forth below:

*Our Cash Equity Specialist Risk Management Process*

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 at our LaBranche & Co. LLC subsidiary that isdesigned to balance our ability to profit from our specialist activities withour exposure to potential losses. This risk management process includesparticipation by our corporate compliance committee, executive operatingcommittee, floor management committee, post managers, floor captains andspecialists. These parties’ roles are as follows:

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*Corporate Compliance 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 compliancecommittee also advises the compliance department in establishing, reviewing andrevising our policies and procedures governing LaBranche & Co. LLC’sregulatory compliance structure.

*Executive Operating Committee.*Our executive operating committee iscomposed of two executive officers. This committee is responsible for approvingall risk management procedures and trading guidelines for our specialiststocks. In addition, our executive operating committee reviews all unusualsituations reported to it by our floor management committee.

*Floor Management Committee.* Our floor management committee iscomposed of eleven post managers, two floor managers and one swat-team manager.This committee 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, the floor management committeeconsiders the recommendations of the floor captains. The post managers meetwith their respective floor captains on a weekly basis to review and, ifnecessary, revise the risk management procedures and trading guidelines forparticular specialist stocks. In addition, post managers and floor managers arealways available on the trading floor to review and assist with any unusualtrading situations reported by a floor captain, and the swat-team manager isavailable to assess and provide assistance on break-out, or intense, tradingsituations. Our floor management committee reports to our executive operatingcommittee about each of these trading situations as they occur.

*Floor Captains.*We employ thirteen floor captains who monitor theactivities of our cash equity specialists throughout the trading day fromvarious positions at our trading posts. The floor captains observe trades andconstantly review trading activities on a real-time basis. In addition, thefloor captains are readily available to assist our specialists in determiningwhen to deviate from procedures and guidelines in reacting to any unusualsituations or market conditions. The floor captains report these unusualsituations and any deviations from these procedures and guidelines to theirrespective post managers. Floor captains meet with each specialist at leastonce a week to evaluate each specialist’s adherence to our risk managementprocedures and trading guidelines, as well as to review compliance reportsgenerated by the compliance department in monitoring and reviewing specialisttrading activities. Floor captains also meet to review risk procedures andguidelines and, if appropriate, make recommendations to the floor managementcommittee.

*Specialists*. Our 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.

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*On-Floor Compliance Officer*. Wealso have an on-floor compliance officer that monitors the specialists’compliance with NYSE rules throughout the day on an ad hoc basis. Theon-floor compliance officer reports his findings on general on-floor complianceinitiatives on a daily basis to our equity specialist unit’s Chief ComplianceOfficer and Chief Executive Officer and provides summary updates of theseefforts to the Corporate Compliance Committee on a monthly basis. Many of ourcompliance and risk management activities flow from the efforts of our on-floorcompliance initiative.

Webelieve that the enhancements we have made to our compliance procedures andguidelines in connection with the undertakings set forth in our March 2004settlement with the SEC and NYSE and on a continuous basis as circumstanceswarrant have improved our risk management process.

Our equity specialist operations on the AMEX areconducted by six equity specialists. We have one post manager on the AMEX whomonitors the trading activities of the AMEX equity specialists by observingtrades and reviewing positions on a real-time basis. As a member of the floormanagement committee, the post manager regularly communicates with othermembers of the floor management committee regarding any deviations from ourAMEX procedures and guidelines set by our executive operating committee. Wealso have an on-floor compliance officer that monitors the specialists’compliance with AMEX rules throughout the day on an ad hoc basis. Theon-floor compliance officer reports his findings and on general on-floorcompliance initiatives on a daily basis to our equity specialist unit’s ChiefCompliance Officer and Chief Executive Officer and provides summary updates ofthese efforts to the Corporate Compliance Committee on a monthly basis. Many ofour compliance and risk management activities flow from the efforts of ouron-floor compliance initiative.

*Circuit Breaker Rules.*The NYSEand AMEX have instituted 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 DowJones Industrial Average drops a certain number of points. Current circuitbreaker levels 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 severemarket declines and provide us an additional opportunity to assure compliancewith our risk 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 and profit-and-lossinformation on an aggregate or per issue basis. Subject to the specialist’sobligation to maintain a fair and orderly market and to applicable regulatoryrequirements, we constantly seek to manage our trading positions relative toexisting market conditions.

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A high concentration of equity specialists’ principaltrading revenue generally is generated from their ten and twenty-five mostprofitable NYSE specialist stocks. The percentage of our equity specialisttrading revenue generated from our ten most profitable specialist stocks hasincreased from 19.8% to 21.7% of total principal trading revenue in the firstquarter of 2005 and 2006, respectively. The percentage of our equity specialisttrading revenue generated from our twenty-five most profitable specialiststocks has increased from 39.6% to 40.5% of total principal trading revenue inthe first quarter of 2005 and 2006, respectively. We are not overly reliant ona particular group of specialist stocks, as the composition of our ten andtwenty-five most profitable specialist stocks changes frequently.

Our equity specialist trading activities are subjectto a number of risks, including risks of price fluctuations, rapid changes inthe liquidity of markets and foreign exchange risk related to AmericanDepositary Receipts (“ADRs”). In any period, we may incur trading losses in ourspecialist stocks for a variety of reasons, including price fluctuations andcarrying out our specialist obligations. From time to time, we may have largeposition concentrations in securities of a single issuer or issuers engaged ina specific industry. In general, because our inventory of securities ismarked-to-market on a daily basis, any significant price movement in thesesecurities could result in an immediate reduction of our revenues and operatingprofits.

*Our Options, Futures and ETFs Specialist andMarket-Making Risk Management Process*

As specialists in options, ETFs and futures, we have aresponsibility to maintain a fair and orderly market, and trade securities asprincipal out of both obligation and inclination. Our options, ETFs, futures,U.S. Government obligations and foreign currency specialist trading exposes usto certain risks, such as price and interest rate fluctuations, volatilityrisk, credit risk, foreign currency movements and changes in the liquidity ofmarkets.

Additionally, as a market-maker in options, ETFs andfutures, we also trade as principal out of inclination. In our market-makingfunction, we bring immediacy and liquidity to the markets when we choose toparticipate. Our market-making activities expose us to certain risks,including, but not limited to, price fluctuations and volatility.

Certain members of management who oversee our options,futures and ETFs specialist and market making activities are responsible formanaging these risks. These individuals utilize a third-party softwareapplication to monitor specialist and market-making positions on a real-timebasis. By monitoring actual and theoretical profit and loss, volatility and otherstandard risk measures, these individuals seek to insure that our tradersoperate within the parameters set by management. Our traders purchase and sellfutures, options, the stocks underlying certain positions, U.S. Governmentsecurities and foreign currencies in an attempt to hedge market and foreigncurrency risk. Furthermore, our aggregate risk in connection with our options,futures and ETFs trading is under constant evaluation by certain members ofmanagement and our traders, and all significant trading strategies andpositions are closely monitored. Our options, futures and ETF trading isexecuted on national and foreign exchanges. These trades clear through theOptions Clearing Corporation, the National Securities Clearing Corporation orthe applicable exchange clearing organization, thereby reducing potentialcredit risk.

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The following chart illustrates how specifiedmovements in the underlying securities prices of the options, futures and ETF’sin our specialist and market-making portfolios would have impacted profits andlosses:  

| (000’s omitted) | ** ** | **Profit or (Loss) if the underlying securities move:** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **-15.0%**                                                                                 | ** ** | **-5.0%** | ** ** | **0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio  as of:**     |       |                                                                                       |       |   |   |   |   |   |   |   |   |
| March 31, 2006       |       | $                                                                                          | (13,803    | ) | $ | 5,760 |   | $ | (25 | ) | $ | 1,734 |   | $ | 512 |   |
|                           |            |                                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Themodeling of the risk characteristics of our trading positions involves a numberof assumptions and approximations. While management believes that theseassumptions and approximations are reasonable, there is no standard methodologyfor estimating this risk, and different methodologies would produce materiallydifferent estimates. The zero percent change column represents theprofit or loss our options, futures and ETFs specialist operations wouldexperience on a daily basis if the relevant market remained unchanged.

*Foreign Currency Risk*

In connection with the trading of U.S.-registeredshares of foreign issuers in connection with our cash equity specialistoperations, we are exposed to varying degrees of foreign currency risk. Thepricing of these securities is based on the value of the ordinary securities asdenominated in their local currencies. Thus, a change in a foreign currencyrate relative to the U.S. dollar will result in a change in the value ofU.S.-registered shares in which we are the specialist.

Our ETF specialist and market-makers tradeinternational ETFs that are denominated and settled in U.S. dollars, but thepricing of these ETFs is also affected by changes in the relevant foreigncurrency rates. We, therefore, hold various foreign currencies in order tolessen the risks posed by changing foreign currency rates. In addition, LSPtrades derivatives denominated in foreign currencies, which creates exposure toforeign currency risk.

The following chart illustrates how the specified movementsin foreign currencies relative to the U.S. dollar to which our specialist andmarket-making activities are exposed would have impacted our profits andlosses:

| (000’s omitted) | ** ** | **Profit or (Loss) if the foreign currencies relative to the U.S. dollar move:** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **-15.0%**                                                                                                                                   | ** ** | **-5.0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio  as of:**     |       |                                                                                                                                         |       |   |   |   |   |   |   |
| March 31, 2006       |       | $                                                                                                                                            | (2,412     | ) | $ | (804 | ) | $ | 804 |   | $ | 2,412 |   |
|                           |            |                                                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

Theinformation in the above table is based on certain assumptions and it does notfully represent the profit and loss exposure to changes in security prices,volatility, interest rates and other related factors.

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*Execution and Clearing Risk Management Process*

In connection with our specialist and market-makingactivities, we are engaged in various securities trading and lending activitiesand assume positions in stocks, rights, options, ETFs, U.S. Governmentsecurities, futures and foreign currencies for which we are exposed to creditrisk associated with the nonperformance of counterparties in fulfilling theircontractual obligations pursuant to these securities transactions. We are alsoexposed to market risk associated with the sale of securities not yetpurchased, which can be directly impacted by volatile trading on the NYSE, AMEXand other exchanges. Additionally, in the event of nonperformance andunfavorable market price movements, we may be required to purchase or sellfinancial instruments at a loss.

Ourexecution and clearing activities require that we execute transactions inaccordance with customer instructions and accurately record and process theresulting transactions. Any failure, delay or error in executing, recording andprocessing transactions, whether due to human error or failure of ourinformation or communication systems, could cause substantial losses forbrokers, customers and/or us and could subject us to claims for losses.

Clearingactivities include settling each transaction with both the contra broker andthe customer. In connection with our 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.

Theseclearing activities may expose us to trading risks in the event customers orbrokers are unable to fulfill their contractual obligations and it is necessaryto purchase or sell securities at a loss. For margin transactions, we may be exposedto risk in the event margin requirements are not sufficient to fully coverlosses that customers may incur in their accounts.

Theamount of risk related to our execution and clearance activities is linked tothe size of the transaction, market volatility and the creditworthiness ofcustomers and brokers. Our largest transactions involve those for institutionaland direct access floor brokerage customers.

We systematically monitor our open transaction risk in connection withour execution and clearing activities, starting when the transaction occurs andcontinuing until the designated settlement date. Transactions that remainunsettled after settlement date are scrutinized and necessary action to reducerisk that is taken. Credit risk that could result from contra brokersdefaulting is minimized since much of the settlement risk for transactions withbrokers is essentially transferred to the National Stock Clearing Corporation.The credit risk associated with institutional and direct access clearing customersis minimized 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, senior management that oversees our execution andclearing operations, in conjunction with the related compliance department,reviews the prospective

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customer’s experience in the securities industry,financial condition and personal background, including a background check witha risk reporting agency. For retail customers and professional investors, weseek to control the risks associated with customer activities by requiringcustomers to maintain margin collateral in compliance with various regulatoryand internal guidelines. We monitor margin levels daily pursuant to suchguidelines and require customers to deposit additional collateral or reducepositions 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 equity specialist operations must constantlymonitor our positions and transactions in order to mitigate our risks andidentify troublesome trends should they occur. The substantial capital we haveinvested, along with the NYSE, in real-time, on-line systems affords managementinstant access to specific trading information at any time during the tradingday, including:

·                  our aggregatelong and short positions;

·                  the variouspositions of each of our trading professionals;

·                  our overallposition in a particular stock; and

·                  capital andprofit-and-loss information 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 specialist tradingprofits and losses, as well as our positions. For our AMEX equity specialistoperations, our in-house technology staff has developed applications to monitorour current positions and profits and losses. Our options, futures and ETFsspecialist and market-making operations utilize a third-party softwareapplication to monitor our positions and profits and losses on a real-timebasis.

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.

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Our registered broker-dealer subsidiaries are subjectto certain regulatory requirements intended to insure their general financialsoundness and liquidity. These broker-dealers are subject to SEC Rules 15c3-1,15c3-3 and other requirements adopted and administered by both the NYSEand 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**

Asof the end of the period covered by this report, an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934) was performed under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer. Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that these disclosure controlsand procedures were effective as of the end of the period covered by thisreport. In addition, no change in our internal control over financial reporting(as defined in Rule 13a-15(f) under the Securities Exchange Actof 1934) occurred during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

## **PART II   OTHERINFORMATION**

## **Item1.    Legal Proceedings**

* *Therehave been no material new developments in our legal proceedings since the March 16,2006 filing of the 2005 10-K.

We believe that the claims asserted againstus by the plaintiffs in the pending proceedings described in the 2005 10-Kare without merit, and we deny all allegations of wrongdoing. There can be noassurance, however, as to the outcome or timing of the resolution of theseproceedings. We therefore are unable to estimate the amount or potential rangeof any loss that may arise out of these proceedings. The range of possibleresolutions could include determinations and judgments against us orsettlements that could require substantial payments by us that could have amaterial adverse effect on our financial condition, results of operations andcash flows.

In addition to the proceedings described inthe 2005 10-K we and our operating subsidiaries have been the target,from time to time, of various claims, lawsuits and regulatory inquiries in theordinary course of our and their respective businesses. While the ultimateoutcome of those claims and lawsuits which currently are pending cannot bepredicted with certainty, we believe, based on our understanding of the factsof these proceedings, that their ultimate resolution will not, in theaggregate, have a material adverse effect on our financial

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condition, results of operations or cash flows.

**Item 1A.                     Risk Factors**

In addition to the other information setforth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in the 2005 10-K, which could materially affectour business, financial condition or future results. There have been nomaterial changes in the Risk Factors disclosed in the 2005 10-K. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

## **Item5.        OtherInformation.**

*We have included in this Form 10-Q filing, andfrom time to time our management may make, statements which may constitute “forward-lookingstatements” within the meaning of the safe harbor provisions of The PrivateSecurities Litigation Reform Act of 1995. Our quarterly and annual operatingresults are affected by a wide variety of factors that could materially andadversely affect actual results, including a decrease in trading volume on theNYSE or the AMEX, changes in volatility in the equity securities market andchanges in the value of our securities positions. As a result of these andother factors, we may experience material fluctuations in future operatingresults on a quarterly or annual basis, which could materially and adverselyaffect our business, financial condition, operating results and stock price. Aninvestment in us involves various risks, including those mentioned above andthose that are detailed 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 anduncertainties, our actual results and performance and the performance of thespecialist industry as a whole, may turn out to be materially different fromthe results expressed or implied by such forward-looking statements. Giventhese uncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements. We also disclaim any obligation to update our viewof any such risks or uncertainties or to publicly announce the result of anyrevisions to the forward-looking statements made in this report.

## **Item6.    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 A. McCutcheon, Senior Vice  President and Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.   |

 

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| 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 March 31, 2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 32.2   |   | Certification of Jeffrey A. McCutcheon, 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 March 31, 2006.   |

 

All other items ofthis 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.
| May 10, 2006 | LABRANCHE & CO INC. |
|-------------------|------------------------------|
|              |                         |   |
|              |                         |   |
|              | By:                          | /s/ Jeffrey A. McCutcheon |
|              | Name:                        | Jeffrey A. McCutcheon |
|              | 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 A. McCutcheon, 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 March 31, 2006. |
|                 |       |                                                                                                                                                                                                                                                                                                                     |
| 32.2                 |       | Certification of Jeffrey A. McCutcheon, 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 March 31, 2006.   |

 

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