LABRANCHE & CO INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 2001

or

|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .

Commission file number: 001-15251
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LaBRANCHE & CO INC.
-------------------
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 13-4064735
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

ONE EXCHANGE PLAZA, NEW YORK, NEW YORK 10006
--------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(212) 425-1144
--------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $0.01 New
York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

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The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the last sale price of the Common Stock reported on
the New York Stock Exchange on March 14, 2002, was approximately $622,000,000.

The number of shares of Common Stock outstanding as of March 14, 2002 was
59,116,678.

DOCUMENTS INCORPORATED BY REFERENCE

As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 2002 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K.

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PART I

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE REGISTRANT'S INDUSTRY, MANAGEMENT'S BELIEFS AND CERTAIN
ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. UNLESS REQUIRED BY LAW, THE
REGISTRANT UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS THE REGISTRANT FILES FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION.

ITEM 1. BUSINESS.

OVERVIEW

LaBranche & Co Inc. ("LaBranche") is a holding company that is the sole
member of LaBranche & Co. LLC and owns all the outstanding stock of LaBranche
Financial Services, Inc. ("LFSI"). Founded in 1924, LaBranche & Co. LLC is one
of the oldest and largest specialist firms on the New York Stock Exchange
("NYSE"). We also act as a specialist in stocks and options on the American
Stock Exchange ("AMEX"). Our LFSI subsidiary is a clearing broker for customers
of introducing brokers and provides direct access floor brokerage services to
institutional customers, securities clearing and other related services to
individual and institutional clients, including traders, professional investors
and broker-dealers. In addition, LFSI also provides front-end order execution,
analysis and reporting solutions for the wholesale securities dealer market. As
of December 31, 2001, our former subsidiaries Henderson Brothers, Inc.
("Henderson Brothers") and Internet Trading Technologies, Inc. ("ITTI") were
merged with and into our ROBB PECK McCOOEY Clearing Corporation subsidiary ("RPM
Clearing Corporation"). RPM Clearing Corporation changed its name to LFSI in
January 2002 and continues to be a registered broker-dealer and NYSE member
firm.

As a specialist, our role is to maintain, as far as practicable, a fair
and orderly market in our specialist stocks. In doing so, we provide a service
to our listed companies, and to the brokers, traders and investors who trade in
our specialist stocks. We believe that, as a result of our commitment to
providing high quality specialist services, we have developed a strong
reputation among our constituencies, including investors, members of the Wall
Street community and our listed companies.

Our business has grown considerably during the past five years. Our
revenues have increased from approximately $49.9 million in 1996 to $424.1
million in 2001, representing a compound annual growth rate of 53.4%. We have
accomplished our growth both internally and

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through acquisitions. For example, since the NYSE implemented its new specialist
allocation process in March 1997, as described in "Industry Background-The NYSE
Specialist," we have been selected by 87 new listed companies, resulting from
178 listing interviews through December 31, 2001. In addition, we have acquired
ten specialist operations since 1997, adding over 550 NYSE and AMEX common
stocks and 107 AMEX-listed options for which we act as the specialist. During
the past five years, we have also increased the scope of our business, as
illustrated by the following data:

o the annual dollar volume on the NYSE of stocks for which we acted as
specialist increased to $2.5 trillion in 2001, from $201.4 billion
in 1996. Based on these dollar volumes, we were the largest
specialist firm in 2001 as compared to the sixth largest in 1996;

o the annual share volume on the NYSE of stocks for which we act as
specialist increased to 76.0 billion in 2001, from 5.6 billion in
1996. Based on these share volumes, we were the largest specialist
firm in 2001 as compared to the fourth largest in 1996; and

o the total number of our common stock listings increased to 591 as of
December 31, 2001, from 132 as of December 31, 1996. Based on the
number of our NYSE common stock listings, we were the largest
specialist firm as of December 31, 2001 as compared to the fourth
largest as of December 31, 1996. In addition, we acted as the
specialist for 266 other NYSE-listed securities (e.g., preferred and
convertible securities) and for 57 stocks and 122 options on AMEX.

As of December 31, 2001, our listed companies included:

o 104 of the S&P 500 Index companies; and

o nine of the 30 companies comprising the Dow Jones Industrial
Average. Our Dow stocks are American Express Company, AT&T, DuPont,
Eastman Kodak, ExxonMobil, Merck, Minnesota Mining & Manufacturing,
Philip Morris and SBC Communications.

INDUSTRY BACKGROUND

THE NYSE

The NYSE is currently the largest securities market in the world. The
market capitalization of all U.S. shares listed on the NYSE increased from
approximately $6.8 trillion at December 31, 1996 to approximately $11.9 trillion
at December 31, 2001, representing a compound annual growth rate of 11.8%.

The NYSE's average daily trading volume increased from 178.9 million
shares in 1991 to 1.2 billion shares in 2001, as illustrated by the following
graph:

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NYSE AVERAGE DAILY TRADING VOLUME FROM 1991 TO 2001
(SHARE VOLUME IN MILLIONS)

EDGAR REPRESENATION OF DATA POINTS USED IN PRINTED GRAPHIC

1991 179
1992 202
1993 265
1994 291
1995 346
1996 412
1997 527
1998 674
1999 809
2000 1042
2001 1240

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Trading on the NYSE takes place through open bids to buy and open offers
to sell made by NYSE members, acting as principal or as agent for institutions
or individual investors. Buy and sell orders meet directly on the trading floor
through an auction process, and prices are determined by the interplay of supply
and demand in that auction. In order to buy and sell securities on the NYSE, a
person must first be accepted for membership in the NYSE. The number of
memberships, or seats, is presently limited to 1,366, and the price of a
membership depends on supply and demand. Based on recent transfers of
memberships, the market price of a membership on the NYSE is approximately $2.2
million as of February 28, 2002. To become a member, each prospective applicant
must also pass an examination covering NYSE rules and regulations.

NYSE members are generally categorized based upon the activities in which
they engage on the trading floor, such as specialists or brokers. The largest
single membership group is floor brokers, which consists of both commission
brokers and independent brokers. Commission brokers are employed by
broker-dealer firms that are members of the NYSE and earn salaries and
commission. Independent floor brokers are brokers who independently handle
orders for other broker-dealers and financial institutions.

THE NYSE SPECIALIST

All trading of securities on the NYSE is conducted through an auction
process. The auction process for each security is managed by the exclusive
specialist for that security. The specialist is a broker-dealer who applies for
and, if accepted, is assigned the role to maintain a fair and orderly market in
its specialist stocks. The number of specialist units on the NYSE has decreased
from 37 at December 31, 1996 to nine at December 31, 2001. A recently announced
transaction, if consummated, would further reduce the number of specialist units
on the NYSE to eight. Of the nine specialist units, the three largest specialist
units as ranked by their number of specialist stocks were responsible for
approximately 56.0% and 69.6% of the average daily trading volume in 2000 and
2001, respectively.

A specialist firm is granted a franchise by the NYSE to conduct the
auction in each of its NYSE-listed stocks. Specialist firms conduct their
auctions at specific trading posts located on the floor of the NYSE. Because the
specialist firm runs the auction in its specialist stocks, it knows of all bids
and offers in those stocks and gathers orders to price its stocks appropriately.

Specialist firms compete for the original listing of stocks through an
allocation process organized by the NYSE. As part of this allocation process,
companies seeking a listing may select a specialist firm in one of two ways.
Under the first method, the NYSE's allocation committee selects the specialist
firm based on specific criteria. Under the second method, available since March
1997, the listing company requests that the allocation committee select three to
five potential specialist firms suitable for the stock, based on criteria
specified by the listing company. The listing company then has the opportunity
to meet with each specialist firm identified by the allocation committee. Within
one week after meeting the competing specialist firms, the listing company must
select a specialist firm. Currently, substantially all of the companies seeking
a listing on the NYSE are opting to make the final choice of their own
specialist firm under the second allocation method.

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When assigned a particular stock, the specialist firm agrees to specific
obligations. The specialist firm's role is to maintain, as far as practicable,
trading in the stock that will be fair and orderly. This implies that the
trading will have reasonable depth and price continuity, so that, under normal
circumstances, a customer may buy or sell stock in a manner consistent with
market conditions. A specialist firm helps market participants achieve price
improvement in their trades because the best bids and offers are discovered
through the auction process. In performing its obligations, the specialist firm
is exposed to all transactions that occur in each of its specialist stocks on
the NYSE floor. In any given transaction, the specialist firm may act as:

o an auctioneer by setting opening prices for its specialist stocks
and by matching the highest bids with the lowest offers, permitting
buyers and sellers to trade directly;

o a facilitator bringing together buyers and sellers who do not know
of each other in order to execute a trade which would not otherwise
occur;

o an agent for broker-dealers who wish to execute transactions as
instructed by their customers (typically, these orders are limit
orders entrusted to the specialist at prices above or below the
current market price); or

o a principal using its own capital to buy or sell stocks for its own
account.

The specialist firm's decision to buy or sell shares of its specialist
stocks as principal for its own account may be based on obligation or
inclination. For example, the specialist firm may be obligated to buy or sell
its specialist stock to counter short-term imbalances in the prevailing market,
thus helping to maintain a fair and orderly market in that stock. At other
times, the specialist firm may be inclined to buy or sell the stock as principal
based on attractive opportunities. The specialist firm may trade at its election
so long as the trade will contribute to a fair and orderly market. In
actively-traded stocks, the specialist firm continually buys and sells its
specialist stocks at varying prices throughout each trading day. The specialist
firm's goal and expectation is to profit from differences between the prices at
which it buys and sells these stocks. In fulfilling its specialist obligations,
however, the specialist firm may, at times, be obligated to trade against the
market, adversely impacting the profitability of the trade. In addition, the
specialist firm's trading practices are subject to a number of restrictions, as
described in "Operations--NYSE Rules Governing Our Specialist Activities."

RECENT TRENDS IN NYSE TRADING AND THE SPECIALIST'S ROLE

Specialist firms generate revenues by executing trades, either as agent or
principal, in their specialist stocks. Accordingly, the specialist firms'
revenues are significantly impacted by the volume of trading on the NYSE. This
volume has increased significantly in recent years. The increase in trading
volume has resulted from a number of factors, including:

o an increase in the number of households investing in stocks;

o an increase in the amount of assets managed through retirement
plans, mutual funds, annuity and insurance products, index funds and
other institutional investment vehicles;

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o the increased popularity and use of computerized trading, hedging
and other derivative strategies;

o an increase in NYSE-listed stocks due to:

o transfers from Nasdaq;

o an increase in listings of foreign companies; and

o initial public offerings and spin-offs;

o higher equity portfolio turnover by individuals and institutional
investors as a result of lower commission rates and other
transaction costs;

o trading in decimal price increments;

o an increase in the amount of shares traded due to stock splits and
stock dividends; and

o on-line trading.

These factors have, in turn, been influenced by low interest rates and low
levels of inflation.

In January 2001, the NYSE commenced trading in decimals. Although the NYSE
average daily trading volume for 2001 increased over prior years, the full
effects of decimalization on the marketplace and specialist profitability are
still uncertain. The NYSE also has increased the window for providing
commission-free execution of trades to five minutes from two minutes. The NYSE
is also considering the following additional changes:

o longer trading days; and

o trading of foreign stocks in ordinary form side by side with their
American Depository Receipts .

These additional changes, if instituted, will likely contribute to
additional growth in NYSE trading volume.

The majority of trades in NYSE-listed stocks take place through NYSE
specialist firms. In 2001, specialist firms handled approximately 83.6% of
trades in NYSE-listed stocks. Trades in NYSE-listed stocks also are generally
effected as follows:

o some stocks are listed on multiple exchanges, such as regional
exchanges, and trades take place on those exchanges;

o NYSE members may trade NYSE-listed stocks off the NYSE in the
over-the-counter market; and

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o non-NYSE members may trade NYSE-listed stocks off the NYSE in
over-the-counter markets.

Technological advances have contributed to the increased trading through
alternative trading systems, called ATSs, such as electronic communications
networks, or ECNs, and crossing systems. While the first ECN was created in
1969, most of the others currently in operation were started in the past few
years. These systems electronically facilitate the matching of buy and sell
orders that are entered by their network members. If a match does not occur,
some ATSs will forward unfilled orders to other ATSs or to exchanges such as the
NYSE. Some of these networks also allow limited negotiation between members to
facilitate a match. These ATSs generally limit trades over their systems to
their members, who are typically large financial institutions, well-capitalized
traders or brokerage firms. Additionally, some ATSs are being developed to
facilitate trading by retail investors. In April 1999, the SEC ruled that these
networks are allowed, and in specified cases are required, to register and
become subject to regulation as stock exchanges.

The percentage of annual trading of NYSE listed stocks on the NYSE has
ranged from 82.5% to 83.7% for the past five years. It is unclear, however, how
the alternative trading methods and new technologies just described or that may
be developed will affect the percentage of trading in listed stocks conducted on
the NYSE. The NYSE has indicated that it is studying the possibility of
embracing electronic communications network technology to expand trading. ATSs
may be developed, organized and operated by large brokerage houses and
investment banks with substantial capital, better access to technology and
direct access to investors. As a result, these parties may be well positioned to
direct trading to ATSs. These alternative trading methods may account for a
growing percentage of the trading volume of NYSE-listed stocks.

The accelerating growth of trading volume, the increase in stock prices on
the NYSE in the 1990s and the more recent increased volatility of stock prices
have increased the demands upon specialists. In order to fulfill their
obligations, specialists are required to execute a greater number of trades in
shorter periods of time with greater price volatility. In addition, specialists
are called upon to take larger positions in their stocks. These factors have led
to a consolidation of specialist units in the past five years. The NYSE
specialist market has become dominated by a number of large, well-capitalized
firms that are able to provide an enhanced level of service.

LABRANCHE'S COMPETITIVE POSITION

We are committed to providing the highest quality service to our various
constituencies. We believe our success is based on the following factors:

o LEADING POSITION IN THE SPECIALIST MARKET. We have a long-standing
reputation as one of the leading specialist firms on the NYSE. We
have successfully grown our business and improved our services
through widely varying market conditions. Trading in the stocks for
which we acted as specialist during 2001 accounted for 27.6% of the
dollar volume on the NYSE and 28.5% of the share volume. Based on
these percentages, we were the largest specialist firm on the NYSE.
We are continuing to develop our relationships with ATSs and to
embrace new technologies in trading platforms.

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o DIVERSE AND HIGH QUALITY SPECIALIST STOCKS. Our listed companies
operate in a variety of industries including financial services,
media, oil and gas, retail, technology and telecommunications. Many
of our listed companies are leaders in their respective fields.
Acting as specialist in the stocks of industry leaders should
benefit us as these leading companies continue to expand their
businesses through internal growth and acquisitions.

o STRONG MARKET-MAKING SKILLS. We utilize our strong market-making
skills to actively trade as principal in our specialist stocks. In
our opinion, we significantly improve liquidity in our specialist
stocks, particularly during periods of market volatility. In 2001,
approximately 33.4% of our trades were as principal as compared to
an average of approximately 30.6% for all NYSE specialists.

o INNOVATIVE CUSTOMER-ORIENTED SERVICES. We are committed to providing
our listed companies with a high level of service, in addition to
our specialist functions on the trading floor. We provide our listed
companies with detailed reports on the trading activity of their
stocks. We also maintain frequent contact with our listed companies
to discuss the trading in their stock. In addition, we were the
first specialist firm to:

o host an annual listed company conference;

o publish a company newsletter; and

o commission customer satisfaction surveys from our listed
companies.

o COMPLETED ACQUISITIONS. Since 1997, we have acquired the following
ten specialist operations, solidifying our position as one of the
leading NYSE specialist firms, as well as establishing and expanding
our presence on the AMEX:

o a portion of the specialist operations of Stern Bros., LLC
(July 1997);

o Ernst, Homans, Ware & Keelips (August 1997);

o Fowler, Rosenau & Geary, LLC (July 1998);

o Henderson Brothers, Inc. (March 2000);

o Webco Securities, Inc. (March 2000);

o the assets and operations of an AMEX options specialist unit
that acted as the specialist in the options of 21 common
stocks (December 2000);

o ROBB PECK McCOOEY Financial Services, Inc. (March 2001);

o the assets and operations of an AMEX specialist firm, Cranmer
& Cranmer, Inc. (August 2001);

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o the remaining interest that we did not previously own in the
specialist business conducted as a joint account by us, R.
Adrian & Company, LLC and Freedom Specialist Inc. (September
2001); and

o Bocklet & Company, LLC (October 2001).

o OTHER ACQUISITIONS. In March 2001, we also acquired ITTI , a company
providing front-end order execution, analysis and reporting
solutions for the wholesale securities dealer market.

Our objective is to continue the growth in our revenues and profits by
continuing to be aggressive in positioning ourselves in the NYSE allocation
process. Between March 1997, when the NYSE adopted the new allocation procedure,
and December 31, 2001, we participated in 178 allocation pools for listed
companies and were selected in 87 of them by management of the listed companies.

ACQUISITIONS DURING 2001

INTERNET TRADING TECHNOLOGIES, INC.

On March 13, 2001, we acquired all the outstanding capital stock of ITTI,
a company that provides front-end order execution, analysis and reporting
solutions for the wholesale securities dealer market. We operated ITTI as a
separate subsidiary until December 31, 2001, when it was merged with and into
our RPM Clearing Corporation subsidiary.

ROBB PECK MCCOOEY FINANCIAL SERVICES, INC.

On March 15, 2001, we acquired ROBB PECK McCOOEY Financial Services, Inc.
("RPM") for approximately 6.9 million shares of our common stock and 100,000
shares of our Series A preferred stock. Each share of our Series A preferred
stock delivered to the former RPM stockholders entitles the holder thereof to
cumulative preferred cash dividends at an annual rate of 8% for the first four
years, 10% for the fifth year and 10.8% thereafter, certain voting rights and
preferred distributions upon liquidation. Approximately 54,500 shares of our
Series A preferred stock issued to the RPM stockholders are currently held in
escrow in order to secure the RPM stockholders' indemnification obligations to
us. In connection with our acquisition of RPM, each formerly outstanding RPM
option was converted into an immediately exercisable option to purchase 98.778
shares of our common stock. We also assumed RPM's liabilities and obligations
under the RPM Deferred Compensation Plan which provides for the payment on or
before December 15, 2007 of approximately $30.2 million, plus interest at 8% per
year, to the former RPM option holders. We also assumed RPM's liabilities and
obligations under RPM's retention bonus pool, which requires the payment of $9.0
million as bonus compensation on March 15, 2004 to as many as 31 former
employees of RPM, subject to certain service requirements.

In connection with the RPM acquisition, we:

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o acquired an additional 27 NYSE memberships, of which 10 were owned
by RPM, pursuant to A-B-C agreements, 15 were leased from third
parties and two seats were owned by RPM employees and contributed to
RPM for its use;

o hired an additional 215 employees, including 120 employees in RPM's
clearing operations and 95 employees in RPM's specialist operations,
of which 27 are specialists and 68 are trading assistants. In
addition, nine former RPM employees became managing directors; and

o acquired an additional 42,300 square feet of office space.

CRANMER & CRANMER, INC.

On August 13, 2001, LaBranche & Co. LLC acquired all the assets relating
to the AMEX stocks and options specialist operations of Cranmer & Cranmer, Inc.
("Cranmer") for an aggregate of approximately $9.2 million, 100,000 shares of
our common stock and an amount equal to the equity capital of Cranmer, including
the net value of Cranmer's open security positions on the closing date of the
acquisition.

FREEDOM SPECIALIST INC, R. ADRIAN & COMPANY, LLC AND LABRANCHE & CO. LLC JOINT
BOOK

On September 20, 2001, LaBranche & Co. LLC acquired the interests in the
Freedom Specialist Inc. ("Freedom"), R. Adrian & Company, LLC ("Adrian") and
LaBranche & Co. LLC Joint Book (the "Joint Book") which it did not previously
own for an aggregate of approximately $13.6 million in cash, 54,750 shares of
our common stock and an amount equal to Freedom's and Adrian's respective shares
of the equity capital of the Joint Book on the closing date of the acquisition.
Simultaneously with this acquisition we transferred the specialist operations of
the Joint Book to our subsidiary LaBranche & Co. LLC.

BOCKLET & COMPANY, LLC

On October 18, 2001, LaBranche & Co. LLC acquired Bocklet & Company, LLC
("Bocklet") for an aggregate of $20.0 million in cash, of which $5.0 million was
paid at the closing, $5.0 million was paid on January 18, 2002 and $5.0 million
is payable on each of April 18, 2002 and July 18, 2002 and 1,100,000 shares of
our common stock. In addition, an amount equal to the equity capital of Bocklet
on the closing date of the acquisition will be paid in three equal installments
of which approximately $1.4 million was paid January 18, 2002 and the remaining
amount will be paid six and nine months from the closing date.

SPECIALIST COMPANIES

As of December 31, 2001, we acted as specialist for 591 common stocks listed on
the NYSE. Our listed companies operate in a variety of industries including
financial services, media, oil and gas, retail, technology and
telecommunications. They range in market capitalization from some of the
smallest on the NYSE to some of its largest and well-known corporations. Of our
NYSE common stock listings, 123 and 69 were foreign listings as of December 31,
2001 and

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December 31, 2000, respectively. As of February 28, 2002, we represented 126
foreign listings on the NYSE. The following is a list of our top 50 listed
companies in terms of market capitalization as of February 28, 2002 in order of
their respective global market capitalization (read in descending order from top
to bottom, left to right):

Exxon Mobil Corporation Wachovia Corporation
GlaxoSmithKline plc Federal Home Loan Mortgage Corp.
Merck & Co., Inc. U.S. Bancorp
SBC Communications Inc. Diageo plc
Philip Morris Companies Inc. Banco Bilbao Vizcaya Argentaria S.A.
HSBC Holdings plc Lowes Companies, Inc.
TOTAL Fina Elf S.A. Enel S.p.A.
Nokia Corporation Schlumberger Limited
Novartis AG PetroChina Company Ltd
Toyota Motor Corporation Koninklijke Philips Electronics N.V.
Bristol-Meyers Squibb Company First Data Corp.
Wells Fargo & Company The News Corporation Limited
Kraft Foods Inc. National Australia Bank Limited
United Parcel Service, Inc. Ford Motor Corp.
Tyco International Ltd. Clear Channel Communications, Inc.
AT&T Corp. ABN Amro Holding N.V.
Taiwan Semiconductor Manufacturing Company Emerson Electric Co.
Medtronic, Inc. Household International, Inc.
Morgan Stanley Dean Witter & Co. United Microelectronics Corporation
Nippon Telegraph and Telephone Corporation AT&T Wireless Group, Inc.
Schering-Plough Corp. Lucent Technologies Inc.
American Express Company Fox Entertainment Group, Inc.
Du Pont (E.I.) de Nemours and Company SunTrust Banks, Inc.
ING Groep N.V. The Kroger Co.
Minnesota Mining & Manufacturing Company Compaq Computer Corporation

OPERATIONS

NYSE RULES GOVERNING OUR SPECIALIST ACTIVITIES

Under NYSE rules, a specialist has a duty to maintain, as far as
practicable, a fair and orderly market in its specialist stocks. In order to
fulfill its obligations, the specialist must at times trade for its own account,
even when it may adversely affect the specialist's profitability. In addition,
under some circumstances, the specialist is prohibited from making trades as
principal in its specialist stocks. The specialist's obligations are briefly
described below.

REQUIREMENT TO TRADE AS PRINCIPAL. A specialist must buy and sell
securities as principal when necessary to minimize an actual or reasonably
anticipated short-term imbalance between supply and demand in the auction
market. The specialist must effect these transactions when their absence could
result in an unreasonable lack of continuity and/or depth in their specialist
stocks. The specialist is not expected to act as a barrier in a rising market or
a support in a falling market,

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but must use its own judgment to try to keep such price increases and declines
equitable and consistent with market conditions.

A specialist must make firm and continuous two-sided quotations that are
timely and that accurately reflect market conditions. In making these
quotations, the specialist's transactions are calculated to contribute to the
maintenance of price continuity with reasonable depth. Following is an
illustration of how a specialist acts as principal to maintain price continuity:

The most recent sale in a listed stock was $50, the best public bid (to
buy) on the specialist's book is $49.75, and the best public offer (to
sell) on the book is $50.25. A broker who wants to buy 100 shares at the
market in this instance without a specialist would purchase at $50.25, the
offer price. Similarly, a broker seeking to sell 100 shares without a
specialist would receive $49.75, the bid price. The specialist, who is
expected to provide reasonable price continuity, in this case might narrow
the quote spread by offering or bidding for stock for its own account. In
this instance, the broker who wants to buy 100 shares might buy at
$50.0625 from the specialist, as opposed to buying the same amount of
shares from the best offer of $50.25, thereby offering price improvement
to the customer. In the next trade, a broker willing to sell 100 shares
might sell to the specialist at $50, as opposed to selling to the best
available bid of $49.75, again achieving price improvement for the
customer.

TRADING RESTRICTIONS. In trading for its own account, the specialist must
avoid initiating a market-destabilizing transaction. All purchases and sales
must be reasonably necessary to permit the specialist to maintain, as far as
practicable, a fair and orderly market in its specialist stocks. In addition,
the specialist must comply with the following trading requirements:

o A specialist must first satisfy a customer's market buy order (an
order to buy at the prevailing market price) before buying any stock
for its own account. Similarly, a specialist must first satisfy a
customer's market sell order (an order to sell at the prevailing
market price) before selling any stock for its own account.

o A specialist must first satisfy a customer's limit order held by it
before buying or selling at the same price for its own account. A
limit order is an order either to buy only at or below a specified
price, or to sell only at or above a specified price. A specialist
may not have priority over any customer's limit order. A specialist,
however, may buy or sell at the same price as a customer limit order
as long as that limit order is executed first.

o If a public buyer wants to buy at a particular price and a seller
wants to sell at the same price, the buyer and seller trade directly
with each other, and the specialist should not interfere in the
transaction.

o The specialist does not charge commissions for trades in which it
acts as a principal.

o Except in some circumstances in less active markets, the specialist
may not, without permission from an NYSE official, initiate
destabilizing trades for its own account which cause the stock price
to rise or fall.

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o Any transactions by the specialist for its own account must be
effected in a reasonable and orderly manner in relation to the
condition of the general market, the market in the particular stock
and the adequacy of the specialist's position to the immediate and
reasonably anticipated needs of the market.

In addition, the specialist cannot be in a control relationship with any
of its listed companies. This means a specialist may not acquire more than 5% of
any common or preferred issue of its specialist stocks and may not own 10% or
more of any common or preferred stock. A specialist may not hold any position as
an officer or director or receive payments or loans or engage in business
transactions with any of its listed companies.

RISK MANAGEMENT

Because our specialist activities expose our capital to significant risks,
managing these risks is a constant priority for us. Our central role in the
auction process helps us to reduce risks by enabling us to incorporate
up-to-date market information in the management of our inventory, subject to our
specialist obligations. In addition, we have developed a risk management
process, which is designed to balance our ability to profit from our specialist
activities with our exposure to potential losses. Our risk management process
includes participation by our executive operating committee, our floor
management committee, our floor team captains and our specialists. These
parties' roles are described as follows:

EXECUTIVE OPERATING COMMITTEE. Our executive operating committee is
composed of Michael LaBranche, Anthony M. Corso, Alfred O. Hayward, Jr., Robert
M. Murphy and James G. Gallagher. This committee is responsible for approving
all risk management policies and trading guidelines for particular specialist
stocks, after receiving input and proposals by the floor management committee.
In addition, our executive operating committee reviews all unusual situations
reported to it by our floor management committee.

FLOOR MANAGEMENT COMMITTEE. Our floor management committee is composed of
Anthony M. Corso, Alfred O. Hayward, Jr., Robert M. Murphy, John McGraner,
Michael Nichols, Thomas G. McLaughlin and Eugene McCarthy. This committee is
responsible for formulating and overseeing our overall risk management policies
and risk guidelines for each of our specialist stocks. In arriving at these
policies and guidelines, our floor management committee considers the advice and
input of our floor team captains. Our floor management committee meets with all
floor team captains no less than once a month to review and, if necessary,
revise the risk management policies for our firm as a whole and/or for
particular specialist stocks. In addition, a member of our floor management
committee is always available on the trading floor to review and assist with any
unusual situations reported by a captain. Our floor management committee reports
to our executive operating committee about each of these situations.

FLOOR TEAM CAPTAINS. We have 21 floor team captains who monitor the
activities of our specialists throughout the trading day from various positions
at our trading posts. The captains observe trades and constantly review trading
positions on a real-time basis through our information systems. In addition, the
captains are readily available to assist our specialists in determining when to
deviate from our policies and guidelines to react to any unusual situations or

15

market conditions. The captains must report these unusual situations to
management, including any deviations from our policies and guidelines. Captains
meet with each specialist at least once a week to evaluate the specialist's
adherence to our risk management policies and guidelines. Captains also meet
among themselves at least twice weekly to review risk policies and guidelines
and, if appropriate, make new recommendations to the floor management committee.

SPECIALISTS. Our specialists conduct auctions based upon the conditions of
the marketplace. In doing so, specialists observe our risk management policies
and guidelines as much as practicable. Specialists must immediately notify a
captain of any unusual situations or market conditions requiring a deviation
from our policies and guidelines.

We rely heavily on our information systems in conducting our risk
management. Management members and captains must constantly monitor our
positions and transactions in order to mitigate our risks and identify
troublesome trends as they occur. We have invested substantial capital, along
with the NYSE, in real-time, on-line systems which give management instant
access to specific trading information at any time during the trading day,
including:

o our aggregate long and short positions;

o the various positions of each of our trading professionals;

o our overall position in a particular stock;

o capital and profit-and-loss information on an aggregate, per
specialist or per issue basis; and

o average position size.

CIRCUIT BREAKER RULES. The NYSE has instituted certain circuit breaker
rules intended to halt trading in all NYSE-listed stocks in the event of a
severe market decline. The circuit breaker rules impose temporary halts in
trading when the Dow Jones Industrial Average drops a certain number of points.
Effective January 2, 2001, circuit breaker levels are set quarterly at 10, 20
and 30 percent of the Dow Jones Industrial Average closing values of the
previous month, rounded to the nearest 50 points.

LISTED COMPANY SERVICES

We are committed to providing our listed companies with a high level of
service, in addition to our specialist functions on the trading floor. We have a
Corporate Relations Department consisting of 19 full-time employees devoted to
serving our listed companies. The most important function of the Corporate
Relations Department is to provide current information to the listed companies.
Upon request, our Corporate Relations Department provides our listed companies
with the following reports:

o daily reports on the trading results of their stock;

o real-time data regarding intra-day trading activity in their stock;
and

16

o weekly, monthly and yearly reports which analyze short and long term
trading trends in their stock.

In addition to providing trading information, we help to educate our listed
companies on general market trends. We organize annual educational conferences
that review trends in the securities industry and NYSE trading. We also publish
for and distribute to our listed companies a periodic newsletter that reviews
market trends. Finally, we survey our specialist companies annually on the
quality of our services, and use the information obtained in these surveys to
continually improve our services.

NYSE MEMBERSHIPS

NYSE memberships are granted only to individuals, and each individual
specialist must own or lease a NYSE membership. As of December 31, 2001, 118
NYSE memberships were used or available for use in our business. As of February
28, 2002, our 112 specialists owned or leased NYSE memberships under the
following arrangements:

o 10 memberships were owned directly by 10 of our employees, and we
paid these employees at prevailing market rates for the use of their
memberships;

o 34 were owned by specialists, who acquired their memberships through
financing provided by us pursuant to A-B-C agreements; and

o 68 were leased by specialists from other individual members, and we
pay and guarantee the lease payments.

Additionally, LaBranche & Co. LLC has financed the acquisition of two
additional NYSE memberships that are available for use by its employees. Our
LFSI subsidiary also has financed the acquisition of two NYSE memberships that
are available for use by its employees. Two additional memberships are directly
owned and used by two LFSI employees, and LFSI pays these employees at
prevailing market rates for the use of their memberships.

AMEX OPTIONS SPECIALIST UNIT

In December 2000, we purchased the assets and operations of an AMEX
options specialist unit and, in August 2001, we expanded our AMEX specialist
activities by purchasing the assets and operations of Cranmer, another AMEX
specialist firm. Our AMEX specialist business is conducted by our LaBranche &
Co. LLC subsidiary. As of December 31, 2001 this unit acted as the specialist in
57 stocks and 122 options on the AMEX. As of February 28, 2002 this unit acted
as specialist in 56 stocks and 125 options on the AMEX. In our view, these
acquisitions enhance our commitment to the listed auction market and are
important steps in the implementation of our growth strategy. As of December 31,
2001, eight of the nine AMEX memberships utilized by our AMEX specialist unit
were leased by eight specialist employees of that unit, and one membership was
owned directly by an employee. LaBranche & Co. LLC pays and guarantees the
rental payments due under the leases of AMEX memberships and pays its
employee for the use of his AMEX membership.

17

OUR INFORMATION AND COMMUNICATIONS SYSTEMS AND THE NYSE'S SUPER-DOT SYSTEM

As a self-clearing broker-dealer, we have made significant investments in
our trade processing systems. Our use of and dependence on technology have
allowed us to maintain our significant growth over the past several years. In
addition to using consultants who primarily service the specialist industry, we
have an in-house information technology staff. As of February 28, 2002, we
cleared an average of approximately 126,000 principal trades per day. We also
conduct clearing operations involving trades for third parties through our LFSI
subsidiary.

Our information systems send and receive data from the NYSE through a
dedicated data feed. Our systems enable us to monitor, on a real-time basis, our
profits and losses along with our trading positions. The NYSE supplies us with
specialist position reporting system terminals both on the trading floor and in
our offices. These terminals allow us to monitor our trading profits and losses
as well as our positions.

We have a back-up disaster recovery center in New Jersey. The back-up
system operates as a mirror image of our primary computer system in New York
City through a direct connection between the two sites which we utilize to
back-up all data on an hourly basis. We also test both systems on a regular
basis to assure that they are fully operational. Subsequent to the September 11
disaster, our operations group utilized our New Jersey site to clear our
specialist business, as our primary facilities were inaccessible. Due to the
effectiveness of our back-up facility, our operations were not materially
impacted. We are reevaluating our business continuity processes and are
formalizing a comprehensive plan. We also are in the process of securing a
second back-up facility in another New York state location so that all aspects
of our operations are safeguarded from potential business interruption.

In executing trades on the NYSE, we receive electronic orders from the
Super-Dot system, an order routing system operated by the NYSE. The Super-Dot
System is designed to handle individual orders of up to 100,000 shares and is
essentially an electronic broker. Orders that originate through the Super-Dot
system are routed directly to us through our computer system at the NYSE. When
we receive an order from the Super-Dot system, we conduct the same auction
process and we are subject to the same obligations as with any other order.

Our information technology staff has developed software which enables our
corporate relations staff and our specialists to share information with each
other regarding upcoming company and industry conferences. In addition, we
monitor each of our specialist stocks intra-day to see if there are any
significant price and/or volume variances of which we should alert the listed
company. This has proven to be a valuable customer service tool.

CLEARING OPERATIONS

Our LFSI clearing subsidiary provides services to individual and
institutional clients, including traders, professional investors, institutions
and broker-dealers. These services include clearing and custody services,
customer account maintenance and customized data processing services. The use of
new technologies at our LFSI subsidiary has enhanced its ability to handle an
increasing volume of transactions. These technologies allow our LFSI subsidiary
to provide customized and detailed account information and implement
straight-through processing

18

solutions to better serve customers. Before conducting business with a
prospective customer, we review such factors as the prospective customer's
experience in the securities industry, financial condition and personal
background.

Our LaBranche & Co. LLC subsidiary acts as a self-clearing broker-dealer
for our NYSE and AMEX equity specialist business. All trades made in connection
with our NYSE and AMEX equity specialist business are cleared by LaBranche & Co.
LLC.

DIRECT ACCESS BUSINESS

The Institutional Client Group division of our LFSI subsidiary places its
customers in direct contact with the NYSE. Utilizing easy-to-use web-based
technology, this division provides its institutional customers with the choice
of two conduits for sending their order flow directly to the point of sale on
the floor of the NYSE. Orders that require special attention can be sent to one
of this division's licensed floor brokers for customized handling. Otherwise,
customers can send their orders directly to the specialist's order book using
the NYSE's Super-Dot system. The Institutional Client Group division's brokers
take advantage of the NYSE's advanced wireless technology to communicate
directly with its trading customers. By employing the advanced technology, its
customers receive extremely fast trade executions and confirmations. All
customer orders are treated with strict confidentiality and anonymity, allowing
for the best execution with the least market impact. In addition, the
Institutional Client Group division's customers are given all the benefits of
straight-through, seamless trade processing. Our LFSI subsidiary also clears and
delivers the trades directly to its customers' depository accounts.

PROPRIETARY TRADING

In 1995, we initiated a proprietary trading program, seeking to leverage
our trading and market experience. Our strategy is short-term oriented, and most
of our positions are maintained intra-day and not held overnight. During 2001
our five traders focused primarily on stocks listed on the NYSE. In 2001, we
derived 0.3% of our revenues from our proprietary trading. Our proprietary
trading desk utilizes a Windows NT based trade reporting system which captures
all trades executed by the trading desk and marks all positions to market.
Proprietary traders who are employees of LaBranche & Co. LLC are not permitted
to trade in stocks for which we act as specialist. As of January 1, 2002, three
of our proprietary traders became employees of our LFSI subsidiary, and are now
permitted to trade stocks for which we act as specialist.

MARKETING

It is a priority for our management to proactively identify potential
listing companies before the allocation process begins. We contact these
companies and commence our marketing efforts upon determining that they are
considering listing on the NYSE. Our marketing efforts typically consist of
members of our management group visiting with the companies that are considering
listing on the NYSE and describing our services. We also provide written
literature describing our operations, our listed companies, our more than
75-year history as a specialist firm and a general overview of the specialist
industry.

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REGULATORY MATTERS

GENERAL

The securities industry in the United States, including all
broker-dealers, is subject to regulation under both federal and state laws. In
addition, the SEC and the NYSE require compliance with their rules and
regulations. As a matter of public policy, regulatory bodies are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of investors participating in those markets.

As a broker-dealer, we are subject to regulations concerning operational
and financial aspects of our business. We are subject to registration
requirements with various government entities and self-regulatory organizations,
commonly referred to as SROs, with which we must comply before we can conduct
our business. We are also subject to laws, rules and regulations forcing us to
comply with financial reporting requirements, trade practices, capital structure
requirements, and record retention requirements governing the conduct of our
directors, officers and employees. Failure to comply with any of these laws,
rules or regulations could result in censure, fine, the issuance of
cease-and-desist orders or the suspension or disqualification of our directors,
officers or employees, and other negative consequences, which could have an
adverse effect on our business.

As a NYSE specialist firm, we are under constant review by the NYSE on all
aspects of our operations and financial condition. As part of the price
discovery mechanism implemented by the NYSE, every specialist transaction is
published immediately on the tape and is broadcast worldwide. The NYSE also
employs sophisticated monitoring and stringent rules approved by the SEC. The
NYSE's Market Surveillance Division examines specialists' trading in all stocks,
every trading day, including specialists' decisions to trade or to not trade as
principal.

CAPITAL REQUIREMENTS

As a broker-dealer, we are subject to SEC Rule 15c3-1, which requires
minimum net regulatory capital. We are required to maintain minimum net capital,
as defined, equivalent to the greater of $100,000 or 1/15 of our aggregate
indebtedness, as defined. At December 31, 2001, our net capital, as defined by
this rule, was $484.2 million and exceeded minimum requirements by $481.4
million.

The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. Under changes to Rule
104, effective October 30, 2000specialist units that exceed five percent in any
of the NYSE's four concentration measures must maintain minimum net liquid
assets based upon the securities for which they act as the specialist. The
requirements state that the net liquid assets must be equivalent to $4.0 million
for each stock in the Dow Jones Industrial Average, $2.0 million for each stock
in the S&P 100 Stock Price Index, excluding stocks included in the previous
classification, $1.0 million for each stock in the S&P 500 Stock Price Index,
excluding stock included in the previous classifications, $500,000 for each
common stock, excluding bond funds and stocks included in the previous
classifications, and $100,000 for each stock not included in any of the above
classifications. In addition, the NYSE requires any

20

new specialist entities that result from a merger, acquisition, consolidation or
other combination of specialist entities to maintain net liquid assets
equivalent to the greater of either: (1) the aggregate net liquid assets of the
specialist entities prior to their combination or (2) the new capital
requirements prescribed under Rule 104. As of December 31, 2001, LaBranche & Co.
LLC's net liquid asset requirement was $446.0 million, and its actual net liquid
assets were approximately $491.5 million. Net liquid assets for a specialist who
also engages in transactions other than specialist activities is based upon its
excess net capital as determined in accordance with SEC Rule 15c3-1.

As registered broker-dealers and member firms of the NYSE, our former
subsidiary Henderson Brothers and our RPM Clearing Corporation subsidiary were
also subject to SEC Rule 15c3-1 as adopted and administered by the NYSE and the
SEC. Under the alternative method permitted by this rule, the minimum required
net capital for each of these subsidiaries as of December 31, 2001 was equal to
the greater of $250,000 or 2% of aggregate debit items as defined. As of
December 31, 2001, the combined net capital of these subsidiaries as defined
under SEC Rule 15c3-1 was $20.5 million which exceeded minimum requirements by
$19.7 million.

Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.

NEW PROPOSED REGULATORY LEGISLATION

On October 26, 2001, President Bush signed the USA PATRIOT Act, aimed at
giving the government new powers in the war on terrorism. Title III of the new
legislation, the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, imposes significant new anti-money laundering
requirements on all financial institutions, including domestic banks and
domestic operations of foreign banks, broker-dealers, futures commission
merchants and investment companies. We do not currently know the full effects of
this legislation, but it will result in additional reporting and disclosure
requirements.

COMPETITION

We obtain each of our new listings on the NYSE by participating in an
allocation process. As part of this process, either the allocation committee of
the NYSE or the listing company chooses the specialist firm. We compete with
other specialist firms based on a number of factors, including:

o the strength of our capital base;

o our willingness to commit our own capital and trade for our own
account while conducting our specialist operations; and

o the ancillary services we offer our specialist companies, such as
providing information on the trading activities in their stocks.

The following are the remaining specialist units as of February 28, 2002,
listed in descending order based on number of common stock listings:

21

o LaBranche & Co. LLC

o Spear, Leeds & Kellogg Specialist

o Fleet Meehan Specialists, Inc.

o Wagner Stott Bear Specialists, LLC

o Van Der Moolen Specialists USA

o Performance Specialist Group, LLC

o Susquehanna Specialists, Inc.

o Walter N. Frank & Co. LLC

The competition for obtaining new listed companies is intense. We expect
competition to continue and intensify in the future. Some of our competitors may
have greater financial resources than we have and may also have greater name
recognition. These competitors may be able to respond more quickly to new or
evolving opportunities and listed company requirements. They may also be able to
undertake more extensive promotional activities to attract new listing
companies.

EMPLOYEES

As of December 31, 2001, we had 545 full-time employees, including 53
managing directors. As of February 28, 2002, we had 550 full time employees,
including 63 managing directors with:

o 123 specialists, including 55 managing directors and 11 AMEX options
specialists;

o 245 trading assistants;

o 19 corporate relations department employees;

o 52 clearing operations employees;

o 22 individuals employed as proprietary traders, floor brokers and
registered representatives; and

o 89 management, administration and finance staff, including 8
managing directors.

Our employees are not covered by a collective bargaining agreement. We
have never experienced an employment-related work stoppage. We consider our
employee relations to be good.

22

ITEM 2. PROPERTIES.

Our offices are located at One Exchange Plaza, New York, New York, where
we lease approximately 45,000 square feet under three separate leases, with
9,000 square feet expiring in January 2003 and approximately 36,000 square feet
expiring in January 2008. We also lease approximately 45,000 square feet at 120
Broadway, New York, New York, under a lease expiring in March 2006. In addition,
we lease four trading posts on the floor of the NYSE. We lease approximately
21,000 square feet of additional space at locations in New York and New Jersey
under leases expiring between September 2002 and July 2004. We intend to renew
the lease that expires in September 2002. We believe that our current leased
space is suitable and adequate for the operation of our business as presently
conducted and as contemplated to be conducted in the immediate future.

ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any material legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the
fourth quarter of our fiscal year ended December 31, 2001.

23

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION AND HOLDERS

Our common stock is quoted on the NYSE under the symbol "LAB." The
following table sets forth the range of high and low closing sales prices for
our common stock on the NYSE for the periods indicated:

As of March 14, 2002, we had approximately 150 stockholders of record of
our common stock and an estimated 4,299 beneficial owners. The closing sale
price of our common stock on March 14, 2002 was $33.30 per share.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We do not expect to
declare or pay any dividends on our common stock in the foreseeable future, but
instead intend to retain all earnings, if any, to invest in our operations. The
payment of future dividends is within the discretion of our board of directors
and will depend upon our future earnings, if any, our capital requirements,
financial condition and other relevant factors.

In connection with our acquisition of RPM, we issued 100,000 shares of our
Series A preferred stock. Each outstanding share of our Series A preferred stock
entitles the holder thereof

24

to cumulative preferred cash dividends at an annual rate of 8% of the
liquidation preference per share until the fourth anniversary of the closing of
the merger, 10% until the fifth anniversary of the closing, and 10.8%
thereafter. Dividends are payable on the first day of January and the first day
of July of each year (or if such date is not a regular business day, then the
next business day thereafter). Dividends on the issued and outstanding shares of
Series A preferred stock are preferred and cumulative and accrue from the date
on which they were originally issued. On February 19, 2002, we repurchased
approximately 28,164 shares of our Series A preferred stock at $1,000 per share
plus accrued and unpaid dividends through the date of purchase, pursuant to a
tender offer commenced on January 18, 2002.

RECENT ISSUANCE OF UNREGISTERED SECURITIES

In connection with our acquisition of the assets and operations of Cranmer
on August 13, 2001 we issued 100,000 shares of our common stock to Cranmer in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. We subsequently registered these shares for resale in
November 2001.

In connection with our acquisition on September 20, 2001 of the remaining
interest in the Joint Book that we did not already own we issued 54,750 shares
of our common stock to Adrian in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.

In connection with our acquisition of Bocklet on October 18, 2001, we
issued 1,100,000 shares of our common stock to the members of Bocklet in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. We subsequently registered these shares for resale in
November 2001.

25

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The selected consolidated financial data set forth below for the years
ended December 31, 2001, 2000 and 1999 and as of December 31, 2001 and 2000 have
been derived from our consolidated financial statements, which have been audited
by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this filing. The selected consolidated financial data set forth
below for the years ended December 31, 1998 and 1997 and as of December 31,
1999, 1998 and 1997 have been derived from our consolidated financial
statements, audited by Arthur Andersen LLP, independent public accountants,
which are not included elsewhere in this filing. The selected consolidated
financial data set forth below should be read in conjunction with the
consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this filing.

(1) Excludes subordinated liabilities related to contributed exchange
memberships.

QUARTERLY RESULTS (UNAUDITED)

The following represents the firm's unaudited quarterly results for 2001
and 2000. These quarterly results were prepared in accordance with accounting
principles generally accepted in the United States and reflect all adjustments

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND THE NOTES TO
SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS FILING. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRY. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO THOSE
DISCUSSED IN "RISK FACTORS" ATTACHED HERETO AS EXHIBIT 99.1. OUR ACTUAL RESULTS
COULD DIFFER

27

MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

OVERVIEW

Organized in 1999 in connection with the reorganization of LaBranche & Co.
from partnership to corporate form and the related initial public offering of
our common stock, LaBranche & Co Inc. is the sole member of LaBranche & Co. LLC
and the sole stockholder of LFSI. Our subsidiary LaBranche & Co. LLC is one of
the oldest and largest specialist firms on the NYSE, as well as a specialist on
the AMEX. LFSI provides clearing, prime brokerage and execution services to both
individual and institutional clients, including traders, professional investors
and broker-dealers, direct access floor brokerage services. In addition, LFSI
provides front-end order execution systems, analysis and reporting solutions for
the wholesale securities market.

Our business has grown considerably during the past five years. We have
accomplished this growth both internally and through acquisitions. Our revenues
increased from $49.9 million in 1996 to $424.1 million in 2001, representing a
compound annual growth rate of 53.4%. During the same period, we increased the
number of our NYSE common stock listings from 125 to 591.

REVENUES

Our revenues consist primarily of net gain earned from principal
transactions in securities for which we act as specialist, and commissions
revenue earned from specialist and clearance activities. Net gain on principal
transactions represents trading gains net of trading losses and SEC transaction
fees, and are earned by us when we act as principal buying and selling our
specialist stocks and options. These revenues are primarily affected by changes
in share volume and fluctuations in price of our specialist stocks and options.
Commissions revenue consists primarily of fees we earn when our specialists act
as agents to match buyers and sellers for limit orders executed by us on behalf
of brokers after a specified period of time; we do not earn commissions when we
match market orders. In addition, commissions revenue includes fees charged to
customers for execution and clearance by our clearing subsidiaries, Henderson
Brothers and RPM Clearing Corporation. Other revenue consists of interest
income, fees charged to customers for use of the front-end order execution
system developed by ITTI, proprietary trading revenues and earnings or losses
from investments in a hedge fund and two joint specialist books. For the year
ended December 31, 2001, net gain on principal transactions represented 80.4% of
our total revenues, commissions revenue represented 14.8% of our total revenues,
and other revenue represented 4.8% of our total revenues. The respective
percentages for the prior year were 82.1%, 13.2% and 4.7%.

EXPENSES

Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries and wages and profitability-based
compensation. Profitability-based

28

compensation includes compensation and benefits paid to managing directors,
trading professionals and other employees based on our profitability.

Prior to our reorganization from partnership to corporate form in August
1999, a large portion of the compensation payments to our managing directors had
not been presented as part of operating expenses. The aggregate amount of these
compensation payments generally approximated the interest of LaB Investing Co.
L.L.C., formerly the general partner of LaBranche & Co., in the income of
LaBranche & Co., before managing directors' compensation. Generally, these
payments of compensation were allocated among our managing directors based on
their respective percentage interests in the profits of LaB Investing Co. L.L.C.
Subsequent to the reorganization transactions, we include payments to managing
directors in employee compensation and related benefits expense. Therefore,
historical income before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes for 1999 and
years prior, understates our operating costs when compared to our present
corporate structure.

REORGANIZATION TRANSACTIONS

In August 1999, we reorganized from partnership to corporate form. Prior
to the reorganization, we operated as LaBranche & Co., a limited partnership and
LaB Investing Co. L.L.C., a limited liability company and the general partner of
LaBranche & Co. As part of the reorganization, we redeemed limited partnership
interests in LaBranche & Co. and redeemed or purchased all membership interests
in LaB Investing Co. L.L.C. in exchange for a combination of cash, indebtedness
and common stock of LaBranche & Co Inc. The redemption of the limited
partnership interests was accounted for as a step acquisition under the purchase
method of accounting. The excess of purchase price over the limited partners'
capital accounts of $127.4 million was allocated to intangible assets. Following
the reorganization, LaBranche & Co Inc. became a holding corporation whose
assets consisted primarily of ownership interests in LaBranche & Co. and LaB
Investing Co. L.L.C. As of June 30, 2000, LaB Investing Co. L.L.C. was merged
with and into LaBranche & Co. and on the same date, LaBranche & Co. converted
into a limited liability company and changed its name to LaBranche & Co. LLC. As
a result, LaBranche & Co Inc. became, and continues to be, the sole member of
our specialist subsidiary, LaBranche & Co. LLC.

As of December 31, 2001 our Henderson Brothers and ITTI subsidiaries were
merged with and into our RPM Clearing Corporation subsidiary. RPM Clearing
Corporation then changed its name to LFSI in January 2002, of which LaBranche &
Co Inc. is the sole shareholder.

INCOME TAXES

As a partnership, we were not subject to U.S. federal, state and local
income taxes, apart from the 4% New York City unincorporated business tax. As
part of our restructuring to a corporation, we are subject to U.S. federal,
state and local income taxes.

29

COMPLETED ACQUISITIONS

On March 13, 2001, we acquired all the outstanding capital stock of ITTI,
a company that provides front-end order execution systems, analysis and
reporting solutions for the wholesale securities dealer market. The results of
the operations of ITTI have been included in our financial statements since
March 14, 2001. The excess of purchase price over fair value of net tangible
assets of approximately $4.3 million was allocated to goodwill.

On March 15, 2001, we acquired RPM for an aggregate of approximately 6.9
million shares of our common stock and 100,000 shares of nonconvertible Series A
preferred stock. In addition, each formerly outstanding RPM option was converted
into an immediately exercisable option to purchase 98.778 shares of our common
stock. The adjusted excess of purchase price over fair value of net tangible
assets of approximately $434.7 million was allocated to specialist stock list
and goodwill. The results of the operations of RPM have been included in our
financial statements since March 16, 2001. As a result of the exercise of
replacement options granted to former RPM employees, we recorded a tax benefit
not reflected through the results of operations of $16.2 million for the year
ended December 31, 2001.

On August 13, 2001, LaBranche & Co. LLC acquired all the assets relating
to the AMEX stocks and options specialist operations of Cranmer for an aggregate
of approximately $9.2 million, 100,000 shares of our common stock and an amount
equal to the equity capital of Cranmer, including the net value of Cranmer's
open security positions on the closing date of the acquisition. The excess of
purchase price over fair value of net tangible assets of approximately $14.0
million was allocated to specialist stock list and goodwill. The results of the
AMEX specialist operations formerly conducted by Cranmer have been included in
our consolidated financial statements since August 14, 2001.

On September 20, 2001, LaBranche & Co. LLC acquired the interests in the
Joint Book which it did not previously own for an aggregate of approximately
$13.6 million in cash, 54,750 shares of our common stock and an amount equal to
Freedom's and Adrian's respective shares of the equity capital of the Joint Book
on the closing date of the acquisition. The excess of purchase price over fair
value of net tangible assets of approximately $15.0 million was allocated to
specialist stock list and goodwill. The results of the operations formerly
conducted by the Joint Book in which we previously did not own an interest have
been included in our consolidated financial statements since September 21, 2001.

On October 18, 2001, LaBranche & Co. LLC acquired Bocklet for an aggregate
of $20.0 million in cash, of which $5.0 million was paid at the closing,$5.0
million was paid on January 18, 2002 and $5.0 million is payable on each of
April 18, 2002 and July 18, 2002 and 1,100,000 shares of our common stock. In
addition, an amount equal to the equity capital of Bocklet on the closing date
of the acquisition will be paid in three equal installments of which
approximately $1.4 million was paid January 18, 2002 and the remaining amount
will be paid six and nine months from the closing date. The excess of purchase
price over fair value of net tangible assets of approximately $53.4 million was
allocated to specialist stock list and goodwill. The results of

30

the operations formerly conducted by Bocklet have been included in our financial
statements since October 19, 2001.

RECENT DEVELOPMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination, requiring that the purchase method of
accounting be used in all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets acquired individually or with a group of assets. The
statement provides that intangible assets with indefinite useful lives will no
longer be amortized, effective for fiscal years beginning after December 15,
2001 for intangible assets existing at June 30, 2001 or effective immediately
for intangible assets acquired after June 30, 2001. Rather, these assets will be
tested at least annually for impairment by applying a fair-value based test. In
addition, intangible assets with finite useful lives continue to be amortized
over their useful lives, which are no longer limited to 40 years. The provisions
of SFAS No. 142 are effective for fiscal years beginning after December 15,
2001. Accordingly, commencing January 2002, we will cease amortization of
recorded goodwill and intangible assets with indefinite useful lives and the
amortization expense for these intangible assets will no longer be included in
our results of operations. We do not anticipate incurring any impairment charges
upon implementation of SFAS No. 142. However, it is possible that in the future,
after periodic testing, we may incur impairment charges related to the carrying
value of goodwill and intangible assets recorded in our financial statements.

In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
do not believe the implementation of SFAS No. 144 will have a material impact on
our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

All of our principal securities transactions and the related revenues and
expenses are recorded on a trade date basis. Customer securities transactions
and the related revenues and expenses are recorded on a settlement date basis,
which does not differ materially from trade date basis. Securities owned and
securities sold, but not yet purchased are reflected at market value and
unrealized gains and losses are reflected in net gain on principal transactions.

Our balance sheet contains significant intangible assets. These intangible
assets are comprised of our specialist stock lists, trade name and goodwill
acquired in connection with our various acquisitions and the limited partner
buyout that occurred in connection with our reorganization from partnership to
corporate form in August 1999. The specialist stock lists and trade name are
being amortized on a straight-line basis over 15 to 40 years and the goodwill is
being amortized on a straight-line basis over 15 years. The allocations of
purchase price and determinations of useful lives were based upon independent
appraisals for all acquisitions

31

through March 2001. In addition, the useful lives of the acquired specialist
stock lists were determined based upon analysis of historical turnover
characteristics of the specialist stocks comprising these lists. For
acquisitions subsequent to March 2001, the allocations of purchase price and
determinations of useful lives were based upon management analysis of revenues,
consideration paid, common stock listings as well as other relevant data and
ratios. This information was analyzed and compared to the results of the
independent appraisals conducted on acquisitions prior to March 2001.

As discussed under "Recent Accounting Pronouncements", with the
implementation of SFAS No. 142 we will no longer amortize goodwill and
intangible assets with indefinite useful lives, which includes goodwill and
trade name. Application of the non-amortization provisions of SFAS No. 142 is
currently expected to result in an increase in results from operations of
approximately $28.2 million. Commencing 2002, we will perform periodic
impairment tests on these assets to determine if there is a need to write them
down. We do not anticipate incurring any impairment charges upon implementation
of SFAS No. 142, but it is possible that in the future the carrying value of our
goodwill and intangible assets may be reduced.

REPURCHASE OF OUR PREFERRED STOCK

On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stock for $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002, we purchased all the
approximately 28,164 shares that had been tendered for approximately $28.5
million, including accrued but unpaid dividends. As a result of the purchase, we
recorded a one-time expense due to the acceleration of the discount accretion on
the shares purchased of approximately $1.5 million.

TRUST DECS OFFERING

On February 8, 2002, certain managing directors of LaBranche & Co. LLC
entered into prepaid forward contracts with DECS Trust IX, a statutory business
trust , pursuant to which the trust agreed to purchase from the participating
managing directors, on a date which is expected to be February 8, 2005 , an
aggregate of 3,800,000 shares of our common stock owned by these managing
directors, subject to the terms and conditions set forth in the contracts. The
trust concurrently sold 3,800,000 trust securities , known as DECS, to
investors. We did not receive, nor will we receive, any portion of the proceeds
from the sale of shares pursuant to the contracts or from the sale of the DECS.
The participating managing directors bore responsibility for payment of the
expenses incurred by them in connection with this transaction.

RESULTS OF OPERATIONS

The following table sets forth the statement of operations data for the
years indicated as a percentage of total revenues:

32

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES

Total revenues increased 23.0% to $424.1 million for 2001, from $344.8
million for 2000, principally due to the increase in revenue from net gain on
principal transactions. Net gain on principal transactions increased 20.5% to
$340.8 million for 2001, from $282.9 million for 2000. This increase was due to
the RPM, Joint Book and Bocklet acquisitions in March, September and October
2001, respectively, as a result of which we became the specialist for 218
additional common stock listings. In addition, increased share volume in
principal trading in our specialist stocks traded on the NYSE also contributed
to the increase in revenue. Our share volume as principal increased 51.1% to
27.2 billion shares for 2001, from 18.0 billion shares for 2000.

Commissions revenue increased 38.5% to $62.9 million for 2001, from $45.4
million for 2000. This increase was primarily due to an increase in commissions
and clearance revenue earned by our Henderson Brothers and RPM Clearing
Corporation subsidiaries. The share volume executed by us as agent in our
specialist stocks increased 10.7% to 6.2 billion shares for 2001, from 5.6
billion shares for 2000. Despite the increase in share volume, competitive price
pressures within the marketplace mitigated the increases in our clearance
revenue.

Other revenue increased 24.2% to $20.5 million for 2001, from $16.5
million for 2000. This increase was primarily due to the revenues earned by our
ITTI and RPM Clearing Corporation subsidiaries, as well as an increase in our
interest income due to the investment of

33

additional funds. These gains were offset by losses incurred by our investments
in a hedge fund, joint trading books as well as other non-marketable
investments.

EXPENSES

Total expenses before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes increased
50.1% to $267.4 million for 2001 from $178.2 million in 2000.

Employee compensation and related benefits increased 24.8% to $110.8
million for 2001, from $88.8 million for 2000. This increase was due to the RPM,
Bocklet and other 2001 acquisitions , which increased our average headcount for
the year by approximately 226 individuals. As a percentage of total revenues,
employee compensation increased to 26.1% of total revenues for 2001, from 25.7%
of total revenues for 2000.

Interest expense increased 24.1% to $52.0 million for 2001, from $41.9
million for 2000. This increase was primarily due to the assumption of
approximately $17.4 million and $9.0 million of promissory notes and secured
demand notes, respectively, in connection with the RPM acquisition. As of
December 31, 2001, approximately $14.1 million of the promissory notes were
outstanding as the result of scheduled repayments throughout the year. The
issuance of $16.4 million of subordinated indebtedness in connection with the
Bocklet acquisition also contributed to the increase. In addition, the increase
was due to a full year of interest expense on $250.0 million of indebtedness,
incurred in connection with the Henderson Brothers and Webco acquisitions. As a
percentage of total revenues, interest expense increased to 12.3% of total
revenues for 2001, from 12.2% of total revenues for 2000.

Depreciation and amortization of intangibles expense increased 113.5% to
$39.5 million for 2001, from $18.5 million for 2000. Amortization of intangibles
increased as a result of the $434.7 million of intangible assets recorded as a
result of our acquisition of RPM. As a percentage of total revenues,
depreciation and amortization of intangibles expense increased to 9.3% of total
revenues for 2001, from 5.4% of total revenues for 2000.

Exchange, clearing and brokerage fees expense increased 339.2% to $22.4
million for 2001, from $5.1 million for 2000. This increase was primarily due to
a new NYSE allocation fee, requiring specialist firms to share the cost of newly
allocated listings on the NYSE, an increase in NYSE regulatory fees based on
exchange seat use, an increase in exchange and brokerage fees related to our
expanded execution and clearing business and an increase in trading volumes as a
result of the RPM, Bocklet and other 2001 acquisitions. As a percentage of total
revenues, exchange, clearing and brokerage fees expense increased to 5.3% of
total revenues for 2001, from 1.5% of total revenues for 2000.

Lease of exchange memberships expense increased 88.1% to $20.5 million for
2001, from $10.9 million for 2000. This increase was due to the increase in the
number of our NYSE leased memberships from 50 to 80, and to an increase in the
average annual leasing cost of a membership from approximately $276,000 to
$312,000. In addition, we also leased eight AMEX seats during 2001 as a result
of the Cranmer acquisition. As a percentage of total revenues lease

34

of exchange memberships expense increased to 4.8% of total revenues for 2001,
from 3.2% of total revenues for 2000.

Legal and professional fees increased 163.2% to $5.0 million for 2001,
from $1.9 million for 2000. This increase was primarily the result of
professional fees incurred by our acquired subsidiaries ITTI and RPM Clearing
Corporation, as well as an increase in legal, accounting and other professional
fees in our existing businesses.

Communications expense increased 220.0% to $4.8 million for 2001, from
$1.5 million for 2000. This increase was primarily the result of additional
telephone, data retrieval and informational services utilized due to the growth
of our business.

Occupancy expense increased 200.0% to $3.9 million for 2001, from $1.3
million for 2000. This increase was primarily the result of additional leased
office space acquired in connection with the RPM acquisition as well as the
general expansion of our business.

Other expenses increased 2.4% to $8.5 million for 2001, from $8.3 million
for 2000. This increase was primarily due to an increase in advertising and
promotional costs, and increased charitable contributions.

INCOME BEFORE MANAGING DIRECTORS' COMPENSATION, LIMITED PARTNERS' EARNINGS IN
INTEREST OF SUBSIDIARY AND PROVISION FOR INCOME TAXES

Income before managing directors' compensation, limited partners' interest
in earnings of subsidiary and before provision for income taxes decreased 5.9%
to $156.7 million for 2001, from $166.6 million for the same period in 2000.
This decrease was primarily due to an increase in employee compensation and
related benefits expense, depreciation and amortization of intangibles,
exchange, clearing and brokerage fees and other expenses as a result of our
acquisitions in 2001, which was offset by an increase in revenues as a result of
those acquisitions.

INCOME TAXES

Provision for income taxes increased 0.5 % to $85.1 million for 2001, from
$84.7 million for 2000, due to an increase in nondeductible amortization of
intangibles -- despite a decrease in income before provision for income taxes.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES

Total revenues increased 71.5% to $344.8 million for 2000, from $201.0
million for 1999, principally due to the increase in revenue from net gain on
principal transactions. Net gain on principal transactions increased 87.4% to
$282.9 million for 2000, from $151.0 million for 1999. This increase was
primarily due to the Henderson Brothers and Webco acquisitions in March 2000, as
a result of which we became the specialist for 147 additional common stock
listings, as well as increased share volume in principal trading in our
specialist stocks traded on

35

the NYSE. Our share volume as principal increased 87.5% to 18.0 billion shares
for 2000, from 9.6 billion shares for 1999.

Commissions revenue increased 22.0% to $45.4 million for 2000, from $37.2
million for 1999. This increase was primarily due to the increase in the number
of our common stock listings as a result of the Henderson Brothers and Webco
acquisitions and to increased share volume in our specialist stocks traded on
the NYSE in which we acted as agent. The share volume executed by us as agent in
our specialist stocks increased 36.6% to 5.6 billion shares for 2000, from 4.1
billion shares for 1999.

Other revenue increased 28.9% to $16.5 million for 2000, from $12.8
million for 1999. This increase was primarily due to an increase in our interest
income, which was also offset by a decrease in our proprietary trading revenues
and other investments.

EXPENSES

Total expenses before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes increased
167.6% to $178.2 million for 2000 from $66.6 million for 1999.

Employee compensation and related benefits increased 158.9% to $88.8
million for 2000, from $34.3 million for 1999. This increase was primarily due
to the inclusion of managing directors' salary, incentive-based compensation and
related benefits in employee compensation subsequent to our reorganization, and
due to the Henderson Brothers and Webco acquisitions that resulted in our
employment of 97 additional individuals as of the respective acquisition dates.
As a percentage of total revenues, employee compensation increased to 25.7% of
total revenues for 2000, from 17.0% of total revenues for 1999.

Interest expense increased 404.8% to $41.9 million for 2000, from $8.3
million for 1999. This increase was primarily due to the issuance, in connection
with the Henderson Brothers and Webco acquisitions, of $250.0 million of
indebtedness that began accruing interest on March 2, 2000. In addition, the
increase was due to the issuance of $116.4 million of indebtedness, in
connection with our reorganization, that began accruing interest from August 24,
1999. As a percentage of total revenues, interest increased to 12.2% of total
revenues for 2000, from 4.1% of total revenues for 1999.

Depreciation and amortization of intangibles expense increased 262.8% to
$18.5 million for 2000, from $5.1 million for 1999. Amortization of intangibles
increased as a result of the $233.7 million of intangible assets recorded as a
result of our acquisition of Henderson Brothers and Webco and incurring a full
year of amortization of intangibles in 2000 related to the redemption of limited
partnership interest in 1999. As a percentage of total revenues, depreciation
and amortization of intangibles increased to 5.4% of total revenues for 2000,
from 2.5% of total revenues for 1999.

Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
primarily include fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee.

36

Exchange, clearing and brokerage fees expense increased 41.7% to $5.1 million
for 2000, from $3.6 million for 1999. This increase was primarily due to the
increased trading volumes as a result of the Henderson Brothers and Webco
acquisitions.

Lease of exchange memberships expense increased 29.8% to $10.9 million for
2000, from $8.4 million for 1999. This increase was due to the increase in the
number of leased memberships from 44 to 50, and was also due to an increase in
the average annual leasing cost of a membership from approximately $192,000 to
$276,000. As a percentage of total revenues, however, lease of exchange
memberships decreased to 3.2% of total revenues for 2000, from 4.2% of total
revenues for 1999.

Legal and professional fees increased 18.8% to $1.9 million for 2000, from
$1.6 million for 1999. This increase was primarily the result of increased legal
and filing fees associated with various filings and acquisitions.

Communications expense increased 25.0% to $1.5 million for 2000, from $1.2
million for 1999. This increase was primarily the result of additional
telephone, data retrieval and informational services utilized due to the growth
of our business.

Occupancy expense increased 30.0% to $1.3 million for 2000, from $1.0
million for 1999. This increase was primarily the result of the leasing of
additional office space due to the Henderson Brothers and Webco acquisitions.

Other expenses increased 176.7% to $8.3 million for 2000, from $3.0
million for 1999. This increase was primarily due to additional fees incurred in
connection with the increase and extension of our line-of-credit with a U.S.
commercial bank, increased charitable contributions, as well as an increase in
advertising and promotional costs.

INCOME BEFORE MANAGING DIRECTORS' COMPENSATION, LIMITED PARTNERS' EARNINGS IN
INTEREST OF SUBSIDIARY AND PROVISION FOR INCOME TAXES

Income before managing directors' compensation, limited partners' interest
in earnings of subsidiary and before provision for income taxes increased 23.9%
to $166.6 million for 2000, from $134.5 million for the same period in 1999.
This increase was primarily due to the additional revenues generated by the
Henderson Brothers and Webco acquisitions which was offset by the inclusion of
managing directors' salary and incentive-based compensation in employee
compensation and related benefits and the additional interest and amortization
of intangibles expense as a result of the acquisitions.

INCOME TAXES

Provision for income taxes increased 254.4% to $84.7 million for 2000,
from $23.9 million for 1999, as a result of a full year of federal, state and
local income taxes to which we are subject as a result of our reorganization
from partnership to corporate form in 1999 and our increased profitability.

37

LIQUIDITY

As of December 31, 2001, we had $2,000.8 million in assets, of which
$189.5 million consisted of cash and short-term investments primarily in
government obligations and commercial paper maturing within three months, cash
and securities segregated under federal regulations and overnight repurchase
agreements. As of December 31, 2000, we had $1,004.1 million in assets, of which
$287.6 million consisted of cash and short-term investments primarily in
commercial paper maturing within three months and overnight repurchase
agreements.

In January 2001, LaBranche & Co. LLC extended our $200.0 million
line-of-credit with a U.S. commercial bank until February 1, 2002 and extended
it again in February 2002 until February 27, 2003. Amounts outstanding under the
U.S. commercial bank credit facility would be secured by our inventory of
specialist stocks and bear interest at the U.S. commercial bank's broker loan
rate. To date, we have not utilized this facility. In order to maintain the
availability of funds under this credit facility, we must comply with certain
customary covenants.

As of December 31, 2001 and 2000, the subordinated indebtedness of
LaBranche & Co. LLC aggregated $66.0 million and $41.9 million (excluding
subordinated liabilities related to contributed exchange memberships),
respectively. The $66.0 million of outstanding subordinated indebtedness of
LaBranche & Co LLC on December 31, 2001 consisted of the following:

o $35.0 million in senior subordinated notes,

o $20.0 of which were privately placed pursuant to note purchase
agreements, mature on September 15, 2002 and bear interest at
an annual rate of 8.17%, payable on a quarterly basis; and

o $15.0 million of which were privately placed pursuant to note
purchase agreements, mature on June 3, 2008 and bear interest
at an annual rate of 7.69%, payable on a quarterly basis.

o $31.0 million in junior subordinated notes,

o $8.0 million of which were issued to former limited partners,
family members of former employees and former equity owners of
Bocklet and their respective family members. These notes
mature on varying dates between the second half of 2002 and
the first half of 2003 and bear interest at annual rates
between 8.0% and 10.0%, payable on a quarterly basis;

o $9.0 million in secured demand note obligations which were
assumed by LaBranche & Co. LLC in connection with our
acquisition of RPM, $1.0 million matures in April 2003 and
$8.0 million matures in June 2003 and bear interest at
adjusting variable rates, payable monthly; and

o $14.0 million in secured demand note obligations to two former
members of Bocklet, which were incurred in connection with our
acquisition of

38

Bocklet, bear interest at an annual rate of 10% and mature in
October 2002.

The junior subordinated notes have automatic rollover provisions , which
extend the maturities for an additional year, unless the lender provides at
least seven months' advance notice prior to maturity. LaBranche & Co. LLC is
also entitled to prepay the junior subordinated notes and the secured demand
note obligations without penalty under the terms of the agreements relating
thereto.

As of December 31, 2001, we had an aggregate of $14.1 million
ofindebtedness outstanding, which we had assumed in connection with the RPM
acquisition and which consisted of:

o $3.0 million in subordinated notes issued to family members of
former employees of RPM maturing between the first half of 2002 and
the first half of 2006 and bearing interest at an annual rate of
between 9.0% and 12.5%, payable on a quarterly basis;
o a $295,000 promissory note which has an automatic rollover provision
that extends the maturity for an additional year, unless the lender
provides notice at least 30 days prior to maturity, and which bears
interest at an annual rate of 9.0% payable on a quarterly basis;
o $8.5 million in promissory notes issued to former RPM employees and
their family members. These notes are payable in equal annual
installments on the anniversaries of issuance, mature between the
second half of 2002 and the first half of 2005, and bear interest at
annual rates ranging from 8.0% to 12.0%, payable on a quarterly
basis; and
o $2.3 million in notes representing deferred compensation owed to
former RPM employees. These notes are payable in equal annual
installments on the anniversaries of issuance, mature between the
second half of 2002 and the second half of 2004 and bear interest at
annual rates ranging from 9.5% to 10.0%payable on a quarterly basis.

In connection with our acquisition of RPM, we issued 100,000 shares of our
nonconvertible Series A preferred stock to the former stockholders of RPM. Each
outstanding share of our Series A preferred stock entitles the holder to
cumulative preferred cash dividends at an annual rate of 8% of the liquidation
preference per share until the fourth anniversary of the closing of the merger,
10% until the fifth anniversary of the closing, and 10.8% thereafter. Dividends
are payable on the first day of January and the first day of July of each year
(or if such date is not a regular business day, then the next business day
thereafter), with the first payment made on July 1, 2001. Dividends on the
issued and outstanding shares of Series A preferred stock are preferred and
cumulative and accrue daily from the date on which they were originally issued.
On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stockfor $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002 we

39

purchased all the approximately 28,164 shares that had been tendered for a
purchase price of approximately $28.5 million including accrued but unpaid
dividends. As of February 28, 2002, 71,836 shares of our Series A preferred
stock were outstanding.

On August 24, 1999, we issued $100.0 million aggregate principal amount of
Senior Notes. The Senior Notes bear interest at a rate of 9 1/2% annually and
mature in August 2004. The indenture covering the Senior Notes includes certain
covenants that, among other things, limit our ability to borrow money, pay
dividends on our stock or purchase our stock, make investments, engage in
transactions with stockholders and affiliates, create liens on our assets, and
sell assets or engage in mergers and consolidations, except in accordance with
certain specified conditions.

On August 24, 1999, in connection with our reorganization from partnership
to corporate form, we issued a $16.0 million senior note as partial payment for
the acquisition of a certain limited partnership interest in LaBranche & Co. LLC
(prior to its conversion to a limited liability company). The note is payable in
three annual installments, with $11.0 million of the aggregate principal amount
already having been paid on the first and second anniversaries of issuance. The
remaining $5.0 million principal amount is payable on the third anniversary of
issuance, and bears interest at the annual rate of 9.5%.

On March 2, 2000, we issued $250.0 million aggregate principal amount of
Senior Subordinated Notes. These Senior Subordinated Notes bear interest at a
rate of 12.0% annually and mature in March 2007. The indenture covering the
Senior Subordinated Notes includes certain covenants that, among other things,
limit our ability to borrow money, pay dividends on our stock or purchase our
stock, make investments, engage in transactions with stockholders and
affiliates, create liens on our assets, and sell assets or engage in mergers and
consolidations, except in accordance with certain specified conditions.

The Senior Subordinated Notes also require us, within 150 days after the
end of each fiscal year, to offer to redeem from all holders of the Senior
Subordinated Notes a principal amount equal to our Excess Cash Flow at a price
equal to 103.0% of the principal amount being offered for purchase plus accrued
and unpaid interest, if any, to the date of redemption. Each holder is entitled
to be offered his or her pro rata share based upon his or her ownership
percentage of the outstanding Senior Subordinated Notes. Excess Cash Flow is
defined for this purpose as 40% of the amount by which our consolidated EBITDA
exceeds the sum of our interest expense, tax expense, increase in net capital or
net liquid asset requirements, capital expenditures, any cash amounts related to
acquisitions of NYSE specialists or any cash payments related to our payment at
maturity of the principal amount of our existing or certain other indebtedness.
On April 12, 2001, we offered to purchase approximately $9.9 million aggregate
principal amount of our Senior Subordinated Notes based on our Excess Cash Flow
for the year ending December 31, 2000. This offer expired on May 22, 2001
without the tender of any Senior Subordinated Notes. For the year ending
December 31, 2001, we did not have Excess Cash Flow, as defined for this
purpose.

In connection with the Webco acquisition on March 9, 2000, we issued
unsecured senior promissory notes in the aggregate principal amount of $3.0
million to the stockholders of Webco. These notes bear interest at an annual
rate of 10.0%. Of the aggregate principal amount,

40

$500,000 was repaid during 1999, and the balance, plus all accrued interest, was
paid in full on September 9, 2001.

As a broker-dealer, LaBranche & Co. LLC is subject to regulatory
requirements intended to ensure the general financial soundness and liquidity of
broker-dealers and requiring the maintenance of minimum levels of net capital,
as defined in SEC Rule 15c3-1. LaBranche & Co. LLC is required to maintain
minimum net capital, as defined, equivalent to the greater of $100,000 or 1/15
of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits a
broker-dealer from repaying subordinated borrowings, paying cash dividends,
making loans to any parent, affiliates or employees, or otherwise entering into
transactions which would result in a reduction of its total net capital to less
than 150% of its required minimum capital. Moreover, broker-dealers are required
to notify the SEC prior to repaying subordinated borrowings, paying dividends
and making loans to any parent, affiliates or employees, or otherwise entering
into transactions which, if executed, would result in a reduction of 30% or more
of their excess net capital (net capital less minimum requirement). The SEC has
the ability to prohibit or restrict such transactions if the result is deemed
detrimental to the financial integrity of the broker-dealer.

At December 31, 2001, LaBranche & Co. LLC had net capital of $484.2
million, which was $481.4 million in excess of its required net capital of $2.9
million. At December 31, 2000, LaBranche & Co. LLC had net capital of $293.4
million, which was $290.3 million in excess of its required net capital of $3.1
million.

The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. Under changes to Rule
104, effective October 30, 2000, specialist units that exceed five percent in
any of the NYSE's four concentration measures must maintain minimum net liquid
assets based upon the securities for which they act as the specialist. The
requirements state that the net liquid assets must be equivalent to $4.0 million
for each stock in the Dow Jones Industrial Average, $2.0 million for each stock
in the S&P 100 Stock Price Index, excluding stocks included in the previous
classification, $1.0 million for each stock in the S&P 500 Stock Price Index,
excluding stock included in the previous classifications, $500,000 for each
common stock, excluding bond funds and stocks included in the previous
classifications, and $100,000 for each stock not included in any of the above
classifications. In addition, the NYSE requires any new specialist entities that
result from a merger, acquisition, consolidation or other combination of
specialist entities to maintain net liquid assets equivalent to the greater of
either: (1) the aggregate net liquid assets of the specialist entities prior to
their combination or (2) the new capital requirements prescribed under Rule 104.
Net liquid assets for a specialist who also engages in transactions other than
specialist activities is based upon its excess net capital as determined in
accordance with SEC Rule 15c3-1. Currently, LaBranche & Co. LLC's net liquid
asset requirement is $446.0 million. As of December 31, 2001, LaBranche & Co.
LLC's actual net liquid assets were approximately $491.5 million. As of December
31, 2000, LaBranche & Co. LLC's NYSE minimum required dollar amount of net
liquid assets was $284.3 million compared to actual net liquid assets of
approximately $305.0 million.

Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.

41

Additionally, as registered broker-dealers and member firms of the NYSE,
our former Henderson Brothers and RPM Clearing Corporation subsidiaries were
subject to SEC Rule 15c3-1 as adopted and administered by the NYSE and the SEC.
Under the alternative method permitted by the rule, the minimum required net
capital shall be equal to the greater of $250,000 or 2% of aggregate debit items
as defined. As of December 31, 2001, the combined net capital of these
subsidiaries as defined under SEC Rule 15c3-1 was $20.5 million which exceeded
minimum requirements by $19.7 million.

As clearing broker-dealers, our former Henderson Brothers subsidiary and
our RPM Clearing Corporation subsidiary elected to compute a reserve requirement
for Proprietary Accounts of Introducing Broker-Dealers ("PAIB Calculation"), as
defined. The PAIB Calculation is computed in order for correspondent firms to
classify their assets held by these subsidiaries as allowable assets in the
correspondents' net capital calculation. At December 31, 2001, the combined
reserve requirement of these subsidiaries was approximately $23.3 million.
Additionally, these subsidiaries have combined cash and securities on deposit in
a special reserve bank account of $24.8 million as of January 3, 2002, to comply
with the December 31, 2001 requirement.

We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our working capital, regulatory capital
and capital expenditure requirements through the end of 2002.

As of December 31, 2001, the scheduled maturities of our obligations,
assuming any available roll-over provisions were inapplicable, were (000's
omitted):

** Amounts represent aggregate amount to be paid at maturity and do not
include discounts of approximately $3.6 million as of December 31, 2001.
Amounts also include $2.3 million of notes payable related to accrued
compensation.

CASH FLOWS

Our cash flows are primarily related to the operating activities
undertaken in connection with our specialist trading activities, as well as our
financing activities related to the expansion of our business.

At December 31, 2001, our cash and cash equivalents was $52.0 million,
representing a decrease of $97.9 million during 2001. This decrease resulted
from $121.5 million used for our operating activities, offset by $16.1 million
provided by our investing activities, including the acquisitions we made during
2001 in which we issued shares of our common stock. Cash of $7.5 million was
also provided by financing activities, primarily from the exercise of stock
options by our employees.

42

At December 31, 2000, our cash and cash equivalents was $149.9 million,
representing an increase of $66.1 million during 2000. This increase resulted
from $22.7 million provided by our operating activities and $202.6 was used for
investing activities, mainly to make acquisitions. Cash of $246.0 million was
provided by financing activities, as a result of the issuance of our Senior
Subordinated Notes.

As of December 31, 1999, our cash and cash equivalents was $83.8 million,
representing an increase of $79.1 million. During 1999, operating activities
provided cash of $14.5 million. Investing activities used cash of $145.4 million
primarily for the redemption of former limited partners interests upon our
reorganization. Cash of $239.0 million was provided by financing activities,
which came from the proceeds of our initial public offering and proceeds from
the issuance of long-term debt.

CERTAIN RISK FACTORS

In light of the economic downturn over the past two years and the
terrorist attacks on the United States in September 2001, we believe that the
following risk factors could have a significant impact on our business,
operating results, financial condition, and cash flows. If any of these events
actually occurs, our business, financial condition, operating results and/or
cash flows could be harmed.

OUR REVENUES MAY DECREASE DUE TO CHANGES AFFECTING THE ECONOMY, SUCH AS
INCREASES IN INTEREST RATES OR INFLATION, OR CHANGES AFFECTING THE SECURITIES
MARKETS, SUCH AS DECREASED VOLUME OR LIQUIDITY.

An adverse change affecting the economy or the securities markets could
result in a decline in market volume or liquidity. This would result in lower
revenues from our specialist and other activities. Historically, increases in
our revenues have resulted primarily from significant increases in the volume of
trading on the NYSE and favorable conditions in the securities markets. More
recently, however, the economy has begun to slow and financial markets have
become less prosperous in comparison to the past several years. If this causes a
decline in market volume, or if market liquidity becomes compromised, our
revenues could decline and our results of operations could be adversely
affected.

OUR RESULTS MAY FLUCTUATE SIGNIFICANTLY.

Our revenues may fluctuate significantly based on factors relating to the
securities markets. These factors include:

o a decrease in trading volume on the NYSE and the AMEX;

o volatility in the equity securities markets; and

o changes in the value of our securities positions.

Many elements of our cost structure do not decline if we experience
reductions in our revenues. As a result, if market conditions cause our revenues
to decline, we may be unable to

43

adjust our cost structure on a timely basis and we could suffer losses.
Long-term downturns in the economy or the equity markets in general could cause
trading volumes and revenues to declines and cause our operating results to
suffer.

SUSTAINED DECLINES IN PRICE LEVELS OF SECURITIES COULD CAUSE US TO INCUR LOSSES.

Adverse changes in the economy and the securities markets, such as have
occurred in 2000 and 2001, could lead to lower price levels of securities.
Sustained declines in these price levels may result in:

o losses from declines in the market value of securities held in our
accounts;

o the failure of buyers and sellers of securities to fulfill their
settlement obligations; and

o increases in claims and litigation.

RECENT TERRORIST ATTACKS HAVE CONTRIBUTED TO ECONOMIC INSTABILITY IN THE UNITED
STATES; CONTINUED TERRORIST ATTACKS, WAR OR OTHER CIVIL DISTURBANCES COULD LEAD
TO FURTHER ECONOMIC INSTABILITY AND DEPRESS OUR STOCK PRICE.

On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope, with the attacks in New York City particularly
affecting our operations. These attacks may cause long-term instability in the
global financial markets. This instability has resulted in a slowdown in the
employment sector as companies assess the impact of the attacks on their
operations and on their employment needs. The United States is also currently
conducting military operations in response to the terrorist attacks. These
attacks and the United States military campaign may lead to substantial armed
hostilities or to further acts of terrorism and civil disturbances in the United
States or elsewhere, which may contribute further to economic instability in the
United States and could have a material adverse effect on our business,
financial condition and operating results.

In addition, our offices are located in close proximity to the terrorist
attacks on the World Trade Center on September 11, 2001. The aftermath of the
attacks on the World Trade Center and the resulting air-quality issues in our
building required us to close our operations and temporarily relocate our
offices. The NYSE also was forced to stop operating for four consecutive trading
days, which caused our operations to halt and could have compromised the
liquidity of that market during closure. If additional terrorist attacks occur
in close proximity to our offices, or upon our office buildings, the NYSE or the
AMEX, we could be forced to relocate for a longer period of time, or
permanently. Furthermore, additional terrorist attack in New York City, or on
our buildings, the NYSE or the AMEX, or additional armed hostilities within the
United States, could cause significant delays or stoppages in our business
activities, which would significantly harm our revenues and profits.

OUR INFORMATION OR COMMUNICATION SYSTEMS MAY FAIL AND INTERRUPT OUR BUSINESS.

44

Any information or communication systems failure or decrease in
information or communications systems performance that causes interruptions in
our operations could have an adverse effect on our business, financial condition
and/or operating results. Our systems may fail as a result of:

o hardware or software failure; or

o power or telecommunications failure.

The September 11, 2001 terrorist attacks, particularly the attacks
on the World Trade Center, caused a temporary lapse in our information and
communications systems. It is possible that additional terrorist attacks may
occur in the future without warning and that such attacks could compromise or
disable our systems. Although we have established a back-up disaster recovery
center in New Jersey, it may not be effective in preventing an interruption of
our business. It is also possible that any future terrorist activities or an act
of war in retaliation against the current United States military campaign could
harm our operations and/or disaster recovery center, which could significantly
harm our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

A majority of our specialist related revenues are derived from trading by
us as principal. Additionally, a high concentration of our specialist trading
revenue is generated from our ten most profitable specialist stocks. However, on
the percentage of our specialist trading revenue generated from our ten most
profitable specialist stocks has decreased from 44.2% to 38.7% to 28.2% of
principal trading revenue for the years ended December 31, 1999, 2000 and 2001,
respectively. We are not overly reliant on a particular group of specialist
stocks, as the composition of our ten most profitable specialist stocks changes
from year to year. We also operate a proprietary trading desk separately from
our NYSE and AMEX specialist operations, which generated .3% of our total
revenues for the year ended December 31, 2001 and 0.5% of our total revenues for
the year ended December 31, 2000. We may incur trading losses as a result of
these trading activities. These activities involve primarily the purchase, sale
or short sale of securities for our own account. These activities are subject to
a number of risks, including risks of price fluctuations and rapid changes in
the liquidity of markets. In any period, we may incur trading losses in our
specialist stocks for a variety of reasons, including price fluctuations of our
specialist stocks, lack of trading volume in our specialist stocks and the
performance of our specialist obligations. From time to time, we have large
position concentrations in securities of a single issuer or issuers engaged in a
specific industry. In general, because our inventory of securities is marked to
market on a daily basis, any downward price movement in these securities could
result in a reduction of our revenues and operating profits.

We have developed a risk management process, which is intended to balance
our ability to profit from our specialist activities with our exposure to
potential losses. In addition, we have trading limits relating to our
proprietary trading activities.

45

Although we have adopted risk management policies, we cannot be sure that
these policies have been formulated properly to identify or limit our risks.
Even if these policies are formulated properly, we cannot be sure that we will
successfully implement these policies. As a result, we may not be able to manage
our risks successfully or avoid trading losses.

Henderson Brothers and RPM Clearing Corporation, which were merged into
and now exist as LFSI, have clearance activities that involve settlement and
financing of various customer securities transactions on a cash or margin basis.
These activities may expose LFSI to off-balance sheet risk in the event
customers or other brokers are unable to fulfill their contractual obligations
and LFSI has to purchase or sell securities at a loss. For margin transactions,
LFSI may be exposed to significant off-balance sheet risk in the event margin
requirements are not sufficient to fully cover losses that customers may incur
in their accounts.

LFSI seeks to control the risks associated with customer activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. LFSI monitors margin levels daily and
pursuant to such guidelines, requires customers to deposit additional collateral
or to reduce positions when necessary.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements and supplementary data required in
this item are set forth at the pages indicated in Item 14(a)(1).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last two fiscal years.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES.

The information set forth under the caption "Directors and Executive
Officers" in our definitive proxy statement to be used in connection with our
2002 Annual Meeting of Stockholders is incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information set forth under the caption "Executive Compensation" in
our definitive proxy statement to be used in connection with our 2002 Annual
Meeting of Stockholders is incorporated by reference.

46

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information set forth under the caption "Beneficial Ownership of
Common Stock by Certain Stockholders and Management" in our definitive proxy
statement to be used in connection with our 2002 Annual Meeting of Stockholders
is incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information set forth under the caption "Certain Relationships and
Related Transactions" in our definitive proxy statement to be used in connection
with our 2002 Annual Meeting of Stockholders is incorporated by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) (1) FINANCIAL STATEMENTS:

The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.

(2) FINANCIAL STATEMENT SCHEDULES:

Schedules have been omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.

(3) EXHIBITS:

The following exhibits are filed as part of this report or incorporated
herein by reference.

2.1 Plan of Incorporation of LaBranche & Co.*
2.2 Exchange Agreement by and among LaBranche & Co Inc., LaB Investing Co.,
L.L.C. and the members of LaB Investing Co. L.L.C. listed on Schedule A
thereto.*
3.1 Amended and Restated Certificate of Incorporation of LaBranche & Co Inc.*
3.2 Amended and Restated Bylaws of LaBranche & Co Inc.*
4.1 Specimen Stock Certificate.*
4.2 Indenture, dated as of August 24, 1999, among LaBranche & Co Inc., as
issuer, and Firstar Bank, N.A., as trustee, relating to the 9 1/2% Senior
Notes due 2004.**
4.3 Form of 9 1/2% Senior Notes due 2004 of LaBranche & Co Inc. (included as
Exhibit A to the Indenture filed as Exhibit 4.2).**
4.4 Registration Rights Agreement, dated as of August 24, 1999, by and among
LaBranche & Co Inc., as issuer, and Salomon Smith Barney Inc. and
Donaldson,

47

Lufkin & Jenrette Securities Corporation, as initial purchasers.**
4.5 Indenture, dated as of March 2, 2000, among LaBranche & Co., as issuer,
and Firstar Bank, N.A., as trustee, relating to the 12% Senior
Subordinated Notes due 2007.
4.6 Form of 12% Senior Subordinated Notes due 2007 of LaBranche & Co Inc.
(included as Exhibit A to the Indenture filed as Exhibit 4.5).
4.7 Registration Rights Agreement, dated as of March 2, 2000, by and among
LaBranche & Co Inc., as issuer, and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Smith Barney Inc. and ABN AMRO
Incorporated, as initial purchasers.
10.1 Agreement of Lease between Aetna Life Insurance Company and LaBranche &
Co., dated January 6, 1984, as amended to date.*
10.2 Second Amendment to Lease Agreement by and between Bank of Communications
and LaBranche & Co. dated July 1995, as amended to date.*
10.3 LaBranche & Co Inc. Equity Incentive Plan.*
10.4 LaBranche & Co Inc. Annual Incentive Plan.*
10.5 Form of Employment Letter between LaBranche & Co Inc. and its executive
officers.*
10.6 Form of Agreement Relating to Noncompetition and Other Covenants.*
10.7 Form of Pledge Agreement.*
10.8 Stockholders' Agreement by and among LaBranche & Co Inc. and the
Stockholders listed on Schedule I thereto.*
10.9 LaBranche & Co. Note Purchase Agreement, dated September 15, 1997,
relating to the issuance of $20,000,000 aggregate principal amount of
8.17% Subordinated Notes, as amended.*
10.10 LaBranche & Co. Note Purchase Agreement, dated June 3, 1998, relating to
the issuance of $15,000,000 aggregate principal amount of 7.69%
Subordinated Notes.*
10.11 Amendment to Note Purchase Agreements, dated as of August 23, 1999,
relating to the issuance of $20,000,000 aggregate principal amount of
8.17% Subordinated Notes and $15,000,000 aggregate principal amount of
7.69% Subordinated Notes.**
10.12 Form of Subordinated Note.*
10.13 Credit Agreement, dated as of June 26, 1998, by and among LaBranche & Co.
and The Bank of New York.*
10.14 Amendment No. 1 to Credit Agreement, dated as of June 23, 1999, by and
among LaBranche & Co. and The Bank of New York.**
10.15 Amendment No. 2 to Credit Agreement, dated as of August 24, 1999, by and
among LaBranche & Co. and The Bank of New York.**
10.16 Amendment No. 3 to Credit Agreement, dated as of February 4, 2000, by and
among LaBranche & Co. and The Bank of New York.***
10.17 Form of Indemnification Agreement.*
10.18 Purchase Agreement, dated February 24, 2000, by and among LaBranche & Co
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Smith Barney Inc. and ABN AMRO Incorporated, as initial purchasers,
relating to the issuance of $250,000,000 aggregate principal amount of 12%
Senior

48

Subordinated Notes due 2007.
10.19 Amended and Restated Articles of Partnership of LaBranche & Co.**
10.20 LaB Investing Co., L.L.C. Amended and Restated Operating Agreement.**
10.21 Acquisition Agreement, dated August 16, 1999, by and between Ernst &
Company and LaBranche & Co.**
10.22 Acquisition Agreement, dated August 16, 1999, by and between Mill Bridge
Inc., LaB Investing Co. L.L.C., LaBranche & Co Inc. and LaBranche & Co.**
10.23 Stock Purchase Agreement, dated as of December 23, 1999, among LaBranche &
Co Inc., Henderson Brothers Holdings, Inc. and the stockholders listed on
Schedule A thereto.****
10.24 Amendment to Stock Purchase Agreement, dated as of February 1, 2000, by
and among LaBranche & Co Inc., Henderson Brothers Holdings, Inc., and the
authorized representatives of the persons listed on Schedule A
thereto.****
10.25 Agreement and Plan of Merger, dated as of January 18, 2001, by and between
LaBranche & Co Inc. and ROBB PECK McCOOEY Financial Services, Inc.*****
10.26 Amendment No. 1, dated as of February 15, 2001, to Agreement and Plan of
Merger by and between LaBranche & Co Inc. and ROBB PECK McCOOEY Financial
Services, Inc.*****
21 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
99.1 Risk Factors

- -----------

* Incorporated by reference to our Registration Statement on Form S-1
(Registration No. 333-81079), as amended, effective August 18, 1999.
** Incorporated by reference to our Registration Statement on Form S-4
(Registration No. 333-88119), as amended, effective November 3, 1999. ***
*** Incorporated by reference to our Current Report on Form 8-K, filed
February 8, 2000.
**** Incorporated by reference to our Current Report on Form 8-K, filed March
17, 2000.
***** Incorporated by reference to our Current Report on Form 8-K, filed on
March 22, 2001.

(b) REPORTS ON FORM 8-K:

On October 24, 2001, we filed a Current Report on Form 8-K, dated October
22, 2001, relating to the release of our third quarter earnings and announcing
our acquisition of (i) Bocklet & Company, LLC, (ii) the interests of Freedom
Specialist, Inc. and R. Adrian & Company, LLC in the NYSE specialist joint
account in which we also owned an interest, and (iii) the AMEX specialist
operations of Cranmer & Cranmer, Inc., under Item 5 of Form 8-K.

49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

March 15, 2002 LABRANCHE & CO INC.

By: /s/ George M.l. Labranche, IV
--------------------------------
George M.L. LaBranche, IV
Chairman, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

50

/s/ Robert M. Murphy Director March 15, 2002
- -------------------------------
Robert M. Murphy

/s/ George E. Robb, Jr. Director March 15, 2002
- -------------------------------
George E. Robb, Jr.

/s/ Todd A. Graber Controller (Principal Accounting March 15, 2002
- ------------------------------- Officer
Todd A. Graber

51

INDEX TO FINANCIAL STATEMENTS

PAGE
----
LaBRANCHE & CO INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants .......................... F-2

Consolidated Statements of Financial Condition as of
December 31, 2001 and 2000 ........................................ F-3

Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 .................................. F-4

Consolidated Statements of Changes in Stockholders'
Equity/Members' Capital for the Years Ended December 31, 2001,
2000 and 1999 ..................................................... F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 .................................. F-6

Notes to Consolidated Financial Statements ........................ F-7

LaBRANCHE & CO INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS

Condensed Statements of Financial Condition as of
December 31, 2001 and 2000 ........................................ F-26

Condensed Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 .................................. F-27

Condensed Statements of Changes in Stockholders'
Equity/Members' Capital for the Years Ended December 31, 2001, 2000
and 1999 .......................................................... F-28

Condensed Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 .................................. F-29

Note to Condensed Financial Statements ............................ F-30

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of LaBranche & Co Inc.:

We have audited the accompanying consolidated statements of financial condition
of LaBranche & Co Inc. (a Delaware corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity/members' capital and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LaBranche & Co Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The parent company only condensed
financial statements appearing on pages F-29 through F-34 are presented for the
purpose of complying with the Securities and Exchange Commission's rules and are
not part of the basic financial statements. Such statements have been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP
New York, New York
January 17, 2002

F-2

LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated statements.

F-3

LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated statements.

F-4

LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY/MEMBERS' CAPITAL
(000'S OMITTED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED STATEMENTS.

F-5

LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)

The accompanying notes are an integral part of these consolidated statements.

F-6

LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

The consolidated financial statements include the accounts of LaBranche &
Co Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries,
LaBranche & Co. LLC, a New York limited liability company ("LaBranche"),
Henderson Brothers, Inc., a Delaware corporation ("Henderson Brothers"), ROBB
PECK McCOOEY Clearing Corporation, a New York corporation ("RPM Clearing
Corporation"), and Internet Trading Technologies, Inc., a Delaware corporation
("ITTI" and, collectively with the Holding Company, LaBranche, Henderson
Brothers and RPM Clearing Corporation, the "Company"). The Holding Company is
the sole member of LaBranche and 100% stockholder of Henderson Brothers, RPM
Clearing Corporation and ITTI. LaBranche is a registered broker-dealer and
operates primarily as a specialist in equity securities listed on the New York
Stock Exchange, Inc. (the "NYSE") and as a specialist in equities and options on
the American Stock Exchange (the "AMEX"). Henderson Brothers is also a
registered broker-dealer and a member of the NYSE and primarily provides
clearance services to customers of introducing brokers and provides direct
access floor brokerage to institutional customers. RPM Clearing Corporation is a
registered broker-dealer and a member of the NYSE and other exchanges and
provides clearing, prime brokerage and execution services. ITTI provides
front-end order execution systems, analysis and reporting solutions for the
wholesale securities dealer market.

As of December 31, 2001, the Company's subsidiaries Henderson Brothers and
ITTI merged with and into RPM Clearing Corporation, which changed its name to
LaBranche Financial Services, Inc. ("LFSI"), effective January 1, 2002. The
Company remains the sole shareholder of LFSI.

2. INITIAL PUBLIC OFFERING AND DEBT ISSUANCE

On August 24, 1999, the Company reorganized from partnership to corporate
form, upon the members of LaB Investing Co. L.L.C. ("LaB Investing") exchanging
their membership interests for common stock in the Holding Company, and
completed its initial public offering. In that offering, the Company sold
10,500,000 shares of common stock and received net proceeds of $134.8 million.
Concurrently with the offering, the Company issued $100.0 million aggregate
principal amount of Senior Notes.

3. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management does not believe that actual results will differ materially from

F-7

these estimates. Certain prior period amounts have been reclassified to conform
with current presentation.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Holding
Company and its wholly-owned subsidiaries. All intercompany balances and
transactions are eliminated in consolidation.

INTANGIBLE ASSETS

Intangible assets are comprised of the Company's specialist stock lists,
trade name and goodwill from acquisitions and the limited partner buyout that
occurred in concurrence with its reorganization to corporate form. The
specialist stock lists and trade name are being amortized on a straight-line
basis over 15 to 40 years and the goodwill is being amortized on a straight-line
basis over 15 years. The allocations of purchase price and determinations of
useful lives were based upon independent appraisals for all acquisitions through
March 2001. In addition, the useful lives of the specialist stock lists were
determined based upon analysis of historical turnover characteristics of the
specialist stocks comprising these lists. For acquisitions subsequent to March
2001, the allocations of purchase price and determinations of useful lives were
based upon management analysis of revenues, consideration paid, common stock
listings and other relevant data and ratios.

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life may warrant revision
or that the remaining balance may not be recoverable. When factors indicate that
intangible assets should be evaluated for possible impairment, the Company would
use an estimate of undiscounted net income over the remaining life in measuring
whether the assets are recoverable.

EXCHANGE MEMBERSHIPS

Exchange memberships owned by the Company are carried at cost.

Certain members of the Company have contributed the use of 12 memberships
on the NYSE and one membership on the AMEX to the Company. These memberships are
subordinated to claims of general creditors and are carried at market value with
a corresponding amount recorded in subordinated liabilities. Lease payments are
paid by the Company to its managing directors and employees for the use of the
exchange memberships at a rate that is commensurate with the rent paid to
nonaffiliated parties for the use of their exchange memberships.

The Company leases additional memberships on the NYSE and AMEX from
nonaffiliated parties and makes lease payments to these parties at the
prevailing market rates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly liquid investments
with original maturities of less than three months.

F-8

SECURITIES TRANSACTIONS

Principal securities transactions and the related revenues and expenses
are recorded on a trade date basis. Customer securities transactions and the
related revenues and expenses are recorded on a settlement date basis, which
does not differ materially from trade date basis. Receivables from and payables
to customers represent amounts due from or to customers of the Company in
connection with cash and margin securities transactions. Amounts receivable are
collateralized by customers' securities held by the Company and by others for
delivery to the Company, the value of which is not reflected in the accompanying
consolidated financial statements. Securities owned and securities sold, but not
yet purchased are reflected at market value and unrealized gains and losses are
reflected in net gain on principal transactions. Dividends and Securities and
Exchange Commission ("SEC") fees are also included in net gain on principal
transactions. Dividend income and expense are recognized on the record date,
which does not differ materially from the ex-date. In the normal course of
business, the Company is permitted to use client margin securities to finance
customer securities transactions, subject to certain regulatory guidelines.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization are calculated using the straight-line
method over the estimated useful lives of office equipment and the lesser of the
economic useful life of the leasehold improvement or the term of the lease.

COLLATERALIZED FINANCING TRANSACTIONS

Securities purchased and sold under agreements to resell and repurchase,
as well as securities borrowed and loaned for which cash is deposited or
received, are treated as collateralized financing transactions and are recorded
at contract amount plus accrued interest. It is the policy of the Company to
obtain possession of collateral with market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily, and
the Company may require counterparties to deposit additional collateral when
appropriate. The market value of securities received for securities purchased
under agreements to resell at December 31, 2001 approximates 102% of cash paid.
None of the securities received were subsequently repledged or resold.

REPORTABLE OPERATING SEGMENT

The Company considers its present operations to be one reportable segment
for purposes of presenting consolidated financial information and for evaluating
its performance. The financial statement information presented in the
accompanying consolidated financial statements is consistent with the
preparation of financial information for the purpose of internal use.

MANAGING DIRECTORS' COMPENSATION

Prior to the reorganization of the Company on August 24, 1999, the
managing directors of LaBranche were the members of LaB Investing. LaBranche
paid out substantially all of its earnings as compensation expense to its
managing directors. Subsequent to August 24, 1999, the

F-9

managing directors of the Company are compensated based on an annual salary as
well as an incentive-based compensation pool, which is determined based upon a
certain percentage of pre-tax income.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination, requiring that the purchase method of
accounting be used in all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets acquired individually or with a group of assets. The
statement provides that intangible assets with indefinite useful lives will no
longer be amortized, effective for fiscal years beginning after December 15,
2001 for intangible assets existing at June 30, 2001 or effective immediately
for intangible assets acquired after June 30, 2001. Rather, these assets will be
tested at least annually for impairment by applying a fair-value based test. In
addition, intangible assets with finite useful lives continue to be amortized
over their useful lives, which are no longer limited to 40 years. The provisions
of SFAS No. 142 are effective for fiscal years beginning after December 15,
2001. Accordingly, commencing January 2002, the Company will cease amortization
of recorded goodwill and intangible assets with indefinite useful lives and the
amortization expense for these intangible assets will no longer be included in
the results of operations. The Company does not anticipate incurring any
impairment charges upon implementation of SFAS No. 142. However, it is possible
that in the future, after periodic testing, the Company may incur impairment
charges related to the carrying value of goodwill and intangible assets recorded
in its financial statements. The Company expects the effect of adoption of SFAS
No. 142 will materially increase its future results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets.". SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company does not believe the implementation of SFAS No. 144 will have
a material impact on the financial statements.

4. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

The balances presented as receivables from and payables to brokers,
dealers and clearing organizations consist of the following (000's omitted):

F-10

Securities borrowed transactions require the Company to deposit cash with
the lender. As of December 31, 2001, the Company had borrowed securities related
to securities sold, but not yet purchased, with a market value of $103.4
million.

With respect to securities loaned, the Company receives collateral in the
form of cash in an amount in excess of the market value of securities loaned. If
the Company's counterparties to its securities loaned transactions have the
right by contract or custom to sell or repledge the Company's pledged
proprietary securities, then the Company will disclose these securities as
"securities pledged to counterparties" on the accompanying consolidated
statement of financial condition. As of December 31, 2001, there were no
proprietary securities pledged related to the Company's securities loaned
transactions included in securities pledged to counterparties, and securities
loaned included customer securities of approximately $1.2 million.

The Company monitors the market value of securities borrowed and loaned on
a daily basis, with additional collateral obtained or refunded as necessary.

5. INCOME TAXES

The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of tax benefits or
expenses on temporary differences between the financial reporting and tax bases
of its assets and liabilities. Deferred tax assets and liabilities relate to
stock-based compensation, amortization periods of certain intangibles and
differences between the financial and tax basis of assets acquired. The
Company's effective tax rate differs from the federal statutory rate primarily
due to the non-deductible amortization of intangible assets.

The components of provision for income taxes reflected on the consolidated
statements of operations are set forth below (000's omitted):

F-11

For the Years Ended December 31,
2001 2000 1999
---- ---- ----

Current Income Taxes:
Federal $ 58,538 $ 61,123 $18,267
State and Local 32,280 27,628 5,297
-------- -------- -------
Total Current 90,818 88,751 23,564

Deferred Income Taxes:
Federal (3,670) (2,822) 260
State and Local (2,024) (1,275) 75
-------- -------- -------
Total Deferred (5,694) (4,097) 335
-------- -------- -------

Total Income Tax Expense $ 85,124 $ 84,654 $23,899
======== ======== =======

The following table presents the components of deferred tax asset and
liability balances (000's omitted):

For the Years Ended December 31,
2001 2000
-------- -------

Deferred Tax Assets:
Deferred compensation $ 16,521 $ --
Other 1,565 3,081
-------- -------
Total Deferred Tax Assets $ 18,086 $ 3,081

Deferred Tax Liabilities:
Acquisitions $161,550 $72,472
Other 3,991 2,188
-------- -------
Total Deferred Tax Liabilities $165,541 $74,660

A reconciliation of the statutory U.S. Federal Income Tax Rate of 35% to
the Company's effective income tax rate is set forth below:

For the Years Ended December 31,
2001 2000 1999
------ ------ ------

U.S. Federal Income tax rate 35.0% 35.0% 35.0%
Increase(decrease) in taxes related to:
State and local taxes 11.4 11.6 14.4
Nondeductible intangibles 8.3 4.5 2.9
Conversion to corporate form -- -- (7.6)
Other (0.4) (0.3) 0.4
------ ------ ------
Effective tax rate 54.3% 50.8% 45.1%
====== ====== ======

6. CAPITAL AND NET LIQUID ASSET REQUIREMENTS

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

As of December 31, 2001 and 2000, LaBranche's net capital, as defined
under SEC Rule 15c3-1, was $484.2 million and $293.4 million, respectively,
which exceeded minimum requirements by $481.4 million and $290.3 million,
respectively. LaBranche's aggregate indebtedness to net capital ratio was .09 to
1 and .16 to 1, as of December 31, 2001 and 2000, respectively.

F-12

Additionally, as registered broker-dealers and member firms of the NYSE,
Henderson Brothers and RPM Clearing Corporation are also subject to SEC Rule
15c3-1 as adopted and administered by the NYSE and the SEC. Under the
alternative method permitted by this rule, the minimum required net capital
shall be equal to the greater of $250,000 or 2% of aggregate debit items as
defined. As of December 31, 2001, the combined net capital of these subsidiaries
as defined under SEC Rule 15c3-1 was $20.5 million which exceeded minimum
requirements by $19.7 million.

As clearing broker-dealers, Henderson Brothers and RPM Clearing
Corporation have elected to compute a reserve requirement for Proprietary
Accounts of Introducing Broker-Dealers ("PAIB Calculation"), as defined. The
PAIB Calculation is computed in order for correspondent firms to classify their
assets held by Henderson Brothers or RPM Clearing Corporation as allowable
assets in the correspondents' net capital calculation. At December 31, 2001, the
combined reserve requirement of these subsidiaries was approximately $23.3
million. Additionally, these subsidiaries have combined cash and securities on
deposit in a Special Reserve Bank Account of $24.8 million as of January 3,
2002, to comply with their December 31, 2001 requirements.

The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. Effective October 30,
2000, with SEC approval, the NYSE changed Rule 104, its minimum net liquid asset
requirements. Specialist units that exceed five percent in any of the NYSE's
four concentration measures must maintain minimum net liquid assets based upon
the securities for which they act as the specialist. The requirements state that
the net liquid assets must be equivalent to $4.0 million for each stock in the
Dow Jones Industrial Average, $2.0 million for each stock in the S&P 100 Stock
Price Index, excluding stocks included in the previous classification, $1.0
million for each stock in the S&P 500 Stock Price Index, excluding stock
included in the previous classifications, $500,000 for each common stock,
excluding bond funds and stocks included in the previous classifications, and
$100,000 for each stock not included in any of the above classifications. In
addition, the NYSE requires any new specialist entities that result from a
merger, acquisition, consolidation or other combination of specialist entities
to maintain net liquid assets equivalent to the greater of either: (1) the
aggregate net liquid assets of the specialist entities prior to their
combination or (2) the new capital requirements prescribed under Rule 104. Net
liquid assets for a specialist who also engages in transactions other than
specialist activities is based upon its excess net capital as determined in
accordance with SEC Rule 15c3-1.

As of December 31, 2001 and 2000, LaBranche's NYSE minimum required dollar
amount of net liquid assets, as defined, was $446.0 million and $284.3 million,
respectively, compared to actual net liquid assets, as defined, of $491.5
million and $305.0 million, respectively.

7. ACQUISITIONS

Effective August 24, 1999, the limited partnership interests of $37.1
million in LaBranche were acquired at an excess purchase price of $127.4 million
over the limited partners' capital balances. The redemption of the limited
partners' interests was accounted for as a step

F-13

acquisition under the purchase method of accounting. The excess of purchase
price over the limited partners' capital balances was allocated to intangible
assets and assigned lives as follows:

ORIGINAL AMOUNT LIFE
--------------- ----

Specialist Stock List..................... $ 93.6 million 40 years
Trade Name................................ 26.6 million 40 years
Goodwill.................................. 7.2 million 15 years
---------

$ 127.4 million
=========

Effective March 2, 2000, the Holding Company acquired all the outstanding
capital stock of Henderson Brothers Holdings, Inc., which in turn wholly owned
Henderson Brothers, a specialist on the NYSE, for an aggregate purchase price of
approximately $228.4 million. The acquisition was accounted for under the
purchase method of accounting. The results of Henderson Brothers' operations
have been included in the Company's consolidated financial statements since
March 3, 2000. The excess of purchase price over fair value of net tangible
assets of approximately $204.9 million was allocated to intangible assets with
corresponding respective lives as follows:

ORIGINAL AMOUNT LIFE
--------------- ----
Specialist Stock List................... $ 87.7 million 40 years
Goodwill................................ 117.2 million 15 years
---------

$ 204.9 million
=========

Effective March 9, 2000, the Holding Company acquired, through a merger,
Webco Securities, Inc. ("Webco"), a specialist on the NYSE, for an aggregate
purchase price of $11.0 million in cash, $3.0 million in senior promissory notes
and 2.8 million shares of the Company's common stock. The acquisition was
accounted for under the purchase method of accounting. The results of Webco's
specialist operations have been included in the Company's consolidated financial
statements since March 10, 2000. The excess of purchase price over fair value of
net tangible assets of approximately $28.8 million was allocated to intangible
assets with corresponding respective lives as follows:

ORIGINAL AMOUNT LIFE
--------------- ----
Specialist Stock List..................... $ 9.8 million 36 years
Goodwill.................................. 19.0 million 15 years
---------

$ 28.8 million
=========

Effective December 21, 2000, LaBranche acquired an AMEX specialist unit
from a joint venture of Midland Trading L.P., Pal-Bro Partners L.L.C. and Cohen
Specialists L.L.C. The acquisition was accounted for under the purchase method
of accounting. The results of the AMEX specialist unit operations have been
included in the Company's consolidated financial statements since December 22,
2000. The excess of purchase price over fair value of net tangible assets of
approximately $3.8 million was allocated to goodwill.

F-14

Effective March 13, 2001, the Holding Company acquired all the outstanding
capital stock of ITTI, a company that provides front-end order execution,
analysis and reporting solutions for the wholesale securities dealer market.
Through December 31, 2001, ITTI was operated by the Company as a separate
subsidiary. The excess of purchase price over fair value of net tangible assets
of approximately $4.3 million was allocated to goodwill.

Effective March 15, 2001, the Holding Company acquired, through a merger,
ROBB PECK McCOOEY Financial Services, Inc. ("RPM") for an aggregate of
approximately 6.9 million shares of the Company's common stock and shares of the
Company's nonconvertible preferred stock having an aggregate face and
liquidation value of approximately $100.0 million and a fair value of
approximately $93.4 million. Each share of the Series A preferred stock entitles
the holder thereof to cumulative preferred cash dividends at an annual rate of
8% for the first four years, 10% for the fifth year and 10.8% thereafter,
certain voting rights and preferred distributions upon liquidation. In addition,
the Company assumed RPM's obligations under RPM's outstanding option agreements
with its employees. Thus, each option to purchase RPM common stock was converted
into a vested option to purchase 98.778 shares of the Company's common stock.
The acquisition was accounted for under the purchase method of accounting and
the results of RPM's operations have been included in the Company's consolidated
financial statements since March 16, 2001. The excess of purchase price over
fair value of net tangible assets of approximately $452.5 million was allocated
to intangible assets with corresponding respective lives as follows:

Original
Amount Life
------ ----

Specialist Stock List $ 180.0 million 40 years
Goodwill 272.5 million 15 years
-------

$ 452.5 million
=======

The allocation of purchase price and determination of useful lives for the
RPM acquisition was based upon an independent appraisal as of a preliminary
date. The useful lives of the specialist stock lists were determined based upon
analysis of historical turnover characteristics of the specialist stocks
comprising these lists.

Effective August 13, 2001, LaBranche acquired all the assets relating to
the AMEX stocks and options specialist operations of Cranmer & Cranmer, Inc.
("Cranmer") for an aggregate of approximately $9.2 million, 100,000 shares of
the Company's common stock and an amount equal to the equity capital of Cranmer,
including the net value of Cranmer's open security positions on the closing date
of the acquisition. The excess of purchase price over fair value of net tangible
assets of approximately $14.0 million was allocated to specialist stock list and
goodwill. The acquisition was accounted for under the purchase method of
accounting. The results of the AMEX specialist operations formerly conducted by
Cranmer have been included in the Company's consolidated financial statements
since August 14, 2001.

Effective September 20, 2001, LaBranche acquired the interests in the
Freedom Specialist Inc. ("Freedom"), R. Adrian & Company, LLC ("Adrian") and
LaBranche Joint Book (the "Joint

F-15

Book") which it did not previously own for an aggregate of approximately $13.6
million in cash, 54,750 shares of the Company's common stock and an amount equal
to Freedom's and Adrian's respective shares of the equity capital of the Joint
Book on the closing date of the acquisition. The acquisition was accounted for
under the purchase method of accounting. The excess of purchase price over fair
value of net tangible assets of approximately $15.0 million was allocated to
specialist stock list and goodwill. The results of the operations formerly
conducted by the Joint Book in which LaBranche previously did not own an
interest have been included in the Company's consolidated financial statements
since September 21, 2001.

Effective October 18, 2001, LaBranche acquired Bocklet & Company, LLC
("Bocklet") for an aggregate of $20.0 million in cash, of which $5.0 million was
paid upon the closing and the remaining amount will be paid in equal
installments three, six and nine months from the closing date, and 1,100,000
shares of the Company's common stock. In addition, an amount equal to the equity
capital of Bocklet on the closing date of the acquisition will be paid in equal
installments three, six and nine months from the closing date. The acquisition
was accounted for under the purchase method of accounting. The excess of
purchase price over fair value of net tangible assets of approximately $53.4
million was allocated to specialist stock list and goodwill. The results of the
operations formerly conducted by Bocklet have been included in the Company's
financial statements since October 19, 2001.

8. COMMITMENTS

During January 2001, the LaBranche extended its $200 million committed
line of credit with a U.S. commercial bank through February 1, 2002. In February
2002, LaBranche extended this line-of-credit to February 27, 2003. Any amounts
outstanding under this credit facility would be secured by our inventory of
specialist stocks and bear interest at the U.S. commercial bank's broker loan
rate. To date, we have not utilized this facility.

Minimum rental commitments under existing noncancellable leases for office
space and equipment are as follows:

These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.

9. SUBORDINATED LIABILITIES

LaBranche is a party to subordinated loan agreements under which it has
indebtedness approved by the NYSE for inclusion as net capital, as defined.
Interest is payable quarterly at

F-16

various annual rates. Five of the agreements representing $2,650,000 mature
within the last six months of 2002 and six agreements representing $2,985,000
mature within the first six months of 2003. These agreements all have automatic
rollover provisions, and each scheduled maturity date will be extended an
additional year, unless the lender gives LaBranche seven months advance notice
that the maturity date will not be extended. In addition, four subordinated loan
agreements representing $2,400,000, which do not have automatic rollover
provisions, mature within the last six months of 2002. Interest expense incurred
for the years ended December 31, 2001, 2000 and 1999, on these agreements was
approximately $0.6 million, $1.0 million and $1.1 million, respectively.

LaBranche also issued seven subordinated notes representing aggregate
indebtedness of $20,000,000 which mature on September 15, 2002, and bear
interest at an annual rate of 8.17% payable on a quarterly basis. LaBranche also
issued an additional five subordinated notes representing aggregate indebtedness
of $15,000,000 which mature on June 3, 2008 and bear interest at an annual rate
of 7.69% payable on a quarterly basis. These notes are senior to all other
subordinated notes of LaBranche. Interest expense incurred for the years ended
December 31, 2001, 2000 and 1999, on these notes was approximately $2.8 million
for each year. The agreements covering these subordinated notes require
LaBranche to comply with certain covenants that, among other things, restrict
the type of business in which LaBranche may engage, set certain net capital
levels and prohibits restricted payments.

In connection with the acquisition of RPM, LaBranche assumed secured
demand note obligations in the amount of $1.0 million and $8.0 million with
maturity dates of April 2003 and June 2003, respectively. Interest with respect
to these obligations is payable monthly at adjusting variable rates. These
agreements have automatic rollover provisions, and the scheduled maturity date
of each such obligation will be extended an additional year, unless the lender
gives LaBranche seven months advance notice that the maturity date will not be
extended. In October 2001 LaBranche issued two additional secured demand note
obligations for $3.0 million and $11.0 million with annual interest rates of
10%, which do not have an automatic rollover provision and mature within the
last six months of 2002. Interest for these agreements is payable quarterly.
During August 2001 LaBranche cancelled a subordinated secured demand note
agreement representing $1,300,000 and paid any accrued interest. Interest
expense incurred for the years ended December 31, 2001, 2000 and 1999, on the
notes was approximately $1.0 million, $108,333 and $123,333 respectively.

As of December 31, 2001, the Holding Company also had $3.3 million of
subordinated debt which had been assumed in connection with the RPM
acquisition.These notes are placed with family members of former employees of
RPM. This debt has maturities ranging from the first half of 2002 through the
first half of 2006, and bears interest at an annual rate between 9.0% and 12.5%,
payable on a quarterly basis. One of these agreements, representing $295,000,
has an automatic rollover provision that extends the maturity for an additional
year, unless the lender provides notice at least 30 days prior to maturity.
Interest expense incurred on these obligations for the years ended December 31,
2001, 2000 and 1999 was approximately $314,000 , $0 and $0, respectively.

F-17

10. EARNINGS PER SHARE

Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic EPS is calculated by dividing net income by the
weighted-average number of common shares outstanding. Diluted EPS includes the
determinants of basic EPS and, in addition, gives effect to dilutive potential
common shares. For purposes of determining weighted-average shares outstanding
for periods prior to the Company's reorganization from partnership to corporate
form, the outstanding shares were determined based on the conversion ratio of
members' capital to common stock issued to the members upon reorganization.

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

Under the treasury stock method of accounting, restricted stock units
representing 368,740, 699,990 and 1,062,600 shares of common stock, restricted
stock representing 222,579, 286,308 and 0 shares of common stock and options to
purchase an aggregate of 2,010,865, 1,000,471 and 1,200,000 shares of common
stock for the years ended December 31, 2001, 2000 and 1999, respectively, were
not included in the calculation of diluted earnings per share due to their
antidilutive effect.

F-18

11. EMPLOYEE INCENTIVE PLANS

EQUITY INCENTIVE PLAN

The Company has elected to account for stock-based employee compensation
plans in accordance with Accounting Principles Board Opinion ("APB") No. 25 as
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." In
accordance with APB No. 25, compensation expense is not recognized for stock
options that have no intrinsic value on the date of grant.

The Company sponsors an Equity Incentive Plan which provides for grants of
incentive stock options, nonqualified stock options, restricted shares of common
stock, restricted stock units, unrestricted shares and stock appreciation
rights.

Upon inception, 4,687,500 shares of common stock were reserved for
issuance under the Equity Incentive Plan. During July 2001, the board of
directors approved an increase in the number of shares of the Company's common
stock available for issuance under the Equity Incentive Plan by an additional
3,000,000 shares. The effectiveness of this increase is subject to the approval
of the stockholders of the Company at the next annual or special meeting of
stockholders. The maximum number of shares of common stock with respect to which
options, restricted stock, restricted stock units or other equity-based awards
may be granted under the Equity Incentive Plan during any calendar year to any
employee may not exceed 500,000 shares, subject to adjustment upon certain
corporate transactions.

On August 18, 1999, restricted stock units with respect to 1,059,000
shares of common stock were granted to employees who were not managing directors
with an issue cost of $0 to the employees and a fair market value of $14 per
share. In October 1999 and March 2000, respectively, restricted stock units for
an additional 3,600 and 2,055 shares of common stock were issued to two
different employees with an issue cost of $0 to the employees and a fair market
value of $9.50 and $13.69 per share, respectively. These restricted stock units,
which are subject to continuing service with the Company and other restrictions,
generally vest in three annual installments commencing on the third anniversary
of the grant date. Compensation expense is being recognized over the five-year
vesting period on a straight-line basis. During the years ended 2001 and 2000,
60,142 and 36,891 shares, respectively, were forfeited as a result of a failure
to meet vesting requirements. In addition, 136,405 and 77,502 shares,
respectively, vested as part of severance arrangements. For the years ended
December 31, 2001, 2000 and 1999, respectively, the Company recorded
compensation expense and a credit to additional paid-in capital of approximately
$3.3 million, $3.6 million and $1.1 million, respectively, related to these
restricted stock units.

During August and September 2000, the Company issued to certain newly
hired employees an aggregate of 200,000 and 100,000 shares of restricted stock,
respectively, each with an issue cost of $.01 and a fair market value of $26.50
and $30.13 per share, respectively. These shares of restricted stock, which are
subject to continuing service with the Company, vests in three annual
installments on each anniversary of the grant date. Compensation expense is
being recognized over the three year vesting period, with 25% already vested on
the first anniversary of issuance, 35% vesting the second year and 40% vesting
the third year. For the

F-19

years ended December 31, 2001, 2000 and 1999 the Company recorded compensation
expense of approximately $2.4 million, $711,000 and $0, respectively.

On March 13, 2001 the Company issued to certain newly hired employees an
aggregate of 60,000 shares of restricted stock with an issue cost of $.01 and a
fair market value of $38.87 per share. These shares of restricted stock, which
are subject to continuing service with the Company, generally will vest in three
annual installments on each anniversary of the grant date, although a portion
vests in equal increments quarterly for three years from the grant date. For the
years ended December 31, 2001, 2000 and 1999 the Company recorded compensation
expense of approximately $616,000, $0 and $0, respectively.

STOCK OPTIONS

On August 18, 1999, options to purchase an aggregate of 1,200,000 shares
of common stock were granted to executive officers of the Company at market
value. Of these options, 766,667 options were exercisable as of December 31,
2001. During 2001 and 2000, options to purchase 66,667 and 33,333 shares,
respectively, were forfeited due to a failure to meet vesting requirements. In
addition, 33,333 and 16,667 shares, respectively were exercised at a price of
$14. The options to purchase the remaining 283,333 shares, which are subject to
continuing service with the Company and other restrictions, will become
exercisable on the third anniversary of the date of grant. These options
generally will expire ten years from the date of grant, unless sooner terminated
or exercised. Pursuant to APB No. 25, no compensation expense was recognized
since, on the date of grant, these options had no intrinsic value. As of
December 31, 2001, the outstanding options had an exercise price of $14 and a
remaining life of approximately eight years.

On January 19, 2001, options to purchase an aggregate of 250,000 shares of
common stock were granted to employees of the Company at market value. On March
12, 2001 options to purchase an aggregate of 12,500 shares of common stock were
granted to an employee of the Company at market value. All of these options,
which are subject to continuing service with the Company and other restrictions,
will become exercisable in three equal annual installments commencing on the
first anniversary of the date of grant. These options generally will expire ten
years from the date of grant, unless sooner terminated or exercised. Pursuant to
APB No. 25, no compensation expense was recognized since, on the date of grant,
these options had no intrinsic value.

As part of the acquisition of RPM, the Company assumed RPM's obligations
under the outstanding option agreements with RPM's employees. Each option to
purchase RPM common stock was replaced with a vested option to purchase 98.778
shares of the Company's common stock. In aggregate, options to acquire 2,775,662
shares of the Company's common stock were granted in connection with the RPM
acquisition at prices from $2.78 to $13.67 per share. During 2001, 1,254,603 of
these options were exercised at prices ranging from $2.78 to $13.67 per share.
The tax benefit associated with the exercise of these options has been recorded
as an adjustment to goodwill, resulting in a decrease of approximately $16.2
million.

The estimated fair value of options granted during 1999 was $4.97 per
option granted, during 2001 the weighted average fair value of options granted
to employees was $23.65 per

F-20

option. Fair value is estimated as of the grant date based on a Black Scholes
option pricing model using the following assumptions:

In accordance with SFAS No. 123, compensation expense was not recognized
on the date of the grant of the options since these options had no intrinsic
value or were issued as part of purchase accounting for the acquisition of RPM.
If the Company were to recognize compensation expense under the fair-value based
method of SFAS No. 123, its net income would have decreased by approximately
$1.8 million and $852,000 for the years ended December 31, 2001 and 2000,
respectively, resulting in pro forma net income and earnings per share as
follows (000's omitted, except per share data):

The effect of applying SFAS No. 123 in the pro forma disclosure above may
not be representative of the potential pro forma effect on net income in future
periods.

ANNUAL INCENTIVE PLAN

The Company also sponsors an Annual Incentive Plan. Managing directors and
other employees designated by management are eligible to participate. Under this
plan, a compensation pool of up to 30% of the Company's pre-tax income, or such
lesser percentage determined by the compensation committee, is set aside for
managing directors and other employees selected by the compensation committee to
participate in this plan. In determining the compensation pool, the compensation
expense relating to the grant of restricted stock units and the grant of
restricted stock is deducted. Under the plan, no individual participant may
receive more than 25% of the compensation pool for any fiscal year.

12. LONG TERM DEBT

Effective August 24, 1999, the Holding Company issued $100.0 million
aggregate principal amount of Senior Notes. The Senior Notes bear interest at a
rate of 9 1/2% annually and mature on August 15, 2004. The carrying value of the
Senior Notes as of December 31, 2001 is $99.9 million. The discount on the bond
is being amortized as an adjustment to interest expense over the life of the
Senior Notes. Debt issuance costs incurred as a result of the Senior Note

F-21

offering were approximately $2.7 million, which are also being amortized on a
straight-line basis as an adjustment to interest expense over the life of the
Senior Notes. Interest expense incurred for the years ended December 31, 2001,
2000 and 1999 was approximately $10.1 million, $10.1 million and $3.5 million,
respectively. The indenture covering the Senior Notes includes certain covenants
that, among other things, limits the Company's ability to borrow money, pay
dividends or repurchase stock, make investments, engage in transactions with
stockholders and affiliates, create liens on assets, and sell assets or engage
in mergers and consolidations except in accordance with certain specified
conditions.

In addition, in connection with the reorganization of the Company from
partnership to corporate form on August 24, 1999, the Holding Company issued a
note in an aggregate principal amount of $16.0 million as partial payment for
the acquisition of a limited partner interest. The note is payable in three
annual installments, with $11.0 million of the aggregate principal amount
already having been paid on the first and second anniversaries of issuance. The
remaining $5.0 million principal amount is payable on the third anniversary of
issuance. The note bears interest at the annual rate of 9 1/2%. Interest expense
incurred for the years ended December 31, 2001, 2000 and 1999 was approximately
$783,750, $1.3 million and $538,000, respectively.

In connection with the acquisitions of Henderson Brothers and Webco, the
Holding Company issued $250.0 million aggregate principal amount of Senior
Subordinated Notes (the "Notes") that bear interest at a rate of 12.0% annually
and mature on March 2, 2007. The carrying value of the Notes as of December 31,
2001 was $246.5 million. The discount on the Notes is being amortized as an
adjustment to interest expense over the life of the Notes. Debt issuance costs
incurred as a result of the Note offering were approximately $6.9 million, which
are also being amortized as an adjustment to interest expense over the life of
the Notes. Interest expense incurred for the years ended December 31, 2001, 2000
and 1999 was approximately $31.2 million, $25.8 million and $0, respectively.
The indenture covering the Notes includes certain covenants that, among other
things, limit the Company's ability to borrow money, pay dividends or repurchase
stock, make investments, engage in transactions with stockholders and
affiliates, create liens on assets, and sell assets or engage in mergers and
consolidations except in accordance with certain specified conditions.

The Notes also require the Company, within 150 days after the end of each
fiscal year, to offer to redeem from all holders of the Notes a principal amount
equal to the Excess Cash Flow of the Company for the preceding fiscal year at a
price equal to 103% of the principal amount being offered for purchase plus
accrued and unpaid interest, if any, to the date of redemption. Each holder is
entitled to be offered a pro rata share of the amount subject to redemption
based upon his or her ownership percentage of the outstanding Notes. Excess Cash
Flow is defined for this purpose as 40% of the amount by which the Company's
consolidated EBITDA exceeds the sum of the Company's interest expense, tax
expense, increase in net capital or net liquid asset requirements, capital
expenditures, any cash payments related to acquisitions of NYSE specialists and
any cash payments related to the Company's principal payments of certain other
indebtedness. For the year ended December 31, 2001, there was no Excess Cash
Flow, as defined for this purpose.

As of December 31, 2001, the Holding Company also had seven promissory
notes, representing approximately $8.5 million, placed with former RPM employees
and their family

F-22

members. These notes are payable in equal annual installments on the
anniversaries of issuance, with maturity dates ranging from the second half of
2002 through the first half of 2005, and bear interest at annual rates ranging
from 8.0% to 12.0%, payable on a quarterly basis. The remaining four notes,
representing approximately $2.3 million, represent deferred compensation of
former RPM employees. These notes are payable in equal annual installments on
the anniversaries of issuance, with maturity dates ranging from the second half
of 2002 through the second half of 2004, and bear interest at annual rates
ranging from 9.5% to 10.0%. Interest expense incurred on these notes for the
years ended December 31, 2001, 2000 and 1999 was approximately $1.0 million, $0
and $0, respectively.

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires companies to report the fair value of financial instruments for certain
assets and liabilities. Substantially all of the Company's financial instruments
are short-term in nature or carry market interest rates and, accordingly,
approximate fair value.

The fair value of the fixed rate debt, in millions, is as follows:

The fair value of the Senior Notes and the Notes was determined based upon
its market value as of December 31, 2001. The fair value of the fixed rate note
was determined using current market rates to discount its cash flows.

14. RETIREMENT PLAN

The Company has a defined contribution retirement plan (the "Plan") that
is subject to the provisions of the Employee Retirement Income Security Act of
1974 ("ERISA"). Prior to April 1, 2000, The Retirement Services Division of the
Bank of New York acted as recordkeeper, while LaBranche acted as custodian and
administrator. Effective April 1, 2000, the Plan was amended and restated and
all assets were transferred to Fidelity Management Trust Company, which
currently acts as custodian and trustee. The Fidelity Investment Institutional
Operations Company acts as the recordkeeper of the Plan.

All employees are eligible to participate in the Plan after they have
completed twelve months of service and have been credited with 1,000 hours of
service. Participants are entitled to contribute voluntarily in an amount equal
to not less than 1% and not more than 15% of their annual compensation, to a
maximum amount permitted under the Internal Revenue Service ("IRS") regulations
for the applicable Plan year. The Company, acting in its sole discretion, can
declare and contribute to the Plan an employer matching contribution and an
additional voluntary

F-23

contribution. During the years ended December 31, 2001, 2000 and 1999, the
Company contributed approximately $1.0 million, $590,000 and $423,000
respectively, as employer matching contributions to the Plan, and approximately
$3.4 million, $2.0 million and $1.1 million respectively, as additional
voluntary contributions.

Upon the completion of the acquisition of RPM, the employee participant
balances of the Robb, Peck, McCooey 401(k) Plan totaling approximately $3.6
million were rolled over into the Plan. In addition, the Robb, Peck, McCooey
Pension Trust and the Robb, Peck, McCooey Profit Sharing Plan were assumed by
the Company. These plans were inactive during 2001, and on August 31, 2001, both
plans were terminated subject to the ERISA and IRS provisions.

As of December 31, 2001, the Plan had approximately 492 participants
compared to 230 participants as of December 31, 2000.

15. FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT AND OFF-BALANCE SHEET
RISK

As a specialist on the NYSE, LaBranche is engaged in various securities
trading and lending activities. In connection with its activities as a
specialist, LaBranche assumes positions in stocks for which it is responsible.
LaBranche is exposed to credit risk associated with the nonperformance of
counterparties in fulfilling their contractual obligations pursuant to these
securities transactions. LaBranche is exposed to market risk associated with the
sale of securities not yet purchased, which can be directly impacted by volatile
trading on the NYSE and AMEX. Additionally, in the event of nonperformance and
unfavorable market price movements, LaBranche may be required to purchase or
sell financial instruments, which may result in a loss to LaBranche.

LaBranche enters into collateralized financing agreements in which it
extends short-term credit to major financial institutions. LaBranche controls
access to the collateral pledged by the counterparties, which generally consists
of U.S. equity and government securities. The value and adequacy of the
collateral are continually monitored. Consequently, the risk of credit loss from
counterparties' failure to perform in connection with collateralized lending
activities is minimal.

In addition, Henderson Brothers and RPM Clearing Corporation, through the
normal course of business, enter into various securities transactions as agents.
The execution, settlement and financing of those transactions can result in
off-balance sheet risk and concentration of credit risk.

Henderson Brothers' and RPM Clearing Corporation's clearance activities
involve settlement and financing of various customer securities transactions on
a cash or margin basis. These activities may expose Henderson Brothers and RPM
Clearing Corporation to off-balance sheet risk in the event the customer or
other broker is unable to fulfill its contractual obligations and Henderson
Brothers and RPM Clearing Corporation have to purchase or sell securities at a
loss. For margin transactions Henderson Brothers and RPM Clearing Corporation
may be exposed to significant off-balance sheet risk in the event margin
requirements are not sufficient to fully cover losses that customers may incur
in their accounts.

F-24

Henderson Brothers and RPM Clearing Corporation seek to control the risks
associated with customer activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines.
Henderson Brothers and RPM Clearing Corporation monitor margin levels daily and
pursuant to such guidelines, require customers to deposit additional collateral
or to reduce positions when necessary.

Henderson Brothers and RPM Clearing Corporation are engaged in various
brokerage activities whose counterparties primarily include broker-dealers,
banks and other financial institutions. Henderson Brothers and RPM Clearing
Corporation may be exposed to the risk of default, which depends on the
creditworthiness of the counterparty. It is Henderson Brothers' and RPM Clearing
Corporation's policy to review, as necessary, the credit standing of each
counterparty with which it conducts business.

16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following 2000 pro forma consolidated results give effect to the
Company's March 2000 acquisition of all the outstanding capital stock of
Henderson Brothers, the March 2000 acquisition of Webco and the March 2000
issuance of $250.0 million of Senior Subordinated Notes as if they occurred on
January 1, 2000. In addition, the 2000 pro forma consolidated results give
effect to the March 2001 acquisition of RPM including the issuance of common
stock, the issuance of preferred stock, the assumption of RPM's option
agreements and the reversal of the historical results of operations for certain
business lines (the "Acquisition Transactions"), as if they occurred on January
1, 2000. The 2001 pro forma consolidated results give effect to the Acquisition
Transactions as if they occurred on January 1, 2001. The pro forma impact on
revenues, pre-tax income and earnings are as follows (000's omitted, except per
share data):

F-25

LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED, EXCEPT SHARE DATA)

See accompanying note to condensed financial statements.

F-26

LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(000'S OMITTED)

See accompanying note to condensed financial statements.

F-27

LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY/MEMBERS' CAPITAL
(000'S OMITTED)

See accompanying note to condensed financial statements.

F-28

LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOW
(000'S OMITTED)

See accompanying note to condensed financial statements.

F-29

LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS

1. NOTE TO CONDENSED FINANCIAL STATEMENTS

The condensed financial statements of LaBranche & Co Inc. (Parent Company
Only) should be read in conjunction with the consolidated financial statements
of LaBranche & Co Inc. and Subsidiaries and the notes thereto contained
elsewhere in this filing.

F-30