**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

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

 

**For the transition period from            to            **

 

**CommissionFile Number 001-15251**

** **

**LABRANCHE & CO INC.**

(Exact name of registrant as specified in its charter)

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

 

**OneExchange Plaza, New York, New York 10006**

(Address of principal executive offices)

 

**(212)425-1144**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý              Noo

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ý    No o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o    No ý

 

The number of shares ofthe registrant’s common stock outstanding as of November 7, 2005 was 60,623,819.

 

 

----

 

**TABLE OFCONTENTS**

 
| PART I                                               | FINANCIAL INFORMATION                                                                        | 3      |
|-----------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|
|                                                      |                                                                                         |   |
| Item 1.                                                   | Financial Statements.                                                                        | 3      |
|                                                      |                                                                                         |   |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS           | 3                                                                                            |
|                                                      |                                                                                         |   |
| CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL  CONDITION | 4                                                                                            |
|                                                      |                                                                                         |   |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS           | 5                                                                                            |
|                                                      |                                                                                         |   |
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS      | 6                                                                                            |
|                                                      |                                                                                         |   |
| Item 2.                                                   | Management’s Discussion and Analysis of Financial Condition and  Results of Operations. | 15     |
|                                                      |                                                                                         |   |
| Item 3.                                                   | Quantitative and Qualitative Disclosures About Market Risk.                                  | 33     |
|                                                      |                                                                                         |   |
| Item 4.                                                   | Controls and Procedures.                                                                     | 39     |
|                                                      |                                                                                         |   |
| PART II                                              | OTHER INFORMATION                                                                            | 40     |
|                                                      |                                                                                         |   |
| SIGNATURES                                                | 43                                                                                           |

 

2

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# **PART I  FINANCIAL INFORMATION**

# ** **

# **Item 1.**    Financial Statements.

# ** **

**LaBRANCHE &CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(000’somitted except per share data)**

 
| ** **                                                                       | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(unaudited)**                                    | ** ** | **(unaudited)**                                   | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| REVENUES:                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Net gain on  principal transactions                                              |       | $                                                  | 47,212     |                                              | $          | 38,997 |   | $ | 135,124 |   | $ | 131,740 |   |
| Commissions                                                                      |       | 20,123                                             |       | 22,064                                            |       | 64,876 |   | 71,311 |   |
| Net gain on  non-marketable investments                                          |       | 1,059                                              |       | 178                                               |       | 1,381 |   | 24,527 |   |
| Interest                                                                         |       | 14,515                                             |       | 2,712                                             |       | 27,752 |   | 6,497 |   |
| Other                                                                            |       | 822                                                |       | 709                                               |       | (354 | ) | 1,200 |   |
| Total revenues                                                                   |       | 83,731                                             |       | 64,660                                            |       | 228,779 |   | 235,275 |   |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| EXPENSES:                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Employee  compensation and related benefits                                      |       | 25,747                                             |       | 21,985                                            |       | 72,527 |   | 72,421 |   |
| Interest                                                                         |       | 23,285                                             |       | 16,006                                            |       | 58,649 |   | 47,700 |   |
| Exchange,  clearing and brokerage fees                                           |       | 10,559                                             |       | 10,101                                            |       | 30,445 |   | 28,684 |   |
| Lease of  exchange memberships                                                   |       | 1,008                                              |       | 3,804                                             |       | 3,003 |   | 11,902 |   |
| Depreciation and  amortization of intangibles                                    |       | 3,008                                              |       | 3,057                                             |       | 9,100 |   | 9,162 |   |
| Goodwill  impairment                                                             |       | 3⁄4                                             |       | 37,600                                            |       | 3⁄4 |   | 37,600 |   |
| Exchange  memberships impairment                                                 |       | 3⁄4                                             |       | 3⁄4                                            |       | 3⁄4 |   | 18,327 |   |
| Debt repurchase  premium                                                         |       | 3⁄4                                             |       | 3⁄4                                            |       | 3⁄4 |   | 49,028 |   |
| Other                                                                            |       | 9,374                                              |       | 9,941                                             |       | 30,579 |   | 29,927 |   |
| Total expenses                                                                   |       | 72,981                                             |       | 102,494                                           |       | 204,303 |   | 304,751 |   |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Income (loss)  before minority interest and provision (benefit) for income taxes |       | 10,750                                             |       | (37,834                                           | )          | 24,476 |   | (69,476 | ) |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| MINORITY  INTEREST                                                               |       | 3⁄4                                             |       | 161                                               |       | 3⁄4 |   | 530 |   |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Income (loss)  before provision (benefit) for income taxes                       |       | 10,750                                             |       | (37,995                                           | )          | 24,476 |   | (70,006 | ) |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES                                            |       | 1,592                                              |       | (1,533                                            | )          | 4,330 |   | (16,958 | ) |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Net income  (loss)                                                               |       | 9,158                                              |       | (36,462                                           | )          | 20,146 |   | (53,048 | ) |
| Preferred  dividends and discount accretion                                      |       | 3⁄4                                             |       | 142                                               |       | 3⁄4 |   | 2,254 |   |
| Net income  (loss) applicable to common stockholders                             |       | $                                                  | 9,158      |                                              | $          | (36,604 | ) | $ | 20,146 |   | $ | (55,302 | ) |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Weighted-average  common shares outstanding:                                     |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                            |       | 60,624                                             |       | 59,926                                            |       | 60,615 |   | 59,852 |   |
| Diluted                                                                          |       | 60,964                                             |       | 59,926                                            |       | 60,947 |   | 59,852 |   |
| Earnings (loss)  per share:                                                      |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                            |       | $                                                  | 0.15       |                                              | $          | (0.61 | ) | $ | 0.33 |   | $ | (0.92 | ) |
| Diluted                                                                          |       | $                                                  | 0.15       |                                              | $          | (0.61 | ) | $ | 0.33 |   | $ | (0.92 | ) |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements.

 

3

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**LaBRANCHE &CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(UNAUDITED)**

**(000’somitted except per share data)**

 
| ** **                                                                                                                                                                                  | ** ** | **As of**                    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(unaudited)**              | ** ** | **(audited)** | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                         |       |   |   |
| ** **                                                                                                                                                                                  |       |                         |       |   |   |
| Cash and cash equivalents                                                                                                                                                                   |       | $                            | 489,105    |   | $ | 444,446 |   |
| Cash and securities segregated under federal  regulations                                                                                                                                   |       | 6,036                        |       | 13,511 |   |
| Securities purchased under agreements to resell                                                                                                                                             |       | 121,000                      |       | 87,000 |   |
| Receivable from brokers, dealers and clearing  organizations                                                                                                                                |       | 637,477                      |       | 158,421 |   |
| Receivable from customers                                                                                                                                                                   |       | 2,420                        |       | 10,555 |   |
| Securities owned, at market value:                                                                                                                                                          |       |                         |       |   |   |
| Corporate  equities                                                                                                                                                                         |       | 822,092                      |       | 319,378 |   |
| Options                                                                                                                                                                                     |       | 358,538                      |       | 110,705 |   |
| Exchange-traded  funds                                                                                                                                                                      |       | 560,676                      |       | 128,214 |   |
| U.S. Government  obligations                                                                                                                                                                |       | 8                            |       | 8 |   |
| Commissions receivable                                                                                                                                                                      |       | 4,623                        |       | 5,428 |   |
| Exchange memberships contributed for use, at market  value                                                                                                                                  |       | 22,880                       |       | 9,450 |   |
| Exchange  memberships owned, at adjusted cost (market value of $113,395 and $41,696,  respectively)                                                                                         |       | 59,657                       |       | 59,332 |   |
| Office equipment  and leasehold improvements, at cost, less accumulated depreciation and  amortization of $11,970 and $10,655, respectively                                                 |       | 2,814                        |       | 3,459 |   |
| Intangible  assets, net of accumulated amortization:                                                                                                                                        |       |                         |       |   |   |
| Specialist stock  lists                                                                                                                                                                     |       | 353,422                      |       | 361,204 |   |
| Trade name                                                                                                                                                                                  |       | 25,011                       |       | 25,011 |   |
| Goodwill                                                                                                                                                                                    |       | 250,569                      |       | 250,569 |   |
| Other assets                                                                                                                                                                                |       | 43,992                       |       | 68,406 |   |
| Total assets                                                                                                                                                                                |       | $                            | 3,760,320  |   | $ | 2,055,097 |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |                         |       |   |   |
| ** **                                                                                                                                                                                  |       |                         |       |   |   |
| Liabilities:                                                                                                                                                                                |       |                         |       |   |   |
| Payable to  brokers and dealers                                                                                                                                                             |       | $                            | 162,403    |   | $ | 120,434 |   |
| Payable to  customers                                                                                                                                                                       |       | 6,727                        |       | 3,830 |   |
| Securities sold,  but not yet purchased, at market value:                                                                                                                                   |       |                         |       |   |   |
| Corporate  equities                                                                                                                                                                         |       | 1,276,098                    |       | 265,078 |   |
| Options                                                                                                                                                                                     |       | 343,670                      |       | 92,580 |   |
| Exchange-traded  funds                                                                                                                                                                      |       | 419,346                      |       | 142,735 |   |
| U.S. Government  obligations                                                                                                                                                                |       | 92,925                       |       | 3⁄4 |   |
| Accrued  compensation                                                                                                                                                                       |       | 25,411                       |       | 38,195 |   |
| Accounts payable  and other accrued expenses                                                                                                                                                |       | 31,564                       |       | 18,245 |   |
| Other  liabilities                                                                                                                                                                          |       | 11,911                       |       | 12,510 |   |
| Income taxes  payable                                                                                                                                                                       |       | 6,809                        |       | 1,671 |   |
| Deferred tax  liabilities                                                                                                                                                                   |       | 151,305                      |       | 156,294 |   |
| Short term debt                                                                                                                                                                             |       | 3⁄4                       |       | 2,000 |   |
| Long term debt                                                                                                                                                                              |       | 481,414                      |       | 481,448 |   |
| Subordinated  liabilities:                                                                                                                                                                  |       |                         |       |   |   |
| Exchange  memberships contributed for use, at market value                                                                                                                                  |       | 22,880                       |       | 9,450 |   |
| Other  subordinated indebtedness                                                                                                                                                            |       | 12,395                       |       | 17,285 |   |
| Total liabilities                                                                                                                                                                           |       | 3,044,858                    |       | 1,361,755 |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| Minority interest                                                                                                                                                                           |       | 3⁄4                       |       | 356 |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| Commitments and contingencies                                                                                                                                                               |       |                         |       |   |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| Common stock,  $.01 par value, 200,000,000 shares authorized; 60,623,819 and 60,532,080  shares issued and outstanding at September 30, 2005 and December 31,  2004, respectively |       | 606                          |       | 605 |   |
| Additional paid-in capital                                                                                                                                                                  |       | 689,369                      |       | 687,040 |   |
| Retained earnings                                                                                                                                                                           |       | 25,487                       |       | 5,341 |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| Total stockholders’ equity                                                                                                                                                             |       | 715,462                      |       | 692,986 |   |
|                                                                                                                                                                                        |       |                         |       |   |   |
| Total  liabilities and stockholders’ equity                                                                                                                                            |       | $                            | 3,760,320  |   | $ | 2,055,097 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financial statements.

 

4

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**LaBRANCHE &CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(000’s omitted)**

 
| ** **                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                             | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Net income (loss)                                                                     |       | $                                        | 20,146     |   | $ | (53,048 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                                     |       |   |   |
| Depreciation and  amortization of intangibles                                         |       | 9,100                                    |       | 9,162 |   |
| Amortization of  debt issuance costs and bond discount                                |       | 1,295                                    |       | 6,977 |   |
| Minority  interest in consolidated subsidiary                                         |       | 3⁄4                                   |       | 530 |   |
| Compensation  expense related to stock-based compensation                             |       | 2,330                                    |       | 3,161 |   |
| Deferred taxes,  net                                                                  |       | 17,221                                   |       | 12,840 |   |
| Goodwill  impairment                                                                  |       | 3⁄4                                   |       | 37,600 |   |
| Exchange  memberships impairment                                                      |       | 3⁄4                                   |       | 18,327 |   |
| Acceleration of  preferred stock discount accretion                                   |       | —                                   |       | 496 |   |
| Changes in  operating assets and liabilities:                                         |       |                                     |       |   |   |
| Cash and  securities segregated under federal regulations                             |       | 7,475                                    |       | (646 | ) |
| Securities  purchased under agreements to resell                                      |       | (34,000                                  | )          | (59,000 | ) |
| Receivable from  brokers, dealers and clearing organizations                          |       | (479,056                                 | )          | (5,172 | ) |
| Receivable from  customers                                                            |       | 8,135                                    |       | (3,134 | ) |
| Securities  owned, at market value:                                                   |       |                                     |       |   |   |
| Corporate  equities                                                                   |       | (502,714                                 | )          | (226,092 | ) |
| Options                                                                               |       | (247,833                                 | )          | (35,447 | ) |
| Exchange-traded  funds                                                                |       | (432,462                                 | )          | (70,363 | ) |
| U.S. Government  obligations                                                          |       | 3⁄4                                   |       | (250 | ) |
| Commissions  receivable                                                               |       | 805                                      |       | (290 | ) |
| Income taxes  receivable                                                              |       | 3⁄4                                   |       | (17,047 | ) |
| Other assets                                                                          |       | 938                                      |       | (320 | ) |
| Payable to  brokers and dealers                                                       |       | 41,969                                   |       | 32,590 |   |
| Payable to  customers                                                                 |       | 2,897                                    |       | (4,383 | ) |
| Securities sold,  but not yet purchased, at market value:                             |       |                                     |       |   |   |
| Corporate  equities                                                                   |       | 1,011,020                                |       | 127,091 |   |
| Options                                                                               |       | 251,090                                  |       | 17,499 |   |
| Exchange-traded  funds                                                                |       | 276,611                                  |       | 146,702 |   |
| U.S. Government  obligations                                                          |       | 92,925                                   |       | 22,450 |   |
| Accrued  compensation                                                                 |       | (12,784                                  | )          | (15,712 | ) |
| Accounts payable  and other accrued expenses                                          |       | 13,319                                   |       | (2,877 | ) |
| Other  liabilities                                                                    |       | (599                                     | )          | (64,167 | ) |
| Income taxes  payable                                                                 |       | 5,138                                    |       | (8,588 | ) |
|                                                                                  |       |                                     |       |   |   |
| Net cash  provided by (used in) operating activities                                  |       | 52,966                                   |       | (131,111 | ) |
|                                                                                  |       |                                     |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                            | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Payments for  purchases of office equipment and leasehold improvements                |       | (673                                     | )          | (470 | ) |
| Payments for  purchases of exchange memberships                                       |       | (325                                     | )          | (340 | ) |
| Net cash (used  in) investing activities                                              |       | (998                                     | )          | (810 | ) |
|                                                                                  |       |                                     |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                             | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Payment to  minority interest holder                                                  |       | (356                                     | )          | (322 | ) |
| Payment for  preferred stock dividends                                                |       | 3⁄4                                   |       | (3,448 | ) |
| Payment for  preferred stock buyback                                                  |       | 3⁄4                                   |       | (39,186 | ) |
| Principal  payments of subordinated debt                                              |       | (4,890                                   | )          | (3,000 | ) |
| Proceeds from  issuance of long term debt                                             |       | 3⁄4                                   |       | 460,000 |   |
| Repayment of  short term and long term debt                                           |       | (2,063                                   | )          | (336,358 | ) |
| Net cash (used  in) provided by financing activities                                  |       | (7,309                                   | )          | 77,686 |   |
|                                                                                  |       |                                     |       |   |   |
| Increase  (Decrease) in cash and cash equivalents                                     |       | 44,659                                   |       | (54,235 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                                       |       | 444,446                                  |       | 491,885 |   |
|                                                                                  |       |                                     |       |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                             |       | $                                        | 489,105    |   | $ | 437,650 |   |
|                                                                                  |       |                                     |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE  PERIOD FOR:**                      | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Interest                                                                              |       | $                                        | 27,193     |   | $ | 31,306 |   |
| Income taxes                                                                          |       | $                                        | 362        |   | $ | 393 |   |
|                                                                                  |       |                                     |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:**       |       |                                     |       |   |   |
| Net increase in  additional paid-in capital related to stock-based awards             |       | $                                        | 2,329      |   | $ | 3,134 |   |

** **

The accompanyingnotes are an integral part of these condensed consolidated financial statements.

 

5

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**LaBRANCHE & CO INC. and SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

** **

**1.**             ORGANIZATION AND DESCRIPTION OF BUSINESS

** **

The condensed consolidatedfinancial statements include the accounts of LaBranche & Co Inc., aDelaware corporation (the “Holding Company”), and its subsidiaries, LaBranche &Co. LLC, a New York limited liability company, LaBranche Financial Services, Inc.,a New York corporation (“LFSI”), LaBranche Structured Holdings, Inc., a Delawarecorporation (“LSHI”), LABDR Services, Inc., a Delaware corporation (“LABDR”),and LaBranche & Co. B.V., a Netherlands private limited liabilitycompany (“BV”).  The Holding Company isthe sole member of LaBranche & Co. LLC, the 100% stockholder of LFSI,LSHI and LABDR and the sole owner of BV. LSHI is a holding company that is thesole member of LaBranche Structured Products, LLC, a New York limited liabilitycompany (“LSP”), LaBranche Structured Products Specialists LLC, a New Yorklimited liability company (“LSPS”), LaBranche Structured Products EuropeLimited, a United Kingdom single member private company (“LSPE”) and LaBrancheStructured Products Hong Kong Limited, a Hong Kong single member privatecompany (“LSPH”, and collectively with the Holding Company, LaBranche &Co. LLC, LFSI, LSHI, LABDR, LSP, LSPS and LSPE the “Company”).  LaBranche & Co. LLC is a registeredbroker-dealer that operates primarily as a specialist in equity securities andrights listed on the New York Stock Exchange (“NYSE”) and in equity securitieson the American Stock Exchange (“AMEX”). LFSI is a registered broker-dealer anda member of the NYSE and other exchanges and provides securities execution,securities clearing and other related services to its own customers andcustomers of introducing brokers. LFSI also provides direct-access floorbrokerage services to institutional customers. LSP is a registeredbroker-dealer that operates as a specialist in options, futures andExchange-Traded Funds (“ETFs”) on several exchanges, and as a market-marker inoptions, ETFs and futures on several exchanges. LSPS is a registered broker-dealerthat operates as a specialist in ETFs traded on the NYSE. LSPE was organized tooperate as a market-maker for ETFs in Europe, and is in the process ofregistering as a broker-dealer with the United Kingdom’s Financial SecuritiesAuthority. LSPH was organized to operate as a market-maker for ETFs and engagein hedging transactions in Asia, and is in the process of registering as abroker-dealer with Hong Kong’s Securities and Futures Commission. LABDR provides disaster recoveryservices and back-up facilities to other Holding Company subsidiaries. BVrepresents LaBranche & Co. LLC in European markets and provides clientservices to LaBranche & Co. LLC’s European listed companies.

 

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

** **

The unaudited interimcondensed consolidated financial information as of September 30, 2005 and forthe three and nine months ended September 30, 2005 and 2004 is presentedin the accompanying condensed consolidated financial statements. The unauditedinterim condensed consolidated financial statements have been prepared inaccordance with U.S. 

 

6

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generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial information. The unaudited interim condensed consolidatedfinancial information reflects all adjustments which are, in the opinion ofmanagement, necessary for a fair presentation of the results for such periods.The preparation of condensed consolidated financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from these estimates and assumptions. The unauditedinterim condensed consolidated financial information as of September 30,2005 should be read in conjunction with the audited consolidated financialstatements and notes thereto as of December 31, 2004 included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004filed with the Securities and Exchange Commission (“SEC”) on March 16, 2005,as amended on April 15, 2005 (the “2004 10-K”). Results of the third quarter2005 interim period are not necessarily indicative of results to be obtainedfor the full fiscal year.

 

## **3.**             INCOME TAXES

## ** **

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes,” which requires the recognition of tax benefits or expenses based on theestimated future tax effects of temporary differences between the financialstatement and tax bases of its assets and liabilities. Deferred tax assets andliabilities primarily relate to tax basis differences on stock-basedcompensation, other compensation accruals, net operating loss carryforwards, amortizationperiods of certain intangible assets and differences between the financialstatement and tax bases of assets acquired.

 

In the third quarter of 2005,the Company maintained its income tax accrual rate at 43.5%.  During the quarter ended September 30,2005, the Company recognized $1.7 million in tax benefits resulting from a taxrate change in the first half of 2005, and $1.3 million from the reduction oftax liabilities due to the close of a prior Federal tax year, for a total of $3.0million for the 2005 third quarter. The Company expects to recognizeapproximately $2.2 million of additional tax benefits throughout the remainderof 2005, for a total benefit from changes in tax estimates of $7.4 million forthe 2005 fiscal year. The Company expects that its effective tax rate will bein the range of 16.0%-18.0% for the year ending December 31, 2005.

 

The components of theprovision (benefit) for income taxes reflected on the condensed consolidatedstatements of operations are set forth below (000’s omitted):

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current federal, state and local taxes      |       | $                                         | 2,391      |                                     | $          | 14,073 |   | $ | (12,891 | ) | $ | (29,798 | ) |
| Deferred tax provision  (benefit)           |       | (799                                      | )          | (15,606                                  | )          | 17,221 |   | 12,840 |   |
| Total provision  (benefit) for income taxes |       | $                                         | 1,592      |                                     | $          | (1,533 | ) | $ | 4,330 |   | $ | (16,958 | ) |

 

7

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

** **

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

 

As of September 30,2005 and December 31, 2004, LaBranche & Co. LLC’s net capital, asdefined under SEC Rule 15c3-1, was $463.2 million and $455.1 million,respectively, which exceeded the minimum requirements by $461.9 million and $453.2million, respectively. LaBranche & Co. LLC’s aggregate indebtedness tonet capital ratio on those dates was .04 to 1 and .06 to 1, respectively.

 

TheNYSE generally requires its specialist firms to maintain a minimum dollarregulatory capital amount in order to establish that they can meet, with theirown net liquid assets, their position requirement. As of September 30, 2005 and December 31,2004, LaBranche & Co. LLC’s and LSPS’ NYSE minimum required combined dollaramount of net liquid assets, as defined, was $447.0 million. LaBranche &Co. LLC’s actual net liquid assets, as defined, were $459.0 million and $458.7million as of September 30, 2005 and December 31, 2004, respectively.As of September 30, 2005 and December 31, 2004, LaBranche &Co. LLC’s actual net liquid assets exceeded the combined net liquid assetsrequirement of LaBranche & Co. LLC and LSPS. Both LaBranche &Co. LLC and LSPS thus satisfied their respective net liquid asset requirementsas of those dates.

 

The AMEX generallyrequires its equity specialist firms to maintain a cash or liquid assetposition of the greater of (a) $1.0 million or (b) an amountsufficient to assume a position of sixty trading units of each security inwhich the equity specialist is registered. As of September 30, 2005 and December 31,2004, LaBranche & Co. LLC satisfied the AMEX equity specialist liquidasset requirements.

 

As a registeredbroker-dealer and member firm of the NYSE, LFSI is also subject to SEC Rule 15c3-1,as adopted and administered by the SEC and the NYSE. Under the alternativemethod permitted by this rule, the minimum required net capital is equal to thegreater of $1.5 million or 2.0% of aggregate debit items, as defined. As of September 30,2005 and December 31, 2004, LFSI’s net capital, as defined, was $8.2 millionand $12.5 million, respectively, which exceeded minimum requirements by $6.7 millionand $11.0 million, respectively.

 

Asa clearing broker-dealer, LFSI is subject to SEC Rule 15c3-3, as adoptedand administered by the SEC. As of October 4, 2005, to comply with its September 30,2005 requirement, cash and U.S. Treasury Bills in the amount of $2.0 millionwere segregated in a special reserve account for the exclusive benefit ofcustomers exceeding the actual requirements by $2.0 million. As of January 4,2005, to comply with its December 31, 2004 requirement, cash and U.S.Treasury Bills in the amount of $0.1 million were segregated in a specialreserve account for the exclusive benefit of customers, thus exceeding actualrequirements by $0.1 million. In addition, the Proprietary Accounts ofIntroducing Brokers 

 

8

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(“PAIB”) Calculation iscomputed in order for correspondent firms to classify their assets held by LFSIas allowable assets in the correspondents’ net capital calculation.  As of October 4, 2005, to comply with LFSI’sSeptember 30, 2005 requirement, cash and U.S. Treasury Bills in the amountof $5.2 million were segregated in a special reserve account for the exclusivebenefit of customers, thus exceeding actual requirements by $1.2 million. As of January 4, 2005,to comply with LFSI’s December 31, 2004 requirement, cash and U.S.Treasury Bills in the amount of $4.4 million were segregated in a specialreserve account for the exclusive benefit of customers, thus exceeding actualrequirements by $3.4 million.

 

As a registeredbroker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1, asadopted and administered by the SEC and the AMEX. LSP is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. As of September 30, 2005 and December 31,2004, LSP’s net capital, as defined, was $45.9 million and $23.8 million,respectively, which exceeded minimum requirements by $45.4 million and $23.2million, respectively.

 

LSPS, as a specialist andmember of the NYSE, is subject to the provisions of SEC Rule 15c3-1, asadopted and administered by the SEC and NYSE. LSPS is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. As of September 30, 2005 and December 31,2004, LSPS’ net capital, as defined, was $3.9 million and $4.4 million, respectively,which exceeded the minimum requirements by $3.7 million and $4.3 million,respectively. LSPS’ aggregate indebtedness to net capital ratio on those dateswas .53 to 1 and .13 to 1, respectively.

 

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

## ** **

Earnings (loss) per shareare computed in accordance with SFAS No. 128, “Earnings Per Share.” Basicearnings (loss) per share is calculated by dividing net income (loss) applicableto common stockholders by the weighted-average number of common sharesoutstanding. Diluted earnings (loss) per share includes the determinants ofbasic earnings (loss) per share and, in addition, gives effect to dilutivepotential common shares for periods in which there is net income available tocommon stockholders.

 

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

 
| ** **                                                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                                                                                     |       | $                                          | 9,158      |                                      | $          | (36,462 | ) | $ | 20,146 |   | $ | (53,048 | ) |
| Less: preferred  dividends and discount accretion                                                                      |       | 3⁄4                                     |       | 142                                       |       | 3⁄4 |   | 2,254 |   |
|                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Numerator for  basic and diluted earnings (loss) per share – net income (loss) applicable to  common stockholders |       | $                                          | 9,158      |                                      | $          | (36,604 | ) | $ | 20,146 |   | $ | (55,302 | ) |
| Denominator for  basic earnings (loss) per share – weighted-average number of common shares  outstanding          |       | 60,624                                     |       | 59,926                                    |       | 60,615 |   | 59,852 |   |
| Dilutive shares:                                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Restricted stock  units                                                                                                |       | 340                                        |       | 3⁄4                                    |       | 332 |   | 3⁄4 |   |
| Denominator for  diluted earnings (loss) per share – weighted-average number of common shares  outstanding        |       | 60,964                                     |       | 59,926                                    |       | 60,947 |   | 59,852 |   |
| Earnings (loss)  per share:                                                                                            |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                  |       | $                                          | 0.15       |                                      | $          | (0.61 | ) | $ | 0.33 |   | $ | (0.92 | ) |
| Diluted                                                                                                                |       | $                                          | 0.15       |                                      | $          | (0.61 | ) | $ | 0.33 |   | $ | (0.92 | ) |

 

9

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Options to purchase anaggregate of 1,709,778 and 2,724,223 shares of common stock were outstandingduring the three and nine months ended September 30, 2005 and 2004,respectively, but were not included in the computation of diluted earnings pershare because the options’ exercise prices were greater than the average marketprice of the Company’s common stock.  Inaddition, potential common shares relating to restricted stock and restrictedstock units for the three months ended September 30, 2005 and 2004 totaling728,706 and 552,960 shares, respectively, and nine months ended September 30,2005 and 2004 totaling 736,829 and 484,094 shares, respectively, wereantidilutive.  The calculation of dilutedearnings per share does not include the antidilutive effect of thesestock-based awards.

 

## **6.**             EMPLOYEE INCENTIVE PLANS

## ** **

Effective January 1,2003, the Company began to account for stock-based employee compensation inaccordance with the prospective method prescribed by SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure, an Amendment of FASBStatement No. 123.” Under this method, compensation expense is recognizedover the period that an employee provides service in exchange for the award, basedon the grant date fair value of stock options and restricted stock unitsgranted to employees on or after January 1, 2003.

 

Compensation expenseresulting from stock-based awards granted for the year ended December 31,2002 and prior years is accounted for under the intrinsic value-based methodprescribed by APB No. 25, “Accounting for Stock Issued to Employees,” aspermitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Inaccordance with APB No. 25, no compensation expense is recognized forstock options issued for years prior to fiscal 2003 that had no intrinsic valueon the date of grant. In addition, compensation expense was not recognized forthose stock options issued in connection with the Company’s acquisition of ROBBPECK McCOOEY Financial Services, Inc. (“RPM”) in March 2001. Suchoptions were treated as part of the purchase price of RPM in accordance withthe rules of purchase accounting.

 

Had the Companyrecognized compensation expense over the relevant service period under the fairvalue-based method of SFAS No. 123 with respect to stock options grantedfor the year ended December 31, 2002 and prior years, net income (loss) applicableto common stockholders would have been reduced, resulting in pro forma netincome (loss) applicable to common stockholders and earnings per share aspresented below:

 

10

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| ** **                                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(000’s  omitted, except per share data)**                                                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) applicable to common stockholders, as reported                                  |       | $                                          | 9,158      |                                      | $          | (36,604 | ) | $ | 20,146 |   | $ | (55,302 | ) |
| Add: Stock-based  compensation expense included in reported net income (loss) (net of tax  effect) |       | 188                                        |       | 420                                       |       | 1,192 |   | 1,584 |   |
| Less:  Stock-based compensation expense under SFAS 123 (net of tax effect)                         |       | (188                                       | )          | (1,672                                    | )          | (1,386 | ) | (5,704 | ) |
| Pro forma net  income (loss) applicable to common stockholders                                     |       | $                                          | 9,158      |                                      | $          | (37,856 | ) | $ | 19,952 |   | $ | (59,422 | ) |
|                                                                                               |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share, as reported                                                    |       | $                                          | 0.15       |                                      | $          | (0.61 | ) | $ | 0.33 |   | $ | (0.92 | ) |
| Pro forma  diluted earnings (loss) per share                                                       |       | $                                          | 0.15       |                                      | $          | (0.63 | ) | $ | 0.33 |   | $ | (0.99 | ) |

 

The effect of applyingSFAS No. 123 in the pro forma disclosure above may not be representativeof the potential effect stock-based compensation could have on net income infuture periods.

 

## **7.**             BUSINESS SEGMENTS

## ** **

Segment information ispresented in accordance with SFAS No. 131, “Disclosures About Segments ofan Enterprise and Related Information.” The Company’s business segments arebased on the nature of the financial services provided, their revenue sourceand the Company’s management organization.

 

The Company’s Specialistsegment operates as a specialist in equities, rights and ETFs listed on theNYSE, as a specialist in equities, options, ETFs and futures on severalexchanges,****and as a market-maker in ETFs, futuresand options on several exchanges. This segment also provides support servicesfor the NYSE specialist activities. The Specialist segment currently includesthe operations of LaBranche & Co. LLC, LSHI and its directsubsidiaries, LABDR and BV.

 

The Company’s Executionand Clearing segment provides securities execution, securities clearing andother related services to its own customers and customers of introducingbrokers. This segment also provides direct-access floor brokerage services toinstitutional customers. The Execution and Clearing segment currently includesthe operations of LFSI.

 

Revenues and expensesdirectly associated with each segment are included in determining its operatingresults. Other expenses, including corporate overhead, which are not directlyattributable to a particular segment, generally are allocated to each segmentbased on its resource usage levels or other appropriate measures. Interest withrespect to the Company’s $473.4 million aggregate principal amount of senior notesand senior 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):

 

11

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| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                       | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Specialist Segment:**                           | ** ** | ** **                                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                          |       | $                                              | 71,877     |                                      | $          | 53,532 |   | $ | 192,448 |   | $ | 174,305 |   |
| Operating expenses                                |       | 44,311                                         |       | 33,324                                    |       | 114,117 |   | 98,537 |   |
| Goodwill impairment                               |       | 3⁄4                                         |       | 37,600                                    |       | 3⁄4 |   | 37,600 |   |
| Exchange memberships impairment                   |       | 3⁄4                                         |       | 3⁄4                                    |       | 3⁄4 |   | 16,300 |   |
| Depreciation and amortization of intangibles      |       | 2,868                                          |       | 2,916                                     |       | 8,675 |   | 8,728 |   |
| Income (loss) before minority  interest and taxes |       | 24,698                                         |       | (20,308                                   | )          | 69,656 |   | 13,140 |   |
| Segment goodwill                                  |       | 250,569                                        |       | 251,993                                   |       | 250,569 |   | 251,993 |   |
| Segment assets                                    |       | $                                              | 3,548,010  |                                      | $          | 2,020,902 |   | $ | 3,548,010 |   | $ | 2,020,902 |   |
|                                              |       |                                           |       |                                      |       |   |   |   |   |
| **Execution and Clearing Segment:**               |       |                                           |       |                                      |       |   |   |   |   |
| Revenues                                          |       | $                                              | 10,035     |                                      | $          | 10,594 |   | $ | 33,022 |   | $ | 35,405 |   |
| Operating expenses                                |       | 10,484                                         |       | 11,892                                    |       | 34,845 |   | 39,319 |   |
| Exchange memberships impairment                   |       | 3⁄4                                         |       | 3⁄4                                    |       | 3⁄4 |   | 2,027 |   |
| Depreciation and amortization of intangibles      |       | 108                                            |       | 115                                       |       | 331 |   | 359 |   |
| Loss before minority interest  and taxes          |       | (557                                           | )          | (1,413                                    | )          | (2,154 | ) | (6,300 | ) |
| Segment assets                                    |       | $                                              | 59,058     |                                      | $          | 53,897 |   | $ | 59,058 |   | $ | 53,897 |   |
|                                              |       |                                           |       |                                      |       |   |   |   |   |
| **Other****(1):**                                 |       |                                           |       |                                      |       |   |   |   |   |
| Revenues                                          |       | $                                              | 1,819      |                                      | $          | 534 |   | $ | 3,309 |   | $ | 25,565 |   |
| Operating expenses                                |       | 15,178                                         |       | 16,621                                    |       | 46,241 |   | 52,778 |   |
| Debt repurchase premium                           |       | 3⁄4                                         |       | 3⁄4                                    |       | 3⁄4 |   | 49,028 |   |
| Depreciation and amortization of intangibles      |       | 32                                             |       | 26                                        |       | 94 |   | 75 |   |
| Loss before minority interest  and taxes          |       | (13,391                                        | )          | (16,113                                   | )          | (43,026 | ) | (76,316 | ) |
| Segment assets                                    |       | $                                              | 153,252    |                                      | $          | 147,677 |   | $ | 153,252 |   | $ | 147,677 |   |
|                                              |       |                                           |       |                                      |       |   |   |   |   |
| **Total:**                                        |       |                                           |       |                                      |       |   |   |   |   |
| Revenues                                          |       | $                                              | 83,731     |                                      | $          | 64,660 |   | $ | 228,779 |   | $ | 235,275 |   |
| Operating expenses                                |       | 69,973                                         |       | 61,837                                    |       | 195,203 |   | 190,634 |   |
| Goodwill impairment                               |       | 3⁄4                                         |       | 37,600                                    |       | 3⁄4 |   | 37,600 |   |
| Exchange memberships impairment                   |       | 3⁄4                                         |       | 3⁄4                                    |       | 3⁄4 |   | 18,327 |   |
| Debt repurchase premium                           |       | 3⁄4                                         |       | 3⁄4                                    |       | 3⁄4 |   | 49,028 |   |
| Depreciation and amortization of intangibles      |       | 3,008                                          |       | 3,057                                     |       | 9,100 |   | 9,162 |   |
| Income (loss) before minority  interest and taxes |       | 10,750                                         |       | (37,834                                   | )          | 24,476 |   | (69,476 | ) |
| Goodwill                                          |       | 250,569                                        |       | 251,993                                   |       | 250,569 |   | 251,993 |   |
| Assets                                            |       | $                                              | 3,760,320  |                                      | $          | 2,222,476 |   | $ | 3,760,320 |   | $ | 2,222,476 |   |

 

----

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

 

## **8.**             CONTINGENCIES

## ** **

There have been no material new developments in theCompany’s legal proceedings since the filing of the Company’s Form 10-Qfor the quarter ended June 30, 2005, filed August

 

12

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9, 2005 (the “Second Quarter 10-Q”), which updatedthe legal proceedings disclosed in the 2004 10-K and the Company’s Form 10-Qfor the quarter ended March 31, 2005, filed May 10, 2005 (the “FirstQuarter 10-Q”) except as follows:

 

LastAtlantis/Rule/Martin.  On October 4, 2005, the court in theLast Atlantis action granted the plaintiffs’ motion for leave to file a secondamended complaint and to join Bryan Rule and River North Investors LLC asplaintiffs.  On October 5, 2005, thesecond amended complaint was filed.

 

OnSeptember 28, 2005, Bryan Rule and River North Investors LLC, who, asstated above, now are plaintiffs in the Last Atlantis action, commenced anaction in the United States District Court for the Northern District ofIllinois, Rule et al. v. Chicago Board Options Exchange, Inc., etal., No. 05 C 5600.  The complaintin this action is substantially similar to the second amended complaint in theLast Atlantis action, making substantially the same allegations and seeking thesame relief against the same defendants, including the Company and LSP, exceptthat the complaint in this action also asserts a federal antitrust law claim (Section 1of the Sherman Act).

 

On September 30, 2005,Brad Martin commenced an action in the United States District Court for theNorthern District of Illinois, Martin v. Chicago Board Options Exchange, Inc.,et al., No. 05 C 5671.  Thecomplaint in this action is substantially similar to the second amendedcomplaint in the Last Atlantis action and the complaint in the Rule action,making substantially the same allegations and seeking the same relief againstthe same defendants, including the Company and LSP, except that the complaintin this action, like the complaint in the Rule action, also asserts afederal antitrust law claim (Section 1 of the Sherman Act).  To the Company’s knowledge, neither theCompany nor LSP has been served with the complaint in this action.

 

EEOC Claim.  On September 27,2005, the Equal Employment Opportunity Commission (the “EEOC”) commenced anaction in the United States District Court for the Southern District of NewYork, EEOC v. LaBranche & Co Inc., No. 05 CV 8304, on behalf of aformer employee of LaBranche.  Thecomplaint in this action alleges that the Company harassed and discriminatedagainst the employee on the basis of a disability, retaliated against him forcomplaining about the alleged harassment and constructively discharged him.  The complaint seeks injunctive relief andmonetary damages, including reinstatement, back pay and front pay.

 

The Company believes thatthe claims asserted against it by the plaintiffs in the pending proceedingsdescribed in the 2004 10-K, the First Quarter 10-Q, the Second Quarter 10-Q andabove are without merit, and the Company denies all allegations ofwrongdoing.  There can be no assurance,however, as to the outcome or timing of the resolution of theseproceedings.  The Company therefore isunable to estimate the amount or potential range of any loss that may arise outof 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.

 

13

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## **In addition to the proceedingsdescribed in the 2004 10-K, the First Quarter 10-Q, Second Quarter 10-Q, andabove, the Company and its operating subsidiaries have been the target, fromtime to time, of various claims, lawsuits and regulatory inquiries in theordinary course of their respective businesses. While the ultimate outcome ofthose claims and lawsuits which currently are pending cannot be predicted withcertainty, the Company believes, based on its understanding of the facts ofthese proceedings, that their ultimate resolution will not, in the aggregate,have a material adverse effect on the Company’s financial condition, results ofoperations or cash flows**

## ** **

## **9.**             SUBSEQUENT EVENTS.

## ** **

Inconnection with the sale of its investment****in LavaTrading, Inc. as part of an acquisition of Lava in August 2004, the Companyreceived cash of approximately $39.0 million at the closing. Additionalconsideration of approximately $9.6 million was deposited in escrow to securethe Company’s indemnification obligations as a selling stockholder of Lavauntil November 2, 2005.  This escrowfund was released on October 31, 2005 and the Company receivedapproximately $9.6 million at that time.

 

14

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## **Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

## ** **

*Unlessthe context otherwise requires, the “Company,” “we” or “us” shall meanLaBranche & Co Inc. and subsidiaries.*

* *

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2004 (the “2004 10-K”) and ourCondensed Consolidated Financial Statements and the Notes thereto contained inthis report.*

* *

***ExecutiveOverview***

* *

*Our netincome available to common stockholders was $9.2 million, or $0.15 per dilutedshare, for the third quarter of 2005, compared to a net loss applicable tocommon stockholders of $36.6 million, or $0.61 per diluted share, for the sameperiod last year. Our 2005 third quarter results include a tax benefit of $3.0 million,or $0.05 per diluted share, relating to a reduction in our income tax rate andthe reduction of tax liabilities due to the close of a prior federal tax year. The2004 third quarter results, however, included a non-cash pre-tax goodwillimpairment charge of $37.6 million, and a $0.5 million after-tax charge due tothe acceleration of the discount accretion with respect to the remaining sharesof Series B Preferred Stock that we repurchased during the third quarter2004.  Our 2005 third quarter results reflectincreased principal trading revenues from higher share volumes and dollar valuetraded of our NYSE-listed company stocks, continued improvement of our specialistand market making trading activities and higher interest income from increasesin interest rates, our trading activity and our cash balances.*

* *

*Our netincome available to common stockholders for the nine months ended September 30,2005 was $20.1 million, or $0.33 per diluted share, which includes an aggregatetax benefit for the period of $6.4 million, or $0.11 per diluted share,relating to the income tax rate change and the close of a prior tax year describedabove.  Our net loss applicable to commonstockholders for the nine months ended September 30, 2004 of $55.3 million,or $0.92 per diluted share, include the above-mentioned goodwill impairment andpreferred stock discount charges, as well as a $55.9 million charge inconnection with the May 2004 refinancing of our indebtedness, a non-cashcharge of $18.3 million in connection with the impairment of our exchangememberships, and a $24.9 million appreciation in the fair value of aninvestment. Our results for the first nine months of 2005, as compared to thesame period of 2004, reflect an increase in our net gain on principaltransactions, primarily from our specialist and market maker trading activity.*

* *

*Notwithstandingthe announcement of the planned merger between the NYSE and ArchipelagoHoldings, Inc. (currently expected to be consummated in the first half of 2006),SEC approval of Regulation NMS and the NYSE’s hybrid model initiatives, therehave still been no substantive changes to NYSE market structure or the role ofthe specialist. Currently, there is only speculation as to how the NYSEspecialists will interact with the general marketplace while trading in theirlisted company stocks on the floor of the NYSE after the planned merger isconsummated, but we expect that the specialist will continue to be an*

 

15

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*integralpart of the NYSE market structure. It is also our understanding that the NYSEwill continue to operate as a separate operating company following themerger.  The NYSE and its senior executivesalso have confirmed that the specialists will continue to be an integral partof the market model of the separate NYSE operating company.*

* *

*Wecontinue to expand our product offerings in our specialist segment by not onlyincreasing our participation as a specialist in U.S. listed ETFs, but byseeking to expand our operations outside the United States.  We believe that these efforts will furtherdiversify our product offerings and revenue streams, while maintaining ourbusiness focus and strategy on the activities we do best—being a specialist andmarket-maker in exchange-traded securities and other products.*

* *

*Wecontinue to focus our strategic initiatives on developing the best possibletechnology to address the needs of investors within the NYSE’s current andfuture market structure and, in particular, the delivery of orders to the pointof sale.  Despite the current migrationto an expanded electronic trading platform, equity exchanges aim to offerinvestors quality of execution and best price. We believe that this service canbest be delivered by specialists who effectively manage market imbalances instock prices of, and provide liquidity to, NYSE-listed companies.*

* *

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

 

**NewAccounting Developments**

 

In December 2004,the FASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation,” SFAS No. 123(R), “Share Based Payment.” SFAS No. 123(R)will require compensation costs related to share-based payment transactions tobe recognized in the financial statements over the period that an employeeprovides service in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” Effective April 15, 2005, the SEC issued final rule No. 33-8568,which amended the date for compliance with SFAS No. 123(R) for registrantsthat do not file as small business issuers to the first interim or annualreporting period of the registrant’s fiscal year beginning on or after June 15,2005, which for us is January 1, 2006. We do not expect the adoption ofSFAS No. 123(R) to have a material impact on our financial condition or resultsof operations.

 

**CriticalAccounting Estimates**

 

*Goodwilland Other Intangible Assets*

 

We determine the fairvalue of each of our reporting units and the fair value of each reporting unit’sgoodwill under the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets.”  In determining fair value, we use standardanalytical approaches to business enterprise valuation (“BEV”), such as themarket comparable approach and the income approach. The market comparableapproach is based on comparisons of the subject company to similar companiesengaged in an actual merger or 

 

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acquisition or to public companies whose stocks areactively traded.  As part of thisprocess, multiples of value relative to financial variables, such as earningsor stockholders’ equity, are developed and applied to the appropriate financialvariables of the subject company to indicate its value.  The income approach involves estimating thepresent value of the subject company’s future cash flows by using projectionsof the cash flows that the business is expected to generate, and discountingthese cash flows at a given rate of return. Each of these BEV methodologiesrequires the use of management estimates and assumptions. For example, underthe market comparable approach, we assign a certain control premium to thepublic market price of our common stock as of the valuation date in estimatingthe fair value of our specialist reporting unit.  Similarly, under the income approach, weassume certain growth rates for our revenues, expenses, earnings beforeinterest, income taxes, depreciation and amortization, returns on workingcapital, returns on other assets and capital expenditures, among others.  We also assume certain discount rates andcertain terminal growth rates in our calculations.  Given the subjectivity involved in selectingwhich BEV approach to use and in determining the input variables for use in ouranalyses, it is possible that a different valuation model and the selection ofdifferent input variables could produce a materially different estimate of fairvalue of our goodwill.

 

We review thereasonableness of the carrying value of our goodwill annually as of December 31,unless an event or change in circumstances requires an interim reassessment ofimpairment. During the nine months ended September 30, 2005, there were nochanges in circumstances that necessitated goodwill impairment testing. Wecannot provide assurance that future goodwill impairment testing will notresult in impairment charges in subsequent periods.

 

Our other intangibleasset, as defined under SFAS No. 142, is our trade name. We determine thefair value of our trade name by applying the income approach using the royaltysavings methodology. This method assumes that the trade name has value to theextent we are relieved of the obligation to pay royalties for the benefitsreceived from it.  Application of thismethodology requires estimating an appropriate royalty rate, which is typicallyexpressed as a percentage of revenue. Estimating an appropriate royalty rateincludes reviewing evidence from comparable licensing agreements andconsidering qualitative factors affecting the trade name. Given thesubjectivity involved in selecting which BEV approach to use and in determiningthe input variables for use in our analyses, it is possible that a differentvaluation model and the selection of different input variables could produce amaterially different estimate of fair value of our trade name.

 

We review thereasonableness of the carrying amount of our trade name on an annual basis inconjunction with our goodwill impairment assessment. We cannot provideassurance that future trade name impairment testing will not result inimpairment charges in subsequent periods.

 

*ExchangeMemberships*

 

The determination of thefair value of our exchange memberships is a critical accounting estimate.Exchange memberships owned by us are originally carried at cost, pursuant tothe American Institute of Certified Public Accountants (“AICPA”) *Audit and Accounting Guide—Brokers and Dealers in Securities*.  Adjustments to carrying value are 

 

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made if we deem that an “other-than-temporary” declinein value, as defined in (a) Emerging Issues Task Force (“EITF”) Issue No. 03-1,*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments,*and (b) Section M of Topic 5 of theSEC staff accounting bulletin series (“SAB No. 59”), has occurred. In determining whether thevalue of our owned exchange memberships is impaired (*i.e*.,fair market value is below cost) and whether such impairment is temporary orother-than-temporary, we consider many factors, including, but not limited to,information regarding recent sale and lease prices of exchange memberships,historical trends of sale and lease prices of memberships on a particularexchange and their duration, the current condition of the particular exchange’smarket structure, legal and regulatory developments affecting the particularexchange’s market structure and earnings capability, trends in new listings onthe particular exchange, general global and national economic factors and ourknowledge and judgment of the specialist and execution and clearing industriesand the securities market as a whole. As a result of our analysis of the above-mentionedfactors for the nine months ended September 30, 2005, we believe thecarrying values of our owned exchange memberships were not impaired.

 

We cannot provideassurance that the consistent application of this accounting policy to futurereporting periods will not result in further adjustments to the carrying valueof our exchange memberships.

 

**Restructuring of Our LaBranche Structured Products-RelatedSubsidiaries**

 

In August 2005, we formed a new wholly-owned subsidiary, LaBranche Structured Holdings, Inc. (“LSHI”), as a holding company to own all our LaBranche Structured Products-affiliated entities.  Pursuant to a contribution agreement among LSP,LSPS, LSHI and LaBranche & Co Inc, effective August 20, 2005, LSHI became the sole member of LSP,and, effective September 9, 2005, LSHI became the sole member of LSPS. Also effective August 20, 2005, LSHI became the sole stockholder of LSPE, which previously had been wholly-owned by LSP, pursuant to a distribution agreement between LSHI and LSP.  Other than these restructuring transactions, the structure and operations of each of LSP, LSPS and LSPE have not changed. On August 25, 2005, we formed LaBranche Structured Products Hong Kong Limited, a Hong Kong single member private company (“LSPH”) to operate as a market-maker in ETFs and engage in hedging transactions in Asia.  LSHI became the sole stockholder of LSPH in October 2005. LSPE and LSPH are in the process of registering as broker-dealers with London’s FSA and Hong Kong’s Securities and Futures Commission, respectively.

 

**Completed Senior Note Repurchase; Release of Lava Escrow**

 

Inconnection with the sale of our interest in Lava Trading Inc. (“Lava”) as partof an acquisition of Lava in August 2004, we received cash ofapproximately $39.0 million at the closing. Additional consideration ofapproximately $9.6 million was deposited in escrow to secure our indemnificationobligations as a selling stockholder of Lava until November 2, 2005. Underthe terms of the indenture governing our outstanding 9.5% Senior Notes due 2009and our outstanding 11.0% Senior Notes due 2012 (collectively, the “outstandingsenior notes”), by the 361st day following the closing of the Lavaacquisition, we were required to offer to purchase outstanding senior notes inan aggregate principal amount equal to the after-tax proceeds on the sale ofour interest in Lava received in August 2004, at a price equal to 

 

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100.0%of the principal amount of such outstanding senior notes.  Therefore, on July 29, 2005, wecommenced an offer to purchase outstanding senior notes in the aggregateprincipal amount of up to approximately $18.2 million. This excess proceedsoffer expired on August 25, 2005, with $63,000 principal amount havingbeen tendered.  Following the closing ofthis transaction, approximately $199.8 aggregate principal amount of our SeniorNotes due 2009 remained outstanding and approximately $260.0 aggregateprincipal amount of our Senior Notes due 2012 remained outstanding.

 

OnOctober 31, 2005, the escrow in connection with the Lava transaction wasterminated and we received approximately $9.6 million as additionalconsideration in connection with the Lava transaction. Therefore, under theindenture governing the outstanding senior notes we will again be required tooffer to purchase our outstanding senior notes in an aggregate principal amountequal to the after-tax proceeds of this $9.6 million on or prior to the 361stday following October 31, 2005.

 

**Results of Operations**

** **

# **SpecialistSegment Operating Results**

 
| ** **                                | ** ** | **For the Three   Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** | **Three  Months 2005  vs. 2004  Percentage** | ** ** | **Nine Months  2005 vs. 2004  Percentage** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| **(000’s  omitted)**                 | ** ** | **2005**                                             | ** ** | **2004**                                           | ** ** | **2005**                                     | ** ** | **2004**                                   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                      |       |                                                 |       |                                               |       |                                         |       |                                       |       |   |   |   |   |
| Revenues:                                 |       |                                                 |       |                                               |       |                                         |       |                                       |       |   |   |   |   |
| Net gain on principal transactions        |       | $                                                    | 47,212     |                                               | $          | 38,997                                       |       | 135,124                                    |       | $ | 131,740 |   | 21.1 | % | 2.6 | % |
| Commissions                               |       | 10,313                                               |       | 11,612                                             |       | 32,465                                       |       | 36,430                                     |       | (11.2 | ) | (10.9 | ) |
| Interest                                  |       | 13,418                                               |       | 2,338                                              |       | 25,109                                       |       | 5,238                                      |       | 473.9 |   | 379.3 |   |
| Other                                     |       | 934                                                  |       | 585                                                |       | (250                                         | )          | 897                                        |       | 59.7 |   | (127.8 | ) |
|                                      |       |                                                 |       |                                               |       |                                         |       |                                       |       |   |   |   |   |
| Total segment  revenues                   |       | 71,877                                               |       | 53,532                                             |       | 192,448                                      |       | 174,305                                    |       | 34.3 |   | 10.4 |   |
|                                      |       |                                                 |       |                                               |       |                                         |       |                                       |       |   |   |   |   |
| Goodwill impairment                       |       | 3⁄4                                               |       | 37,600                                             |       | 3⁄4                                       |       | 37,600                                     |       | (100.0 | ) | (100.0 | ) |
| Exchange memberships impairment           |       | 3⁄4                                               |       | 3⁄4                                             |       | 3⁄4                                       |       | 16,300                                     |       | 3⁄4 |   | (100.0 | ) |
| Operating expenses                        |       | 47,179                                               |       | 36,240                                             |       | 122,792                                      |       | 107,265                                    |       | 30.2 |   | 14.5 |   |
|                                      |       |                                                 |       |                                               |       |                                         |       |                                       |       |   |   |   |   |
| Income before minority interest and taxes |       | $                                                    | 24,698     |                                               | $          | (20,308                                      | )          | $                                          | 69,656     |   | $ | 13,140 |   | 221.6 |   | 430.1 |   |
|                                           |            |                                                      |            |                                                    |            |                                              |            |                                            |            |  |  |  |  |  |  |  |  |

 

Revenues from ourSpecialist segment consist primarily of net gain earned from principaltransactions in securities for which we act as specialist and market-maker. Netgain on principal transactions represents trading gains, net of trading lossesand SEC transaction fees, where applicable, and are earned by us when we act asprincipal buying and selling our specialist stocks, rights, options, ETFs andfutures. Also included in net gain on principal transactions are (a) netgains and losses resulting from our market-making activities in ETFs, optionsand futures, (b) net gains and losses resulting from trading of foreigncurrencies, futures, equities and fixed income instruments underlying therights, ETFs and options for which we act as specialist or market-maker, (c) accrueddividends receivable or payable on our equity positions and (d) accruedinterest receivable/payable on our fixed income positions. These revenues areprimarily affected by changes in share volume traded and fluctuations in 

 

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the prices of stocks, rights, options, ETFs andfutures in which we are the specialist or in which we make a market.

 

Commissions revenueconsists primarily of fees earned when our specialists act as agents byexecuting, after a specified period of time, limit orders in equities on behalfof brokers, professional traders and broker-dealers. We do not earn commissionswhen we match market orders or when we act as a market-maker.

 

Interest income consistsof rebate income earned on stock borrow transactions, and interest incomeearned on cash balances and short term investments.

 

Other revenue at ourSpecialist segment consists primarily of proprietary trading gains or losses,and gains or losses from an investment in a hedge fund.

 

***KeyMetrics of our NYSE Equity Specialist Business—***When assessing the performance andfinancial results of a specific period, management examines certain metrics toascertain their impact on our NYSE equity specialist’s financial results. Someof the key metrics that we review, and their values for the three and nine monthperiods ended September 30, 2005 and 2004, are as follows:

 
| ** **                                                                           | ** ** | **For the Three   Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** | **Three Months  2005 vs. 2004  Percentage** | ** ** | **Nine Months  2005 vs. 2004  Percentage** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                             | ** ** | **2004**                                           | ** ** | **2005**                                    | ** ** | **2004**                                   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                                                 |       |                                                 |       |                                               |       |                                        |       |                                       |       |   |   |   |   |
| NYSE average  daily share volume (in millions)                                       |       | 1,532.4                                              |       | 1,326.6                                            |       | 1,576.1                                     |       | 1,440.8                                    |       | 15.5 | % | 9.4 | % |
| LAB share volume  on the NYSE (in billions)                                          |       | 24.7                                                 |       | 22.1                                               |       | 74.6                                        |       | 71.3                                       |       | 11.8 |   | 4.6 |   |
| LAB dollar value  on the NYSE (in billions)                                          |       | $                                                    | 821.8      |                                               | $          | 636.3                                       |       | $                                          | 2,439.5    |   | $ | 2,076.0 |   | 29.2 |   | 17.5 |   |
| Share volume of  principal shares traded (in billions)                               |       | 4.6                                                  |       | 4.9                                                |       | 14.6                                        |       | 16.8                                       |       | (6.1 | ) | (13.1 | ) |
| Dollar value of  principal shares traded (in billions)                               |       | $                                                    | 167.4      |                                               | $          | 148.6                                       |       | $                                          | 510.4      |   | $ | 512.9 |   | 12.7 |   | (0.5 | ) |
| Average closing  price of the CBOE Volatility Index                                  |       | 12.3                                                 |       | 15.4                                               |       | 12.8                                        |       | 16.1                                       |       | (20.1 | ) | (20.5 | ) |
| Program trading  as an approximate percentage of NYSE average daily share volume (1) |       | 55.9                                                 | %          | 54.0                                               | %          | 56.8                                        | %          | 49.5                                       | %          | 1.9 | (2) | 7.3 | (2) |

 

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

 

(2)   Changerepresents percentage points.

 

Generally, an increase inthe average daily share volume on the NYSE, an increase in volatility (asmeasured by the average closing price of the Chicago Board of Options Exchange’sVolatility Index®, or the “VIX”), an increase in the dollar value and sharevolume 

 

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of stocks in which specialists trade, or a decline inthe level of program trading enables the specialist to increase its level ofprincipal trading participation and thus its ability to realize gains onprincipal transactions. While we monitor these metrics each period, they arenot the sole indicators or factors that determine our level of revenues,profitability or overall performance in any given period. Other factors, suchas extreme price movements, unanticipated listed company news and events andother uncertainties may influence our financial performance either positivelyor negatively.

 

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

## ** **

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

 

Commissionrevenue during the third quarter of 2005 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, there was anincrease in program trading, which resulted in fewer opportunities toparticipate in block trades.

 

Theincrease in interest income was attributable primarily to an increase ininterest income on our stock borrow transactions and higher interest income onshort term investments. Stock-borrow rebate income was higher due primarily toincreased stock borrow positions and higher interest rates during the 2005 thirdquarter, as compared to the 2004 third quarter. Interest income on our short-terminvestments increased due to higher interest rates during the three monthsended September 30, 2005 as compared to the same period in 2004, as wellas increases in excess cash balances.

 

## **Nine Months Ended September 30,2005 versus September 30, 2004**

## ** **

Theincrease in our net gain on principal transactions is primarily due to anincrease in revenues from our ETF, option and future specialist and marketmaking revenues due to an increase in the number and diversity of derivativeproducts we trade, as well as the size of our positions in these products.Partially offsetting these increases was a decrease in our equity specialistprincipal trading revenue for the nine months ended September 30, 2005 ascompared to the same period in 2004, which was primarily attributable toreduced opportunities for our NYSE specialists to participate in trades asprincipal during the first quarter of 2005.  These reduced opportunities were a reflectionof lower volatility and higher levels of program trading.

 

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Commissionrevenue during the nine months ended September 30, 2005 decreased as aresult of a decrease in share volume of transactions with respect to which aspecialist commission may be charged. Despite the increase in share volume on the NYSE and in our NYSEspecialist stocks, there was an increase in program trading, which resulted infewer opportunities to participate in block trades.

 

Theincrease in interest income was attributable primarily to an increase ininterest income on our stock borrow transactions and higher interest income onshort term investments. Stock-borrow rebate income was higher due primarily toincreased stock borrow positions and higher interest rates during the ninemonths ended September 30, 2005, as compared to the same period in 2004.Interest income on our short term investments increased due to higher interestrates during the nine months ended September 30, 2005 as compared to thesame period in 2004, as well as increases in excess cash balances.

 

For a discussion of operatingexpenses, see “Our Operating Expenses” below.

 

# **Execution andClearing Segment Operating Results**

 
| ** **                              | ** ** | **For the Three  Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** | **Three  Months  2005 vs.  2004  Percentage** | ** ** | **Nine Months  2005 vs. 2004  Percentage** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| **(000’s  omitted)**               | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005**                                      | ** ** | **2004**                                   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                    |       |                                                |       |                                               |       |                                          |       |                                       |       |   |   |   |   |
| Revenues:                               |       |                                                |       |                                               |       |                                          |       |                                       |       |   |   |   |   |
| Commissions                             |       | $                                                   | 9,810      |                                               | $          | 10,452                                        |       | 32,411                                     |       | $ | 34,881 |   | (6.1 | )% | (7.1 | )% |
| Interest                                |       | 212                                                 |       | 133                                                |       | 535                                           |       | 340                                        |       | 59.4 |   | 57.4 |   |
| Other                                   |       | 13                                                  |       | 9                                                  |       | 76                                            |       | 184                                        |       | 44.4 |   | (58.7 | ) |
| Total segment  revenues                 |       | 10,035                                              |       | 10,594                                             |       | 33,022                                        |       | 35,405                                     |       | (5.3 | ) | (6.7 | ) |
|                                    |       |                                                |       |                                               |       |                                          |       |                                       |       |   |   |   |   |
| Exchange  memberships impairment        |       | 3⁄4                                              |       | 3⁄4                                             |       | 3⁄4                                        |       | 2,027                                      |       | 3⁄4 |   | (100.0 | ) |
| Operating  expenses                     |       | 10,592                                              |       | 12,007                                             |       | 35,176                                        |       | 39,678                                     |       | (11.8 | ) | (11.3 | ) |
|                                    |       |                                                |       |                                               |       |                                          |       |                                       |       |   |   |   |   |
| Loss before minority interest and taxes |       | $                                                   | (557       | )                                                  | $          | (1,413                                        | )          | $                                          | (2,154     | ) | $ | (6,300 | ) | 60.6 |   | 65.8 |   |
|                                         |            |                                                     |            |                                                    |            |                                               |            |                                            |            |  |  |  |  |  |  |  |  |

 

Our Execution andClearing segment’s commissions revenue includes fees charged to customers forexecution, clearance and direct-access floor brokerage services and net gains fromriskless principal transactions.

 

Our Execution andClearing segment’s interest consist of interest income earned on customermargin balances, short term U.S. Treasury Bill investments and stock-borrowtransactions.

 

Other revenues consistprimarily of realized trading errors.

 

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

## ** **

Commissionrevenues decreased as a result of a decline in direct-access floor broker orderflow and reduced trade volume from clearance customers. This decline waspartially 

 

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offsetby an increase in revenues from our institutional execution group as a resultof general growth and expansion of its customer base.

 

## **Nine Months Ended September 30,2005 versus September 30, 2004**

## ** **

Commissionrevenues decreased as a result of a decline in direct-access floor broker orderflow and reduced trade volume from clearance customers. This decline waspartially offset by an increase in revenues from our institutional executiongroup as a result of general growth and expansion of its customer base.

 

For a discussion ofoperating expenses, see “Our Operating Expenses” below.

 

# **Other SegmentOperating Results**

 
| ** **                              | ** ** | **For the Three Months   Ended September 30,** | ** ** | **For the Nine Months   Ended September 30,** | ** ** | **Three Months  2005 vs. 2004  Percentage** | ** ** | **Nine Months  2005 vs. 2004  Percentage** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| **(000’s  omitted)**               | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005**                                    | ** ** | **2004**                                   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                    |       |                                                |       |                                               |       |                                        |       |                                       |       |   |   |   |   |
| Interest                                |       | $                                                   | 885        |                                               | $          | 240                                         |       | $                                          | 2,108      |   | $ | 920 |   | 268.8 | % | 129.1 | % |
| Other revenue                           |       | 934                                                 |       | 294                                                |       | 1,201                                       |       | 24,645                                     |       | 217.7 |   | (95.1 | ) |
| Total segment  revenues                 |       | 1,819                                               |       | 534                                                |       | 3,309                                       |       | 25,565                                     |       | 240.6 |   | (87.1 | ) |
|                                    |       |                                                |       |                                               |       |                                        |       |                                       |       |   |   |   |   |
| Debt repurchase  premium                |       | 3⁄4                                              |       | 3⁄4                                             |       | 3⁄4                                      |       | 49,028                                     |       | 3⁄4 |   | (100.0 | ) |
| Operating  expenses                     |       | 15,210                                              |       | 16,647                                             |       | 46,335                                      |       | 52,853                                     |       | (8.6 | ) | (12.3 | ) |
|                                    |       |                                                |       |                                               |       |                                        |       |                                       |       |   |   |   |   |
| Loss before minority interest and taxes |       | $                                                   | (13,391    | )                                                  | $          | (16,113                                     | )          | $                                          | (43,026    | ) | $ | (76,316 | ) | 16.9 |   | 43.6 |   |

 

The portion of ourrevenues that is not generated from our two principal business segmentsconsists primarily of interest income earned on cash balances and net gains orlosses from non-marketable investments.

 

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

## ** **

Theincrease in interest income is a reflection of higher interest rates and anincrease in excess cash balances for the three months ended September 30,2005 as compared to the same period in 2004.

 

Otherrevenue increased primarily as a result of the appreciation in the fair value ofour non-marketable investments

 

For a discussion ofoperating expenses, see “Our Operating Expenses” below.

 

## **Nine Months Ended September 30,2005 versus September 30, 2004**

## ** **

Theincrease in interest income is a reflection of higher interest rates and anincrease in excess cash balances for the nine months ended September 30,2005, as compared to the same period in 2004.

 

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Other revenue decreasedprimarily as a result of the $24.9 million appreciation in fair value of ourinvestment in Lava during the second and third quarter of 2004.  Partially offsetting this decrease was anincrease in our short-term interest income for the nine months ended September 30,2005 as compared to the same period in 2004, due to higher interest rates andexcess cash balances.

 

# **Our OperatingExpenses**

 
| ** **                                         | ** ** | **For the Three  Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** | **Three  months  2005 vs.  2004  Percentage** | ** ** | **Nine  months  2005 vs.  2004  Percentage** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **(000’s  omitted)**                          | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005**                                      | ** ** | **2004**                                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** **                                    | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expenses:                                          |       |                                                |       |                                               |       |                                          |       |                                         |       |   |   |   |   |
| Employee  compensation and related benefits        |       | $                                                   | 25,747     |                                               | $          | 21,985                                        |       | $                                            | 72,527     |   | $ | 72,421 |   | 17.1 | % | 0.1 | % |
| Interest                                           |       | 23,285                                              |       | 16,006                                             |       | 58,649                                        |       | 47,700                                       |       | 45.5 |   | 23.0 |   |
| Exchange,  clearing and brokerage fees             |       | 10,559                                              |       | 10,101                                             |       | 30,445                                        |       | 28,684                                       |       | 4.5 |   | 6.1 |   |
| Lease of  exchange memberships                     |       | 1,008                                               |       | 3,804                                              |       | 3,003                                         |       | 11,902                                       |       | (73.5 | ) | (74.8 | ) |
| Goodwill  impairment                               |       | 3⁄4                                              |       | 37,600                                             |       | 3⁄4                                        |       | 37,600                                       |       | (100.0 | ) | (100.0 | ) |
| Exchange  memberships impairment                   |       | 3⁄4                                              |       | 3⁄4                                             |       | 3⁄4                                        |       | 18,327                                       |       | 3⁄4 |   | (100.0 | ) |
| Debt repurchase  premium                           |       | 3⁄4                                              |       | 3⁄4                                             |       | 3⁄4                                        |       | 49,028                                       |       | 3⁄4 |   | (100.0 | ) |
| Other                                              |       | 12,382                                              |       | 12,998                                             |       | 39,679                                        |       | 39,089                                       |       | (4.7 | ) | 1.5 |   |
|                                               |       |                                                |       |                                               |       |                                          |       |                                         |       |   |   |   |   |
| Total expenses  before minority interest and taxes |       | 72,981                                              |       | 102,494                                            |       | 204,303                                       |       | 304,751                                      |       | (28.8 | ) | (33.0 | ) |
|                                               |       |                                                |       |                                               |       |                                          |       |                                         |       |   |   |   |   |
| Provision (benefit) for income taxes               |       | $                                                   | 1,592      |                                               | $          | (1,533                                        | )          | $                                            | 4,330      |   | $ | (16,958 | ) | 203.8 |   | 125.5 |   |

 

Our Specialist segment’semployee compensation and related benefits expense consists of salaries, wagesand performance-based compensation paid to our traders and related supportstaff. 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 as incentive-basedcompensation paid to various trading professionals, which is based on theirearned commissions. Performance-based compensation may include cashcompensation and stock-based compensation granted to managing directors,trading professionals and other employees based on our operating results.

 

Interest expense is attributableprimarily to our outstanding 9.5% $199.8 million aggregate principalamount of Senior Notes due 2009 and 11.0% $260.0 million aggregate principalamount of Senior Notes due 2012. Interest expense at our Specialist segment consists mainlyof margin interest on derivatives trading positions and interest on subordinatedindebtedness. Customers’ free credit balances, bank loans and stock loansgenerate interest expense at our Execution and Clearing segment.

 

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Exchange, clearing andbrokerage fees expense at our Specialist segment consists of fees paid by us tothe NYSE, AMEX, other exchanges, the Depository Trust Clearing Corporation (“DTCC”)and third-party execution and clearing companies. These fees are basedprimarily on the volume of transactions executed by us as principal and asagent, a fee based on exchange seat use, an allocation fee requiring specialistfirms to share the cost of newly-allocated listings, exchange access and usage fees,a flat annual fee and execution and clearing fees. Our Execution and Clearingsegment’s exchange, clearing and brokerage fees expense consists of floorbrokerage fees paid to direct-access floor brokers and fees paid to variousexchanges.

 

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

## ** **

Employeecompensation and related benefits expense increased primarily as a result ofhigher compensation at our Specialist segment, which is a result of improvedrevenues and operating results.  Employeecompensation expense at our Specialist segment also increased due to anincrease in the number of specialists and professionals making markets inoptions, indexes and ETFs, which was partially offset by a reduction in thenumber of employees acting as specialists in cash equities.  Employee compensation and related benefitsexpense decreased at our Execution and Clearing segment due to a reduction inheadcount during the third quarter of 2005 as compared to the headcount duringthe third quarter of 2004.

 

Theincrease in interest expense for the third quarter of 2005 as compared to thesame period in 2004 was due to the higher margin interest expense in our Specialistsegment trading activities, which was the result of an increase in interestrates, as well as the size and number of our positions in our specialist andmarket making products.

 

Whileconsolidated exchange, clearing and brokerage fees increased slightly for thethree months ended September 30, 2005 as compared to the same period in2004, there were material changes within the components of exchange, clearingand brokerage fees at our business segments quarter over quarter. The increase wasprimarily the result of higher commissions at our Specialist segment, which primarilyis a reflection of the increased trading activity by our option, index and ETFspecialists and professionals.  Partiallyoffsetting this increase were decreases in our Execution and Clearingsubsidiary’s floor brokerage expenses relating to direct-access commissions anddecreases in our NYSE equity specialists’ fees due to lower allocation andexchange fees.

 

Leaseof exchange memberships expense decreased due to lower average annual lease pricesof our NYSE leased memberships for the third quarter of 2005 versus the 2004comparable period. Average annual lease cost of an NYSE membership declined toapproximately $71,000 for the three months ended September 30, 2005 from$233,000 for the 2004 comparable period. Additionally, we leased eleven fewer NYSE memberships as of September 30,2005 than we did as of September 30,2004.

 

## **Nine Months Ended September 30,2005 versus September 30, 2004**

## ** **

Whileconsolidated employee compensation and related benefits expense increased onlyslightly for the nine months ended September 30, 2005 as compared to thesame period in 

 

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2004,there were material changes within the components of employee compensation andrelated benefits expense at our Specialist segment period over period.  Employee compensation and related benefits expenseincreased primarily as a result of higher compensation, resulting from improvedrevenues and operating results.  Employeecompensation and related benefits expense at our Specialist segment increaseddue to an increase in the number of specialists and professionals makingmarkets in options, indexes and ETFs, which was partially offset by a reductionin the number of employees acting as specialist in cash equities.  Employee compensation and related benefitsexpense decreased at our Execution and Clearing segment due to a reduction inheadcount in the first nine months of 2005, as compared to the same period in2004.  Also contributing to the decreasewas the expiration and payment of a retention bonus plan liability during thefirst quarter of 2004 and a decrease in deferred compensation expense, bothrelated to a prior acquisition.

 

Interestexpense increased for the nine months ended September 30, 2005 from thesame period in 2004 mainly due to the increase in margin interest in thetrading activities related to our option, index and ETF specialists and marketmaking activities as a result of higher margin interest rates, coupled with anincrease in the size of our positions in these products. Additionally, with therefinancing of our debt in May 2004, the first nine months of 2005 reflectedthe higher interest costs on our outstanding senior notes as compared to 2004. Partiallyoffsetting these increases were charges we incurred during the second quarterof 2004 relating to the aforementioned refinancing of our debt. These chargesincluded the acceleration of the debt issuance cost and discount accretion onthe portion of the notes repurchased.

 

Exchange,clearing and brokerage fees expense increased for the nine months ending September 30,2005 as compared to the same period in 2004 due to increased commission fees fromincreased trading activity from our option, index and ETF specialists andmarket makers.  Partially offsettingthese increases was a decline at our Execution and Clearing segment of floorbrokerage expenses relating to direct-access commissions.

 

Leaseof exchange memberships expense decreased due to the lower average annual leaseprices of our NYSE leased memberships for the nine months ended September 30,2005 versus the 2004 comparable period. The average annual lease cost of anNYSE membership declined to approximately $70,000 for the nine months ended September 30,2005 from $235,000 for the 2004 comparable period.  Additionally, we leased eleven fewer NYSEmemberships as of September 30, 2005 than we did as of September 30,2004.

 

## **Liquidity and CapitalResources**

## ** **

*FinancialOverview*

 

Given the nature of ourspecialist, market-making, execution and clearing activities, certain lineitems on our balance sheet may fluctuate considerably from time to time. Ourtotal assets at September 30, 2005 increased to $3,760.3 million from$2,055.1 million at December 31, 2004. The increase was primarilyattributable to increases in receivable from brokers, dealers and clearingorganizations, securities owned at market value, and cash and cash equivalents whichwere partially offset by decreases in deferred tax assets and cash segregatedunder federal regulations. Of our total assets at September 30, 2005, $616.1million consisted 

 

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of cash and short-term investments, primarily ingovernment obligations maturing within three months, cash and securitiessegregated under federal regulations and overnight repurchase agreements. Ourtotal capital base, which consists of long term obligations (inclusive ofsubordinated debt, other than those related to contributed exchange memberships)and total stockholders’ equity, increased to $1,209.3 million at September 30,2005 from $1,191.7 million at December 31, 2004. This change was mainlydue to an increase in equity associated with higher additional paid-in capitaland retained earnings, partially offset by a decrease in other subordinatedindebtedness.

 

To date, we have financedour operations primarily with retained earnings from operations and proceedsfrom our debt and equity offerings. Due to the nature of the securitiesbusiness and our role as a specialist, market-maker and execution and clearingagent, the amount of our cash and short-term investments, as well as operatingcash flow, may vary considerably from period to period due to a number offactors, including but not limited to the dollar value of our positions asprincipal, whether we are net buyers or sellers of securities, the dollarvolume of executions by our customers and clearing house requirements. Certainregulatory requirements constrain the use of a portion of our liquid assets forfinancing, investing or operating activities. Similarly, the nature of ourbusiness lines, the capital necessary to maintain current operations and ourcurrent funding needs subject our cash and cash equivalents to differentrequirements and uses.

 

*Capital Resources*

 

Ouroutstanding senior notes were issued pursuant to an indenture, which includescertain covenants that, among other things, limit our ability to make certaininvestments, engage in transactions with stockholders and affiliates, createliens on our assets and sell assets or engage in mergers and consolidations,except in accordance with certain specified conditions.****In addition, our ability to take certainactions, including incurring additional indebtedness (other than certain “permittedindebtedness”), or making certain “restricted payments” (such as payingdividends, redeeming stock or repurchasing subordinated indebtedness prior tomaturity), is limited if our consolidated fixed charge coverage ratio—calculatedon a trailing four-quarter basis—is at or below a threshold of 2.00:1. The “consolidatedfixed charge coverage ratio” reflects a comparison between (1) ourconsolidated earnings before interest, taxes, depreciation and amortizationexpenses, or “EBITDA,” and (2) the sum of our consolidated interestexpense and a tax-effected multiple of any dividend payments that we might makewith respect to preferred stock. As of September 30, 2005, ourconsolidated fixed charge coverage ratio was approximately 1.90:1, therebylimiting our ability to make these “restricted payments.”  Under the indenture, however, we are permitted to make“restricted payments” of up to an aggregate amount of $15.0 million over thelife of the indenture, regardless of our consolidated fixed charge coverageratio or the amount of our cumulative consolidated net income since July 1,2004.

 

In addition, under theindenture governing our outstanding senior notes, even if our consolidatedfixed charge coverage ratio is 2.00:1 or greater, we cannot make any such “restrictedpayments” if doing so will cause our cumulative “restricted payments” since May 18,2004 to be greater than the sum of (A) 50.0% of our cumulativeconsolidated net income since July 1, 2004 (or, if such calculation is aloss, minus 100.0% of such loss) and (B) 100.0% 

 

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of the net cash proceeds received from any issuance orsale of our capital stock since July 1, 2004 and certain other amounts. Inthe event this restriction were to limit us from making restricted payments inthe future, we also would be entitled to make such payments up to an aggregateof $15.0 million over the life of the indenture, as described above. Althoughwe have not made any restricted payments since May 18, 2004, we cannot besure if, when or to what extent the covenants in the indenture will prevent usfrom making restricted payments higher than $15.0 million in the future.

 

Theindenture also permits us to redeem some or all of the Senior Notes due 2009 onor after May 15, 2007 and some or all of the Senior Notes due 2012 on orafter May 15, 2008 at varying redemption prices, depending on the date ofredemption.  In addition, we have theoption to redeem up to 33.0% of the aggregate principal amount of the SeniorNotes due 2009 at a redemption price of 109.5% and up to 33.0% of the aggregateprincipal amount of the Senior Notes due 2012 at a redemption price of 111.0%using the proceeds of certain equity offerings which we may complete on orprior to May 15, 2007. We have no current intention of conducting any suchequity offerings.  Under the terms of theindenture, if we sell substantially all our assets or experience specific kindsof changes in control, we will be required to offer to repurchase ouroutstanding senior notes, on a pro rata basis, at a price in cash equal to101.0% of their principal amount, plus accrued and unpaid interest, if any, tothe date of purchase.

 

Inconnection with the sale of our interest in Lava as part of an acquisition ofLava in August 2004, we received cash of approximately $39.0 million atthe closing. Additional consideration of approximately $9.6 million was depositedin escrow to secure our indemnification obligations as a selling stockholder ofLava until November 2, 2005.  Underthe terms of the indenture governing our outstanding senior notes, on the 361stday following the closing of the Lava acquisition, we were required to offer topurchase outstanding senior notes in an aggregate principal amount equal tosuch after-tax proceeds of the sale of our interest in Lava in August 2004,at a price equal to 100.0% of the principal amount of such outstanding seniornotes.  Therefore, on July 29, 2005,we commenced an offer to purchase outstanding senior notes in the aggregateprincipal amount of up to approximately $18.2 million. This excess proceedsoffer expired on August 25, 2005, with $63,000 principal amount havingbeen tendered.  Following the closing ofthis transaction, approximately $199.8 aggregate principal amount of our SeniorNotes due 2009 remained outstanding and approximately $260.0 aggregateprincipal amount of our Senior Notes due 2012 remained outstanding.

 

OnOctober 31, 2005, the escrow fund in connection with the Lava transactionwas terminated and we received approximately $9.6 million as additionalconsideration in connection with the Lava transaction. Therefore, under theindenture governing the outstanding senior notes we will again be required tooffer to purchase outstanding senior notes in an aggregate principal amountequal to the after-tax proceeds of this $9.6 million on or prior to the 361stday following October 31, 2005.

 

Wealso have outstanding $13.6 million aggregate principal amount of 12.0% seniorsubordinated notes due 2007 (the “2007 Notes”) that were not tendered forrepurchase in 

 

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connection with our May 2004debt refinancing. Until their maturity on March 2, 2007, the 2007 Noteswill continue to accrue interest at a rate of 12.0% per annum.

 

Asof September 30, 2005, the subordinated indebtedness of LaBranche &Co. LLC (excluding subordinated liabilities related to contributed exchangememberships) aggregated $12.4 million. This subordinated debt is comprised ofsenior subordinated notes and junior subordinated notes, which mature onvarious dates between August 2006 and June 2008 and bear interest atannual rates ranging from 7.7% to 10.0%. The senior subordinated notes were originally issuedin the aggregate principal amount of $15.0 million, and, in accordance withtheir terms, $3.0 million in principal amount must be repaid on June 3 ofeach of 2004, 2005, 2006, 2007 and 2008. On June 3, 2005, LaBranche &Co. LLC repaid $3.0 million principal amount of this senior subordinatedindebtedness, plus accrued interest, thus leaving $9.0 million principal amountof this senior subordinated indebtedness outstanding.  LaBranche & Co. LLC may prepay, at apremium, all or any part of these remaining senior subordinated notes at anytime, provided that the amount prepaid is not less than 5.0% of the aggregateprincipal amount of such senior subordinated notes then outstanding. Upon theoccurrence of a change of control, LaBranche & Co. LLC may, but is notrequired to, make one irrevocable separate offer to each holder of the seniorsubordinated notes to prepay all the senior subordinated notes then held bythat holder. The occurrence of a change of control also constitutes an event ofacceleration under the senior subordinated notes.  The junior subordinated notes,which aggregate $3.4 million principal amount, have an automatic rolloverprovision, which extends the maturity for an additional year, unless the lenderprovides at least seven months advance notice of its intention not to renew atmaturity. LaBranche & Co. LLC is entitled to prepay—with writtenconsent from the NYSE—the junior subordinated notes without penalty under theterms of the agreements relating thereto.

 

As of September 30,2005, $8.0 million of our outstanding indebtedness consisted of eight separatenotes, each in the principal amount of $1.0 million, which mature in August 2007and bear interest at an annual rate of 9.0%.

 

Apotential source of liquidity for LaBranche & Co. LLC is the committedline of credit that it maintains with a bank. In October 2005, LaBranche &Co. LLC extended this $200.0 million committed credit agreement to October 27,2006 on the same terms and conditions as the expiring agreement. In connectionwith the credit agreement, we pay annual fee of 0.25% of the total committedline of credit.  Amounts outstandingunder this credit facility would be secured by our inventory of specialiststocks and bear interest at the bank’s broker loan rate. This facility can onlybe used to finance inventory requirements at LaBranche & Co. LLC. Todate, we have not utilized this facility. In order to maintain the availabilityof funds under this credit facility, we must comply with certain financial andother covenants.

 

*Regulated Subsidiaries*

 

Asa specialist and market-maker, we are required to maintain certain levels ofcapital and liquid assets as promulgated by various regulatory agencies, whichregulate our business. As part of our overall risk management procedures (forfurther discussion, refer to Part I, Item 3. “Quantitative and QualitativeDisclosures about Market Risk”), we balance our responsibility as specialist,market-maker and broker-dealer with our overall capital resources. 

 

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These requirements may restrictour ability to make use of cash and other liquid assets for corporate actions,such as repaying our debt, repurchasing stock or making acquisitions.

 

Asa broker-dealer, LaBranche & Co. LLC is subject to regulatoryrequirements intended to ensure the general financial soundness and liquidityof broker-dealers and requiring the maintenance of minimum levels of netcapital, as defined in SEC Rule 15c3-1. LaBranche & Co. LLC isrequired to maintain minimum net capital, as defined, equivalent to the greaterof $100,000 or 1/15 of aggregate indebtedness, asdefined. NYSE Rule 326(c) also prohibits a broker-dealer fromrepaying subordinated borrowings, paying cash dividends, making loans to anyparent, affiliates or employees or otherwise entering into transactions which wouldresult in a reduction of its total net capital to less than 150.0% of itsrequired minimum capital. Moreover, broker-dealers are required to notify theSEC prior to repaying subordinated borrowings, paying dividends and makingloans to any parent, affiliates or employees, or otherwise entering intotransactions which, if executed, would result in a reduction of 30.0% or moreof their excess net capital (net capital less minimum requirement). The SEC hasthe ability to prohibit or restrict such transactions if the result is deemeddetrimental to the financial integrity of the broker-dealer. As of September 30,2005, LaBranche & Co. LLC’s net capital, as defined, was $463.2million, which exceeded the minimum requirements by $461.9 million.

 

The NYSE generally requires its specialist firms tomaintain a minimum dollar regulatory capital amount in order to establish thatthey can meet, with their own net liquid assets, their position requirement. As of September 30,2005, LaBranche &Co. LLC’s and LSPS’ minimum required combined dollar amount of net liquidassets, as defined, was $447.0 million. LaBranche & Co. LLC’s actual net liquidassets, as defined, were $459.0 million as of September 30, 2005. As of September 30,2005, since LaBranche & Co. LLC’s actual net liquid assets exceededthe combined net liquid assets requirement of LaBranche & Co. LLC andLSPS, both LaBranche & Co. LLC and LSPS satisfied their respective netliquid asset requirements. In addition, as of September 30, 2005,LaBranche & Co Inc. had an additional $121.0 million invested inovernight repurchase agreements, whichis not subject to regulatory capital requirements.

 

On May 26, 2005, the NYSE filedwith the SEC a proposal to establish a new method of calculating its net liquidasset requirements for specialists such as LaBranche & Co. LLC.  Current rules, based partly on classes ofallocated securities, would be replaced by a focus on market risk, volatilityand market share.  Although the proposednew rule would likely reduce LaBranche & Co. LLC’s net liquidasset requirement, the extent of any such reduction has not been finallydetermined.  A reduction in LaBranche &Co. LLC’s net liquid asset requirement would be phased in over a nine-monthperiod in four tranches and would allow funds no longer needed for purposes ofsatisfying the net liquid asset requirement to be used for other corporatepurposes.

 

TheAMEX generally requires its equities specialist firms to maintain a cash orliquid asset position of the greater of (a) $1.0 million or (b) anamount sufficient to assume a position of sixty trading units of each securityin which the specialist is registered. As of September 30, 2005, LaBranche &Co. LLC satisfied the AMEX equities specialist liquid asset requirements.

 

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Asa registered broker-dealer and member firm of the NYSE, LFSI also is subject toSEC Rule 15c3-1, as adopted and administered by the NYSE and the SEC.Under the alternative method permitted by the rule, the minimum required netcapital of LFSI as of September 30, 2005 was equal to the greater of $1.5million or 2.0% of aggregate debit items, as defined. As of September 30,2005, LFSI’s net capital, as defined, was $8.2 million, which exceeded itsminimum net capital requirement by $6.7 million.

 

Asa clearing broker-dealer, LFSI is subject to SEC Rule 15c3-3, as adoptedand administered by the SEC. As of October 4, 2005, to comply with its September 30,2005 requirement, cash and U.S. Treasury Bills in the amount of $2.0 millionwere segregated in a special reserve account for the exclusive benefit ofcustomers exceeding the actual requirements by $2.0 million. In addition, the ProprietaryAccounts of Introducing 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 October 4, 2005, to comply with LFSI’s September 30,2005 requirement, cash and U.S. Treasury Bills in the amount of $5.2 million weresegregated in a special reserve account for the exclusive benefit of customers,thus exceeding actual requirements by $1.2 million.

 

Asa registered broker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1,as adopted and administered by the AMEX and the SEC. LSP is required tomaintain minimum net capital, as defined, equivalent to the greater of $100,000or 1/15 of aggregate indebtedness, as defined. As ofSeptember 30, 2005, LSP’s net capital, as defined, was $45.9 million,which exceeded its minimum net capital requirement by $45.4 million.

 

As a specialist andmember of the NYSE, LSPS is subject to the provisions of SEC Rule 15c3-1,as adopted and administered by the SEC and NYSE. LSPS is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. As of September 30, 2005, LSPS’net capital, as defined under SEC Rule 15c3-1, was $3.9 million, whichexceeded the minimum requirement by $3.7 million.

 

Failureby any of our broker-dealer subsidiaries to maintain its required net capitaland net liquid assets, where applicable, may subject it to suspension orrevocation of its SEC registration or its suspension or expulsion by the NYSE,the AMEX and/or any other exchange of which it is a member firm.

 

Asevidenced by the foregoing requirements, our broker-dealer subsidiaries requirea substantial amount of capital. In particular, LaBranche & Co. LLC’sand LSPS’ combined net liquid asset requirement of $447.0 million limits ourability to utilize a substantial portion of our liquid assets for othercorporate purposes. Although a portion of the combined net liquid assetrequirement of $447.0 million is met by LaBranche & Co. LLC’s and LSPS’securities positions, pending trades and other assets associated with its equities,options, futures and ETF specialist activities, a substantial portion ofLaBranche & Co. LLC’s cash and cash equivalents as of September 30,2005 was used to meet their combined net liquid asset requirement.

 

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*Other Contractual Obligations*

 

Inconnection with our acquisition of ROBB PECK McCOOEY Financial Services, Inc.(“RPM”) in March 2001, we assumed its liabilities and obligations underits deferred compensation plan. The deferred compensation plan provides for thepayment, on or before December 15, 2007, of approximately $30.2 million,plus interest at a rate of 8.0% per year, to certain former employees of RPM.While the payment of benefits under this deferred compensation plan may beaccelerated in certain circumstances, no more than $6.0 million in deferredcompensation benefits (including interest) may be paid in any 12 consecutivemonth period beginning March 15, 2001. After taking into account allpayments of deferred compensation plan benefits through September 30, 2005,approximately $14.4 million, including interest, remains payable under the RPMdeferred compensation plan.  Our board ofdirectors is entitled to terminate the deferred compensation plan at anytime.  Upon any such termination, thedeferred compensation benefits (including interest) of all participants in theplan—to the extent not previously paid—must be distributed immediately to theparticipants in one lump sum.

 

*Cash Flows*

 

Our cash and cashequivalents during the nine-month period ended September 30, 2005 increased$44.7 million to $489.1 million. The increase was the result of (a) $53.0million provided by our operating activities primarily from increases in cashflow from operations, our securities sold, but not yet purchased, partiallyoffset by decreases in receivable from brokers, dealers and clearingorganizations, deferred tax assets and securities owned, at market value; (b) $1.0million used in investing activities for capital expenditures and purchases of exchangememberships; and (c) $7.3 million used in financing activities primarilyfrom payments on short term debt and subordinated debt.

 

We currently anticipate that we will be able to meetour working capital, regulatory capital and capital expenditure requirementsthrough at least the next twelve months.

 

**Credit Ratings**

 

Following our May 2004debt refinancing, $13.6 million aggregate principal amount of our 2007 Notes remainoutstanding. These 2007 Notes are publicly held but are no longer rated. Thefollowing table sets forth the credit ratings on our Senior Notes due 2009 andour Senior Notes due 2012 as of September 30, 2005:

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

 

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## **Item 3.**    Quantitative and Qualitative Disclosures aboutMarket Risk.

## ** **

Because our equityspecialist activities on the NYSE and AMEX expose our capital to significantrisks, managing these risks is a constant priority for us. Our central role inthe auction process helps us to manage risks by incorporating up-to-date marketinformation in the management of our inventory, subject to our specialistobligations. We have developed a risk management process that is designed tobalance our ability to profit from our specialist activities with our exposureto potential losses.

 

*ComplianceRisk*

 

LaBranche & Co.LLC's risk management process includes participation by our corporatecompliance committee, executive operating committee, floor managementcommittee, post managers, floor captains and specialists. These parties’ rolesare as follows:

 

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

 

*ExecutiveOperating Committee.*  Our executive operating committee is composedof two executive officers of LaBranche & Co. LLC. This committee isresponsible for approving all risk management procedures and trading guidelinesfor our specialist stocks, after receiving recommendations from our floormanagement committee. In addition, our executive operating committee reviewsall unusual situations reported to it by our floor management committee.

 

*FloorManagement Committee.*  Our floor management committeeis composed of six post managers. This committee is responsible for formulatingand overseeing our overall risk management procedures and trading guidelinesfor each of our specialist stocks. In determining these procedures andguidelines, our floor management committee considers the recommendations of ourfloor captains. Our post managers meet with their respective floor captains ona weekly basis to review and, if necessary, revise the risk managementprocedures and trading guidelines for LaBranche & Co. LLC and/or forparticular specialist stocks. In addition, post managers are always availableon the trading floor to review and assist with any unusual trading situationsreported by any floor captain. Our floor management committee reports to ourexecutive operating committee about each of these unusual trading situations asthey occur.

 

*FloorCaptains.*  We have thirteen floor captains who monitorthe activities of LaBranche & Co. LLC’s specialists throughout thetrading day from various positions at their trading posts. The floor captainsobserve trades and constantly review trading activities on a real-time basis.In addition, the floor captains are readily available to assist LaBranche &Co. LLC’s specialists in determining when to deviate from our procedures andguidelines in reacting to any unusual situations or market conditions. Thefloor captains report these unusual situations and any deviations from ourprocedures and guidelines to their respective post managers. Floor captainsmeet with each specialist at least once a week to evaluate each specialist’sadherence to our risk management procedures and trading guidelines. Floor 

 

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captains also meetto review risk procedures and guidelines and, if appropriate, makerecommendations to the floor management committee.

 

*Specialists.* LaBranche & Co. LLC’s specialists conduct auctions of ourspecialist stocks based on the conditions of the marketplace. In doing so,specialists observe our risk management procedures and trading guidelines intandem with their responsibility to create and maintain a fair and orderlymarket. Specialists immediately notify a floor captain of any unusualsituations or market conditions requiring a deviation from our procedures andguidelines.

 

We believe thatthe enhancements we have made to our compliance procedures and guidelines inconnection with the undertakings set forth in the March 2004 settlement ofthe SEC and NYSE investigation of our specialist trading activities haveimproved our risk management process.

 

Our equities specialistoperations on the AMEX are conducted by various equity specialists. Our postmanager(s) on the AMEX monitor the trading activities of the AMEX equity specialistsby observing trades and reviewing positions on a real-time basis. As members ofthe floor management committee, post managers regularly communicate with othermembers of the floor management committee regarding any deviations from the AMEXprocedures and guidelines established by LaBranche & Co. LLC’sexecutive operating committee.

 

*CircuitBreaker Rules.*  The NYSE and AMEX have certain circuitbreaker rules intended to halt trading in all NYSE/AMEX listed stocks inthe event of a severe market decline. The circuit breaker rules imposetemporary halts in trading when the Dow Jones Industrial Average drops acertain number of points. Current circuit breaker levels are set quarterly at10, 20 and 30 percent of the Dow Jones Industrial Average closing valuesof the previous month, rounded to the nearest 50 points. These rules provideinvestors extra time to respond to severe market declines and provide us anadditional opportunity to assure compliance with our risk managementprocedures.

 

*EquityMarket Risk*

 

We have developed a riskmanagement process, which is intended to balance our ability to profit from ourequity specialist activities with our exposure to potential losses. We haveinvested substantial capital, along with the NYSE, in real-time, on-linesystems which give our management instant access to specific tradinginformation at any time during the trading day, including our aggregate longand short positions and our capital and profit-and-loss information on anaggregate or per issue basis.  Subject tothe specialist’s obligation to maintain a fair and orderly market and toapplicable regulatory requirements, we constantly seek to manage our tradingpositions relative to existing market conditions.

 

A high concentration ofLaBranche & Co. LLC’s principal trading revenue is generated from itsten and twenty-five most profitable NYSE specialist stocks. The percentage ofLaBranche & Co. LLC’s cash equity specialist trading revenue generatedfrom its ten most profitable specialist stocks has decreased from 17.5% to 16.7%of total principal trading 

 

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revenue for the nine months ended September 30,2004 and 2005, respectively. The percentage of LaBranche & Co. LLC’s cashequity specialist trading revenue generated from its twenty-five mostprofitable specialist stocks has also decreased from 35.0% to 32.0% of totalprincipal trading revenue for the nine months ended September 30, 2004 and2005, respectively.  LaBranche &Co. LLC is not overly reliant on a particular group of specialist stocks, asthe composition of its ten and twenty-five most profitable specialist stockschanges frequently.

 

Our cash equityspecialist trading activities are subject to a number of risks, including risksof price fluctuations, rapid changes in the liquidity of markets and foreignexchange risk related to American Depositary Receipts (“ADRs”). In any period,we may incur trading losses in our specialist stocks for a variety of reasons,including price fluctuations of our specialist stocks and carrying out ourspecialist obligations. From time to time, we may have large positionconcentrations in securities of a single issuer or issuers engaged in aspecific industry. In general, because our inventory of securities ismarked-to-market on a daily basis, any significant price movement in thesesecurities could result in a reduction of our revenues and operating profits.

 

*DerivativesMarket Risk*

 

As a specialist inoptions, ETFs and futures, LSP has a responsibility to maintain a fair andorderly market, and trades securities as principal out of both obligation andinclination. LSP’s options, ETFs, futures, fixed income instruments and foreigncurrency trading exposes it to certain risks, such as price and interest ratefluctuations, volatility risk, credit risk, foreign currency movements andchanges in the liquidity of markets. LSP maintains a market-making capacity inoptions, ETFs and futures and trades as principal out of inclination. In itsmarket-making function, LSP brings immediacy and liquidity to the markets whenit chooses to participate. LSP’s market-making activities expose it to certainrisks including, but not limited to, price fluctuations and volatility.

 

As a specialist in ETFson the NYSE, LSPS is responsible for maintaining a fair and orderly market andtrades ETFs as principal out of both obligation and inclination.  LSPS’ ETF trading exposes it to certainrisks, including price fluctuations, foreign currency movements and changes inthe liquidity of markets.

 

Certain members of LSP’sand LSPS’ management are responsible for managing these risks. Theseindividuals utilize a third-party software application to monitor LSP’s andLSPS’ positions on a real-time basis. By monitoring actual and theoreticalprofit and loss, volatility and other standard risk measures, these individualsseek to assure that all LSP and LSPS traders operate within the parameters setby management. LSP’s and LSPS’ traders purchase and sell futures, options, thestocks underlying certain positions, fixed income instruments and foreigncurrencies in an attempt to hedge market and foreign currency risk. LSP’s andLSPS’ aggregate risk is under constant evaluation by certain members ofmanagement and its traders, and all significant trading strategies andpositions are closely monitored. LSP’s and LSPS’ options, futures and ETFtrading is executed on national and foreign exchanges. These trades clearthrough the Options Clearing Corporation, the National Securities ClearingCorporation or the applicable exchange clearing organization, thereby reducingpotential credit risk.

 

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The following chartillustrates how specified movements in the underlying securities prices of LSP’sand LSPS’ entire portfolios would have impacted profits and losses from theirtrading activities: 

 
| ** **                | ** ** | **Profit or (Loss) if the underlying securities move:** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|
| **(000’s  omitted)** | ** ** | **-15.0%**                                              | ** ** | **-5.0%** | ** ** | **0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio as of:**      |       |                                                    |       |   |   |   |   |   |   |   |   |
| March 31, 2005       |       | $                                                       | (10,167    | ) | $ | 8,609 |   | $ | (20 | ) | $ | 6,028 |   | $ | 15,930 |   |
| June 30, 2005        |       | $                                                       | (20,676    | ) | $ | 13,324 |   | $ | (75 | ) | $ | 21,513 |   | $ | 53,516 |   |
| September 30, 2005   |       | $                                                       | (4,996     | ) | $ | 840 |   | $ | (28 | ) | $ | 2,125 |   | $ | 4,318 |   |

 

The information in theabove table is based on certain theoretical assumptions, and thus does notfully represent the profit or loss exposure to certain market conditions,including, but not limited to, changes in volatility, interest rates anddividends. Other risk models may yield different results.  The zero percent change column represents theprofit or loss LSP and LSPS would experience on a daily basis if the relevantmarket remained unchanged.

 

*ForeignCurrency Risk*

 

In connection withLaBranche & Co. LLC’s trading of U.S.-registered shares of foreignissuers, it is exposed to varying degrees of foreign currency risk. The pricingof 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 LaBranche & Co. LLC acts as thespecialist.

 

LSP and LSPS 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. LSP and LSPS hold various foreign currencies in order to lessenthe risks posed by changing foreign currency rates. In addition, LSP and LSPStrade derivatives denominated in foreign currencies, which creates exposure toforeign currency risk for these entities.

 

The following chartillustrates how the specified movements in foreign currencies relative to theU.S. dollar to which LSP, LSPS and LaBranche & Co. LLC are exposedwould have impacted profits and losses from their trading activities:

 
| ** **                | ** ** | **Profit or (Loss) if the foreign currencies relative   to the U.S. dollar move:** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------------------|------------|
| **(000’s  omitted)** | ** ** | **-15.0%**                                                                         | ** ** | **-5.0%** | ** ** | **+5.0%** | ** ** | **+15.0%** | ** ** |
| **Portfolio as of:**      |       |                                                                               |       |   |   |   |   |   |   |
| March 31, 2005       |       | $                                                                                  | (1,487     | ) | $ | (496 | ) | $ | 496 |   | $ | 1,487 |   |
| June 30, 2005        |       | $                                                                                  | (532       | ) | $ | (177 | ) | $ | 177 |   | $ | 532 |   |
|                      |       |                                                                               |       |   |   |   |   |   |   |
| September 30, 2005   |       | $                                                                                  | 2,296      |   | $ | 765 |   | $ | (765 | ) | $ | (2,296 | ) |

 

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

 

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*Executionand Clearing Risk*

 

In connection with theirspecialist and market-making activities, LaBranche & Co. LLC, LSP andLSPS are engaged in various securities trading and lending activities andassume positions in stocks, rights, options, ETFs, fixed income instruments,futures and foreign currencies for which they are exposed to credit riskassociated with the nonperformance of counterparties in fulfilling theircontractual obligations pursuant to these securities transactions. LaBranche &Co. LLC, LSP and LSPS are also exposed to market risk associated with the saleof securities not yet purchased, which can be directly impacted by volatiletrading on the NYSE, AMEX and other exchanges. Additionally, in the event ofnonperformance and unfavorable market price movements, LaBranche & Co.LLC, LSP and LSPS may be required to purchase or sell financial instruments ata loss.

 

LFSI’sexecution and clearing activities require that LFSI 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 LFSI’sinformation or communication systems, could cause substantial losses forbrokers, customers and/or LFSI and could subject LFSI to claims for losses.

 

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

 

Theseclearing activities may expose LFSI to off-balance sheet risk in the eventcustomers or brokers are unable to fulfill their contractual obligations and itis necessary to purchase or sell securities at a loss. For margin transactions,LFSI may be exposed to off-balance sheet risk in the event margin requirementsare not sufficient to fully cover losses that customers may incur in theiraccounts.

 

Theamount of risk related to LFSI’s execution and clearance activities is linkedto the size of the transaction, market volatility and the creditworthiness ofcustomers and brokers. LFSI’s largest transactions involve those forinstitutional and direct access floor brokerage customers.

 

LFSIsystematically monitors its open transaction risk starting when the transactionoccurs and continuing until the designated settlement date. Transactions thatremain unsettled after settlement date are scrutinized and necessary action toreduce LFSI’s risk is taken. Credit risk that could result from contra brokersdefaulting is minimized since much of the settlement risk for transactions withbrokers is essentially transferred to the National Stock Clearing Corporation.The credit risk associated with institutional and direct access clearingcustomers is minimized since these customers have been qualified by theDepository Trust Company 

 

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(“DTC”) or the DTCparticipants or have met the prime broker qualification standards at otherbrokerage firms. Before conducting business with a prospective customer, LFSI’ssenior management, in conjunction with its compliance department, reviews theprospective customer’s experience in the securities industry, financialcondition and personal background, including a background check with a riskreporting agency. For retail customers and professional investors, LFSI seeksto control the risks associated with customer activities by requiring customersto maintain margin collateral in compliance with various regulatory andinternal guidelines. LFSI monitors margin levels daily pursuant to suchguidelines and requires customers to deposit additional collateral or reducepositions when necessary.

 

*OperationalRisk*

 

Operational risk relatesto the risk of loss from external events, and from failures in internalprocesses or information systems. In each of our business segments, we relyheavily on our information systems in managing our risk. Accordingly, workingin conjunction with the NYSE, we have made significant investments in our tradeprocessing and execution systems. Our use of, and dependence on, technology hasallowed us to sustain our growth over the past several years. Managementmembers and floor captains at our NYSE and AMEX 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 aggregate long and short positions;

 

•      the various positions of each of ourtrading professionals;

 

•      our overall position in a particularstock; and

 

•      capital and profit-and-loss informationon an aggregate, per specialist or per issue basis.

 

Our information systemssend and receive data from the NYSE and AMEX through dedicated data feeds. TheNYSE supplies us with specialist position reporting system terminals both onthe trading floor and in our offices. These terminals allow us to monitor ourNYSE trading profits and losses, as well as our positions. For our AMEX equityoperations, our in-house technology staff has developed applications to monitorour current positions and profits and losses. Our derivative trading operationutilizes a third-party software application to monitor its positions andprofits and losses on a real-time basis.

 

We have developed, implementedand maintain a business continuity plan, which includes a comprehensivedisaster recovery plan. We have back-up disaster recovery centers in New Yorkand New Jersey.

 

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*Legal andRegulatory Risk*

 

Substantial legalliability or a significant regulatory action against us could have a materialadverse effect on our financial condition or cause significant harm to ourreputation, which in turn could negatively affect our business prospects.

 

As registeredbroker-dealers, LaBranche & Co. LLC, LFSI, LSP and LSPS are subject tocertain regulatory requirements intended to insure their general financialsoundness and liquidity. These subsidiaries are subject to SEC Rules 15c3-1,15c3-3 and other requirements adopted and administered by both the NYSE andAMEX.

 

The USA PATRIOT Act of2001 requires U.S. financial institutions, including banks, broker-dealers,futures commission merchants and investment companies, to implement policies,procedures and controls which are reasonably designed to detect and reportinstances of money laundering and the financing of terrorism. We activelymonitor and update our anti-money laundering practices.

 

## **Item 4.**    Controls and Procedures

## ** **

Asof the end of the period covered by this report, an evaluation of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934) was performed under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer. Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that these disclosure controlsand procedures were effective as of the end of the period covered by thisreport. In addition, no change in our internal control over financial reporting(as defined in Rule 13a-15(f) under the Securities Exchange Act of1934) occurred during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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## **PART II   OTHER INFORMATION**

## ** **

## **Item 1.**    Legal Proceedings

## ** **

There have been no material new developments in ourlegal proceedings since the filing of our Form 10-Q for the quarter ended June 30,2005, filed August 9, 2005 (the “Second Quarter 10-Q”), which updated thelegal proceedings disclosed in our 2004 10-K and the Company’s Form 10-Qfor the quarter ended March 31, 2005, filed May 10, 2005 (the “FirstQuarter 10-Q”), except as follows:

 

LastAtlantis/Rule/Martin.  On October 4, 2005, the court in theLast Atlantis action granted the plaintiffs’ motion for leave to file a secondamended complaint and to join Bryan Rule and River North Investors LLC asplaintiffs.  On October 5, 2005, thesecond amended complaint was filed.

 

OnSeptember 28, 2005, Bryan Rule and River North Investors LLC, who, asstated above, now are plaintiffs in the Last Atlantis action, commenced anaction in the United States District Court for the Northern District ofIllinois, Rule et al. v. Chicago Board Options Exchange, Inc., etal., No. 05 C 5600.  The complaintin this action is substantially similar to the second amended complaint in theLast Atlantis action, making substantially the same allegations and seeking thesame relief against the same defendants, including LaBranche & Co Inc.and LSP, except that the complaint in this action also asserts a federalantitrust law claim (Section 1 of the Sherman Act).

 

On September 30, 2005,Brad Martin commenced an action in the United States District Court for theNorthern District of Illinois, Martin v. Chicago Board Options Exchange, Inc.,et al., No. 05 C 5671.  Thecomplaint in this action is substantially similar to the second amendedcomplaint in the Last Atlantis action and the complaint in the Rule action,making substantially the same allegations and seeking the same relief againstthe same defendants, including us and LSP, except that the complaint in thisaction, like the complaint in the Rule action, also asserts a federalantitrust law claim (Section 1 of the Sherman Act).  To our knowledge, neither we nor LSP has beenserved with the complaint in this action.

 

EEOC Claim.  On September 27,2005, the Equal Employment Opportunity Commission (the “EEOC”) commenced anaction in the United States District Court for the Southern District of NewYork, EEOC v. LaBranche & Co Inc., No. 05 CV 8304, on behalf of aformer employee of LaBranche.  Thecomplaint in this action alleges that we harassed and discriminated against theemployee on the basis of a disability, retaliated against him for complainingabout the alleged harassment and constructively discharged him.  The complaint seeks injunctive relief andmonetary damages, including reinstatement, back pay and front pay.

 

Webelieve that the claims asserted against us by the plaintiffs in the pendingproceedings described in the 2004 10-K, the First Quarter 10-Q, the SecondQuarter 10-Q and above are without merit, and we deny all allegations ofwrongdoing.  There can be no assurance,however, as to the outcome or timing of the resolution of theseproceedings.  We therefore are unable toestimate the amount or potential range of any loss that may arise out of 

 

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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.

 

Inaddition to the proceedings described in the 2004 10-K, the First Quarter 10-Q,the Second Quarter 10-Q and above, we and our operating subsidiaries have beenthe target, from time to time, of various claims, lawsuits and regulatoryinquiries in the ordinary course of our and their respective businesses. Whilethe ultimate outcome of those claims and lawsuits which currently are pendingcannot be predicted with certainty, we believe, based on our understanding ofthe facts of these proceedings, that their ultimate resolution will not, in theaggregate, have a material adverse effect on our financial condition, resultsof operations or cash flows.

 

## **Item 5.**    Other Information.

## ** **

*Effective September 15, 2005,Todd A. Graber, our Principal Accounting Officer, resigned.  Jeffrey M. Chertoff, our Senior VicePresident and Chief Financial Officer, and our Principal Financial Officer,succeeded Mr. Graber as our Principal Accounting Officer.  The information required by Items 401(b), (d) and(e) and 404(a) of Regulation S-K with respect to Mr. Chertoff was disclosedin Items 1.01 and 5.02 of our Current Report on Form 8-K filed with theSecurities and Exchange Commission on July 7, 2005, which is incorporatedherein by reference thereto.*

* *

*We have included in this Form 10-Qfiling, and from time to time our management may make, statements which mayconstitute “forward-looking statements” within the meaning of the safe harborprovisions of The Private Securities Litigation Reform Act of 1995. Ourquarterly and annual operating results are affected by a wide variety offactors that could materially and adversely affect actual results, including adecrease in trading volume on the NYSE or the AMEX, excessive volatility in theequity securities market and changes in the value of our securities positions.As a result of these and other factors, we may experience material fluctuationsin future operating results on a quarterly or annual basis, which couldmaterially and adversely affect our business, financial condition, operatingresults and stock price. An investment in us involves various risks, includingthose mentioned above and those that are detailed from time to time in our SECfilings.*

* *

Certain statementscontained in this report, including without limitation, statements containingthe words “believe,” “intend,” “expect,” “anticipate” and words of similarimport, also may constitute “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. Readers are cautionedthat any such forward-looking statements are not guarantees of futureperformance, and since such statements involve risks and uncertainties, our actualresults and performance and the performance of the specialist industry as awhole, may turn out to be materially different from the results expressed orimplied by such forward-looking statements. Given these uncertainties, readersare cautioned not to place undue reliance on such forward-looking statements. Wealso disclaim any obligation to update our view of any such risks oruncertainties or to publicly announce the result of any revisions to theforward-looking statements made in this report.

 

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## **Item 6.**    Exhibits.

## ** **

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

 

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| November 9, 2005 | LABRANCHE & CO  INC. |
|-----------------------|-------------------------------|
|                  |                          |
|                  |                          |   |
|                  | By:                           | /s/ Jeffrey M. Chertoff |   |
|                  | Name:                         | Jeffrey M. Chertoff |
|                  | Title:                        | Senior Vice President  and Chief |
|                  |                          | Financial Officer |

 

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EXHIBIT INDEX

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

 

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