**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**

**x****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2006**

**OR**

o         **TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(D) OF THE****SECURITIES EXCHANGE ACT OF1934**

**For the transition period from                     to                     **

**Commission File Number:001-15251**

**LABRANCHE & CO INC.**(Exact name of registrant asspecified 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,if changed since last report)

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

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 Exchange Act.(Check one):

Largeaccelerated filer  o  Acceleratedfiler  x     Non-accelerated filer  o

Indicate by checkmark 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 August 7, 2006 was 60,733,889.

 

----

**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                                         |                                                                                        |
|    |                                                      |                                                                                        |
|    | Item  1.                                                  | Legal  Proceedings                                                                          |   |   |
|    |                                                      |                                                                                        |   |   |
|    | Item 1A.                                                  | Risk Factors                                                                                |   |   |
|    |                                                      |                                                                                        |   |   |
|    | Item 5.                                                   | Other Information                                                                           |   |   |
|    |                                                      |                                                                                        |   |   |
|    | Item 6.                                                   | Exhibits                                                                                    |   |   |
|    |                                                      |                                                                                        |   |   |
|    | SIGNATURES                                                |                                                                                        |   |
|         |                                                           |                                                                                             |  |  |  |  |  |

 

2

----

 

# **PART I  FINANCIAL INFORMATION**

# **Item 1.    FinancialStatements.**

**LaBRANCHE & CO INC. andSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(000’s omitted except per share data)**
| ** **                                                 | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **(unaudited)**                                                   | ** ** | **(unaudited)**                                                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| REVENUES:                                                  |       |                                                              |       |                                                            |       |   |   |   |   |
| Net gain on  principal transactions                        |       | $                                                                 | 24,822     |                                                            | $          | 47,871 |   | $ | 89,787 |   | $ | 87,912 |   |
| Commissions                                                |       | 18,540                                                            |       | 21,190                                                          |       | 38,684 |   | 44,753 |   |
| Net (loss) gain  on non-marketable investments             |       | (120                                                              | )          | 230                                                             |       | 143 |   | 322 |   |
| Net (loss) gain  on NYX transaction                        |       | (30,309                                                           | )          | 3⁄4                                                          |       | 148,672 |   | 3⁄4 |   |
| Stock borrow  interest                                     |       | 35,262                                                            |       | 4,651                                                           |       | 61,673 |   | 6,727 |   |
| Other interest                                             |       | 5,539                                                             |       | 3,877                                                           |       | 10,715 |   | 6,509 |   |
| Other                                                      |       | (518                                                              | )          | (74                                                             | )          | 78 |   | (1,175 | ) |
| Total revenues                                             |       | 53,216                                                            |       | 77,745                                                          |       | 349,752 |   | 145,048 |   |
|                                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| EXPENSES:                                                  |       |                                                              |       |                                                            |       |   |   |   |   |
| Employee  compensation and related benefits                |       | 9,382                                                             |       | 24,877                                                          |       | 43,523 |   | 46,780 |   |
| Margin interest                                            |       | 42,162                                                            |       | 5,501                                                           |       | 68,794 |   | 8,798 |   |
| Other interest                                             |       | 13,786                                                            |       | 13,280                                                          |       | 27,207 |   | 26,566 |   |
| Exchange,  clearing and brokerage fees                     |       | 12,564                                                            |       | 9,892                                                           |       | 22,574 |   | 19,886 |   |
| Lease of  exchange memberships and trading license fees    |       | 1,260                                                             |       | 983                                                             |       | 2,311 |   | 1,995 |   |
| Depreciation and  amortization of intangibles              |       | 3,078                                                             |       | 3,039                                                           |       | 6,060 |   | 6,092 |   |
| Other                                                      |       | 10,594                                                            |       | 10,159                                                          |       | 21,086 |   | 21,205 |   |
| Total expenses                                             |       | 92,826                                                            |       | 67,731                                                          |       | 191,555 |   | 131,322 |   |
|                                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| (Loss) income before  (benefit) provision for income taxes |       | (39,610                                                           | )          | 10,014                                                          |       | 158,197 |   | 13,726 |   |
|                                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| (BENEFIT) PROVISION FOR  INCOME TAXES                      |       | (17,222                                                           | )          | 1,272                                                           |       | 68,300 |   | 2,738 |   |
|                                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| Net (loss) income  applicable to common stockholders       |       | $                                                                 | (22,388    | )                                                               | $          | 8,742 |   | $ | 89,897 |   | $ | 10,988 |   |
|                                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| Weighted-average common  shares outstanding:               |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                      |       | 60,734                                                            |       | 60,624                                                          |       | 60,713 |   | 60,610 |   |
| Diluted                                                    |       | 60,734                                                            |       | 60,688                                                          |       | 61,399 |   | 60,870 |   |
| (Loss) Earnings per  share:                                |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                      |       | $                                                                 | (0.37      | )                                                               | $          | 0.14 |   | $ | 1.48 |   | $ | 0.18 |   |
| Diluted                                                    |       | $                                                                 | (0.37      | )                                                               | $          | 0.14 |   | $ | 1.46 |   | $ | 0.18 |   |

 

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

3

----

**LaBRANCHE & CO INC. andSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION****(000’s omitted except per share data)**
| ** **                                                                                                                                                                  | ** ** | **As of**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(unaudited)**         | ** ** | **(audited)** | ** ** |
|                                                                                                                                                                        |       |                    |       |   |   |
| **ASSETS**                                                                                                                                                                  |       |                    |       |   |   |
| Cash and cash  equivalents                                                                                                                                                  |       | $                       | 600,604    |   | $ | 427,284 |   |
| Cash and securities  segregated under federal regulations                                                                                                                   |       | 8,430                   |       | 6,554 |   |
| Securities purchased  under agreements to resell                                                                                                                            |       | 45,000                  |       | 79,000 |   |
| Receivable from  brokers, dealers and clearing organizations                                                                                                                |       | 169,577                 |       | 596,796 |   |
| Receivable from  customers                                                                                                                                                  |       | 3,538                   |       | 3,659 |   |
| Financial instruments  owned, at fair value:                                                                                                                                |       |                    |       |   |   |
| Corporate  equities, not readily marketable                                                                                                                                 |       | 192,717                 |       | 3⁄4 |   |
| Corporate  equities                                                                                                                                                         |       | 1,651,195               |       | 660,949 |   |
| Options                                                                                                                                                                     |       | 600,152                 |       | 393,783 |   |
| Exchange-traded  funds                                                                                                                                                      |       | 788,991                 |       | 743,853 |   |
| Government and  corporate bonds                                                                                                                                             |       | 5,116                   |       | 8 |   |
| Commissions receivable                                                                                                                                                      |       | 4,015                   |       | 4,337 |   |
| Exchange memberships  contributed for use, at market value                                                                                                                  |       | 3⁄4                  |       | 24,500 |   |
| Exchange memberships  owned, at adjusted cost (market value of $3,341 and $138,768, respectively)                                                                           |       | 1,314                   |       | 59,664 |   |
| Office equipment and  leasehold improvements, at cost, less accumulated depreciation and  amortization of $13,236 and $12,364, respectively                                 |       | 6,489                   |       | 2,695 |   |
| Intangible assets, net  of accumulated amortization:                                                                                                                        |       |                    |       |   |   |
| Specialist stock  lists, less accumulated amortization of $60,550 and $55,362, respectively                                                                                 |       | 345,640                 |       | 350,828 |   |
| Trade name                                                                                                                                                                  |       | 25,011                  |       | 25,011 |   |
| Goodwill                                                                                                                                                                    |       | 250,569                 |       | 250,569 |   |
| Deferred tax assets                                                                                                                                                         |       | 24,248                  |       | 12,543 |   |
| Other assets                                                                                                                                                                |       | 31,573                  |       | 22,876 |   |
| Total assets                                                                                                                                                                |       | $                       | 4,754,179  |   | $ | 3,664,909 |   |
|                                                                                                                                                                        |       |                    |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                              | ** ** | ** **              | ** ** | ** ** | ** ** |
| Liabilities:                                                                                                                                                                |       |                    |       |   |   |
| Payable to  brokers and dealers                                                                                                                                             |       | $                       | 535,045    |   | $ | 17,811 |   |
| Payable to  customers                                                                                                                                                       |       | 7,678                   |       | 4,858 |   |
| Financial  instruments sold, but not yet purchased, at fair value:                                                                                                          |       |                    |       |   |   |
| Corporate  equities                                                                                                                                                         |       | 1,493,485               |       | 1,377,184 |   |
| Options                                                                                                                                                                     |       | 659,396                 |       | 400,211 |   |
| Exchange-traded  funds                                                                                                                                                      |       | 467,666                 |       | 321,316 |   |
| Government and  corporate bonds                                                                                                                                             |       | 957                     |       | 77,263 |   |
| Accrued  compensation                                                                                                                                                       |       | 5,666                   |       | 22,722 |   |
| Accounts payable  and other accrued expenses                                                                                                                                |       | 25,359                  |       | 21,133 |   |
| Other  liabilities                                                                                                                                                          |       | 16,468                  |       | 11,859 |   |
| Income taxes  payable                                                                                                                                                       |       | 10,833                  |       | 10,513 |   |
| Deferred tax  liabilities                                                                                                                                                   |       | 214,928                 |       | 148,263 |   |
| Short term debt                                                                                                                                                             |       | 16,610                  |       | 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                                                                                                                                            |       | 6,395                   |       | 9,395 |   |
| Total liabilities                                                                                                                                                           |       | 3,928,323               |       | 2,931,453 |   |
|                                                                                                                                                                        |       |                    |       |   |   |
| 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 June 30, 2006 and December 31, 2005, respectively |       | 607                     |       | 606 |   |
| Additional paid-in  capital                                                                                                                                                 |       | 692,490                 |       | 689,988 |   |
| Retained earnings                                                                                                                                                           |       | 132,759                 |       | 42,862 |   |
| Total stockholders’  equity                                                                                                                                            |       | 825,856                 |       | 733,456 |   |
| Total liabilities and  stockholders’ equity                                                                                                                            |       | $                       | 4,754,179  |   | $ | 3,664,909 |   |

 

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

4

----

**LaBRANCHE & CO INC. andSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS****(000’somitted)**
| ** **                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                                   | ** ** | **(unaudited)** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                                 | 89,897     |   | $ | 10,988 |   |
| Adjustments to  reconcile net income to net cash provided by (used) in operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization of intangibles                                                |       | 6,060                                             |       | 6,092 |   |
| Amortization of  debt issuance costs and bond discount                                       |       | 939                                               |       | 849 |   |
| Compensation  expense related to stock-based compensation                                    |       | 2,503                                             |       | 1,998 |   |
| Deferred taxes,  net                                                                         |       | 54,960                                            |       | 18,021 |   |
| Net gain on NYX  transaction                                                                 |       | (134,217                                          | )          | 3⁄4 |   |
| Changes in  operating assets and liabilities:                                                |       |                                              |       |   |   |
| Cash and  securities segregated under federal regulations                                    |       | (1,876                                            | )          | 9,244 |   |
| Securities  purchased under agreements to resell                                             |       | 34,000                                            |       | (26,000 | ) |
| Receivable from  brokers, dealers and clearing organizations                                 |       | 427,219                                           |       | (380,689 | ) |
| Receivable from  customers                                                                   |       | 121                                               |       | 4,360 |   |
| Financial  instruments owned, at fair value:                                                 |       |                                              |       |   |   |
| Corporate  equities                                                                          |       | (990,246                                          | )          | (54,680 | ) |
| Options                                                                                      |       | (206,369                                          | )          | (75,255 | ) |
| Exchange-traded  funds                                                                       |       | (45,138                                           | )          | (297,953 | ) |
| Government and  corporate bonds                                                              |       | (5,108                                            | )          | 3⁄4 |   |
| Commissions  receivable                                                                      |       | 322                                               |       | 741 |   |
| Other assets                                                                                 |       | (9,614                                            | )          | 3,985 |   |
| Payable to  brokers and dealers                                                              |       | 517,234                                           |       | (51,093 | ) |
| Payable to customers                                                                         |       | 2,820                                             |       | 3,501 |   |
| Financial  instruments sold, but not yet purchased, at fair value:                           |       |                                              |       |   |   |
| Corporate  equities                                                                          |       | 116,301                                           |       | 402,846 |   |
| Options                                                                                      |       | 259,185                                           |       | 76,162 |   |
| Exchange-traded  funds                                                                       |       | 146,350                                           |       | 44,378 |   |
| Government and  corporate bonds                                                              |       | (76,306                                           | )          | 304,421 |   |
| Accrued  compensation                                                                        |       | (17,056                                           | )          | (12,812 | ) |
| Accounts payable  and other accrued expenses                                                 |       | 4,226                                             |       | 1,745 |   |
| Other  liabilities                                                                           |       | 4,609                                             |       | 193 |   |
| Income taxes  payable                                                                        |       | 259                                               |       | 2,429 |   |
| Net cash  provided by (used) in operating activities                                         |       | 181,075                                           |       | (6,529 | ) |
|                                                                                         |       |                                              |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Payments for  purchases of office equipment and leasehold improvements                       |       | (4,666                                            | )          | (497 | ) |
| Payments for  purchases of exchange memberships                                              |       | (150                                              | )          | (325 | ) |
| Net cash used in  investing activities                                                       |       | (4,816                                            | )          | (822 | ) |
|                                                                                         |       |                                              |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Payment to  minority interest holder                                                         |       | 3⁄4                                            |       | (356 | ) |
| Principal  payments of subordinated debt                                                     |       | (3,000                                            | )          | (4,890 | ) |
|                                                                                         |       |                                              |       |   |   |
| Tax benefit from  vesting of stock based compensation                                        |       | 61                                                |       | 3⁄4 |   |
| Repayment of  short term and long term debt                                                  |       | 3⁄4                                            |       | (2,000 | ) |
| Net cash used in  financing activities                                                       |       | (2,939                                            | )          | (7,246 | ) |
| Increase  (Decrease) in cash and cash equivalents                                            |       | 173,320                                           |       | (14,597 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                                              |       | 427,284                                           |       | 444,446 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                    |       | $                                                 | 600,604    |   | $ | 429,849 |   |
|                                                                                         |       |                                              |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  PAID DURING THE PERIOD FOR:**                             | ** ** | ** **                                        | ** ** | ** ** | ** ** |
|                                                                                         |       |                                              |       |   |   |
| Interest                                                                                     |       | $                                                 | 94,337     |   | $ | 25,695 |   |
| Income taxes                                                                                 |       | $                                                 | 14,051     |   | $ | 228 |   |
|                                                                                         |       |                                              |       |   |   |
| **SUPPLEMENTAL SCHEDULE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:**                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net increase in  additional paid-in capital related to stock-based awards                    |       | $                                                 | 2,502      |   | $ | 1,998 |   |
| Net increase in  corporate equities, not readily marketable from NYX exchange transaction    |       | $                                                 | (192,717   | ) | 3⁄4 |   |
| Net decrease from  exchange of NYSE memberships for NYX common stock                         |       | $                                                 | 58,500     |   | 3⁄4 |   |

** **

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

5

----

**LaBRANCHE & CO INC. andSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.**                                      ORGANIZATION ANDDESCRIPTION OF BUSINESS

The condensed consolidated financial statementsinclude the accounts of LaBranche & Co Inc., a Delaware corporation (the “HoldingCompany”), and its subsidiaries, LaBranche & Co. LLC, a New York limitedliability company, LaBranche Financial Services, Inc., a New York corporation (“LFSI”),LaBranche Structured Holdings, Inc., a Delaware corporation (“LSHI”), LABDRServices, Inc., a Delaware corporation (“LABDR”), and LaBranche & Co. B.V.,a Netherlands private limited liability company (“BV”).  The Holding Company is the sole member ofLaBranche & Co. LLC, the 100% stockholder of LFSI, LSHI and LABDR and thesole owner of BV. LSHI is a holding company that is the sole member ofLaBranche Structured Products, LLC, a New York limited liability company (“LSP”),LaBranche Structured Products Specialists LLC, a New York limited liabilitycompany (“LSPS”), LaBranche Structured Products Europe Limited, a UnitedKingdom single member private company (“LSPE”) and LaBranche StructuredProducts Hong Kong Limited, a Hong Kong single member private company (“LSPH”),and LaBranche Structured Products Direct, Inc., a New York 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 and as a market-maker in options,futures and Exchange-Traded Funds (“ETFs”) 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 an approvalfrom 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 in Europeanmarkets and provides client services to LaBranche & Co. LLC’s European listed companies.

**2.**                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

***Cashand Cash Equivalents***

Included in cash and cashequivalents are currency positions that are being held in the Company’s primebrokerage account with the clearing broker for the Company’s specialist andmarket-making

6

----

operations. At June30, 2006 and December 31, 2005 the balances were $184.5 million and $43.0million, respectively.  These balancesrepresent cash that is used in day-to-day trading activities and may not beutilized by the Company to pay for daily operating activities unrelated to thetrading for which it is used.

***SecuritiesTransactions***

TheCompany, at the subsidiary level, has proprietary security positions in whichit maintains both a long and short position in separate proprietary tradingaccounts at its clearing broker. These long and short positions are treated asoffsetting and are presented on a net basis. Prior-period amounts have beenreclassified to conform to the current period’s presentation.

Certainreceivables from and payables to brokers, dealers and clearing organizationshave been presented on a net-by-counterparty basis when the requirements of FINNo. 39, “Offsetting of Amounts Related to Certain Contracts,” aresatisfied.  Prior-period amounts havebeen reclassified to conform to the current period’s presentation.

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

The unaudited interim condensed consolidated financialinformation as of June 30, 2006 and for the three and six months ended June 30,2006 and 2005 is presented in the accompanying condensed consolidated financialstatements. The unaudited interim condensed consolidated financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by U.S. generally accepted accountingprinciples for complete financial information. The unaudited interim condensedconsolidated financial information reflects all adjustments which are, in theopinion of management, necessary for a fair presentation of the results forsuch periods. The preparation of condensed consolidated financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the condensed consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates andassumptions. The unaudited interim condensed consolidated financial informationas of June 30, 2006 should be read in conjunction with the audited consolidatedfinancial statements and notes thereto as of December 31, 2005 included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005 filedwith the Securities and Exchange Commission (“SEC”) on March 16, 2006 (the “200510-K”). Results of the second quarter 2006 interim period are not necessarilyindicative of results to be obtained for the full fiscal year.

## **4.             INCOME TAXES**

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes,” which requires the recognition of tax benefits or expenses

7

----

based on the estimatedfuture tax effects of temporary differences between the financial statement andtax bases of its assets and liabilities. Deferred tax assets and liabilitiesprimarily relate to tax basis differences on unrealized gains on corporateequities, not readily marketable, stock-based compensation, other compensationaccruals, amortization periods of certain intangible assets and differencesbetween the financial 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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current federal,  state and local taxes     |       | $                                                   | 3,375      |                                              | $          | 5,486 |   | $ | 13,340 |   | $ | (15,283 | ) |
| Deferred tax  provision (benefit)           |       | (20,597                                             | )          | (4,214                                            | )          | 54,960 |   | 18,021 |   |
| Total provision  (benefit) for income taxes |       | $                                                   | (17,222    | )                                                 | $          | 1,272 |   | $ | 68,300 |   | $ | 2,738 |   |

 

**5.**             CAPITALAND NET LIQUID ASSET REQUIREMENTS

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

As of June 30, 2006 and December 31, 2005, LaBranche& Co. LLC’s net capital, as defined under SEC Rule15c3-1, was $455.5 million and $459.8 million, respectively, which exceeded theminimum requirements by $454.2 million and $458.1 million, respectively.LaBranche & Co. LLC’s aggregate indebtedness to net capital ratio on thosedates was .04 to 1 and .05 to 1, respectively.

The NYSE generally requires its specialist firms to maintain a minimumdollar regulatory capital amount in order to establish that they can meet, withtheir own net liquid assets, their position requirement. As of June 30,2006 and December 31, 2005, LaBranche & Co. LLC’s and LSPS’ NYSE minimumrequired combined dollar amount of net liquid assets, as defined, was $447.0million. LaBranche & Co. LLC’s actual net liquid assets, as defined, were$460.5 million and $459.3 million as of June 30, 2006 and December 31, 2005,respectively. As of June 30, 2006 and December 31, 2005, LaBranche & Co.LLC’s actual net liquid assets exceeded the combined net liquid assetsrequirement of LaBranche & Co. LLC and LSPS. Both LaBranche & Co. LLCand LSPS thus satisfied their respective net liquid asset requirements as ofthose dates. On July 25, 2006, the SEC approved a reduction of the minimumdollar regulatory capital for a specialist in cash equities and increased therequirement for a specialist in ETFs. This reduction is expected to be effectedin four equal quarterly installments commencing on the date the SEC approvesthe final method of calculating our aggregate NLA reduction.  As a result, the Company anticipates thatLaBranche & Co. LLC’s

8

----

and LSPS’s aggregaterequired minimum combined NLA will be significantly reduced.

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 trading unitsof each security in which the equity specialist is registered. As of June 30,2006 and December 31, 2005, LaBranche & Co. LLC satisfied the AMEX equityspecialist 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 June 30, 2006 andDecember 31, 2005, LFSI’s net capital, as defined, was $20.8 million and $19.7million, respectively, which exceeded minimum requirements by $19.3 million and$18.2 million, respectively.

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by the SEC. Asof July 5, 2006, to comply with its June 30, 2006 requirement, cash and U.S.Treasury Bills in the amount of $3.3 million were segregated in a specialreserve account for the exclusive benefit of customers, thus exceeding actualrequirements by $3.3 million. As of January 4, 2006, to comply with itsDecember 31, 2005 requirement, cash and U.S. Treasury Bills in the amount of$1.2 million were segregated in a special reserve account for the exclusivebenefit of customers, exceeding actual requirements by $1.2 million. Inaddition, the Proprietary Accounts of Introducing Brokers (“PAIB”) Calculationis computed in order for correspondent firms to classify their assets held byLFSI as allowable assets in the correspondents’ net capital calculation.  As of July 5, 2006, to comply with LFSI’sJune 30, 2006 requirement, cash and U.S. Treasury Bills in the amount of $5.8million were segregated in a special reserve account for the exclusive benefitof customers, exceeding actual requirements by $2.5 million. As of January 4, 2006, to comply with LFSI’sDecember 31, 2005 requirement, cash and U.S. Treasury Bills in the amount of$5.7 million were segregated in a special reserve account for the exclusivebenefit of customers, thus exceeding actual requirements by $2.0 million.

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by the SECand the AMEX. LSP is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 of aggregate indebtedness, as defined. Asof June 30, 2006 and December 31, 2005, LSP’s net capital, as defined, was$66.8 million and $56.8 million, respectively, which exceeded minimum requirementsby $65.9 million and $55.7 million, respectively.

LSPS, as aspecialist and member of the NYSE, is subject to the provisions of SEC Rule15c3-1, as adopted and administered by the SEC and NYSE. LSPS is required tomaintain minimum net capital, as defined, equivalent to the greater of $100,000or 1/15 of aggregate indebtedness, as defined. Asof June 30, 2006 and December 31, 2005, LSPS’ net capital, as defined, was$18.8 million and $10.7 million, respectively, which exceeded the minimum

9

----

requirements by $18.5million and $10.6 million, respectively. LSPS’ aggregate indebtedness to netcapital ratio on those dates was .21 to 1 and .16 to 1, respectively.

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

Earnings per share are computed in accordance withSFAS No. 128, “Earnings Per Share.” Basic earnings per share is calculated bydividing net (loss) income available to common stockholders by theweighted-average number of common shares outstanding. Diluted (loss) earningsper share includes the determinants of basic earnings per share and, inaddition, gives effect to potentially dilutive common shares. For the threemonths ended June 30, 2006 692,397 potentially dilutive shares from restrictedstock units were not included in the computation of diluted (loss) earnings pershare because to do so would be anti-dilutive.

The computations of basic and diluted earnings pershare are set forth below (000’s omitted, except per share data): 
|                                                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Numerator for  basic and diluted (loss) earnings per share – net (loss) income applicable to  common stockholders |       | $                                               | (22,388    | )                                             | $          | 8,742 |   | $ | 89,897 |   | $ | 10,988 |   |
| Denominator for  basic (loss) earnings per share – weighted-average number of common shares  outstanding          |       | 60,734                                          |       | 60,624                                        |       | 60,713 |   | 60,610 |   |
| Dilutive shares:                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Stock options                                                                                                          |       | 3⁄4                                          |       | 3⁄4                                        |       | 3⁄4 |   | 3⁄4 |   |
| Restricted stock units                                                                                                 |       | 3⁄4                                          |       | 64                                            |       | 686 |   | 260 |   |
| Denominator for  diluted (loss) earnings per share – weighted-average number of common shares  outstanding        |       | 60,734                                          |       | 60,688                                        |       | 61,399 |   | 60,870 |   |
| (Loss) earnings  per share:                                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                                  |       | $                                               | (0.37      | )                                             | $          | 0.14 |   | $ | 1.48 |   | $ | 0.18 |   |
| Diluted                                                                                                                |       | $                                               | (0.37      | )                                             | $          | 0.14 |   | $ | 1.46 |   | $ | 0.18 |   |

 

Options topurchase an aggregate of 1,654,778 and 1,969,778 shares of common stock were outstandingduring the three and six months ended June 30, 2006 and 2005, respectively, butwere not included in the computation of diluted earnings per share because theoptions’ exercise prices were greater than the average market price of theCompany’s common stock.  In addition,potential common shares relating to restricted stock and restricted stock unitsfor the three months ended June 30, 2005 totaling 1,123,237 shares, and for thesix months ended June 30, 2006 and 2005 totaling 915,105 and 926,945 shares,respectively, were dilutive.  Thecalculation of diluted earnings per share includes the dilutive effect of thesestock-based awards. For the three months ended June 30, 2006, 909,435potentially dilutive shares from restricted stock units were not included inthe computation of diluted net loss per share because to do so would beanti-dilutive.

10

----

## **7.             EMPLOYEE INCENTIVE PLANS**

In December 2004, the FASB issued SFAS No. 123(R), “ShareBased Payment.” SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting forStock-Based Compensation” and supersedes APB opinion No. 25, “Accounting forStock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.”SFAS No. 123(R) requires compensation costs related to share-based paymenttransactions to be recognized in the financial statements over the period thatan employee provides service in exchange for the award. SFAS No. 123(R)  was adopted as of January 1, 2006, using themodified prospective method. SFAS No. 123(R) requires expected forfeitures tobe included in determining share-based employee compensation expense. Prior tothe adoption of SFAS No. 123(R), forfeiture benefits were recorded as areduction to compensation expense when an employee left the firm and forfeitedthe award. In the first quarter of 2006, the Company recorded a benefit forexpected forfeitures on all outstanding share-based awards. The transitionimpact of adopting SFAS No. 123(R) as of the first day of the Company’s 2006fiscal year, including the effect of accruing for expected forfeitures onoutstanding share-based awards, was not material to the Company’s financialcondition, results of operations, earnings per share or cash flows for thefirst 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”), which provides for grants ofincentive stock options, nonqualified stock options, restricted shares ofcommon stock, restricted stock units, unrestricted shares and stockappreciation rights. The fair value of the restricted stock awards isdetermined by using the closing price of the Company’s common stock on the dateon which the awards are granted. Amortization of compensation costs for grants awarded under the Planrecognized during the quarters ended June 30, 2006 and 2005 was approximately$1.1 million and $840,000, respectively. The tax benefit realized in theConsolidated Statements of Operations for the Plan was approximately $478,000and $365,000 for the quarters ended June 30, 2006 and 2005.

At June30, 2006, unrecognized compensation cost related to the Company’s non-vestedstock option and restricted stock unit awards totaled $9.5 million. The cost ofthese non-vested awards is generally expected to be recognized over aweighted-average period of approximately three years.

SFAS123(R) generally requires share-based awards granted to retirement-eligibleemployees to be expensed immediately. The Company did not grant any share-basedawards prior to its adoption of SFAS 123(R) to retirement-eligible employees orthose with non-substantive non-compete agreements.  In addition, no grants of any stock optionsor RSUs were changed or amended  after theCompany’s adoption of SFAS 123(R) to reflect retirement eligibility ornon-compete agreements.

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 June 30, 2006 and December 31, 2005,2,881,236 shares and 3,499,472 shares, respectively, were available for grantunder the Plan.

11

----

*Restricted StockUnits*

TheCompany issued restricted stock units to employees under the Plan, primarily inconnection with year-end compensation. All of the restricted stock units outstanding as of June 30, 2006 andDecember 31, 2005 required future service as a condition to the deliveryof  the underlying shares of commonstock.  In all cases, delivery of theunderlying shares of common stock is conditioned on the grantees’ satisfyingcertain requirements outlined in the agreements. Generally, the restrictedstock units become fully vested if the grantee’s employment with the Companyterminates by reason of death or disability prior to vesting.  The grantee forfeits the unvested portion ofthe restricted stock units upon the termination of employment for any reasonother than death or disability. When delivering the underlying shares of stockto employees, the Company generally issues new shares of common stock, asopposed to reissuing treasury 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       |   |
| Granted                                   |       | —                         |       | —                                           |       |
| Vested                                    |       | —                         |       | —                                           |       |
| Forfeited                                 |       | (30,000                        | )          | 9.80                                             |       |
| RSUs Outstanding as of  June 30, 2006     |       | 1,601,832                      |       | $                                                | 9.55       |   |

 

Under SFAS No.123(R), the Company is required to estimate forfeitures of RSUs for purposes ofdetermining the Company’s share-based award expense.  Applying SFAS No.123(R) as of June 30, 2006, for purposes of determining share-based awardexpense, RSUs with respect to 1,428,169 shares of the Company’s common stockwere expected to vest, with a weighted average price of $9.44 per share.

*Stock Options*

As of December 31,2004, all stock options granted to employees were fully vested andexercisable.  In general, all stockoptions expire on the tenth anniversary of grant, although they may be subjectto earlier termination or cancellation in certain circumstances under the Planand the stock option agreement, such as death, disability or other terminationof employment prior to the tenth anniversary of grant. The dilutive effect ofthe Company’s outstanding stock options is included in “Weighted Average Common Shares Outstanding — Diluted” on theCondensed Consolidated Statement of Operations.

12

----

 

Thefollowing table provides information about options to purchase the Company’scommon 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 Granted                              |       | —                     |       | —                                                         |       |
| Options Exercised                            |       | —                     |       | —                                                         |       |
| Options Forfeited                            |       | (55,000                    | )          | 37.27                                                          |       |
| Options  Outstanding as of June 30, 2006     |       | 1,654,778                  |       | $                                                              | 25.00      |   |
|                                         |       |                       |       |                                                           |       |
| Options  Exercisable as of:                  |       |                       |       |                                                           |       |
| December 31, 2005                            |       | 1,709,778                  |       | $                                                              | 25.39      |   |
| March 31, 2006                               |       | 1,709,778                  |       | $                                                              | 25.39      |   |
| June 30, 2006                                |       | 1,654,778                  |       | $                                                              | 25.00      |   |

 

The following table summarizes information about stockoptions outstanding as of June 30, 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                      |       | 3.54                                                    |       | $ | 13.93 |   | 764,778 |   | $ | 13.93 |   |
| 21.00 – 30.99                      |       | 75,000                       |       | 6.32                                                    |       | 27.50 |   | 75,000 |   | 27.50 |   |
| $31.00 – $40.99                    |       | 815,000                      |       | 5.52                                                    |       | $ | 35.15 |   | 815,000 |   | $ | 35.15 |   |
|                                    |       | 1,654,778                    |       |                                                    |       |   |   | 1,654,778 |   |   |   |

 

No options were exercised during the six months endedJune 30, 2006 and June 30, 2005.

## **8.             BUSINESS SEGMENTS**

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

The Company’s Specialist and Market-Making segmentoperates as a specialist in equities, rights and ETFs listed on the NYSE, as aspecialist in equities, options, ETFs and futures on several exchanges,****and as a market-maker in ETFs, futures and options onseveral exchanges. This segment also provides support services for the NYSEspecialist activities. The Specialist segment currently includes the operationsof LaBranche & Co. LLC, LSH and its direct subsidiaries, LABDR and BV.

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

13

----

Revenues and expenses directly associated with eachsegment are included in determining its operating results. Other expenses,including corporate overhead, which are not directly attributable to aparticular segment, generally are allocated to each segment based on itsresource usage levels or other appropriate measures. Interest with respect tothe Company’s $473.5 million aggregate principal amount of senior notes andsenior subordinated notes outstanding, 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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Specialist  and Market-Making Segment:**    |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                      |       | $                                                   | 44,582     |                                              | $          | 66,083 |   | $ | 315,910 |   | $ | 120,571 |   |
| Operating  expenses                           |       | 64,646                                              |       | 37,714                                            |       | 133,538 |   | 69,806 |   |
| Depreciation and  amortization of intangibles |       | 2,816                                               |       | 2,894                                             |       | 5,631 |   | 5,808 |   |
| (Loss) income before taxes                    |       | (22,880                                             | )          | 25,475                                            |       | 176,741 |   | 44,957 |   |
| Segment goodwill                              |       | 250,569                                             |       | 250,569                                           |       | 250,569 |   | 250,569 |   |
| Segment assets                                |       | $                                                   | 4,581,859  |                                              | $          | 2,755,096 |   | $ | 4,581,859 |   | $ | 2,755,096 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| **Execution  and Clearing Segment:**          | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                   | 7,308      |                                              | $          | 10,792 |   | $ | 31,604 |   | $ | 22,987 |   |
| Operating  expenses                           |       | 9,396                                               |       | 11,561                                            |       | 20,160 |   | 24,361 |   |
| Depreciation and  amortization of intangibles |       | 103                                                 |       | 113                                               |       | 205 |   | 223 |   |
| (Loss) income before taxes                    |       | (2,191                                              | )          | (882                                              | )          | 11,239 |   | (1,597 | ) |
| Segment assets                                |       | 64,413                                              |       | $                                                 | 48,587     |   | $ | 64,413 |   | $ | 48,587 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| **Other****(1):**                             | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                   | 1,326      |                                              | $          | 870 |   | $ | 2,238 |   | $ | 1,490 |   |
| Operating  expenses                           |       | 15,706                                              |       | 15,417                                            |       | 31,797 |   | 31,063 |   |
| Depreciation and  amortization of intangibles |       | 159                                                 |       | 32                                                |       | 224 |   | 61 |   |
| Loss before taxes                             |       | (14,539                                             | )          | (14,579                                           | )          | (29,783 | ) | (29,634 | ) |
| Segment assets                                |       | $                                                   | 107,907    |                                              | $          | 141,729 |   | $ | 107,907 |   | $ | 141,729 |   |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| **Total:**                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                   | 53,216     |                                              | $          | 77,745 |   | $ | 349,752 |   | $ | 145,048 |   |
| Operating  expenses                           |       | 89,748                                              |       | 64,692                                            |       | 185,495 |   | 125,230 |   |
| Depreciation and  amortization of intangibles |       | 3,078                                               |       | 3,039                                             |       | 6,060 |   | 6,092 |   |
| (Loss) income before taxes                    |       | (39,610                                             | )          | 10,014                                            |       | 158,197 |   | 13,726 |   |
| Goodwill                                      |       | 250,569                                             |       | 250,569                                           |       | 250,569 |   | 250,569 |   |
| Assets                                        |       | $                                                   | 4,754,179  |                                              | $          | 2,945,412 |   | $ | 4,754,179 |   | $ | 2,945,412 |   |

 

----

**(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 net gains from non-marketable investments) and eliminationentries.

14

----

## **9.NYSE GROUP RESTRICTED STOCK EXCHANGE TRANSACTION**

As ofDecember 31, 2005, the Company owned 39 NYSE memberships out of a total 1,366NYSE memberships, representing a 2.9% ownership interest in the NYSE. TheCompany has accounted for its investment in these memberships under theadjusted cost method since its inception. On March 7, 2006, the NYSE andArchipelago Holdings, Inc. combined their businesses and becamewholly-owned subsidiaries of NYSE Group, Inc. (“NYSE Group”), a newly-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 the NYSE Merger, the NYSE announced a “permitteddividend” to be paid with respect to each NYSE membership in the amount ofapproximately $70,570, or $2.7 million in total, which was equivalent to themembership’s pro rata portion of the NYSE’s “excess cash,” as defined in theNYSE Merger agreement governing the merger. The Company received the permitteddividend with respect to each of its 39 NYSE memberships 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.

APBNo. 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 theexchange. Based on the guidance under APB No. 29, the Company valued the sharesof NYX 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.

Afterthe consummation of the NYSE Merger, the Company accounts for its investment inthe NYX stock as owned restricted stock and reflected at the estimated fairvalue of such restricted shares pursuant to the American Institute of CertifiedPublic Accountants *Audit and AccountingGuide—Brokers and Dealers in Securities.*At June 30, 2006, the NYSEclosing market price for the NYX stock was $68.48 per share as compared to theclosing price of NYX stock on March 31, 2006, which was $79.25. As such,this resulted in the Company’s recognition of an unrealized loss of $30.3million for the three month period ended June 30, 2006, which includes avaluation allowance due to the share restrictions. The Company’s aggregateunrealized gain for the first half of 2006 was $4.2 million. The shares ofNYX stock received in the NYSE Merger are subject to a three-yearrestriction on transfer. The restriction will be removed in equal one-thirdinstallments on each of March 7, 2007, 2008 and 2009, unless the restrictionsare removed earlier by the NYSE Group in its sole discretion.

15

----

Prior to the closing of the NYSE Merger, the Companyparticipated in a “Dutch” auction for trading licenses, successfully biddingfor 95 trading licenses at an annual price of $49,290 each, the minimum bidaccepted by the NYSE. In June 2006, the Company surrendered three of theselicenses.The licensesbecame effective for trading on the NYSE on March 8, 2006. The costs of thetrading licenses for 2006 are approximately $1.2 million per quarter.

## **10.          CONTINGENCIES**

There have been nomaterial new developments in the Company’s legal proceedings since the March16, 2006 filing of the Company’s 2005 10-K, except as follows:

Henik/Lewis.  On June 30, 2006, the Court entered an orderdismissing the Henik and Lewis actions.

Sternlicht.  On July 18, 2006, plaintiff stipulated to thevoluntarily dismissal of the Sternlicht action without prejudice.  On July 21, 2006, the Court approved thedismissal.

Last Atlantis, Rule andMartin.  On June 14,2006, the Holding Company and LSP entered into a settlement of the LastAtlantis, Rule and Martin actions in exchange for the payment of an immaterialsum.

The Company believes thatthe claims asserted against it by the plaintiffs in the pending proceedingsdescribed in the 2005 10-K and above are without merit, and the Company deniesall allegations of wrongdoing.  There canbe no assurance, however, as to the outcome or timing of the resolution ofthese proceedings.  Therefore, the Companyis unable to estimate the amount or potential range of any loss that may ariseout of these proceedings.  The range ofpossible resolutions could include determinations and judgments against theCompany or settlements that could require substantial payments by the Companythat could have a material adverse effect on the Company’s financial condition,results of operations and cash flows.

## In addition to the proceedings described inthe 2005 10-K and above, the Company and its operating subsidiaries have beenthe target, from time to time, of various claims, lawsuits and regulatoryinquiries in the ordinary course of their respective businesses. While theultimate outcome of those claims and lawsuits which are currently pendingcannot be predicted with certainty, the Company believes, based on itsunderstanding of the facts of these proceedings, that their ultimate resolutionwill not, in the aggregate, have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows.

## On May 26, 2006, the Company entered into alease commitment for office space located at 33 Whitehall Street New York, NewYork. The lease is for approximately 48,000 square feet and expires February28, 2017.

16

----

##  

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

*Unless the context otherwiserequires, the “Company” or “we” shall mean LaBranche & Co Inc. and itswholly-owned subsidiaries.*

*This Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with our Annual Report on Form 10-K for the fiscal yearended December 31, 2005 (the “2005 10-K”) and our Condensed ConsolidatedFinancial Statements and the Notes thereto contained in this report.*

***ExecutiveOverview***

Our revenue for the 2006 second quarter decreased to $53.2million from $77.7 million in the second quarter of 2005. The 2006 secondquarter revenue included a pre-tax loss of approximately $30.3 million attributableto the decline of the estimated fair value of the restricted shares of NYSEGroup, Inc., or “NYX,” common stock which we held. We incurred a net loss of$22.4 million, or $0.37 per diluted share, for the 2006 second quarter, ascompared to net income of $8.7 million, or $0.14 per diluted share, for thesecond quarter of 2005.  Excluding thenet loss attributable to the decline in value of our NYX restricted shares, ournet operating loss for the second quarter of 2006 was $5.3 million, or $0.09per diluted share, which included an after-tax reduction of our discretionaryand incentive bonus estimate by approximately $5.2 million, or $0.09 perdiluted share.

The primary driverof our results, principal trading revenue, was significantly lower this pastquarter due to difficult trading conditions stemming from our affirmativeobligation as specialists and market makers. In May 2006, several major indexesdeclined for an extended period, and we were obligated to purchase securitiesas they fell in price. We also fared relatively poorly in trading many of ouremerging market and foreign securities.

Our businessremains in transition. Decimalization has changed the way orders are executed,resulting in very large orders being broken into small pieces. In addition,sector and index trading are now dominating trading. Electronic message traffichas increased dramatically. We have also shifted much of our focus to makingmarkets in indexes, options and ETFs. For example, we are continuing to become thespecialist and/or market maker in additional ETFs as they continue to be listedon various exchanges. We also are continuing to build on our technology inorder to be able to quote securities in many different markets, domesticallyand abroad.

We believe ourspecialist and market-making operations constitute a good business model interms of profitability. Last year, for example, our cash equity specialistbusiness generated enough operating income to distribute dividends to ourholding company of approximately $77.0 million. As of June 30, 2006, thisbusiness has enabled us to distribute dividends of approximately $26 million toour holding company this year.

17

----

As the equitiesmarkets change, we intend to deploy more technology in the market to enable usto act as dealer and stabilize prices. Historically, we have been largely dependent on the technology providedby the exchanges of which we have been members. However, we are now deploying LaBranche proprietary technology in theNYSE Hybrid system and other markets.  Weare testing these systems vigorously and are participating in pilot programsinvolving a number of securities. We believe this technology will enable us tocontinue to be a meaningful participant and liquidity provider in markets.

Our fixed chargecoverage ratio for purposes of our public debt covenants, our ratio remainsabove 2.0:1, and we currently are allowed to make restricted payments (asdefined in the indenture governing this debt) of up to approximately $81.0million.

Finally, on July 25, 2006, the Securities and Exchange Commission approved a reduction in the netliquid asset (“NLA”) requirements applicable to our Specialist andMarket-Making business.  We believe thisNLA reduction, along with our cash generation, the cash we received inconnection with the NYSE/Archipelago merger and our ownership of 3.1 millionshares of NYX stock will provide us with financial flexibility going forward.

*Regulation G Reconciliation of Non-GAAP FinancialMeasures*

*In evaluating our financialperformance as described above in “Executive Overview,” management reviewsoperating results from operations, which excludes non-operating charges.  Pro-forma earnings per share is a non-GAAP(generally accepted accounting principles) performance measure, but we believethat it is useful to assist investors in gaining an understanding of the trendsand operating results for our core business. Pro-forma earnings per share should be viewed in addition to, and not inlieu of our reported results under U.S. GAAP*.

*The following is a reconciliation of U.S. GAAP results topro-forma results for the periods presented (unaudited):*
|                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **Income as  originally  stated**              | ** ** | **Adjustments  (1)** | ** ** | **Pro forma  net income** | ** ** | **Income as  originally  stated** | ** ** | **Adjustments** | ** ** | **Pro forma  net income** | ** ** |
| Total revenues                                             |       | $                                                   | 53,216     |   | $ | 30,309 |   | $ | 83,525 |   | $ | 77,745 |   | $ | 3⁄4 |   | $ | 77,745 |   |
| Total expenses                                             |       | 92,826                                              |       | 3⁄4 |   | 92,826 |   | 67,731 |   | 3⁄4 |   | 67,731 |   |
| (Loss) income  before (benefit) provision for income taxes |       | (39,610                                             | )          | 30,309 |   | (9,301 | ) | 10,014 |   | 3⁄4 |   | 10,014 |   |
| (Benefit)  provision for income taxes                      |       | (17,222                                             | )          | 13,184 |   | (4,038 | ) | 1,272 |   | 3⁄4 |   | 1,272 |   |
| Net (loss) earnings  applicable to common stockholders     |       | $                                                   | (22,388    | ) | $ | 17,125 |   | $ | (5,263 | ) | $ | 8,742 |   | $ | 3⁄4 |   | $ | 8,742 |   |
| (Loss) earnings  per share:                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       | $                                                   | (0.37      | ) | $ | (0.28 | ) | $ | (0.09 | ) | $ | 0.14 |   | $ | 3⁄4 |   | $ | 0.14 |   |
| Diluted                                                    |       | $                                                   | (0.37      | ) | $ | (0.28 | ) | $ | (0.09 | ) | $ | 0.14 |   | $ | 3⁄4 |   | $ | 0.14 |   |

 

18

----

 
|                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **Income as  originally  stated**            | ** ** | **Adjustments  (1)** | ** ** | **Pro forma  net income** | ** ** | **Income as  originally  stated** | ** ** | **Adjustments** | ** ** | **Pro forma  net income** | ** ** |
| Total revenues                                             |       | $                                                 | 349,752    |   | $ | (148,672 | ) | $ | 201,080 |   | $ | 145,048 |   | $ | 3⁄4 |   | $ | 145,048 |   |
| Total expenses                                             |       | 191,555                                           |       | 3⁄4 |   | 191,555 |   | 131,322 |   | 3⁄4 |   | 131,322 |   |
| Income (loss)  before provision (benefit) for income taxes |       | 158,197                                           |       | (148,672 | ) | 9,525 |   | 13,726 |   | 3⁄4 |   | 13,726 |   |
| Provision  (benefit) for income taxes                      |       | 68,300                                            |       | (63,834 | ) | 4,466 |   | 2,738 |   | 3⁄4 |   | 2,738 |   |
| Net earnings  (loss) applicable to common stockholders     |       | $                                                 | 89,897     |   | $ | (84,838 | ) | $ | 5,059 |   | $ | 10,988 |   | $ | 3⁄4 |   | $ | 10,988 |   |
| Earnings (loss)  per share:                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                      |       | $                                                 | 1.48       |   | $ | (1.40 | ) | $ | 0.08 |   | $ | 0.18 |   | $ | 3⁄4 |   | $ | 0.18 |   |
| Diluted                                                    |       | $                                                 | 1.46       |   | $ | (1.38 | ) | $ | 0.08 |   | $ | 0.18 |   | $ | 3⁄4 |   | $ | 0.18 |   |

 

----

(1)          Reflects gains and losses in eachaccounting period, based on the fair market value of the restricted shares ofNYX common stock at the end of each such period.

**NewAccounting Developments**

*Employee Incentive Plans*

We adopted the fair value recognition provisions forshare-based awards pursuant to SFAS 123(R) effective January 1, 2006. Pleaserefer to Footnote 7, “Employee Incentive Plans” of our consolidated financialstatements in this report for additional information and disclosure.

*Accounting for Tax Uncertainties*

In July 2006, the FASB issued Interpretation No. 48Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effectivebeginning in the first quarter of 2007. We are currently evaluating thepotential impact, if any, that the adoption of FIN 48 will have on ourconsolidated financial statements.

**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, “Goodwill andOther Intangible Assets.”  In determiningfair value, we use standard analytical approaches to business enterprisevaluation (“BEV”), such as the market comparable approach and the incomeapproach. The market comparable approach is based on comparisons of the subjectcompany to similar companies engaged in an actual merger or acquisition or topublic companies whose stocks are actively traded.  As part of this process, multiples of valuerelative to financial variables, such as earnings or stockholders’ equity, aredeveloped and applied to the appropriate financial variables of the subjectcompany to indicate its value.  Theincome approach involves estimating the present value of the subject company’sfuture cash flows by using projections of the cash flows that the business isexpected to generate, and discounting these cash flows at a given rate ofreturn. Each of these BEV methodologies requires the use of managementestimates and assumptions. For example, under the market comparable approach,we assign a certain control premium to the public market price of our commonstock as of the valuation date in estimating the fair value of our specialistreporting unit.  Similarly, under theincome 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 discountrates and certain terminal growth rates in our calculations.  Given

19

----

the subjectivity involvedin selecting which BEV approach to use and in determining the input variablesfor use in our analyses, it is possible that a different valuation model andthe selection of different input variables could produce a materially differentestimate of fair value of our goodwill.

We review the reasonableness of the carrying value ofour goodwill annually as of December 31, unless an event or change incircumstances requires an interim reassessment of impairment. During the threemonths ended June 30, 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 by applyingthe income approach using the royalty savings methodology. This method assumesthat the trade name has value to the extent we are relieved of the obligationto pay royalties for the benefits received from it.  Application of this methodology requiresestimating an appropriate royalty rate, which is typically expressed as apercentage of revenue. Estimating an appropriate royalty rate includesreviewing evidence from comparable licensing agreements and consideringqualitative factors affecting the trade name. Given the subjectivity involvedin selecting which BEV approach to use and in determining the input variablesfor use in our analyses, it is possible that a different valuation model andthe selection of different input variables could produce a materially differentestimate 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 impairment wheneverevents or changes in circumstances suggest that an asset or asset group’scarrying value may not be fully recoverable in accordance with SFAS No. 144. Animpairment loss, calculated as the difference between the estimated fair valueand the carrying value of an asset or asset group is recognized if the sum ofthe estimated undiscounted cash flows relating to the asset or asset group isless than the corresponding carrying value.

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*

**In connection with the NYSE/Archipelago merger onMarch 7, 2006, we received 3,126,903 restricted shares of NYX stock. We mark tomarket these shares of NYX stock and apply the appropriate discount as long asthe transfer restrictions are in effect. As a result, we recognize a loss orgain in each accounting period, based on the**

20

----

**fairmarket value of NYX stock as of the end of such accounting period. The fairmarket value of our shares of NYX stock at June 30, 2006 includes a valuationallowance against the market price to reflect the restricted nature of the NYXstock. The carrying value of the NYX stock as of June 30, 2006 is shown on ourBalance Sheet under a new line item entitled “Corporate Equities, Not-ReadilyMarketable” with a carrying value of approximately $192.7 million. Thevaluation allowance described above requires judgment by our management basedon the market price of the NYX stock and the restrictions on transferapplicable to our shares of NYX stock. Although we have retained an independent valuation consultant indetermining the valuation allowance for our shares of NYX stock, it is possiblethat a reasonable person, applying different factors or analysis to the valueof the restricted shares of NYX stock, could reach different conclusions as tothe valuation allowance 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 estimates is also important in determining provisions forpotential losses that may arise from litigation, regulatory proceedingsand tax audits.

Weestimate and provide for potential losses that may arise out of litigation,regulatory proceedings and tax audits to the extent that such losses areprobable and can be 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 or proceedingswhere there is only a reasonable possibility that a loss may be incurred. See “LegalProceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q forinformation on our judicial, regulatory and arbitration proceedings.

**Executionand Clearing Risk**

OurExecution and Clearing segment, through the normal course of business, entersinto various securities transactions as agent. The execution, settlement andfinancing of these transactions can result in unrecorded market risk andconcentration of credit risk. Our execution and clearing activities involvesettlement and financing of various customer securities transactions on a cashor margin basis. These activities may expose us to risk in the event thecustomer or other broker is unable to fulfill its contractual obligations andwe have to purchase or sell securities at a loss. For margin transactions, wemay be exposed to significant market risk in the event margin requirements arenot sufficient to fully cover losses that customers may incur in theiraccounts.

21

----

**Results of Operations**

# **Specialist and Market-MakingSegment Operating Results**

|                                     | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** | **Three Months  2006 vs. 2005  Percentage** | ** ** | **Six Months  2006 vs. 2005  Percentage** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(000’s omitted)**       | ** ** | **2006**                                                      | ** ** | **2005**                                                    | ** ** | **2006**                                                   | ** ** | **2005**                                                 | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                |       |                                                          |       |                                                        |       |                                                       |       |                                                     |       |   |   |   |   |
| Revenues:                           |       |                                                          |       |                                                        |       |                                                       |       |                                                     |       |   |   |   |   |
| Net gain on  principal transactions |       | $                                                             | 24,823     |                                                        | $          | 47,871                                                     |       | $                                                        | 89,787     |   | $ | 87,912 |   | (48.1 | )% | 2.1 | % |
| Commissions                         |       | 9,321                                                         |       | 10,596                                                      |       | 19,424                                                     |       | 22,153                                                   |       | (12.0 | ) | (12.3 | ) |
| Stock borrow  interest              |       | 35,128                                                        |       | 4,567                                                       |       | 61,404                                                     |       | 6,591                                                    |       | 669.2 |   | 831.6 |   |
| Other interest                      |       | 4,228                                                         |       | 3,030                                                       |       | 8,098                                                      |       | 5,099                                                    |       | 39.5 |   | 58.8 |   |
| Net (loss) gain  on NYX transaction |       | (27,978                                                       | )          | 3⁄4                                                      |       | 137,236                                                    |       | 3⁄4                                                   |       | 100.0 |   | 100.0 |   |
| Other                               |       | (940                                                          | )          | 19                                                          |       | (39                                                        | )          | (1,184                                                   | )          | (5047.4 | ) | (96.7 | ) |
| Total segment revenues              |       | 44,582                                                        |       | 66,083                                                      |       | 315,910                                                    |       | 120,571                                                  |       | (32.5 | ) | 162.0 |   |
|                                |       |                                                          |       |                                                        |       |                                                       |       |                                                     |       |   |   |   |   |
| Operating  expenses                 |       | 67,462                                                        |       | 40,608                                                      |       | 139,169                                                    |       | 75,614                                                   |       | 66.1 |   | 84.1 |   |
|                                |       |                                                          |       |                                                        |       |                                                       |       |                                                     |       |   |   |   |   |
| (Loss)  income before taxes         |       | $                                                             | (22,880    | )                                                           | $          | 25,475                                                     |       | $                                                        | 176,741    |   | $ | 44,957 |   | (189.8 | )% | 293.1 | % |

 

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 consistsprimarily of interest earned in securities lending transactions and inventoryfinancing in connection with our trading in options, futures and ETFs.

Net (loss) gain on the NYX transaction reflects the net gain (loss) 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 change in fair market value of such NYX stock.

22

----

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 Specialist andMarket-Making Business—*** When assessing theperformance and financial results of a specific period, management examinescertain metrics to ascertain their impact on cash equity specialist financialresults. Some of the key metrics that we review, and their values for the three and six month periods endedJune 30, 2006 and 2005, are as follows:
| ** **                                                                       | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** | **Three  Months 2006  vs. 2005  Percentage** | ** ** | **Six Months  2006 vs. 2005  Percentage** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                                      | ** ** | **2005**                                                    | ** ** | **2006**                                          | ** ** | **2005**                                                 | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                                             |       |                                                          |       |                                                        |       |                                              |       |                                                     |       |   |   |   |   |
| NYSE average  daily share volume (in millions)                                   |       | 1,901.3                                                       |       | 1,569.4                                                     |       | 1,825.8                                           |       | 1,598.5                                                  |       | 21.1 | % | 14.2 | % |
| LAB share volume  on the NYSE (in billions)                                      |       | 28.0                                                          |       | 24.7                                                        |       | 53.7                                              |       | 49.9                                                     |       | 13.4 |   | 7.6 |   |
| LAB dollar value  on the NYSE (in billions)                                      |       | $                                                             | 1,008.6    |                                                        | $          | 804.1                                             |       | $                                                        | 1,966.8    |   | $ | 1,617.6 |   | 25.4 |   | 21.6 |   |
| Share volume of  principal shares traded (in billions)                           |       | 4.7                                                           |       | 4.7                                                         |       | 9.9                                               |       | 9.9                                                      |       | 0.0 |   | 0.0 |   |
| Dollar value of  principal shares traded (in billions)                           |       | $                                                             | 179.7      |                                                        | $          | 166.4                                             |       | $                                                        | 376.0      |   | $ | 343.0 |   | 8.0 |   | 9.6 |   |
| Average closing  price of the CBOE Volatility Index                              |       | 14.5                                                          |       | 13.3                                                        |       | 13.3                                              |       | 13.1                                                     |       | 9.0 |   | 1.5 |   |
| Program trading  as an approximate percentage of NYSE average daily share volume |       | 63.2                                                          | %          | 58.7                                                        | %          | 60.6                                              | %          | 57.3                                                     | %          | 7.7 |   | 5.8 |   |
| Number of  Specialist ETFs                                                       |       | 73                                                            |       | 52                                                          |       | 73                                                |       | 52                                                       |       | 40.4 |   | 40.4 |   |
| Number of Specialist  Options                                                    |       | 761                                                           |       | 561                                                         |       | 761                                               |       | 561                                                      |       | 35.7 | % | 35.7 | % |

 

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 the specialistto increase its level of principal trading participation and thus its abilityto realize gains on principal transactions. While we monitor these metrics eachperiod, they are not the sole indicators or factors that determine our level ofrevenues, profitability or overall performance in any given period. Otherfactors, such as extreme price movements, unanticipated listed company news andevents and other uncertainties may influence our financial performance eitherpositively or negatively.

## **ThreeMonths Ended June 30, 2006 versus June 30, 2005**

Netgain on principal transactions for the second quarter of 2006 decreased as aresult

23

----

of poor marketconditions in May and June 2006, combined with the affirmative obligation ofour specialist and market-making business in a declining market and poortrading in emerging market securities. Lower volatility and increased programtrading also contributed to these results.

Commissionsrevenue during the second quarter of 2006 decreased as a result of a decreasein share volume of transactions with respect to which a specialist commissionmay be charged.  Despite the increase inshare volume on the NYSE and in our NYSE specialist stocks, there was anincrease in program trading, which resulted in fewer opportunities toparticipate 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.

Netloss on NYX transaction is directly related to a decrease in the share price ofthe NYX restricted stock during the second quarter of 2006.

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

## **SixMonths Ended June 30, 2006 versus June 30, 2005**

The increasein our net gain on principal transactions reflects an increase in our specialistand market-making principal trading revenue for the six months ended June 30,2006 as compared to the same period in 2005, which was partially offset by thepoor trading conditions in the second quarter of 2006. The increase in the NYSEaverage daily share volume, along with increases in share volume and dollarvalue traded of our NYSE specialist stocks in the first three months, providedour NYSE equity specialists with more opportunities to participate in trades asprincipal.

Commissionsrevenue during the first half 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 inshare volume on the NYSE and in our NYSE specialist stocks, the increase inprogram trading, which facilitates fast executions, has reduced the number oflimit orders and therefore decreased our commission revenue.

Theincrease in stock borrow interest income was primarily due to continuedincreased stock borrow positions and higher interest rates during the 2006first six months, as compared to the 2005 first six months.

24

----

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 theNYSE/Archipelago merger in which the 36 NYSE memberships used in our Specialistand Market-Making segment were exchanged for approximately 2.9 million sharesof NYSE Group, Inc. common stock and approximately $13.3 million in cash, andthe subsequent changes in the fair market value of our restricted shares of NYXcommon stock at June 30, 2006.

Otherrevenue is mainly comprised of non material proprietary trading gains or lossesand gains or losses on non-marketable investments, which vary from period toperiod.

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

# Execution and ClearingSegment Operating Results

| ** **                          | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** | **Three  Months 2006  vs. 2005  Percentage** | ** ** | **Six Months  2006 vs. 2005  Percentage** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(000’s omitted)**       | ** ** | **2006**                                                      | ** ** | **2005**                                                    | ** ** | **2006**                                          | ** ** | **2005**                                                 | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                |       |                                                          |       |                                                        |       |                                              |       |                                                     |       |   |   |   |   |
| Revenues:                           |       |                                                          |       |                                                        |       |                                              |       |                                                     |       |   |   |   |   |
| Commissions                         |       | $                                                             | 9,219      |                                                        | $          | 10,594                                            |       | $                                                        | 19,260     |   | $ | 22,600 |   | (13.0 | )% | (14.8 | )% |
| Stock borrow  interest              |       | 134                                                           |       | 84                                                          |       | 269                                               |       | 136                                                      |       | 59.5 |   | 97.8 |   |
| Other interest                      |       | 257                                                           |       | 96                                                          |       | 540                                               |       | 187                                                      |       | 167.7 |   | 188.8 |   |
| Net (loss) gain  on NYX transaction |       | (2,331                                                        | )          | 3⁄4                                                      |       | 11,436                                            |       | 3⁄4                                                   |       | 100.0 |   | 100.0 |   |
| Other                               |       | 29                                                            |       | 18                                                          |       | 99                                                |       | 64                                                       |       | 61.1 |   | 54.7 |   |
| Total segment revenues              |       | 7,308                                                         |       | 10,792                                                      |       | 31,604                                            |       | 22,987                                                   |       | (32.3 | ) | 37.5 |   |
|                                |       |                                                          |       |                                                        |       |                                              |       |                                                     |       |   |   |   |   |
| Operating  expenses                 |       | 9,499                                                         |       | 11,674                                                      |       | 20,365                                            |       | 24,584                                                   |       | (18.6 | ) | (17.2 | ) |
|                                |       |                                                          |       |                                                        |       |                                              |       |                                                     |       |   |   |   |   |
| (Loss)  income before taxes         |       | $                                                             | (2,191     | )                                                           | $          | (882                                              | )          | $                                                        | 11,239     |   | $ | (1,597 | ) | 148.4 | % | (803.8 | )% |

 

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

Net (loss) gain on the NYXtransaction reflects the net gain (loss) associated with the exchange of theNYSE memberships owned in connection with our Execution and Clearing operationsfor shares of NYX stock and cash on March 7, 2006, and the subsequent change infair market value of such NYX stock.

Our Execution and Clearing segment’s other revenues consist ofinterest income, proprietary trading net gains or losses and fees charged tocustomers for use of our proprietary front-end order execution system.

25

----

## **Three Months Ended June 30, 2006 versus June30, 2005**

Commissionsrevenue decreased primarily as a result of discontinued business with a directaccess customer. This was partially offset by an increase in commissions earnedfrom institutional customers.

Net loss on NYXtransaction is directly related to a decrease in the share price of the NYXrestricted stock during the second quarter of 2006.

## **Six Months Ended June 30, 2006 versus June30, 2005**

Commissions revenue had an overall decrease due todiscontinued business with a direct access customer.  This was offset by increase in commissionsearned by institutional trading.

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

# Other Segment OperatingResults

| ** **                    | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Three Months  2006 vs. 2005  Percentage** | ** ** | **Six Months  2006 vs. 2005  Percentage** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(000’s omitted)** | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006**                                                   | ** ** | **2005**                                                 | ** ** | **Change** | ** ** | **Change** | ** ** |
|                          |       |                                                              |       |                                                            |       |                                                       |       |                                                     |       |   |   |   |   |
| Interest                      |       | $                                                                 | 1,055      |                                                            | 751        |                                                       | $          | 2,076                                                    |       | 1,223 |   | 40.5 | % | 69.7 | % |
| Other                         |       | 271                                                               |       | 119                                                             |       | 162                                                        |       | 267                                                      |       | 127.7 |   | (39.3 | ) |
| Total segment  revenues       |       | 1,326                                                             |       | 870                                                             |       | 2,238                                                      |       | 1,490                                                    |       | 52.4 |   | (50.2 | ) |
|                          |       |                                                              |       |                                                            |       |                                                       |       |                                                     |       |   |   |   |   |
| Operating expenses            |       | 15,865                                                            |       | 15,449                                                          |       | 32,021                                                     |       | 31,124                                                   |       | 2.7 |   | 2.9 |   |
|                          |       |                                                              |       |                                                            |       |                                                       |       |                                                     |       |   |   |   |   |
| Loss before taxes             |       | $                                                                 | (14,539    | )                                                               | $          | (14,579                                                    | )          | $                                                        | (29,783    | ) | $ | (29,634 | ) | (0.3 | )% | 0.5 | % |
|                               |            |                                                                   |            |                                                                 |            |                                                            |            |                                                          |            |  |  |  |  |  |  |  |  |

 

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 June 30, 2006 versus June 30, 2005**

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

Otherrevenues increased as a result of an escrow payment related to a non-marketableinvestment.

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

## **SixMonths Ended June 30, 2006 versus June 30, 2005**

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

26

----

Other revenue decreased primarily as a result of adecline in the gains related to our non-marketable investments.

# Our Operating Expenses

| ** **                                              | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Three  Months  2006 vs.  2005  Percentage** | ** ** | **Six Months  2006 vs.  2005  Percentage** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------|------------|
| **(000’s omitted)**                           | ** ** | **2006**                                                      | ** ** | **2005**                                                        | ** ** | **2006**                                           | ** ** | **2005**                                             | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                    |       |                                                          |       |                                                            |       |                                               |       |                                                 |       |   |   |   |   |
| Expenses:                                               |       |                                                          |       |                                                            |       |                                               |       |                                                 |       |   |   |   |   |
| Employee  compensation and related benefits             |       | $                                                             | 9,382      |                                                            | $          | 24,877                                             |       | $                                                    | 43,523     |   | $ | 46,780 |   | (62.3 | )% | (7.0 | )% |
| Margin interest                                         |       | 42,162                                                        |       | 5,501                                                           |       | 68,794                                             |       | 8,798                                                |       | 666.4 |   | 681.9 |   |
| Other interest                                          |       | 13,786                                                        |       | 13,280                                                          |       | 27,207                                             |       | 26,566                                               |       | 3.8 |   | 2.4 |   |
| Exchange,  clearing and brokerage fees                  |       | 12,564                                                        |       | 9,892                                                           |       | 22,574                                             |       | 19,886                                               |       | 27.0 |   | 13.5 |   |
| Lease of  exchange memberships and trading license fees |       | 1,260                                                         |       | 983                                                             |       | 2,311                                              |       | 1,995                                                |       | 28.2 |   | 15.8 |   |
| Depreciation and  amortization of intangibles           |       | 3,078                                                         |       | 3,039                                                           |       | 6,060                                              |       | 6,092                                                |       | 1.3 |   | (0.5 | ) |
| Other                                                   |       | 10,594                                                        |       | 10,159                                                          |       | 21,086                                             |       | 21,205                                               |       | 4.3 |   | (0.6 | ) |
|                                                    |       |                                                          |       |                                                            |       |                                               |       |                                                 |       |   |   |   |   |
| Total expenses before taxes                             |       | 92,826                                                        |       | 67,731                                                          |       | 191,555                                            |       | 131,322                                              |       | 37.1 |   | 45.9 |   |
|                                                    |       |                                                          |       |                                                            |       |                                               |       |                                                 |       |   |   |   |   |
| Provision (benefit) for  income taxes                   |       | $                                                             | (17,222    | )                                                               | $          | 1,272                                              |       | $                                                    | 68,300     |   | $ | 2,738 |   | (1453.9 | )% | 2394.5 | % |

 

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 and performance-basedcompensation paid to our execution and clearing professionals, as well asincentive-based compensation paid to various trading professionals, which isbased on their earned commissions. Performance-based compensation may includecash compensation and stock-based compensation granted to managing directors,trading professionals and other employees based on our operating results.

Interest expense is attributable primarily to $199.8 millionaggregate 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. Theinterest expense at our Specialist and Market-Making segment is primarily theresult of inventory financing costs relating to positions taken in connectionwith our options, futures and ETFs specialist and market-making operations andinterest on subordinated indebtedness that has been approved by the NYSE forinclusion in the net capital of our LaBranche & Co. LLC subsidiary.Customers’ free credit balances and bank loans generate interest expense at ourExecution and Clearing 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

27

----

Depository Trust ClearingCorporation (“DTCC”) and to third party execution and clearing companies. Thefees paid by us to these entities are primarily based on the volume oftransactions executed by us as principal and as agent, a fee based on exchangeseat use, an allocation fee requiring specialist firms to share the cost ofnewly allocated listings, technology fees, a flat annual fee and execution andclearing fees. Our Execution and Clearing segment’s exchange, clearing andbrokerage fees expense consists of floor brokerage fees paid to direct-accessfloor brokers and fees paid to various exchanges.

## **ThreeMonths Ended June 30, 2006 versus June 30, 2005**

Employeecompensation and related benefits decreased based on a decline in operatingresults during the second quarter of 2006. In addition we reduced our firstquarter 2006 accruals for discretionary and incentive bonus by $9.3 million.

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

Exchange,clearing and brokerage fees increased primarily due to an increase in tradingactivity in our Specialist and Market-Making segment offset by a decrease inour Execution and Clearing segment based on the discontinued business with oneof its customers.

Inthe NYSE/Archipelago merger, we exchanged our NYSE memberships and terminatedour NYSE lease arrangements and purchased 92 trading licenses for $49,290 perlicense. The quarterly expense for these trading licenses is approximately $1.2million.

## **SixMonths Ended June 30, 2006 versus June 30, 2005**

Employeecompensation and related benefits decreased primarily as a result of a decreasein incentive compensation and headcount for our NYSE cash equity specialistemployees.  Partially offsetting thisdecrease were higher employee salaries and stock-based compensation for our options,futures and ETF specialist and market-making employees.

Margininterest expense increased for the six months ended June 30, 2006 from the sameperiod in 2005 mainly due to the increase in margin interest in our options,futures and ETF specialist and market-making trading activities as a result ofhigher margin interest rates, coupled with an increase in the size of ourpositions in these products.

Exchange,clearing and brokerage fees increased for the six months ended June 30, 2006 ascompared to the same period in 2005 due to increased trading activity at ourSpecialist and Market-Making segment. Contributing to this change was an increase in NYSE allocation fees, oddlot fees, and higher commissions as a result of increased structured productstrading activity.  Offsetting theseincreases was a decline at our Execution and Clearing segment of floorbrokerage expenses relating to direct-access commissions.

As aresult of the consummation of the NYSE/Archipelago merger, we exchanged our

28

----

NYSE membershipsand terminated our NYSE lease arrangements and purchased 92 trading licensesfor $49,290 per license. The quarterly expense for these trading licenses isapproximately $1.2 million.

## **Liquidityand Capital Resources**

Given the nature of our specialist and market-makingand execution and clearing activities, certain line items on our balance sheetmay fluctuate considerably from time to time. Our total assets at June 30, 2006increased to $4,754.2 million from $3,664.9 million at December 31, 2005. Ofthe $1.1 billion increase in the balance sheet, $192.7 million was attributableto the exchange of our NYSE memberships in connection with the NYSE/Archipelagomerger for approximately 3.1 million shares of NYX stock. The remainder was dueto the increase in our inventory positions from December 31, 2005 as a resultof the growth in our specialist and market-making business. Our short inventorysimilarly increased due to the growth in our ETFs, equities, options andfutures positions. Our deferred tax liabilities increased $66.7 millionprimarily from the unrealized gains on the tax-free exchange of NYSEmemberships for NYX stock in the NYSE/Archipelago merger. Of our total assetsat June 30, 2006, $654.0 million consisted of cash and short-term investments,primarily in government obligations maturing within three months, cash andsecurities segregated under federal regulations and overnight repurchaseagreements. Our total capital base, which consists of long term obligations(inclusive of subordinated debt, other than those related to contributedexchange memberships), certain other liabilities and total stockholders’equity, increased to $1,349.7 million at June 30, 2006 from $1,259.9 million atDecember 31, 2005. This change was mainly due to an increase in equityassociated with higher additional paid-in capital and retained earnings,partially offset by a decrease in long term indebtedness.

To date, we have financed our operations primarilywith retained earnings from operations and proceeds from our debt and equityofferings. Due to the nature of the securities business and our role as aspecialist, market-maker and execution and clearing agent, the amount of ourcash and short-term investments, as well as operating cash flow, may varyconsiderably from period to period due to a number of factors, including butnot limited to the dollar value of our positions as principal, whether we arenet buyers or sellers of securities, the dollar volume of executions by ourcustomers and clearing house requirements. Certain regulatory requirementsconstrain the use of a portion of our liquid assets for financing, investing oroperating activities. Similarly, the nature of our business lines, the capitalnecessary to maintain current operations and our current funding needs subjectour cash and cash equivalents to different requirements and uses.

AtJune 30, 2006, our net cash capital (as defined below) was $83.8 million.Fluctuations in net cash capital are common and are a function of variabilityin our total assets, balance sheet composition and total capital. We attempt tomaintain cash capital sources in excess of the aggregate longer-term fundingrequirements (*i.e.* positive net cash capital.)Over the previous twelve months, our net cash capital has averaged above $100million.

29

----

 

|                                       | ** ** | **($ millions)** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **6/30/06**           | ** ** | **12/31/05** | ** ** |
| Cash Capital  Available:              |       |                  |       |   |   |
| Stockholders’ equity             |       | $                     | 825.9      |   | $ | 733.5 |   |
| Subordinated debt                     |       | 6.4                   |       | 9.4 |   |
| Long term debt > 1 year            |       | 467.8                 |       | 481.4 |   |
| Other holding company liabilities     |       | 49.6                  |       | 35.6 |   |
| Total cash capital available          |       | $                     | 1,349.7    |   | $ | 1,259.9 |   |
|                                  |       |                  |       |   |   |
| Cash Capital  Required:               |       |                  |       |   |   |
| Regulatory capital                    |       | $                     | 449.5      |   | $ | 449.7 |   |
| Working capital                       |       | 149.0                 |       | 119.1 |   |
| Illiquid assets/long-term investments |       | 662.6                 |       | 582.2 |   |
| Subsidiary intercompany               |       | 4.8                   |       | 2.0 |   |
| Total Cash Capital Required           |       | $                     | 1,265.9    |   | $ | 1,153.0 |   |
| Net Cash Capital                      |       | $                     | 83.8       |   | $ | 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 willprincipally be affected as debt matures or is refinanced and as earnings areretained or paid as dividends. “Cash Capital Required” mainly consists of theassets used in our businesses. Regulatory capital is defined as capital required by the SEC andapplicable exchanges to be maintained by broker-dealers.  It is principally comprised of cash, netequities, other investments and net receivables from other broker-dealers.  Working capital constitutes liquid assetsavailable to our subsidiaries in excess of the required regulatory capital.Illiquid assets and long term investments mainly are comprised of exchangememberships, intangible assets, such as goodwill, tradename and stock listingrights, deposits, deferred taxes and non-marketable investments.  “Net Cash Capital” is considered to be theexcess of Cash Capital Available over Cash Capital Required, or “free cash,”which we can 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 June 30, 2006, wehave identified the following alternative funding measures to support futuredebt maturity requirements:

·                  Disposition ofnet invested capital at certain subsidiaries.

·                  Reduction ofexcess capital at LaBranche & Co LLC to only required net liquid assets(excess NLA dividend).

·                  Proposedreduction of NLA requirements by the NYSE and SEC.

·                  Saleof our NYX shares, subject to transfer restrictions

30

----

**Alternative Funding Measures as of June 30, 2006**$ millions

| Net cash capital                                        |   | $     | 83.8   |   |
|---------------------------------------------------------|--------|-------|--------|--------|
| Investment in  subsidiaries                             |   | 148.9 |   |
| Excess NLA  dividend at LLC                             |   | 13.5  |   |
| Proposed  reduction of NLA requirements (1)             |   | 180.0 |   |
| NYX stock (2) (3)                                       |   | 121.0 |   |
| Total cash  available from alternative funding measures |   | $     | 547.2  |   |

 

----

(1)          Thisnumber could be more or less depending on final approved method for determiningthe NLA reduction.

(2)          Computedon an after-tax basis

(3)          Based on the marketprice of  NYX stock of $68.48 per shareon June 30, 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 June 30, 2006:

31

----

 

Our outstanding senior noteswere issued pursuant to an indenture, which includes certain covenants that,among other things, limit our ability to make certain investments, engage intransactions with stockholders and affiliates, create liens on our assets andsell assets or engage in mergers and consolidations, except in accordance withcertain specified conditions.****Inaddition, our ability to take certain actions, including incurring additionalindebtedness (other than certain “permitted indebtedness”), or making certain “restrictedpayments” (such as paying dividends, redeeming stock or repurchasingsubordinated indebtedness prior to maturity), is limited if our consolidatedfixed charge coverage ratio—calculated on a trailing four-quarter basis—is ator below a threshold of 2.00:1. The “consolidated fixed charge coverage ratio”reflects the ratio of  (1) ourconsolidated earnings before interest, taxes, depreciation and amortizationexpenses, or “EBITDA,” and (2) the sum of our consolidated interest expense anda tax-effected multiple of any dividend payments that we might make withrespect to preferred stock. As of June 30, 2006, our consolidated fixed chargecoverage ratio was approximately 2.12:1.

In addition, under the indenture governing ouroutstanding senior notes, even if our consolidated fixed charge coverage ratiois 2.00:1 or greater, we cannot make any such “restricted payments” if doing sowill cause our cumulative “restricted payments” since May 18, 2004 to begreater than the sum of (A) 50.0% of our cumulative consolidated net income

32

----

since July 1, 2004 (or,if such calculation is a loss, minus 100.0% of such loss) and (B) 100.0% of thenet cash proceeds received from any issuance or sale of our capital stock sinceJuly 1, 2004 and certain other amounts. As of June 30, 2006 this calculationyields a restricted payment allowance of $81.1 million. However, in the eventthis restriction were to limit us from making restricted payments in thefuture, we also would be entitled to make such payments up to an aggregate of$15.0 million over the life of the indenture, as described above. Although wehave not made any restricted payments since May 18, 2004, we cannot be sure if,when or to what extent the covenants in the indenture will prevent us frommaking restricted payments higher than $15.0 million in the future. To the extentwe repurchase any outstanding senior notes in connection with future corporatestrategic initiatives, our fixed-term interest payments would becorrespondingly reduced, and our fixed charge coverage ratio under theindenture would increase.

The indenture also permitsus to redeem some or all of the Senior Notes due 2009 on or after May 15, 2007and some or all of the Senior Notes due 2012 on or after May 15, 2008 atvarying redemption prices, depending on the date of redemption.  In addition, we have the option to redeem upto 33.0% of the aggregate principal amount of the Senior Notes due 2009 at aredemption price of 109.5% and up to 33.0% of the aggregate principal amount ofthe Senior Notes due 2012 at a redemption price of 111.0% using the proceeds ofcertain equity offerings which we may complete on or prior to May 15, 2007. Wehave no current intention of conducting any such equity offerings.  Under the terms of the indenture, if we sellsubstantially all our assets or experience specific kinds of changes incontrol, we will be required to offer to repurchase our outstanding seniornotes, on a pro rata basis, at a price in cash equal to 101.0% of theirprincipal amount, plus accrued and unpaid interest, if any, to the date ofpurchase.

We characterize ouroutstanding $13.6 million aggregate principal amount of 12.0% seniorsubordinated notes due 2007 (the “2007 Notes”), that were not tendered forrepurchase in connection with our May 2004 debt refinancing, as short termdebt. Until their maturity on March 2, 2007, the 2007 Notes will continue toaccrue interest at a rate of 12.0% per annum.

A potential source ofliquidity for LaBranche & Co. LLC is the committed line of credit that itmaintains with a bank. In October 2005, LaBranche & Co. LLC extended this$200.0 million committed credit agreement to October 27, 2006 on the same termsand conditions as the expiring agreement. In connection with the creditagreement, we pay an annual fee of 0.25% of the total committed line ofcredit.  Amounts outstanding under thiscredit facility would be secured by our inventory of specialist stocks and bearinterest at the bank’s broker loan rate. This facility can only be used tofinance inventory requirements at LaBranche & Co. LLC. To date, we have notutilized this facility. In order to maintain the availability of funds underthis credit facility, we must comply with certain financial and othercovenants.

As of June 30, 2006, thesubordinated indebtedness of LaBranche & Co. LLC (excluding subordinatedliabilities related to contributed exchange memberships) aggregated $9.4million. This subordinated debt is comprised of senior subordinated notes andjunior subordinated notes, which mature on various dates between August 2006and June 2008 and bear interest at annual rates ranging from 7.7% to 10.0%. The senior subordinated notes wereoriginally issued in the aggregate principal amount of $15.0 million, and, inaccordance with

33

----

their terms, $3.0 millionin principal amount must be repaid on June 3 of each of 2004, 2005, 2006, 2007and 2008. On June 3 of both 2005 and 2006, LaBranche & Co. LLC repaid $3.0million principal amount of this senior subordinated indebtedness, plus accruedinterest, thus leaving $6.0 million principal amount of this seniorsubordinated indebtedness outstanding. LaBranche & Co. LLC may prepay, at a premium, all or any part ofthese remaining senior subordinated notes at any time, provided that the amountprepaid is not less than 5.0% of the aggregate principal amount of such seniorsubordinated notes then outstanding. The junior subordinatednotes, which aggregate $3.4 million principal amount, have an automaticrollover provision, which extends the maturity for an additional year, unlessthe lender provides at least seven months advance notice of its intention notto renew at maturity. LaBranche & Co. LLC is entitled to prepay—withwritten consent from the NYSE—the junior subordinated notes without penaltyunder the terms of the agreements relating thereto.

As of June 30, 2006, our outstanding indebtednessincluded eight separate note obligations, each in the principal amount of $1.0million, which mature in August 2007 and bear interest at an annual rate of9.0%.

As of June 30, 2006, we hada tax payable of $10.8 million which included a pending tax liability of $2.6million assessed in April 2005.

Our “Other liabilities” of $16.5 million reflectedon the accompanying 2006 consolidated statement of financial condition arecomprised of legal and tax contingencies pursuant to SFAS 5. Such contingenciesare considered long term, as there is no present obligation to pay suchliabilities in the foreseeable future.

*Regulated Subsidiaries*

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

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

34

----

abilityto prohibit or restrict such transactions if the result is deemed detrimentalto the financial integrity of the broker-dealer. As of June 30, 2006, LaBranche& Co. LLC’s net capital, as defined, was $455.5 million, which exceeded theminimum requirements by $454.2 million.

TheNYSE generally requires its specialist firms to maintain a minimum dollarregulatory capital amount in order to establish that they can meet, with theirown net liquid assets (“NLA”), their position requirement. As of June 30,2006, LaBranche &Co. LLC’s and LSPS’ minimum required combined dollar amount of NLA, as defined, was $447.0 million. LaBranche & Co. LLC’s actual NLA, asdefined, was $460.5 million as of June 30, 2006.  LSPS is not required to perform an NLA calculationbecause LaBranche & Co. LLC’s actual NLA exceeds the combined NLA requirementof LaBranche & Co. LLC and LSPS. On July 25, 2006, the Securities and Exchange Commission approved anNYSE-proposed reduction in the NLA requirements applicable to ourSpecialist and Market-Making business. This reduction is expected to beeffected in four equal quarterly installments commencing on the date the SECapproves the final method of calculating our aggregate NLA reduction.  The final reduction in LaBranche & Co.LLC’s NLA requirement, pursuant to this approval, however, will allowfunds no longer needed to satisfy NLArequirements 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 assume aposition of sixty trading units of each security in which the specialist isregistered. As of June 30, 2006, LaBranche & Co. LLC satisfied the AMEXequities specialist liquid asset requirements.

As a registeredbroker-dealer and member firm of the NYSE, LaBranche Financial Services, Inc. (“LFSI”) also issubject to SEC Rule 15c3-1, as adopted and administered by the NYSE and theSEC. Under the alternative method permitted by the rule, the minimum requirednet capital of LFSI as of June 30, 2006 was equal to the greater of $1.5million or 2.0% of aggregate debit items, as defined. As of June 30, 2006, LFSI’snet capital, as defined, was $20.8 million, which exceeded its minimum netcapital requirement by $19.3 million.

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by the SEC. Asof July 5, 2006, to comply with its June 30, 2006 requirement, cash and U.S.Treasury Bills in the amount of $3.3 million were segregated in a specialreserve account for the exclusive benefit of customers, thus exceeding actualrequirements by $3.3 million. In addition, the Proprietary Accounts ofIntroducing Brokers (“PAIB”) calculation is computed in order for correspondentfirms to classify their assets held by LFSI as allowable assets in thecorrespondents’ net capital calculation. As of July 5, 2006, to comply with LFSI’s June 30, 2006 requirement,cash and U.S. Treasury Bills in the amount of $5.8 million were segregated in aspecial reserve account for the exclusive benefit of customers, thus exceedingactual requirements by $2.5 million.

35

----

As a registeredbroker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1, asadopted and administered by the AMEX and the SEC. LSP is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of June 30, 2006, LSP’s netcapital, as defined, was $66.8 million, which exceeded its minimum net capitalrequirement by $65.9 million.

As a specialist and member of the NYSE, LSPS issubject to the provisions of SEC Rule 15c3-1, as adopted and administered bythe SEC and NYSE. LSPS is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 of aggregateindebtedness, as defined. As of June 30, 2006, LSPS’ net capital, as defined under SECRule 15c3-1, was $18.8 million, which exceeded the minimum requirement by $18.5million.

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’ combinednet liquid asset requirement of $447.0 million limits our ability to utilize asubstantial portion of our liquid assets for other corporate purposes. Althougha portion of the combined net liquid asset requirement of $447.0 million is metby LaBranche & Co. LLC’s and LSPS’ securities positions, pending trades andother assets associated with its equities, options, futures and ETF specialistactivities, a substantial portion of LaBranche & Co. LLC’s cash and cashequivalents as of June 30, 2006 was used to meet their combined net liquidasset requirement.

*Cash Flows*

Our cash and cash equivalents during the three monthperiod ended June 30, 2006 increased $173.3 million to $600.6 million. The increasewas the result of (a) $181.1 million provided by our operating activitiesprimarily from increases in payable to brokers and dealers, deferred taxes andfinancial instruments sold, but not yet purchased as well as a decrease inreceivable from brokers and dealers partially offset by increases in ourfinancial instruments owned, at fair value (b) $4.8 million used in investingactivities primarily attributable to capital expenditures and (c) $2.9 millionused in financing activities for the repayment of a portion of our subordinateddebt.

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

**CreditRatings**

Our outstanding senior notes were originally sold inprivate sales to institutional investors on May 18, 2004, and substantially allthese senior notes were subsequently exchanged for substantially identicalsenior notes registered under the Securities Act of 1933, as amended, pursuantto the terms of our May 2004 debt refinancing. The senior subordinated notesthat remain outstanding since our May 2004 debt refinancing, in the aggregateprincipal

36

----

amount of $13.6 million, are publicly held but are no longer rated. Thefollowing table sets forth the credit ratings on our registered outstandingsenior notes as of June 30, 2006:
|                    | ** ** | **Moody’s  Investors Service** | ** ** | **Standard &  Poor’s** | ** ** |
|--------------------|------------|------------------------------------------|------------|--------------------------------------|------------|
|               |       |                                     |       |                                 |       |
| 2009 Senior  Notes |       | Ba2                                      |       | B                                    |       |
|               |       |                                     |       |                                 |       |
| 2012 Senior Notes  |       | Ba2                                      |       | B                                    |       |

 

## In August 2005, although Moody’s InvestorServices changed its credit rating of our outstanding senior notes from Ba1 toBa2, it improved its outlook to stable due to our high quality balance sheetand improved liquidity. In September 2005, Standard & Poors also improvedits outlook on our outstanding senior notes to stable, while affirming our Brating, due to our improved debt service and liquidity positions.

**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 sixmonths of 2006, other than the lease we entered on May 26, 2006 withrespect to 48,000 square feet at 33 Whitehall Street, New York, New York, therewere no significant changes in our reported payments due under contractualobligations and disclosed contingent contractual obligations at 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 to managerisks by incorporating up-to-date market information in the management of ourinventory, subject to our specialist obligations. We have developed a riskmanagement process at our LaBranche & Co. LLC subsidiary that is designedto balance our ability to profit from our specialist activities with ourexposure 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:

37

----

*Corporate Compliance Committee*. Our corporate compliance committee was established in February2002 and consists of representatives from executive and senior management,compliance personnel, including our on-floor compliance officer, our generalcounsel and several additional senior floor specialists, known as postmanagers. The role of the corporate compliance committee is to implement,monitor and report to senior management on the statutory and regulatorycompliance efforts of our specialist business. The corporate compliance committee also advises the compliancedepartment in establishing, reviewing and revising our policies and proceduresgoverning LaBranche & Co. LLC’s regulatory compliance structure.

*Executive Operating Committee.* Our executive operating committee is composed of two executive officers.This committee is responsible for approving all risk management procedures andtrading guidelines for our specialist stocks. In addition, our executiveoperating committee reviews all unusual situations reported to it by our floormanagement 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 employthirteen floor captains who monitor the activities of our cash equityspecialists throughout the trading day from various positions at our tradingposts. The floor captains observe trades and constantly review tradingactivities on a real-time basis. In addition, the floor captains are readilyavailable to assist our specialists in determining when to deviate fromprocedures and guidelines in reacting to any unusual situations or marketconditions. The floor captains report these unusual situations and anydeviations from these procedures and guidelines to their respective postmanagers. Floor captains meet with each specialist at least once a week toevaluate each specialist’s adherence to our risk management procedures andtrading guidelines, as well as to review compliance reports generated by thecompliance department in monitoring and reviewing specialist tradingactivities. Floor captains also meet to review risk procedures and guidelinesand, if appropriate, make recommendations to the floor management committee.

*Specialists.*  Ourspecialists conduct auctions of our specialist stocks based upon the conditionsof the marketplace. In doing so, specialists observe our risk managementprocedures and trading guidelines in tandem with their responsibility to createand maintain a fair and orderly market. Specialists immediately notify a floorcaptain of any unusual situations or market conditions requiring a deviationfrom our procedures and guidelines.

38

----

*On-Floor Compliance Officer*. We also have an on-floor compliance officer that monitors thespecialists’ compliance with NYSE rules throughout the day on an ad hocbasis.  The on-floor compliance officerreports his findings on general on-floor compliance initiatives on a dailybasis to our equity specialist unit’s Chief Compliance Officer and ChiefExecutive Officer and provides summary updates of these efforts to theCorporate Compliance Committee on a monthly basis.  Many of our compliance and risk managementactivities flow from the efforts of our on-floor compliance 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 floor managementcommittee, the post manager regularly communicates with other members of thefloor management committee regarding any deviations from our AMEX proceduresand guidelines set by our executive operating committee. We also have anon-floor compliance officer that monitors the specialists’ compliance with AMEXrules throughout the day on an ad hoc basis. The on-floor compliance officerreports his findings and on general on-floor compliance initiatives on a dailybasis to our equity specialist unit’s Chief Compliance Officer and ChiefExecutive Officer and provides summary updates of these efforts to theCorporate Compliance Committee on a monthly basis.  Many of our compliance and risk managementactivities flow from the efforts of our on-floor compliance initiative.

*Circuit Breaker Rules.* The NYSE and AMEX have instituted certain circuit breaker rules intendedto halt trading in all NYSE/AMEX listed stocks in the event of a severe marketdecline. The circuit breaker rules impose temporary halts in trading when theDow Jones 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 severe marketdeclines and provide us an additional opportunity to assure compliance with ourrisk management procedures.

*Equity Market Risk*

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

39

----

A high concentration of our equity specialists’principal trading revenue generally is generated from our ten and twenty-fivemost profitable NYSE specialist stocks. The percentage of our equity specialisttrading revenue generated from our ten most profitable specialist stocks hasincreased from 17.4% to 43.9% of net principal trading revenue in the secondquarter of 2005 and 2006, respectively. The percentage of our equity specialisttrading revenue generated from our twenty-five most profitable specialiststocks has increased from 33.6% to 82.4% of net principal trading revenue inthe second quarter of 2005 and 2006, respectively. The adverse tradingconditions in the second quarter of 2006 resulted in a decline in overall netprincipal trading revenue. This resulted in the ten and twenty-five mostprofitable equity stocks becoming a larger percentage of equity specialistrevenue. Revenue from the ten most profitable stocks was $6.2 million and $5.1million for the second quarters of 2005 and 2006, respectively. Revenue fromthe twenty-five most profitable stocks was $11.9 million and $9.7 million forthe second quarters of 2005 and 2006, respectively. We are not overly relianton a 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 software applicationto monitor specialist and market-making positions on a real-time basis. Bymonitoring 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

40

----

foreign currency risk.Furthermore, our aggregate risk in connection with our options, futures andETFs trading is under constant evaluation by certain members of management andour traders, and all significant trading strategies and positions are closelymonitored. Our options, futures and ETF trading is executed on national andforeign exchanges. These trades clear through the Options Clearing Corporation,the National Securities Clearing Corporation or the applicable exchangeclearing organization, thereby reducing potential credit risk.

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: 
|                               | ** ** | **Profit or (Loss) if the underlying securities move:** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(000’s omitted)** | ** ** | **-15.0%**                                                                                 | ** ** | **-5.0%** | ** ** | **0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio  as of:**         |       |                                                                                       |       |   |   |   |   |   |   |   |   |
| March 31, 2006                |       | $                                                                                          | (13,803    | ) | $ | 5,760 |   | $ | (25 | ) | $ | 1,734 |   | $ | 512 |   |
| June 30, 2006                 |       | $                                                                                          | (31,187    | ) | $ | (17,747 | ) | $ | (50 | ) | $ | 23,486 |   | $ | 55,548 |   |

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. Thezero percent change column represents the profit or loss our options, futuresand ETFs specialist operations would experience on a daily basis if therelevant 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 specifiedmovements in foreign currencies relative to the U.S. dollar to which ourspecialist and market-making activities are exposed would have impacted ourprofits and losses:

|                               | ** ** | **Profit or (Loss) if the foreign currencies relative  to the U.S. dollar move:** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **(000’s omitted)** | ** ** | **-15.0%**                                                                                                                               | ** ** | **-5.0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio  as of:**         |       |                                                                                                                                     |       |   |   |   |   |   |   |
| March 31, 2006                |       | $                                                                                                                                        | (2,412     | ) | $ | (804 | ) | $ | 804 |   | $ | 2,412 |   |
| June 30, 2006                 |       | $                                                                                                                                        | (500       | ) | $ | (167 | ) | $ | 167 |   | $ | 500 |   |

 

41

----

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.

*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 floor brokerageactivities, a transaction is settled either when the customer pays forsecurities 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 beexposed to risk in the event margin requirements are not sufficient to fullycover losses 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 monitorour open transaction risk in connection with our execution and clearingactivities, starting when the transaction occurs and continuing until thedesignated settlement date. Transactions that remain unsettled after settlementdate are scrutinized and

42

----

necessaryaction to reduce risk that is taken. Credit risk that could result from contrabrokers defaulting is minimized since much of the settlement risk fortransactions with brokers is essentially transferred to the National StockClearing Corporation. The credit risk associated with institutional and directaccess clearing customers is minimized since these customers have beenqualified by the Depository Trust Company (“DTC”) or the DTC participants orhave met the prime broker qualification standards at other brokerage firms.Before conducting business with a prospective customer, senior management thatoversees our execution and clearing operations, in conjunction with the relatedcompliance department, reviews the prospective customer’s experience in thesecurities industry, financial condition and personal background, including abackground check with a risk reporting agency. For retail customers andprofessional investors, we seek to control the risks associated with customeractivities by requiring customers to maintain margin collateral in compliancewith various regulatory and internal guidelines. We monitor margin levels dailypursuant to such guidelines and require customers to deposit additionalcollateral or reduce positions when necessary.

*Operational Risk*

Operational risk relates to the risk of loss fromexternal events, and from failures in internal processes or informationsystems. In each of our business segments, we rely heavily on our informationsystems in managing our risk. Accordingly, working in conjunction with theNYSE, we have made significant investments in our trade processing andexecution systems. Our use of, and dependence on, technology has allowed us tosustain our growth over the past several years. Management members and floorcaptains at our NYSE and AMEX 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 ETFs specialist and market-making operationsutilize a third-party software application to monitor our positions and profitsand losses on a real-time basis.

43

----

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.

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 NYSE andAMEX.

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 Rule13a-15(e) under the Securities Exchange Act of 1934) was performed under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures were effective as of the end of the periodcovered by this report. In addition, no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934) occurred during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

44

----

## **PARTII OTHER INFORMATION**

**Item 1.    Legal Proceedings**

There have been nomaterial new developments in the Company’s legal proceedings since the March16, 2006 filing of the Company’s 2005 10-K, except as follows:

Henik/Lewis.  On June 30, 2006, the Court entered an orderdismissing the Henik and Lewis actions.

Sternlicht.  On July 18, 2006, plaintiff stipulated to thevoluntarily dismissal of the Sternlicht action without prejudice.  On July 21, 2006, the Court approved thedismissal.

Last Atlantis, Rule and Martin.  On June 14, 2006, we and our LSP subsidiaryentered into a settlement of the Last Atlantis, Rule and Martin actions inexchange for the payment of an immaterial sum.

We believe that theclaims asserted against us by the plaintiffs in the pending proceedingsdescribed in the 2005 10-K and above are without merit, and we deny allallegations of wrongdoing.  There can beno assurance, however, as to the outcome or timing of the resolution of theseproceedings.  Therefore, we are unable toestimate the amount or potential range of any loss that may arise out of theseproceedings.  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 and above, we and our operating subsidiaries have been thetarget, from time to time, of various claims, lawsuits and regulatory inquiriesin the ordinary course of our respective businesses. While the ultimate outcomeof those claims and lawsuits which are currently pending cannot be predictedwith certainty, we believe, based on an understanding of the facts of theseproceedings, that their ultimate resolution will not, in the aggregate, have amaterial adverse effect on our financial condition, results of operations orcash flows

**Item 1A. RiskFactors**

In addition to the other information setforth in this report, you should carefully consider the factors discussed inPart 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.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

45

----

## **Item5.    Other Information.**

*We have included in this Form 10-Q filing, and from time totime 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                                                                           Certificationof George M.L. LaBranche, IV, Chairman, Chief Executive Officer and President,pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2                                                                           Certificationof Jeffrey A. McCutcheon, Senior Vice President and Chief Financial Officer,pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1                                                                           Certificationof George M.L. LaBranche, IV, Chairman, Chief Executive Officer and President,pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding theinformation contained in LaBranche & Co Inc.’s Quarterly Report on Form10-Q for the period ended June 30, 2006.

32.2                                                                         Certificationof Jeffrey A. McCutcheon, Senior Vice President and Chief Financial Officer,pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, regarding theinformation contained in LaBranche & Co Inc.’s Quarterly Report on Form10-Q for the period ended June 30, 2006.

46

----

 

All other items of this report are inapplicable.

47

----

**SIGNATURES**

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

 
| August 9, 2006 | LABRANCHE & CO INC. |
|----------------|-------------------------|
|           |                    |
|           |                    |
|           | By:                     | /s/ Jeffrey A. McCutcheon |   |
|           | Name:                   | Jeffrey A. McCutcheon |
|           | Title:                  | Senior Vice President and Chief  Financial Officer |

 

51

----

 

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  June 30, 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 June 30,  2006.   |

 

52

----