Edgar Filing: Lazard Ltd

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-32492

(Commission File Number)

LAZARD LTD

(Exact name of registrant as specified in its charter)


Bermuda		98-0437848
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification No.)
or Organization)

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(Address of principal executive offices)

Registrant’s telephone number: (441) 295-1422

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 whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 25, 2010, there were 116,604,467 shares of the Registrant’s Class A common stock (including 5,679,587 shares held by a subsidiary) and one share of the Registrant’s Class B common stock outstanding.

TABLE OF CONTENTS

When we use the terms “Lazard”, “we”, “us”, “our” and “the Company”, we mean Lazard Ltd, a company incorporated under the laws of Bermuda, and its subsidiaries, including Lazard Group LLC, a Delaware limited liability company (“Lazard Group”), that is the current holding company for our businesses. Lazard Ltd has no operating assets other than indirect ownership as of September 30, 2010 of approximately 91.5% of the common membership interests in Lazard Group and its controlling interest in Lazard Group.


		Page
Part I. Financial Information

Item 1. Financial Statements (Unaudited)		1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		43

Item 3. Quantitative and Qualitative Disclosures About Market Risk		75

Item 4. Controls and Procedures		75

Part II. Other Information

Item 1. Legal Proceedings		76

Item 1A. Risk Factors		76

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		76

Item 3. Defaults Upon Senior Securities		77

Item 4. [Removed and Reserved]		77

Item 5. Other Information		77

Item 6. Exhibits		78

Signatures		83

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)


		Page
Condensed Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009		2

Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2010 and 2009		4

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2010 and 2009		5

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2010 and 2009		6

Notes to Condensed Consolidated Financial Statements		8

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

(UNAUDITED)

(dollars in thousands, except for per share data)


	September 30, 2010		December 31, 2009
ASSETS
Cash and cash equivalents	$	847,431	$	917,329
Cash deposited with clearing organizations and other segregated cash		24,449		20,217
Receivables-net:
Fees		463,718		437,532
Banks		179,112		143,778
Customers and other		137,818		73,750
Related parties		6,829		14,415

		787,477		669,475
Investments:
Debt:
U.S. Government and agencies (includes $126,547 and $126,413 of securities at amortized cost at September 30, 2010 and December 31, 2009, respectively)		148,177		147,507
Other (includes $10,135 and $10,217 of securities at amortized cost at September 30, 2010 and December 31, 2009, respectively)		264,490		313,342
Equities		85,215		82,442
Other		214,401		264,402

		712,283		807,693
Property (net of accumulated amortization and depreciation of $248,690 and $239,603 at September 30, 2010 and December 31, 2009, respectively)		154,177		166,913
Goodwill and other intangible assets (net of accumulated amortization of $12,398 and $7,140 at September 30, 2010 and December 31, 2009, respectively)		318,541		317,780
Other assets		279,340		248,355

Total assets	$	3,123,698	$	3,147,762

See notes to condensed consolidated financial statements.

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

(UNAUDITED)

(dollars in thousands, except for per share data)


	September 30, 2010			December 31, 2009
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits and other customer payables	$	408,768		$	322,101
Accrued compensation and benefits		320,663			515,033
Senior debt		1,076,850			1,086,850
Capital lease obligations		21,749			24,628
Related party payables		564			17,450
Other liabilities		509,110			508,603
Subordinated debt		150,000			150,000

Total liabilities		2,487,704			2,624,665
Commitments and contingencies

STOCKHOLDERS’ EQUITY
Preferred stock, par value $.01 per share; 15,000,000 shares authorized:
Series A - 22,021 and 26,883 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		–			–
Series B - no shares issued and outstanding		–			–
Common stock:
Class A, par value $.01 per share (500,000,000 shares authorized; 116,604,467 and 92,165,912 shares issued at September 30, 2010 and December 31, 2009, respectively, including shares held by a subsidiary as indicated below)		1,166			922
Class B, par value $.01 per share (1 share authorized, issued and outstanding at September 30, 2010 and December 31, 2009)		–			–
Additional paid-in-capital		666,705			549,931
Retained earnings		83,348			52,726
Accumulated other comprehensive income (loss), net of tax		(70,519	)		(57,048	)

		680,700			546,531
Class A common stock held by a subsidiary, at cost (5,865,580 and 5,850,775 shares at September 30, 2010 and December 31, 2009, respectively)		(192,129	)		(191,140	)

Total Lazard Ltd stockholders’ equity		488,571			355,391
Noncontrolling interests		147,423			167,706

Total stockholders’ equity		635,994			523,097

Total liabilities and stockholders’ equity	$	3,123,698		$	3,147,762

See notes to condensed consolidated financial statements.

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

(dollars in thousands, except for per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
REVENUE
Investment banking and other advisory fees	$	245,294	$	252,538	$	759,785	$	650,327
Money management fees		202,662		149,102		560,664		368,346
Interest income		5,430		8,642		16,037		21,954
Other		23,924		27,992		47,785		76,232

Total revenue		477,310		438,274		1,384,271		1,116,859
Interest expense		24,073		26,559		73,788		81,124

Net revenue		453,237		411,715		1,310,483		1,035,735

OPERATING EXPENSES
Compensation and benefits		282,528		250,914		845,926		693,725
Occupancy and equipment		22,414		23,690		65,004		63,774
Marketing and business development		17,503		14,070		51,358		43,311
Technology and information services		18,904		17,592		53,552		49,670
Professional services		10,731		11,823		29,716		31,883
Fund administration and outsourced services		12,037		10,272		34,407		26,075
Amortization of intangible assets related to acquisitions		1,719		2,032		5,258		2,720
Restructuring		–		–		87,108		62,550
Other		7,934		8,157		26,117		22,685

Total operating expenses		373,770		338,550		1,198,446		996,393

OPERATING INCOME		79,467		73,165		112,037		39,342
Provision for income taxes		9,113		19,968		29,049		29,312

NET INCOME		70,354		53,197		82,988		10,030

LESS - NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS		6,263		15,779		7,859		(2,079	)

NET INCOME ATTRIBUTABLE TO LAZARD LTD	$	64,091	$	37,418	$	75,129	$	12,109

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic		111,059,071		80,756,718		101,440,741		75,278,905
Diluted		138,094,101		131,468,085		135,554,131		75,278,905

NET INCOME PER SHARE OF COMMON STOCK:
Basic		$0.58		$0.47		$0.74		$0.16

Diluted		$0.51		$0.41		$0.58		$0.16

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK		$0.125		$0.125		$0.375		$0.325

See notes to condensed consolidated financial statements.

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

(dollars in thousands)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	82,988		$	10,030
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash items included in net income:
Depreciation and amortization of property		16,131			16,781
Amortization of deferred expenses, share-based incentive compensation and interest rate hedge		257,840			224,797
Amortization of intangible assets related to acquisitions		5,258			2,720
(Gain) loss on extinguishment of debt		424			(258	)
(Increase) decrease in operating assets:
Cash deposited with clearing organizations and other segregated cash		(4,824	)		(4,267	)
Receivables - net		(129,364	)		196,158
Investments		(38,902	)		(40,830	)
Other assets		(35,174	)		13,508
Increase (decrease) in operating liabilities:
Deposits and other payables		83,741			(280,858	)
Accrued compensation and benefits and other liabilities		(191,480	)		(9,886	)

Net cash provided by operating activities		46,638			127,895

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired of $23,280, and equity method investments		–			(22,500	)
Disposition of and distributions from equity method investments		51,437			–
Additions to property		(10,073	)		(8,579	)
Disposals of property		301			896
Purchases of held-to-maturity securities		–			(135,950	)
Purchases of available-for-sale securities		–			(3,399	)
Proceeds from sales and maturities of available-for-sale securities		71,579			54,467

Net cash provided by (used in) investing activities		113,244			(115,065	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Contribution from noncontrolling interests		3,005			1,474
Other financing activities		6,638			56
Payments for:
Senior borrowings		(10,375	)		(635	)
Capital lease obligations		(1,626	)		(2,084	)
Distributions to noncontrolling interests		(20,315	)		(47,507	)
Repurchase of common membership interests from members of LAZ-MD Holdings		(5,072	)		(13,285	)
Purchase of Class A common stock		(106,316	)		(50,479	)
Class A common stock dividends		(36,714	)		(23,216	)
Settlement of vested share-based incentive compensation		(54,947	)		(12,291	)
Other financing activities		(53	)		(27	)

Net cash used in financing activities		(225,775	)		(147,994	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(4,005	)		20,531

NET DECREASE IN CASH AND CASH EQUIVALENTS		(69,898	)		(114,633	)
CASH AND CASH EQUIVALENTS - January 1		917,329			909,707

CASH AND CASH EQUIVALENTS - September 30	$	847,431		$	795,074

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Supplemental investing non-cash transaction:
Class A common stock issued/issuable in connection with business acquisitions	$	–		$	4,390

See notes to condensed consolidated financial statements.

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010

(UNAUDITED)

(dollars in thousands)


	Series A Preferred Stock					Common Stock				Additional Paid-In- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Class A Common Stock Held by a Subsidiary						Total Lazard Ltd Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Shares			$		*Shares ()**		$		Additional Paid-In- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Shares			$			Total Lazard Ltd Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
Balance – January 1, 2010		26,883		$	–		92,165,913	$	922	$	549,931		$	52,726		$	(57,048	)		5,850,775		$	(191,140	)	$	355,391		$	167,706		$	523,097

Comprehensive income (loss):
Net income														75,129												75,129			7,859			82,988
Other comprehensive income (loss) - net of tax:
Currency translation adjustments																	(3,829	)								(3,829	)		(292	)		(4,121	)
Amortization of interest rate hedge																	823									823			76			899
Available-for-sale securities:
Net unrealized gain																	2,272									2,272			211			2,483
Adjustments for items reclassified to earnings																	2,372									2,372			219			2,591
Employee benefit plans:
Net actuarial loss																	(5,999	)								(5,999	)		(556	)		(6,555	)
Adjustments for items reclassified to earnings																	888									888			82			970

Comprehensive income																										71,656			7,599			79,255

Class A common stock issued/issuable in connection with business acquisitions and LAM Merger and related amortization							315,617		3		2,064															2,067			2,119			4,186
Conversion of Series A preferred stock into Class A common stock		(4,862	)		–		572,988		6		(6	)														–						–
Amortization of share-based incentive compensation											228,668															228,668			21,185			249,853
Dividend-equivalents											7,758			(7,793	)											(35	)		(3	)		(38	)
Class A common stock dividends														(36,714	)											(36,714	)					(36,714	)
Purchase of Class A common stock																				3,466,178			(106,316	)		(106,316	)					(106,316	)
Delivery of Class A common stock in connection with share-based incentive compensation awards											(276,374	)								(6,451,373	)		221,427			(54,947	)					(54,947	)
Repurchase of common membership interests from LAZ-MD Holdings											(4,642	)														(4,642	)		(430	)		(5,072	)
Issuance of Class A common stock							3,000,000		30		116,070									3,000,000			(116,100	)		–						–
Class A common stock issued in exchange for Lazard Group common membership interests, including in connection with secondary offerings							20,549,950		205		(205	)														–						–
Distributions to noncontrolling interests																										–			(17,310	)		(17,310	)
Adjustments related to noncontrolling interests											43,441						(9,998	)								33,443			(33,443	)		–

Balance – September 30, 2010		22,021		$	–		116,604,468	$	1,166	$	666,705		$	83,348		$	(70,519	)		5,865,580		$	(192,129	)	$	488,571		$	147,423		$	635,994

^(*)	Includes 92,165,912 and 116,604,467 shares of the Company’s Class A common stock issued at January 1, 2010 and September 30, 2010, respectively, and 1 share of the Company’s Class B common stock at each such date.

See notes to condensed consolidated financial statements.

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009

(UNAUDITED)

(dollars in thousands)


	Series A Preferred Stock					Common Stock				Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Class A Common Stock Held By A Subsidiary						Total Lazard Ltd Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Series A Preferred Stock					Common Stock													Class A Common Stock Held By A Subsidiary
	Shares			$		*Shares()**		$											Shares			$
Balance–January 1, 2009		31,745		$	–		76,294,913	$	763	$	429,694		$	221,410		$	(79,435	)		9,376,162			$(321,852)		$	250,580		$	61,172		$	311,752

Comprehensive income (loss):
Net income (loss)														12,109												12,109			(2,079	)		10,030
Other comprehensive income (loss) - net of tax:
Currency translation adjustments																	48,074									48,074			16,450			64,524
Amortization of interest rate hedge																	602									602			206			808
Available-for-sale securities:
Net unrealized gain																	17,479									17,479			5,983			23,462
Adjustment for items reclassified to earnings																	894									894			306			1,200
Employee benefit plans:
Net actuarial gain																	841									841			288			1,129
Adjustment for items reclassified to earnings																	(278	)								(278	)		(95	)		(373	)

Comprehensive income																										79,721			21,059			100,780

Class A common stock issued/issuable in connection with business acquisitions and LAM Merger and related amortization							1,473,866		15		20,190															20,205			10,531			30,736
Conversion of Series A preferred stock into Class A common stock		(4,862	)		–		479,732		5		(5	)														–						–
Amortization of share-based incentive compensation											162,318															162,318			55,112			217,430
Dividend-equivalents											4,793			(4,820	)											(27	)					(27	)
Class A common stock dividends														(23,216	)											(23,216	)					(23,216	)
Purchase of Class A common stock																				1,984,997			(50,479	)		(50,479	)					(50,479	)
Delivery of Class A common stock in connection with share-based incentive compensation awards											(47,142	)								(1,030,960	)		34,851			(12,291	)					(12,291	)
Repurchase of common membership interests from LAZ-MD Holdings											(9,898	)														(9,898	)		(3,387	)		(13,285	)
Class A common stock issued in exchange for Lazard Group common membership interests, including in connection with secondary offerings							13,907,140		139		(139	)														–						–
Acquisitions of and distributions to noncontrolling interests																										–			63,193			63,193
Adjustments related to noncontrolling interests											25,435						(14,678	)								10,757			(10,757	)		–

Balance–September 30, 2009		26,883		$	–		92,155,651	$	922	$	585,246		$	205,483		$	(26,501	)		10,330,199		$	(337,480	)	$	427,670		$	196,923		$	624,593

^(*)	Includes 76,294,912 and 92,155,650 shares of the Company’s Class A common stock issued at January 1, 2009 and September 30, 2009, respectively, and 1 share of the Company’s Class B common stock at each such date.

See notes to condensed consolidated financial statements.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

1.	*ORGANIZATION AND BASIS OF PRESENTATION*

Organization

Lazard Ltd, a Bermuda holding company, and its subsidiaries (collectively referred to as “Lazard Ltd”, “Lazard” or the “Company”), including Lazard Ltd’s indirect investment in Lazard Group LLC, a Delaware limited liability company (collectively referred to, together with its subsidiaries, as “Lazard Group”), is one of the world’s preeminent financial advisory and asset management firms and has long specialized in crafting solutions to the complex financial and strategic challenges of our clients. We serve a diverse set of clients around the world, including corporations, partnerships, institutions, governments and high net worth individuals.

Lazard Ltd indirectly held approximately 91.5% and 74.5% of all outstanding Lazard Group common membership interests as of September 30, 2010 and December 31, 2009, respectively. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group. Lazard Group is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”).

The Company’s sole operating asset is its indirect ownership of common membership interests of Lazard Group and its managing member interest of Lazard Group, whose principal operating activities are included in two business segments:

•

Financial Advisory, which includes providing advice on mergers and acquisitions (“M&A”) and strategic advisory matters, restructurings and capital structure advisory services, capital raising and other transactions, and

•

Asset Management, which includes the management of equity and fixed income securities, alternative investments and private equity funds.

In addition, the Company records selected other activities in its Corporate segment, including management of cash, certain investments and the commercial banking activities of Lazard Group’s Paris-based Lazard Frères Banque SA (“LFB”). The Company also allocates outstanding indebtedness to its Corporate segment.

LFB is a registered bank regulated by the Banque de France and its primary operations include asset and liability management for Lazard Group’s businesses in France through its money market desk and commercial banking operations, deposit taking and, to a lesser extent, financing activities and custodial oversight over assets of various clients. LFB also engages in underwritten offerings of securities in France.

Basis of Presentation

The accompanying condensed consolidated financial statements of Lazard Ltd have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Lazard Ltd’s annual report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”). The accompanying December 31, 2009 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates. The consolidated results of operations for the three month and nine month periods ended September 30, 2010 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Any material events or transactions that occurred subsequent to September 30, 2010 through the date of filing of this Quarterly Report on Form 10-Q were reviewed for purposes of determining whether any adjustments or additional disclosures were required to be made to the accompanying condensed consolidated financial statements.

The condensed consolidated financial statements include Lazard Ltd, Lazard Group and Lazard Group’s principal operating subsidiaries: Lazard Frères & Co. LLC (“LFNY”), a New York limited liability company, along with its subsidiaries, including Lazard Asset Management LLC and its subsidiaries (collectively referred to as “LAM”); its French limited liability companies Compagnie Financière Lazard Frères SAS (“CFLF”) along with its subsidiaries, LFB and Lazard Frères Gestion SAS (“LFG”) and Maison Lazard SAS and its subsidiaries; and Lazard & Co., Limited (“LCL”), through Lazard & Co., Holdings Limited, an English private limited company (“LCH”), together with their jointly owned affiliates and subsidiaries.

The Company’s policy is to consolidate (i) entities in which it has a controlling financial interest, (ii) variable interest entities (“VIEs”) where the Company has a variable interest and is deemed to be the primary beneficiary and (iii) limited partnerships where the Company is the general partner, unless the presumption of control is overcome. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of earnings or losses of the entity. All material intercompany transactions and balances have been eliminated.

Certain prior period amounts have been reclassified to conform to the manner of presentation in the current period.

2. RECENT ACCOUNTING DEVELOPMENTS

Fair Value Measurements—On April 1, 2009, the Company adopted, on a prospective basis, additional accounting guidance issued by the FASB on fair value measurements. The additional accounting guidance assists in the determination of fair value for securities or other financial assets when the volume and level of activity for such items have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis. The additional accounting guidance also assists in determining whether or not a transaction is orderly and whether or not a transaction or quoted price can be considered in the determination of fair value. Accordingly, the additional accounting guidance does not apply to quoted prices for identical assets or liabilities in active markets categorized as Level 1 in the fair value measurement hierarchy, and also requires that additional fair value disclosures be included on an interim basis. See Note 5 of Notes to Condensed Consolidated Financial Statements for the additional disclosures provided pursuant to the additional accounting guidance. The adoption of additional guidance regarding fair value measurements did not materially impact the Company’s consolidated financial statements.

In January 2010, the FASB amended its fair value measurement disclosure guidance to require disclosure of significant transfers into and out of the Level 1 and Level 2 categories in the fair value measurement hierarchy, as well as separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

measurements. In addition, the FASB also clarified its existing fair value measurement disclosure guidance regarding the level of disaggregation required and disclosures about inputs and valuation techniques used to measure fair value. The new disclosure requirements and clarifications of existing fair value measurement disclosure guidance are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to provide disclosures about purchases, sales, issuances and settlements on a gross basis in the roll forward of activities in Level 3 fair value measurements, which becomes effective for interim and annual reporting periods beginning after December 15, 2010. On January 1, 2010, the Company adopted, on a prospective basis, the applicable new disclosure requirements and clarifications of existing fair value measurement disclosure guidance, which did not have a material impact on the Company’s consolidated financial statements. The Company does not anticipate that the adoption of the remaining new disclosure requirements that are effective for interim and annual reporting periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

Other-Than-Temporary Impairments of Debt Securities—On April 1, 2009, the Company adopted, on a prospective basis, new accounting guidance issued by the FASB with respect to the recognition and presentation of other-than-temporary impairments pertaining to debt securities. The new accounting guidance requires greater clarity about the credit and non-credit components of debt securities that are not expected to be sold and whose fair value is below amortized cost, and also requires increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. The adoption of the new accounting guidance did not materially impact the Company’s consolidated financial statements. See Note 4 of Notes to Condensed Consolidated Financial Statements.

VIEs—In June 2009, the FASB amended its guidance on VIEs, which changes how a company determines whether an entity in which it is involved with is insufficiently capitalized or is not controlled through voting (or similar rights) and whether or not such entity should be consolidated. It also requires a company to provide additional disclosures about its involvement with VIEs and any significant changes in risk exposure due to that involvement. The requirements of the amended accounting guidance were to be effective for interim and annual periods beginning after November 15, 2009. On January 27, 2010, the FASB voted to defer the application of its guidance on consolidation of a reporting enterprise’s interest in an entity when certain conditions are met. This deferral, which affects interests in mutual funds, hedge funds, private equity funds and other types of funds, is effective for interim and annual periods beginning after November 15, 2009. The adoption of the amended guidance for which the deferral provisions do not apply and related disclosures did not have a material impact on the Company’s consolidated financial statements.

3.	*RECEIVABLES—NET*

Receivables—net is comprised of receivables from fees, banks, customers and other and related parties.

Receivables from banks represent those related to LFB’s short-term deposits in the inter-bank market and with the Banque de France. The level of these deposits may be driven by the level of LFB customer and bank-related interest-bearing time and demand deposits (which can fluctuate significantly on a daily basis) and by changes in asset allocation.

Customers and other receivables at September 30, 2010 and December 31, 2009 include $2,175 and $4,466, respectively, of loans by LFB to managing directors and employees in France that are made in the ordinary course of business at market terms.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Receivables are stated net of an estimated allowance for doubtful accounts of $17,000 and $11,575 at September 30, 2010 and December 31, 2009, respectively, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. The Company recorded bad debt expense of $226 and $9,416 for the three month and nine month periods ended September 30, 2010, respectively, and $1,148 and $4,770 for the three month and nine month periods ended September 30, 2009, respectively. In addition, the Company recorded charge-offs, foreign currency translation and other adjustments, which resulted in a net decrease to the allowance for doubtful accounts of $2,097 and $3,991 for the three month and nine month periods ended September 30, 2010 and $2,043 and $6,538 for the three month and nine month periods ended September 30, 2009, respectively. At September 30, 2010 and December 31, 2009, the Company had $21,224 and $14,150, respectively, of receivables deemed past due or uncollectible.

4.	*INVESTMENTS*

The Company’s investments and securities sold, not yet purchased, consist of the following at September 30, 2010 and December 31, 2009:


	September 30, 2010		December 31, 2009
Debt:
U.S. Government and agencies	$	148,177	$	147,507

Other:
Non-U.S. Government and agencies		69,208		43,501
U.S. states and municipals		11,232		15,728
Corporates		184,050		254,113

		264,490		313,342

Total debt securities		412,667		460,849

Equities		85,215		82,442

Other:
Interest in LAM alternative asset management funds:
General Partner (“GP”) interests owned		50,859		50,080
GP interests consolidated but not owned		7,514		13,038
Private equity:
Investments owned		99,349		102,983
Investments consolidated but not owned		44,464		35,743
Equity method investments		12,215		62,558

		214,401		264,402

Total investments		712,283		807,693
Less:
Debt at amortized cost		136,682		136,630
Equity method investments		12,215		62,558

Investments, at fair value	$	563,386	$	608,505

Securities sold, not yet purchased, at fair value (included in “other liabilities”)	$	2,868	$	5,179

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Debt investments at September 30, 2010 and December 31, 2009 were categorized as follows:


	September 30, 2010		December 31, 2009
Trading securities:
U.S. Government and agencies	$	21,630	$	21,094
Non-U.S. Government and agencies		59,073		33,284
U.S. states and municipals		11,232		15,728
Corporates		9,186		450

		101,121		70,556

Available-for-sale securities:
Corporates		174,864		253,663


Held-to-maturity securities:
U.S. Government and agencies		126,547		126,413
Non-U.S. Government and agencies		10,135		10,217

		136,682		136,630

Total debt securities	$	412,667	$	460,849

Substantially all of the corporate and non-U.S. Government and agency debt securities are held by LFB and primarily consist of fixed and floating rate European corporate and French government debt securities.

The fair value and amortized cost basis pertaining to debt securities classified as “available-for-sale” at September 30, 2010, by maturity date/first call date, are as follows:


Maturity Date/First Call Date	Fair Value		Amortized Cost Basis
Within one year	$	15,132	$	14,900
After 1 year through 5 years		99,418		105,503
After 5 years through 10 years		45,975		50,758
After 10 years		14,339		15,287

		$174,864	$	186,448

Debt investments include corporate perpetual securities that are callable. Such securities are listed in the table above based on their respective first call dates. All other “available-for-sale” securities are listed in the table based on their contractual maturities.

Debt securities classified as “available-for-sale” at September 30, 2010 and December 31, 2009 that are in an unrealized loss position are as follows:

September 30, 2010

December 31, 2009

Securities in a

Continuous Loss

Position for

Less than 12 Months

Securities in a

Continuous Loss

Position for

12 Months or Longer

Securities in a

Continuous Loss

Position for

Less than 12 Months

Securities in a

Continuous Loss

Position for

12 Months or Longer

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

$9,561

$1,026

$77,757

$11,964

$ –

$166,094

$21,381

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

LFB does not intend to sell its debt securities classified as “available-for-sale” that are in an unrealized loss position, nor is it more likely than not that LFB will be required to sell such debt securities before their anticipated recovery. In addition, no credit loss was required to be recognized for these debt securities during the three month and nine month periods ended September 30, 2010 based on the qualitative and quantitative analysis performed by the Company. During the three month and nine month periods ended September 30, 2009, other-than-temporary impairment charges of $528 and $1,444, respectively, were recognized in “other-revenue” on the condensed consolidated statements of operations, representing the credit loss component of debt securities whose fair value was below amortized cost.

The fair value and amortized cost basis pertaining to debt securities classified as “held-to-maturity” at September 30, 2010, by maturity date, are as follows:


Maturity Date	Fair Value		Amortized Cost Basis
Within one year	$	10,248	$	10,135
After 1 year through 5 years		132,896		126,547

	$	143,144	$	136,682

There were no debt securities classified as “held-to-maturity” at September 30, 2010 and December 31, 2009 that were in an unrecognized loss position.

Equities principally represent the Company’s investments in marketable equity securities of large-, mid- and small-cap domestic, international and global companies to seed new Asset Management products and includes investments in public and private asset management funds managed both by LAM and third-party asset managers.

In 2008, LFNY was a party to a Prime Brokerage Agreement with Lehman Brothers Inc. (“LBI”) for certain accounts involving investment strategies managed by LAM. On September 9, 2008, LAM requested a transfer of such accounts, of which $11,368 was not received. On September 15, 2008, Lehman Brothers Holdings, Inc., the ultimate parent company in the Lehman Group, filed for protection under Chapter 11 of the United States Bankruptcy Code and a number of Lehman Group entities in the UK entered into administration proceedings under the Insolvency Act 1986. In addition, the Securities Investor Protection Corporation (“SIPC”) commenced liquidation proceedings on September 19, 2008 pursuant to the Securities Investor Protection Act of 1970, as amended, with respect to LBI. The Chapter 11 filing, Insolvency Act Administration and SIPC proceedings exposed Lazard to possible loss due to counterparty credit and other risk. During 2008, the Company provided for the entire amount of such possible loss, and, through September 30, 2010, $649 has been recovered by the Company. We continue to actively seek recovery of all amounts.

Interests in LAM alternative asset management funds represent (i) GP interests owned by Lazard in LAM-managed alternative asset management funds and (ii) GP interests consolidated by the Company pertaining to noncontrolling interests in LAM alternative asset management funds. Such noncontrolling interests in LAM alternative asset management funds, which represent GP interests held directly by certain of our LAM managing directors or employees of the Company, are deemed to be controlled by, and therefore consolidated by, the Company in accordance with U.S. GAAP. Noncontrolling interests are presented within “stockholders’ equity” on the condensed consolidated statements of financial condition (see Note 12 of Notes to Condensed Consolidated Financial Statements).

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Private equity investments owned by Lazard are primarily comprised of investments in private equity funds and direct private equity interests. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies; (ii) Corporate Partners II Limited (“CP II”), a private equity fund targeting significant noncontrolling-stake investments in established public and private companies and (iii) Lazard Senior Housing Partners LP (“Senior Housing”), which acquires companies and assets in the senior housing, extended-stay hotel and shopping center sectors. Senior Housing is managed by Lazard Alternative Investments Holdings LLC (“LAI”), a subsidiary of LFCM Holdings LLC (“LFCM Holdings”). LAI owns and operates the alternative investments of LFCM Holdings. CP II was managed by a subsidiary of LAI until February 16, 2009. Effective February 17, 2009, ownership and control of CP II was transferred to the investment professionals who manage CP II.

Private equity investments consolidated but not owned by Lazard are related solely to Lazard’s establishment of a private equity business with the Edgewater Funds (“Edgewater”), a Chicago-based private equity firm, through the acquisition of Edgewater’s management vehicles on July 15, 2009. The acquisition was structured as a purchase by Lazard of interests in a holding company that owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”). Edgewater is focused on buyout and growth equity investments in middle market companies. The economic interests that the Company does not own are owned by the current leadership team and other investors in the Edgewater management vehicles. See Note 8 of Notes to Condensed Consolidated Financial Statements.

Equity method investments at December 31, 2009 primarily consisted of our investment in Sapphire Industrials Corp. (“Sapphire”). On January 24, 2008, Sapphire, a then newly-organized special purpose acquisition company formed by the Company, completed an initial public offering (the “Sapphire IPO”). Sapphire was formed for the purpose of effecting a business combination within a 24-month period (the “Business Combination”) and net proceeds from the Sapphire IPO were placed in a trust account by Sapphire (the “Trust Account”) pending consummation of the Business Combination. In connection with the Sapphire IPO, the Company purchased warrants from Sapphire for a total purchase price of $12,500 and Sapphire common stock for an aggregate purchase price of $50,000.

On January 6, 2010, Sapphire announced that it had not completed the Business Combination and it would dissolve and distribute the funds in the Trust Account to all its public shareholders, to the extent they were holders of shares issued in the Sapphire IPO. Pursuant to such dissolution, on January 26, 2010, Sapphire distributed an initial distribution to the Company aggregating $50,319. All Sapphire warrants expired without value. During the fourth quarter of 2009, the Company recognized a loss of approximately $13,000 principally related to its investment in warrants of Sapphire.

The Company recognized gross investment gains and losses on investments measured at fair value for the three month and nine month periods ended September 30, 2010 and 2009, in “revenue-other” on its condensed consolidated statement of operations as follows:


	Three Month Period Ended September 30,				Nine Month Period Ended September 30,
	2010		2009		2010		2009
Gross investment gains	$	17,306	$	20,489	$	26,690	$	41,419
Gross investment losses	$	–	$	–	$	7,031	$	5,371

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

The table above includes gross unrealized investment gains and losses pertaining to “trading” securities as follows:


	Three Month Period Ended September 30,				Nine Month Period Ended September 30,
	2010		2009		2010		2009
Gross unrealized investment gains	$	1,187	$	2,297	$	–	$	3,021
Gross unrealized investment losses	$	101	$	–	$	138	$	17

In addition, within “accumulated other comprehensive income (loss), net of tax” (“AOCI”), the Company recorded gross pre-tax unrealized investment gains of $8,672 and $41,281 during the nine month periods ended September 30, 2010 and 2009, respectively, and gross pre-tax unrealized investment losses of $1,950 and $364 during the nine month periods ended September 30, 2010 and 2009, respectively, pertaining to debt securities held at LFB that are designated as “available-for-sale.” With respect to adjustments for items reclassified to earnings, the average cost basis is utilized for purposes of calculating realized investment gains and losses.

5.	*FAIR VALUE MEASUREMENTS*

Lazard categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

Level 1.

Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Lazard has the ability to access.

Level 2.

Assets and liabilities whose values are based on quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in non-active markets or inputs other than quoted prices that are directly observable or derived principally from or corroborated by market data.

Level 3.

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis.

Most of the Company’s investments in corporate debt securities are considered Level 2 investments with such fair value based on observable data, principally broker quotes as provided by external pricing services. The Company’s other debt securities at fair value are considered Level 1 investments with such fair value based on unadjusted quoted prices in active markets.

The fair value of equities is principally classified as Level 1 or Level 2 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security; public asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in private asset management funds are classified as Level 2 and are primarily valued based on information provided by fund managers and, secondarily, from external pricing services to the extent managed by LAM.

The fair value of interests in LAM alternative asset management funds is classified as Level 2 and is based on information provided by external pricing services.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

The fair value of private equity investments is classified as Level 3 and is based on financial statements provided by fund managers, appraisals and internal valuations.

Where information reported is based on broker quotes, the Company generally obtains one quote/price per instrument. In some cases, quotes related to corporate bonds obtained through external pricing services represent the average of several broker quotes.

Where information reported is based on data received from fund managers or from external pricing services, the Company reviews such information to ascertain at which level within the fair value hierarchy to classify the investment.

The following tables present the categorization of investments and certain other assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 into a three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:


	As of September 30, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Debt (excluding securities at amortized cost)	$	101,121	$	174,864	$	–	$	275,985
Equities		69,206		15,696		313		85,215
Other (excluding equity method investments):
Interest in LAM alternative asset management funds:
GP interests owned		–		50,859		–		50,859
GP interests consolidated but not owned		–		7,514		–		7,514
Private equity:
Investments owned		–		–		99,349		99,349
Investments consolidated but not owned		–		–		44,464		44,464
Derivatives		–		1,335		–		1,335

Total Assets	$	170,327	$	250,268	$	144,126	$	564,721

Liabilities:
Securities sold, not yet purchased	$	2,868	$	–	$	–	$	2,868
Derivatives		–		29,027		–		29,027

Total Liabilities	$	2,868	$	29,027	$	–	$	31,895

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)


	As of December 31, 2009
	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Debt (excluding securities at amortized cost)	$	70,556	$	253,663	$	–	$	324,219
Equities		65,932		16,205		305		82,442
Other (excluding equity method investments):
Interest in LAM alternative asset management funds:
GP interests owned		–		50,080		–		50,080
GP interests consolidated but not owned		–		13,038		–		13,038
Private equity:
Investments owned		–		2,812		100,171		102,983
Investments consolidated but not owned		–		–		35,743		35,743
Derivatives		5		916		–		921

Total Assets	$	136,493	$	336,714	$	136,219	$	609,426

Liabilities:
Securities sold, not yet purchased	$	5,179	$	–	$	–	$	5,179
Derivatives		–		17,383		–		17,383

Total Liabilities	$	5,179	$	17,383	$	–	$	22,562

There were no transfers into and out of the Level 1, 2 and 3 categories in the fair value measurement hierarchy for the three month and nine month periods ended September 30, 2010.

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month and nine month periods ended September 30, 2010 and 2009:


	Three Months Ended September 30, 2010
	Beginning Balance		Net Unrealized/ Realized Gains (Losses) Included In Revenue-Other			Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
	Beginning Balance					Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
Investments:
Equities	$	299	$	18		$	2		$	(6	)	$	313
Private equity:
Investments owned		94,303		961			(103	)		4,188			99,349
Investments consolidated but not owned		44,106		(362	)		720			–			44,464

Total Level 3 Assets	$	138,708	$	617		$	619		$	4,182		$	144,126

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)


	Three Months Ended September 30, 2009
	Beginning Balance		Net Unrealized/ Realized Gains (Losses) Included In Revenue-Other		Net Purchases, Issuances and Settlements/ Acquisitions		Foreign Currency Translation Adjustments		Ending Balance
	Beginning Balance				Net Purchases, Issuances and Settlements/ Acquisitions		Foreign Currency Translation Adjustments		Ending Balance
Investments:
Equities	$	297	$	–	$	3	$	4	$	304
Private equity:
Investments owned		93,530		1,773		3,344		1,509		100,156
Investments consolidated but not owned		–		1,976		33,416		–		35,392

Total Level 3 Assets		$93,827	$	3,749	$	36,763	$	1,513	$	135,852


	Nine Months Ended September 30, 2010
	Beginning Balance		Net Unrealized/ Realized Gains (Losses) Included In Revenue-Other		Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
	Beginning Balance				Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
Investments:
Equities	$	305	$	6	$	8		$	(6	)	$	313
Private equity:
Investments owned		100,171		1,715		(106	)		(2,431	)		99,349
Investments consolidated but not owned		35,743		3,637		5,084			–			44,464

Total Level 3 Assets	$	136,219	$	5,358	$	4,986		$	(2,437	)	$	144,126


	Nine Months Ended September 30, 2009
	Beginning Balance		Net Unrealized/ Realized Gains (Losses) Included In Revenue-Other			Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
	Beginning Balance					Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments			Ending Balance
Investments:
Equities	$	2,453	$	(5	)	$	(2,053	)	$	(91	)	$	304
Private equity:
Investments owned		83,931		1,665			11,957			2,603			100,156
Investments consolidated but not owned		–		1,976			33,416			–			35,392

Total Level 3 Assets	$	86,384	$	3,636		$	43,320		$	2,512		$	135,852

There were no realized gains or losses included in income for the three month and nine month periods ended September 30, 2010 with respect to Level 3 assets. There were net realized gains of $595 and $616 included in income for the three month and nine month periods ended September 30, 2009, respectively, with respect to such Level 3 assets.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

6.	*DERIVATIVES*

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, equity swaps and other derivative contracts to hedge exposures to fluctuations in interest rates, currency exchange rates and equity markets. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the consolidated statements of financial condition. Except for derivatives hedging “available-for-sale” securities, the Company elected to not apply hedge accounting to its other derivative instruments held. Gains and losses on the Company’s derivatives not designated as hedging instruments, as well as gains and losses on derivatives accounted for as fair value hedges, are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, on the consolidated statements of operations. Furthermore, with respect to derivatives designated as fair value hedges, the hedged item is required to be adjusted for changes in fair value of the risk being hedged, with such adjustment accounted for in the consolidated statements of operations.

The table below presents the fair values of the Company’s derivative assets and liabilities reported within “other assets” and “other liabilities” on the accompanying condensed consolidated statements of financial condition as of September 30, 2010 and December 31, 2009:


	Designated as Hedging Instruments				Not Designated as Hedging Instruments				Total
	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
Derivative Assets:
Forward foreign currency exchange rate contracts	$	–	$	–	$	1,260		$836	$	1,260		$836
Interest rate swaps		–		–		63		80		63		80
Equity swaps and other		–		–		12		5		12		5

	$	–	$	–	$	1,335		$921	$	1,335		$921

Derivative Liabilities:
Forward foreign currency exchange rate contracts	$	–	$	–	$	10,547	$	2,213	$	10,547	$	2,213
Interest rate swaps		15,283		14,147		2		56		15,285		14,203
Equity swaps		–		–		3,195		967		3,195		967

	$	15,283	$	14,147	$	13,744	$	3,236	$	29,027	$	17,383

Gains (losses) with respect to derivatives not designated as hedging instruments on the accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2010 and 2009 (predominantly reflected in “revenue-other”), by type of derivative, were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Forward foreign currency exchange rate contracts	$	(11,884	)	$	(699	)	$	467		$	2,951
Interest rate swaps		2			82			36			564
Equity swaps and other		(6,900	)		(7,847	)		(2,850	)		(11,110	)

	$	(18,782	)	$	(8,464	)	$	(2,347	)	$	(7,595	)

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Derivatives designated as hedging instruments relate to interest rate swaps that hedge “available-for-sale” securities and are being accounted for as fair value hedges. For the three month and nine month periods ended September 30, 2010, the Company recognized net pre-tax losses pertaining to interest rate swaps of $332 and $4,088, respectively, and for the three month and nine month periods ended September 30, 2009, recognized net pre-tax losses pertaining to interest rate swaps of $1,597 and $1,787, respectively. These losses were substantially offset by amounts recognized on the hedged risk portion of such “available-for-sale” securities.

7.	*LAM MERGER TRANSACTION*

On September 25, 2008, the Company, LAM and LAZ Sub I, LLC, a then newly-formed subsidiary of LFNY, completed the merger of LAZ Sub I, LLC with and into LAM (the “LAM Merger”). Prior to the LAM Merger, the common equity interests of LAM were held by LFNY, and certain other equity interests of LAM, representing contingent payments should certain specified fundamental transactions occur, were held by present and former employees of LAM. Following the LAM Merger, all equity interests of LAM are owned directly or indirectly by LFNY.

The aggregate non-contingent consideration relating to the equity interests of LAM held by present and former employees of LAM and its subsidiaries (the “Transaction Consideration”) consists of (i) cash payments made from the closing of the LAM Merger through January 2, 2009 of approximately $60,100, (ii) a cash payment on October 31, 2011 of approximately $90,300 and (iii) an issuance on October 31, 2011 of 2,201,457 shares of Lazard Ltd’s Class A common stock (“Class A common stock”) (plus additional shares of Class A common stock in an amount determined by reference to the cash dividends paid on Class A common stock since the closing of the LAM Merger), subject, in the case of clauses (ii) and (iii) and with respect to certain present employees of LAM and its subsidiaries, to delayed payment/issuance until the eighth anniversary of the closing of the LAM Merger if the applicable employee is no longer employed by Lazard or its affiliates on October 31, 2011, subject to certain exceptions. The merger agreement also generally provides that if there is a change in control of the Company or a sale of LAM, any and all of the Transaction Consideration will be payable as of the date of such change in control. The related liabilities for the present value of the unpaid cash consideration have been recorded in the accompanying condensed consolidated statements of financial condition in “accrued compensation and benefits” and “other liabilities”, and amounted to $14,929 and $70,215, respectively, as of September 30, 2010 and $14,252 and $65,308, respectively, as of December 31, 2009.

8.	*BUSINESS ACQUISITIONS*

On July 15, 2009, the Company established a private equity business with Edgewater, a private equity firm based in Chicago, Illinois, through the Edgewater Acquisition. Following such acquisition, Edgewater’s current leadership team retained a substantial economic interest in such entities. Edgewater primarily manages two middle market funds, Edgewater Growth Capital Partners, L.P. and Edgewater Growth Capital Partners II, L.P. (the “underlying funds”), with an aggregate of approximately $700,000 of capital raised. The acquisition was structured as a purchase by Lazard Group of interests in a holding company that in turn owns interests in the general partner and management company entities of the current Edgewater private equity funds.

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock subject to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

earnout criteria and payable over time (the “Earnout Shares”). The Initial Shares are subject to transfer restrictions and forfeiture provisions that lapse only upon the achievement of certain performance thresholds for

the next Edgewater fund that must be met by July 15, 2011. The Earnout Shares will be issued only if certain performance thresholds for the next two Edgewater funds are met.

The Edgewater Acquisition was accounted for under the acquisition method of accounting, whereby the results of the acquired business are included in our consolidated financial results from July 15, 2009, the effective date of the acquisition. As a result of the acquisition, we recorded net tangible assets, identifiable intangible assets and goodwill of $53,635 (consisting primarily of Edgewater’s investments in their underlying funds and cash), $56,200 and $61,630, respectively, which include amounts for Edgewater’s noncontrolling interests held (whose economic interests approximate 50%) aggregating $109,841. Goodwill pertaining to this acquisition is deductible for income tax purposes. See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information relating to goodwill and other intangible assets. The operating results relating to Edgewater are included in the Company’s Asset Management segment.

In 2007, the Company acquired Goldsmith, Agio, Helms & Lynner, LLC (“GAHL”), a Minneapolis-based investment bank specializing in financial advisory services to mid-sized private companies, and Carnegie, Wylie & Company (Holdings) PTY LTD (“CWC”), an Australia-based financial advisory firm. These purchases were affected through an exchange of a combination of cash, Class A common stock, and by Lazard Ltd issuing shares of non-participating convertible Series A and Series B preferred stock, which are or were each convertible into Class A common stock. In connection with such acquisitions, as of September 30, 2010 and December 31, 2009, 346,398 and 662,015 shares of Class A common stock were issuable on a non-contingent basis, respectively. Additionally, at September 30, 2010 and December 31, 2009, 2,431 and 7,293 shares of Series A preferred stock, respectively, were convertible into Class A common shares on a non-contingent basis, with the number of Class A common shares dependent, in part, upon future prices of the Class A common stock. At both September 30, 2010 and December 31, 2009, 948,631 shares of Class A common stock were contingently issuable and, at both such dates, 19,590 shares of Series A preferred stock were contingently convertible into shares of Class A common stock, dependent upon the future performance of GAHL and CWC. The Class A common stock described above related to the GAHL and CWC acquisitions is issuable over multi-year periods.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at September 30, 2010 and December 31, 2009 are presented below:


	September 30, 2010		December 31, 2009
Goodwill	$	267,722	$	261,703
Other intangible assets (net of accumulated amortization)		50,819		56,077

	$	318,541	$	317,780

At September 30, 2010 and December 31, 2009, goodwill of $206,092 and $200,073, respectively, was attributable to the Company’s Financial Advisory segment and, at each such date, $61,630 of goodwill was attributable to the Company’s Asset Management segment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Changes in the carrying amount of goodwill for the nine month periods ended September 30, 2010 and 2009 are as follows:


	Nine Months Ended September 30,
	2010		2009
Balance, January 1	$	261,703	$	170,277
Business acquisitions, including additional contingent consideration earned		–		62,693
Foreign currency translation adjustments		6,019		19,288

Balance, September 30	$	267,722	$	252,258

The gross cost and accumulated amortization of other intangible assets as of September 30, 2010 and December 31, 2009, by major intangible asset category, are as follows:


	September 30, 2010						December 31, 2009
	Gross Cost		Accumulated Amortization		Net Carrying Amount		Gross Cost		Accumulated Amortization		Net Carrying Amount
Success/performance fees	$	30,740	$	–	$	30,740	$	30,740	$	–	$	30,740
Management fees, customer relationships and non-compete agreements		32,477		12,398		20,079		32,477		7,140		25,337

	$	63,217	$	12,398	$	50,819	$	63,217	$	7,140	$	56,077

Amortization expense of intangible assets for the three month and nine month periods ended September 30, 2010 was $1,719 and $5,258, respectively, and for the three month and nine month periods ended September 30, 2009 was $2,032 and $2,720, respectively. Estimated future amortization expense is as follows:


Year Ending December 31,	Amortization Expense (a)
2010 (October 1 through December 31)	$	1,730
2011		5,718
2012		6,302
2013		13,022
2014		10,083
Thereafter		13,964

Total amortization expense	$	50,819

(a)

Approximately 47% of intangible asset amortization is attributable to a noncontrolling interest.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

10.

SENIOR AND SUBORDINATED DEBT

Senior Debt—Senior debt is comprised of the following as of September 30, 2010 and December 31, 2009:


	Initial Principal Amount		Maturity Date		Annual Interest Rate			Outstanding As Of
	Initial Principal Amount		Maturity Date		Annual Interest Rate			September 30, 2010		December 31, 2009
Lazard Group 7.125% Senior Notes (a)	$	550,000		5/15/15		7.125	%	$	528,500	$	538,500
Lazard Group 6.85% Senior Notes (b)		600,000		6/15/17		6.85	%		548,350		548,350
Lazard Group Credit Facility		150,000		4/29/13		2.23	%		–		–

Total								$	1,076,850	$	1,086,850

(a)	During the second quarter of 2010, the Company repurchased $10,000 principal amount of the 7.125% Senior Notes at a cost, excluding accrued interest, of $10,375 and, after the write-off of applicable unamortized debt issuance costs of $49, the Company recognized a pre-tax loss of $424.

(b)	During the first quarter of 2009, the Company repurchased $900 principal amount of the 6.85% Senior Notes at a cost, excluding accrued interest, of $635 and, after the write-off of unamortized debt issuance costs of $7, recognized a pre-tax gain of $258.

Subordinated Debt—Subordinated debt at September 30, 2010 and December 31, 2009 amounted to $150,000 at each date and represents a note which is convertible into a maximum of 2,631,570 shares of Class A common stock at an effective conversion price of $57 per share. The note matures on September 30, 2016 and has a fixed interest rate of 3.25% per annum. One-third in principal amount became convertible on and after each of July 1, 2008, July 1, 2009 and July 1, 2010, and no principal amount is convertible after June 30, 2011. As of September 30, 2010, there have been no conversions of the note.

On April 29, 2010, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”). The Credit Facility replaced the prior revolving credit facility, which was terminated as a condition to effectiveness of the Credit Facility. Interest rates under the Credit Facility vary and are based on either a Federal Funds rate or a Eurodollar rate, in each case plus an applicable margin. As of September 30, 2010, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 2.23%. The Credit Facility contains customary terms and conditions substantially similar to the prior revolving credit facility, including certain financial covenants. In addition, the Credit Facility, the indenture and supplemental indentures relating to Lazard Group’s senior notes as well as its subordinated convertible note contain certain covenants (none of which relate to financial condition), events of default and other customary provisions, including a customary make-whole provision in the event of early redemption where applicable. As of September 30, 2010, the Company was in compliance with all of these provisions. All of the Company’s senior and subordinated debt obligations are unsecured.

As of September 30, 2010, the Company had approximately $235,000 in unused lines of credit available to it, including the Credit Facility and approximately $40,000 and $23,000 of unused lines of credit available to LFB and Edgewater, respectively. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

The Company’s senior and subordinated debt are recorded at historical amounts. At September 30, 2010 and December 31, 2009, the fair value of the Company’s senior and subordinated debt was $1,294,732 and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

$1,255,254, respectively, and exceeded the aggregate carrying value by $67,882 and $18,404, respectively. The fair value of the Company’s senior and subordinated debt was estimated using a discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements or based on market quotations where available.

11. COMMITMENTS AND CONTINGENCIES

Leases—Lazard has various leases and other contractual commitments arising in the ordinary course of business. In the opinion of management, the fulfillment of such commitments, in accordance with their terms, will not have a material adverse effect on Lazard’s consolidated financial position, results of operations or cash flows.

Guarantees—In the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At September 30, 2010, LFB had $6,807 of such indemnifications and held $5,337 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the consolidated statement of financial condition.

Private Equity Funding Commitments—At September 30, 2010, the principal unfunded commitments by the Company for capital contributions to private equity investment funds related to CP II, in an amount not to exceed $6,694 for potential “follow-on investments” and/or for CP II expenses through the earlier of (i) February 25, 2017 or (ii) the liquidation of the fund.

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominantly at variable interest rates. Outstanding commitments at September 30, 2010 were $9,693. Such commitments have varying expiration dates and are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon.

See Notes 7, 8 and 14 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to the LAM Merger, business acquisitions and obligations to fund our pension plans, respectively.

The Company has various other contractual commitments arising in the ordinary course of business. In the opinion of management, the consummation of such commitments will not have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, from time to time, LFB enters into underwriting commitments in which it participates as a joint underwriter. The settlement of such transactions are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

Legal—The Company’s businesses, as well as the financial services industry generally, are subject to extensive regulation throughout the world. The Company is involved from time to time in a number of judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses, including proceedings initiated by former employees alleging wrongful termination. The

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Company reviews such matters on a case-by-case basis and establishes any required reserves if a loss is probable and the amount of such loss can be reasonably estimated. Management believes, based on currently available information, that the results of such matters, in the aggregate, will not have a material adverse effect on its financial condition but might be material to its operating results or cash flows for any particular period, depending upon the operating results for such period.

12.

STOCKHOLDERS’ EQUITY

At September 30, 2010 and 2009, Lazard Group common membership interests held by subsidiaries of Lazard Ltd amounted to 91.5% and 74.5%, respectively, and by LAZ-MD Holdings LLC, an entity owned by Lazard Group’s current and former managing directors (“LAZ-MD Holdings”), amounted to 8.5% and 25.5%, respectively. Pursuant to provisions of its Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries and the members of LAZ-MD Holdings incur as a result of holding Lazard Group common membership interests. During the nine month periods ended September 30, 2010 and 2009, Lazard Group distributed $8,453 and $13,462, respectively, to LAZ-MD Holdings and $36,714 and $23,216, respectively, to the subsidiaries of Lazard Ltd, which latter amounts were used by Lazard Ltd to pay dividends to third-party stockholders of its Class A common stock. In addition, during the nine month period ended September 30, 2009, Lazard Group made tax distributions of $67,360, including $25,316 paid to LAZ-MD Holdings and $42,044 paid to subsidiaries of Lazard Ltd. During the nine month period ended September 30, 2010, Lazard Group made no such tax distributions.

On October 26, 2010, the Board of Directors of Lazard Ltd declared a quarterly dividend of $0.125 per share on its Class A common stock, totaling $14,576, payable on November 26, 2010 to stockholders of record on November 3, 2010.

Issuance of Class A Common Shares—During the first quarter of 2010, 3,000,000 shares of Class A common stock were newly issued to Lazard Group in connection with the settlement of vested restricted stock unit grants (“RSUs”). Such shares were authorized as part of the 25,000,000 shares of Class A common stock that may be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”). In addition, during the third quarter of 2010, the Company issued an aggregate of 888,605 shares of Class A common stock in connection with the GAHL and CWC acquisitions (see Note 8 of Notes to Condensed Consolidated Financial Statements).

Secondary Offerings—In March 2010, pursuant to a Prospectus Supplement dated March 16, 2010, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard and a former executive officer) and their permitted transferees, sold 7,869,311 shares of Class A common stock (including (i) 7,262 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests, (ii) 6,180,639 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests (including 5,958,000 shares held by the Estate of Lazard’s former Chairman and Chief Executive Officer and related trusts (collectively, the “Estate”)) and (iii) 1,681,410 shares held by the Estate) at a price of $35.90 per share (collectively, the “March 2010 Secondary Offering”).

In August 2010, pursuant to a Prospectus Supplement dated August 3, 2010, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard) and their permitted transferees (the “August 2010 Selling Shareholders”) sold 7,397,837 shares of Class A common stock at a price of $30.32 per share (the “August 2010 Secondary Offering”, and together with the March 2010 Secondary Offering, the “2010

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Secondary Offerings”). Separately, in connection with the August 2010 Secondary Offering, Lazard Group agreed to purchase from the August 2010 Selling Shareholders 2,500,000 shares of Class A common stock for an aggregate cost of $75,800 ($30.32 per share), with such purchase being part of the share repurchase program in effect during 2010. In the aggregate, the August 2010 Selling Shareholders sold a total of 9,897,837 shares of Class A common stock (including 7,194,144 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests and 2,703,693 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests).

In June 2009, pursuant to a Prospectus Supplement dated June 2, 2009, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard (including certain of our executive officers)) and their permitted transferees (the “June 2009 Selling Shareholders”) sold 4,000,000 shares of Class A common stock at a price of $26.00 per share (the “June 2009 Secondary Offering”). Separately, in connection with the June 2009 Secondary Offering, Lazard Group agreed to purchase from the June 2009 Selling Shareholders 1,700,000 shares of Class A common stock for an aggregate cost of $44,200 ($26.00 per share), with such purchase being part of the share repurchase program in effect during 2009. In the aggregate, the June 2009 Selling Shareholders sold a total of 5,700,000 shares of Class A common stock (including 2,110,754 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests and 3,589,246 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests).

In September 2009, pursuant to a Prospectus Supplement dated September 8, 2009, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard (including certain of our executive officers)) and their permitted transferees (the “September 2009 Selling Shareholders”) sold 5,215,921 shares of Class A common stock (including 2,411,001 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests and 2,804,920 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests) at a price of $37.00 per share (the “September 2009 Secondary Offering”, and together with the June 2009 Secondary Offering, the “2009 Secondary Offerings”).

Lazard Ltd did not receive any net proceeds from the sales of Class A common stock from the 2010 Secondary Offerings or the 2009 Secondary Offerings.

Exchanges of Lazard Group Common Membership Interests—In addition to the simultaneous exchanges that occurred in connection with the secondary offerings discussed above, during the nine month periods ended September 30, 2010 and 2009, Lazard Ltd issued 11,665,618 and 7,512,974 shares of Class A common stock, respectively, in connection with the exchange of a like number of common membership interests of Lazard Group (received from members of LAZ-MD Holdings in exchange for a like number of LAZ-MD Holdings exchangeable interests).

See “Noncontrolling Interests” below for additional information regarding Lazard Ltd’s and LAZ-MD Holdings’ ownership interests in Lazard Group.

Share Repurchase Program—On January 27, 2010, the Board of Directors of Lazard Ltd authorized, on a cumulative basis, the repurchase of up to $200,000 in aggregate cost of its Class A common stock and Lazard Group common membership interests through December 31, 2011. The Company expects that the share repurchase program, with respect to the Class A common stock, will continue to be used primarily to offset a

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

portion of the shares that have been or will be issued under the 2005 Plan and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). The Company’s prior share repurchase program expired on December 31, 2009, with $62,542 of the initial $500,000 repurchase authorization unused. Pursuant to such authorizations, purchases have been made in the open market or through privately negotiated transactions, and since inception of the program in February 2006 through September 30, 2010, Lazard Group purchased an aggregate of 15,552,945 shares of Class A common stock at an average price of $32.54 per share, and an aggregate of 1,323,961 Lazard Group common membership interests at an average price of $32.29 per common membership interest. As a result of (i) Lazard Group’s delivery of shares of Class A common stock for the settlement of vested RSUs and deferred stock unit grants (“DSUs”) during the three year period ended December 31, 2009 and the nine month period ended September 30, 2010, (ii) the incentive plan share award of shares of restricted Class A common stock granted during the second quarter of 2010, and (iii) the issuance of shares of restricted Class A common stock in exchange for RSUs during the third quarter of 2010, there were 5,865,580 and 5,850,775 shares of Class A common stock held by Lazard Group at September 30, 2010 and December 31, 2009, respectively. Such Class A common shares are reported, at cost, as “Class A common stock held by a subsidiary” on the condensed consolidated statements of financial condition.

As of September 30, 2010, $88,612 of the $200,000 share repurchase authorization remained available under the share repurchase program. In addition, under the terms of the 2005 Plan and the 2008 Plan, upon the vesting of RSUs, shares of Class A common stock may be withheld by the Company to cover estimated income taxes. During the nine month period ended September 30, 2010, the Company withheld 1,602,999 shares to cover estimated taxes upon the vesting of 7,938,606 RSUs (see Note 13 of Notes to Condensed Consolidated Financial Statements).

Preferred Stock—Lazard Ltd has 15,000,000 authorized shares of preferred stock, par value $0.01 per share, inclusive of its Series A preferred stock and Series B preferred stock. The Series A and Series B preferred shares are each non- participating securities that are or were each convertible into Class A common stock, and have no voting or dividend rights. As of September 30, 2010 and December 31, 2009, 22,021 and 26,883 shares of Series A preferred stock were outstanding, respectively, and no shares of Series B preferred stock were outstanding at such respective dates.

At September 30, 2010 and December 31, 2009, 2,431 and 7,293 shares of the Series A preferred shares outstanding, respectively, were convertible into shares of Class A common stock. The remaining 19,590 shares of Series A preferred stock outstanding at September 30, 2010 and December 31, 2009, may become convertible into shares of Class A common stock upon completion or satisfaction of specified obligations in the CWC acquisition agreement (see Note 8 of Notes to Condensed Consolidated Financial Statements). The initial conversion rate, at the time of the acquisition of CWC, was 100 shares of Class A common stock to one share of Series A preferred stock, with the ultimate conversion rate dependent on certain variables, including the value of the Class A common stock, as defined, and the currency exchange rate on the date of conversion.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Accumulated Other Comprehensive Income (Loss), Net of Tax—The components of AOCI at September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010			December 31, 2009
Currency translation adjustments	$	18,529		$	22,650
Interest rate hedge		(4,875	)		(5,774	)
Available-for-sale securities		(7,556	)		(12,630	)
Employee benefit plans		(81,664	)		(76,079	)

Total AOCI		(75,566	)		(71,833	)
Less amount attributable to noncontrolling interests		(5,047	)		(14,785	)

Total Lazard Ltd AOCI	$	(70,519	)	$	(57,048	)

Noncontrolling Interests—Noncontrolling interests principally represent interests held in Lazard Group by LAZ-MD Holdings and noncontrolling interests in various LAM-related GP interests and Edgewater’s management vehicles that the Company is deemed to control but does not own.

As of September 30, 2010 and December 31, 2009, LAZ-MD Holdings held approximately 8.5% and 25.5%, respectively, of the outstanding Lazard Group common membership interests. Additionally, LAZ-MD Holdings was the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock, which provided LAZ-MD Holdings with approximately 8.5% and 25.5%, of the voting power but no economic rights in the Company as of September 30, 2010 and December 31, 2009, respectively. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Class A common stock.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

The following tables summarize the changes in ownership interests in Lazard Group held by Lazard Ltd and LAZ-MD Holdings during the nine month periods ended September 30, 2010 and 2009:


	Lazard Ltd					LAZ-MD Holdings						Total Lazard Group Common Membership Interests
	Common Membership Interests		% Ownership			Common Membership Interests			% Ownership			Total Lazard Group Common Membership Interests
Balance, January 1, 2009		76,294,912		62.4	%		45,938,752			37.6	%		122,233,664
Activity January 1, 2009 to September 30, 2009:
Common membership interest activity in connection with:
2009 Secondary Offerings		6,394,166					(6,394,166	)					–
Exchanges for Class A common stock		7,512,974					(7,512,974	)					–
Business acquisitions		1,953,598					–						1,953,598
Repurchase of common membership interests from LAZ-MD Holdings		–					(500,924	)					(500,924	)

Balance, September 30, 2009		92,155,650		74.5	%		31,530,688			25.5	%		123,686,338


Balance, January 1, 2010		92,165,912		74.5	%		31,520,426			25.5	%		123,686,338
Activity January 1, 2010 to September 30, 2010:
Common membership interest activity in connection with:
Equity compensation		3,000,000					–						3,000,000
2010 Secondary Offerings		8,884,332					(8,884,332	)					–
Exchanges for Class A common stock		11,665,618					(11,665,618	)					–
Business acquisitions		888,605					–						888,605
Repurchase of common membership interests from LAZ-MD Holdings		–					(167,286	)					(167,286	)

Balance, September 30, 2010		116,604,467		91.5	%		10,803,190			8.5	%		127,407,657

The change in Lazard Ltd’s ownership in Lazard Group in the nine month periods ended September 30, 2010 and 2009 did not materially impact Lazard Ltd’s stockholders’ equity.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

The tables below summarize net income (loss) attributable to noncontrolling interests for the three month and nine month periods ended September 30, 2010 and 2009 and noncontrolling interests as of September 30, 2010 and December 31, 2009 in the Company’s condensed consolidated financial statements:


	Net Income (Loss) Attributable To Noncontrolling Interests
	Three Months Ended September 30,					Nine Months Ended September 30,
	2010			2009		2010			2009
LAZ-MD Holdings	$	6,152		$	13,749	$	4,909		$	(3,297	)
LAM GPs		879			1,184		151			372
Edgewater		(366	)		845		3,511			845
Other		(402	)		1		(712	)		1

Total	$	6,263		$	15,779	$	7,859		$	(2,079	)


	Noncontrolling Interests As Of
	September 30, 2010		December 31, 2009
LAZ-MD Holdings	$	24,969	$	39,407
LAM GPs		7,514		13,409
Edgewater		112,932		112,158
Other		2,008		2,732

Total	$	147,423	$	167,706

13.

INCENTIVE PLANS

Share-Based Incentive Compensation Awards

A description of Lazard Ltd’s 2005 Plan and 2008 Plan, and activity with respect thereto during the nine month periods ended September 30, 2010 and 2009, is presented below.

Shares Available Under the 2005 Plan and 2008 Plan

The 2005 Plan authorizes the issuance of up to 25,000,000 shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock, stock units and other equity-based awards. Each stock unit granted under the 2005 Plan represents a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such stock unit awards is determined based on the closing market price of Lazard Ltd’s Class A common stock at the date of grant.

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan, which was approved by the stockholders of Lazard Ltd on May 6, 2008. The maximum number of shares available under the 2008 Plan is based on a formula that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock (treating, for this purpose, the then-outstanding exchangeable interests of LAZ-MD Holdings on a “fully-exchanged” basis as described in the 2008 Plan).

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Restricted and Deferred Stock Units

RSUs require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into Class A common stock on a one-for-one basis after the stipulated vesting periods. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods, and, for purposes of calculating diluted net income per share, are included in the diluted weighted average shares of Class A common stock outstanding using the treasury stock method. Expense relating to RSUs is charged to “compensation and benefits” expense (and, as applicable, in “restructuring” expense, with respect to the expense associated with the acceleration of unrecognized expense pertaining to RSUs granted previously to individuals who were terminated in the restructuring programs during 2009 and 2010) as follows within the Company’s condensed consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Compensation and benefits (including $24,860 in the nine month period ended September 30, 2010 relating to the amendment of the Company’s retirement policy(a))	$	46,814	$	63,392	$	201,157	$	191,951
Restructuring		–		–		46,880		24,239

Total	$	46,814	$	63,392	$	248,037	$	216,190

(a)	As described below, the Company amended its retirement policy during the first quarter of 2010 to modify the retirement eligibility vesting requirement with respect to RSU awards.

RSUs issued subsequent to December 31, 2005 generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any ordinary quarterly dividends paid on Class A common stock during such period. During the nine month periods ended September 30, 2010 and 2009, dividend participation rights required the issuance of 244,754 and 249,048 RSUs, respectively, and resulted in a charge to “retained earnings” and a credit to “additional paid-in-capital,” net of estimated forfeitures, of $6,963 and $4,793 during the respective periods.

In January 2010, the Company amended its retirement policy with respect to RSU awards. Such amendment served to modify the retirement eligibility vesting requirements of existing and future RSU awards, and, as noted above, Lazard accelerated the recognition of compensation expense for the affected RSU awards. Accordingly, the Company recorded a non-cash charge to compensation and benefits expense of $24,860 in the first quarter of 2010 relating to prior years’ awards.

Non-executive members of the Board of Directors receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs which resulted in 31,588 and 36,627 DSUs granted during the nine month periods ended September 30, 2010 and 2009, respectively. Their remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into Class A common stock at the time of cessation of service to the Board. The DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the nine month periods ended September 30, 2010 and 2009. DSU awards are expensed at their fair value on their date of grant, which, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan, totaled $58 and

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

$1,173 during the three month and nine month periods ended September 30, 2010, respectively, and $157 and $1,240 during the three month and nine month periods ended September 30, 2009, respectively.

On May 9, 2006, the Board of Directors adopted the Directors’ Fee Deferral Unit Plan, which allows the Company’s Non-Executive Directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date on which the foregone cash fees would otherwise have been paid. During the nine month periods ended September 30, 2010 and 2009, 5,912 and 6,963 DSUs, respectively, had been granted pursuant such Plan.

The following is a summary of activity relating to RSUs and DSUs during the nine month periods ended September 30, 2010 and 2009:


	RSUs					DSUs
	Units			Weighted Average Grant Date Fair Value		Units			Weighted Average Grant Date Fair Value
Balance, January 1, 2010		23,367,813		$	37.01		103,146		$	35.75
Granted (including 244,754 RSUs relating to dividend participation)		7,730,444		$	35.66		37,500		$	31.27
Forfeited		(726,948	)	$	36.21		–			–
Vested/Converted/Exchanged		(7,979,501	)	$	39.86		(20,435	)	$	35.38

Balance, September 30, 2010		22,391,808		$	35.57		120,211		$	34.42


	RSUs					DSUs
	Units			Weighted Average Grant Date Fair Value		Units			Weighted Average Grant Date Fair Value
Balance, January 1, 2009		22,141,468		$	39.17		65,256		$	40.32
Granted (including 249,048 RSUs relating to dividend participation)		7,504,232		$	31.00		43,590		$	28.45
Forfeited		(805,721	)	$	36.92		–			–
Vested		(1,446,827	)	$	38.81		–			–

Balance, September 30, 2009		27,393,152		$	37.02		108,846		$	35.57

In connection with the vested RSUs above, and after considering the withholding tax obligations pertaining thereto, 6,335,607 and 1,030,960 shares of Class A common stock held by Lazard Group were delivered during the nine month periods ended September 30, 2010 and 2009, respectively.

As of September 30, 2010, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $286,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.6 years subsequent to September 30, 2010. The ultimate amount of such expense is dependent upon the actual number of RSUs that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described herein.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Restricted Stock

During the second quarter of 2010, 54,437 shares of restricted Class A common stock were awarded under the 2008 Plan at a grant date fair value of $38.78 per share. Such award will vest and will no longer be subject to any restrictions on August 31, 2012. The aggregate grant date fair value of the award is being amortized over the vesting period.

During the third quarter of 2010, 40,895 shares of restricted Class A common stock were issued in exchange for 40,895 RSUs previously granted on February 11, 2010 at a grant date fair value of $36.10 per share. The vesting terms of such restricted Class A common stock issued are the same as that of the original award exchanged. There was no incremental compensation cost incurred as a result of the exchange.

At September 30, 2010, unrecognized restricted stock expense was approximately $2,500, with such unrecognized compensation expense to be recognized over a weighted average period of approximately 2.0 years.

For purposes of calculating diluted net income per share, such awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method. Expense relating to such restricted stock awards is charged to “compensation and benefits” expense within the Company’s condensed consolidated statements of operations, and amounted to $483 and $643 for the three month and nine month periods ended September 30, 2010, respectively. The awards include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award.

14.

EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined contribution and defined benefit pension plans and other post-retirement plans. These plans generally provide benefits to participants based on average levels of compensation. Expense related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the consolidated statements of operations. The Company uses December 31 as the measurement date for its employee benefit plans.

Employer Contributions to Pension Plans—In accordance with agreements reached with the Trustees of certain non-U.S. pension plans in 2005, the Company is obligated to make further contributions to such pension plans based upon the cumulative performance of the plans’ assets against specific benchmarks as measured on June 1, 2009 (the “measurement date”) and subsequently remeasured on June 1, 2010 (the “remeasurement date”). As of September 30, 2010, the remaining obligation related to the cumulative underperformance of the plans’ assets (the “underperformance obligation”) was approximately 3.7 million British pounds ($5,868 at September 30, 2010 exchange rates) which is payable in equal monthly installments through May 2013.

In addition, on June 30, 2009 the Company and Trustees concluded the December 31, 2007 triennial valuation of the non-U.S. pension plans discussed above, pursuant to which: (i) the Company agreed to contribute, in addition to amounts to cover administrative expenses under the plans, 2.3 million British pounds ($3,650 at September 30, 2010 exchange rates), during each year from 2011 to 2018 inclusive, subject to adjustment resulting from the December 31, 2010 triennial valuation, which the Company expects to have concluded prior to the contribution payment scheduled for 2011, and (ii) to secure the Company’s obligations thereunder, on July 15, 2009 the Company placed in escrow 12.5 million British pounds, with a final redemption

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

date of December 31, 2018. This amount is subject to adjustment based on the results of the December 31, 2010 triennial valuation and subsequent triennial valuations. The escrow balance has been recorded in “cash deposited with clearing organizations and other segregated cash” and “investments: debt-other” in the amounts of 6.25 million British pounds and 6.25 million British pounds, respectively, at each of September 30, 2010 and December 31, 2009 ($9,919 and $9,919 at September 30, 2010 exchange rates and $10,138 and $10,138 at December 31, 2009 exchange rates), respectively, on the accompanying condensed consolidated statements of financial condition. Income on the escrow balance accretes to the Company and is recorded in interest income.

During the nine month period ended September 30, 2010, the Company contributed approximately $2,900 primarily with respect to the underperformance obligation discussed above, and during such period there were no other contributions made to other pension plans.

The following table summarizes the components of total benefit cost (credit) for the three month and nine month periods ended September 30, 2010 and 2009:


	Pension Plans						Post-Retirement Medical Plans
	Three Months Ended September 30,
	2010			2009			2010			2009
Components of Net Periodic Benefit Cost (Credit):
Service cost	$	160		$	–		$	20		$	25
Interest cost		6,921			6,232			73			78
Expected return on plan assets		(7,372	)		(6,922	)		–			–
Amortization of:
Prior service cost (credit)		632			–			(332	)		(345	)
Net actuarial loss		203			227			–			–

Net periodic benefit cost (credit)	$	544		$	(463	)	$	(239	)	$	(242	)


	Pension Plans						Post-Retirement Medical Plans
	Nine Months Ended September 30,
	2010			2009			2010			2009
Components of Net Periodic Benefit Cost (Credit):
Service cost	$	420		$	–		$	60		$	74
Interest cost		20,708			17,652			219			233
Expected return on plan assets		(21,801	)		(19,622	)		–			–
Amortization of:
Prior service cost (credit)		2,108			–			(1,023	)		(1,036	)
Net actuarial loss		602			663			–			–

Net periodic benefit cost (credit)	$	2,037		$	(1,307	)	$	(744	)	$	(729	)

15.

RESTRUCTURING PLANS

In each of the first quarters of 2010 and 2009, the Company announced a restructuring plan which included certain staff reductions and realignments of personnel (the “2010 Restructuring Plan” and the “2009

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Restructuring Plan”, respectively, and collectively the “2010 and 2009 Restructuring Plans”). In connection with the 2010 Restructuring Plan, the Company recorded a pre-tax charge in the first quarter of 2010 of $87,108, inclusive of $46,880 relating to the acceleration of RSUs (in aggregate, the “2010 Restructuring Charge”), with this charge partially offset by associated income tax benefits and noncontrolling interest credits of $9,276 and $18,400, respectively, and, in connection with the 2009 Restructuring Plan, the Company recorded a charge in the first quarter of 2009 of $62,550, inclusive of $24,239 relating to the acceleration of RSUs (in aggregate, the “2009 Restructuring Charge”), with this charge partially offset by associated income tax benefits and noncontrolling interest credits of $6,401 and $21,075, respectively (collectively, the “2010 and 2009 Restructuring Charges”).

The 2010 and 2009 Restructuring Charges primarily consisted of compensation-related expenses, including the acceleration of unrecognized expenses pertaining to RSUs previously granted to individuals who were terminated pursuant to the restructuring, severance and benefit payments and other costs. As of September 30, 2010, the remaining liability associated with the 2010 Restructuring Plan was $21,561 and, as of September 30, 2010 and December 31, 2009, the remaining liability associated with the 2009 Restructuring Plan was $5,579 and $11,500, respectively. During the nine month period ended September 30, 2010, other than cash payments of $18,667 and $5,921 for the 2010 Restructuring Plan and the 2009 Restructuring Plan, respectively, and an adjustment of $3,596 to the estimated tax benefit relating to the 2010 Restructuring Charge, there were no adjustments to the amounts relating to the 2010 and 2009 Restructuring Plans. Liabilities relating to the 2010 and 2009 Restructuring Plans are reported within “accrued compensation and benefits” and “other liabilities” on the accompanying condensed consolidated statements of financial condition.

16.

INCOME TAXES

Lazard Ltd is subject to U.S. federal income taxes on its portion of Lazard Group’s operating income. Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income from its U.S. operations is generally not subject to U.S. federal income taxes, because such income is attributable to the partners. In addition, Lazard Group is subject to New York City Unincorporated Business Tax (“UBT”), which is attributable to Lazard Group’s operations apportioned to New York City. UBT is incremental to the U.S. federal statutory tax rate. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes.

The Company recorded income tax provisions of $9,113 and $29,049 for the three month and nine month periods ended September 30, 2010, respectively, and $19,968 and $29,312 for the three month and nine month periods ended September 30, 2009, respectively, representing effective tax rates of 11.5%, 25.9%, 27.3% and 74.5%, respectively. Excluding (i) the income tax benefits of $3,596 and $9,276 for the three month and nine month periods ended September 30, 2010 related to the 2010 Restructuring Charge and $3,472 and $4,835 for the three month and nine month periods ended September 30, 2010 related to the charge incurred in connection with the amendment of Lazard’s retirement policy with respect to RSU awards, and (ii) the income tax benefit of $6,401 related to the 2009 Restructuring Charge, the Company had income tax provisions of $16,181 and $43,160 for the three month and nine month periods ended September 30, 2010, respectively, and $19,968 and $35,713 for the three month and nine month periods ended September 30, 2009, respectively, representing effective tax rates of 20.4%, 19.3%, 27.3% and 35.0%, respectively. The effective tax rates herein for the nine month period ended September 30, 2010 reflect a benefit from reductions in unrecognized tax benefits of $6,629 relating to settlements with taxing authorities and other adjustments pertaining to certain prior years.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates described above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) foreign source income (loss) not subject to U.S. income taxes, (iii) Lazard Group’s income from U.S. operations attributable to noncontrolling interests, (iv) valuation allowance changes affecting the provision for income taxes and (v) U.S. state and local taxes, which are incremental to the U.S. federal statutory tax rate.

Tax Receivable Agreement

The redemption of historical partner interests in connection with the Company’s separation and recapitalization that occurred in May 2005 and subsequent exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock have resulted, and future exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock may result, in increases in the tax basis of the tangible and/or intangible assets of Lazard Group. The tax receivable agreement dated as of May 10, 2005 with LFCM Holdings requires the Company to pay LFCM Holdings 85% of the cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of the above-mentioned increases in tax basis. The Company calculates this provision annually and includes such amounts in operating expenses on its consolidated statements of operations once the results of operations for the full year are known. As a result, there is no provision for such payments in the three month and nine month periods ended September 30, 2010 and 2009. If any provision is required pursuant to the tax receivable agreement, such amount would be fully offset by a reduction in the Company’s income tax expense.

17.

NET INCOME PER SHARE OF CLASS A COMMON STOCK

The Company’s basic and diluted net income per share calculations for the three month and nine month periods ended September 30, 2010 and 2009 are computed as described below.

Basic Net Income Per Share

Numerator—utilizes net income attributable to Lazard Ltd for the three month and nine month periods ended September 30, 2010 and 2009, plus applicable adjustments to such net income associated with the inclusion of shares of Class A common stock issuable on a non-contingent basis.

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the three month and nine month periods ended September 30, 2010 and 2009, plus applicable adjustments to such shares associated with shares of Class A common stock issuable on a non-contingent basis.

Diluted Net Income Per Share

Numerator—utilizes net income attributable to Lazard Ltd for the three month and nine month periods ended September 30, 2010 and 2009 as in the basic net income per share calculation described above, plus, to the extent applicable and dilutive, (i) interest expense on convertible debt, (ii) changes in net income (loss) attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt and convertible preferred stock and, on an “as-if-exchanged” basis, amounts applicable to LAZ-MD Holdings exchangeable interests and (iii) income tax related to (i) and (ii) above.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the three month and nine month periods ended September 30, 2010 and 2009 as in the basic net income per share calculation described above, plus, to the extent dilutive, the incremental number of shares of Class A common stock to settle share-based incentive compensation, convertible debt, convertible preferred stock and LAZ-MD Holdings exchangeable interests, using the “treasury stock” method, the “if converted” method or the “as-if-exchanged” basis, as applicable.

The calculations of the Company’s basic and diluted net income per share and weighted average shares outstanding for the three month and nine month periods ended September 30, 2010 and 2009 are presented below:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income attributable to Lazard Ltd		$64,091		$37,418		$75,129		$12,109
Add - adjustment associated with Class A common stock issuable on a non-contingent basis		116		349		95		(125	)

Net income attributable to Lazard Ltd - basic		64,207		37,767		75,224		11,984
Add - dilutive effect, as applicable, of:
Adjustments to income relating to interest expense and changes in net income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt, convertible preferred stock and exchangeable interests, net of tax		5,992		15,518		3,988		–

Net income attributable to Lazard Ltd - diluted		$70,199		$53,285		$79,212		$11,984


Weighted average number of shares of Class A common stock outstanding		108,302,438		77,707,395		98,579,076		72,124,816
Add - adjustment for shares of Class A common stock issuable on a non-contingent basis		2,756,633		3,049,323		2,861,665		3,154,089

Weighted average number of shares of Class A common stock outstanding - basic		111,059,071		80,756,718		101,440,741		75,278,905
Add - dilutive effect, as applicable, of:
Weighted average number of incremental shares of Class A common stock issuable from share-based incentive compensation, convertible debt, convertible preferred stock and exchangeable interests		27,035,030		50,711,367		34,113,390		–

Weighted average number of shares of Class A common stock outstanding - diluted		138,094,101		131,468,085		135,554,131		75,278,905

Net income attributable to Lazard Ltd per share of Class A common stock:
Basic		$0.58		$0.47		$0.74		$0.16

Diluted		$0.51		$0.41		$0.58		$0.16

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

18.

RELATED PARTIES

Amounts receivable from, and payable to, related parties as of September 30, 2010 and December 31, 2009 are set forth below:


	September 30, 2010		December 31, 2009
	September 30, 2010		December 31, 2009
Receivables
LFCM Holdings	$	5,818	$	14,212
Other		1,011		203

Total	$	6,829	$	14,415

Payables
LFCM Holdings	$	564	$	17,431
Other		–		19

Total	$	564	$	17,450

LFCM Holdings

LFCM Holdings owns and operates the capital markets business and fund management activities, as well as other specified non-operating assets and liabilities, that were transferred to it by Lazard Group (referred to as the “separated businesses”) in May 2005 and is owned by various current and former working members, including certain of Lazard’s current and former managing directors (which also include our executive officers) who are also members of LAZ-MD Holdings. In addition to the master separation agreement, which effected the separation and recapitalization that occurred in May 2005, LFCM Holdings entered into certain agreements that addressed various business matters associated with the separation, including agreements related to administrative and support services (the “administrative services agreement”), employee benefits, insurance matters and licensing. In addition, LFCM Holdings and Lazard Group entered into a business alliance agreement. Certain of these agreements are described in more detail in the Company’s Form 10-K.

For the three month and nine month periods ended September 30, 2010, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $557 and $1,616, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $2,779 and $9,508, respectively. For the three month and nine month periods ended September 30, 2009, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $1,287 and $3,779, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $3,077 and $9,665, respectively. Amounts relating to the administrative services agreement are reported as reductions to operating expenses. Net referral fees for underwriting transactions under the business alliance agreement are reported in “revenue-other”. Net referral fees for private placement, M&A and restructuring transactions under the business alliance agreement are reported in advisory fee revenue.

Receivables from LFCM Holdings and its subsidiaries as of September 30, 2010 and December 31, 2009 primarily include $890 and $5,891, respectively, related to administrative and support services and reimbursement of expenses incurred on behalf of LFCM Holdings and $4,530 and $6,202, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at December 31, 2009 relate primarily to obligations pursuant to the tax receivable agreement of $15,684 (see Note 16 of Notes to Condensed Consolidated Financial Statements).

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

LAZ-MD Holdings

Lazard Group provides selected administrative and support services to LAZ-MD Holdings through the administrative services agreement as discussed above, with such services generally to be provided until December 31, 2014 unless terminated earlier because of a change in control of either party. Lazard Group charges LAZ-MD Holdings for these services based on Lazard Group’s cost allocation methodology and, for the three month and nine month periods ended September 30, 2010, such charges amounted to $188 and $563, respectively. For the three month and nine month periods ended September 30, 2009, such charges amounted to $188 and $563, respectively.

19.

REGULATORY AUTHORITIES

LFNY is a U.S. registered broker-dealer and is subject to the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 (the “Exchange Act”). Under the basic method permitted by this rule, the minimum required net capital, as defined, is a specified fixed percentage of total aggregate indebtedness recorded in LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. At September 30, 2010, LFNY’s regulatory net capital was $130,748, which exceeded the minimum requirement by $123,348.

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (the “U.K. Subsidiaries”) are regulated by the Financial Services Authority. At September 30, 2010, the aggregate regulatory net capital of the U.K. Subsidiaries was $147,248, which exceeded the minimum requirement by $103,865.

CFLF, through which non-corporate finance advisory activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel for its banking activities conducted through its subsidiary, LFB. In addition, the investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), are subject to regulation and supervision by the Autorité des Marchés Financiers. At September 30, 2010, the consolidated regulatory net capital of CFLF was $199,284, which exceeded the minimum requirement set for regulatory capital levels by $99,414.

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At September 30, 2010, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $91,255, which exceeded the minimum required capital by $68,349.

At September 30, 2010, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

Lazard Ltd is currently subject to supervision by the SEC as a Supervised Investment Bank Holding Company (“SIBHC”). As a SIBHC, Lazard Ltd is subject to group-wide supervision, which requires it to compute allowable capital and risk allowances on a consolidated basis. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, provides for the eventual elimination of the SEC’s SIBHC program. The Dodd-Frank Act also allows entities seeking consolidated supervision to elect to be regulated by the Federal Reserve. The Dodd-Frank Act could have other impacts on us, which we are currently in the process of examining, including the impact of the elimination of the SIBHC program.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

20.

SEGMENT INFORMATION

The Company’s reportable segments offer different products and services and are managed separately as different levels and types of expertise are required to effectively manage the segments’ transactions. Each segment is reviewed to determine the allocation of resources and to assess its performance. The Company’s principal operating activities are included in two business segments: Financial Advisory (which includes providing general strategic and transaction-specific advice on M&A and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters), and Asset Management (which includes the management of equity and fixed income securities and alternative investment and private equity funds). In addition, the Company records selected other activities in its Corporate segment, including management of cash, certain investments and the commercial banking activities of LFB. The Company also allocates outstanding indebtedness to its Corporate segment.

The Company’s segment information for the three month and nine month periods ended September 30, 2010 and 2009 is prepared using the following methodology:

•

Revenue and expenses directly associated with each segment are included in determining operating income.

•

Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors.

•

Segment assets are based on those directly associated with each segment, and include an allocation of certain assets relating to various segments, based on the most relevant measures applicable, including headcount, square footage and other factors.

The Company allocates investment gains and losses, interest income and interest expense among the various segments based on the segment in which the underlying asset or liability is reported.

Each segment’s operating expenses include (i) compensation and benefits expenses incurred directly in support of the businesses and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, legal, facilities management and senior management activities.

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

Management evaluates segment results based on net revenue and operating income and believes that the following information provides a reasonable representation of each segment’s contribution with respect to net revenue, operating income (loss) and total assets:


		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Financial Advisory	Net Revenue	$	254,012		$	259,221		$	768,481		$	674,222
	Operating Expenses		215,838			212,543			667,538			595,649

	Operating Income (a)	$	38,174		$	46,678		$	100,943		$	78,573


Asset Management	Net Revenue	$	210,132		$	160,744		$	587,299		$	393,810
	Operating Expenses		150,515			117,728			416,841			312,141

	Operating Income (a)	$	59,617		$	43,016		$	170,458		$	81,669


Corporate	Net Revenue	$	(10,907	)	$	(8,250	)	$	(45,297	)	$	(32,297	)
	Operating Expenses		7,417			8,279			114,067			88,603

	Operating Loss (a)	$	(18,324	)	$	(16,529	)	$	(159,364	)	$	(120,900	)


Total	Net Revenue	$	453,237		$	411,715		$	1,310,483		$	1,035,735
	Operating Expenses		373,770			338,550			1,198,446			996,393

	Operating Income (a)	$	79,467		$	73,165		$	112,037		$	39,342


	As of
	September 30, 2010		December 31, 2009
Total Assets:
Financial Advisory	$	728,215	$	706,785
Asset Management		768,029		702,775
Corporate		1,627,454		1,738,202

Total	$	3,123,698	$	3,147,762

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

(a)

Operating income (loss) for the nine month periods ended September 30, 2010 and 2009 was significantly impacted by certain special items related to the three month periods ended March 31, 2010 and 2009, respectively. Such impact, including the amounts attributable to each of the Company’s business segments, is described in the table below:


	Nine Months Ended September 30,
	2010			2009
Financial Advisory
Operating income, as reported above	$	100,943		$	78,573
Special item:
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards		19,571			–

Operating income, excluding impact of special item	$	120,514		$	78,573


Asset Management
Operating income, as reported above		$170,458		$	81,669
Special item:
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards		2,902			–

Operating income, excluding impact of special item	$	173,360		$	81,669


Corporate
Operating loss, as reported above	$	(159,364	)	$	(120,900	)
Special items:
Restructuring expense		87,108			62,550
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards		2,387			–

Operating loss, excluding impact of special items	$	(69,869	)	$	(58,350	)


Consolidated
Operating income, as reported above	$	112,037		$	39,342
Special items:
Restructuring expense		87,108			62,550
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards		24,860			–

Operating income, excluding impact of special items	$	224,005		$	101,892

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Lazard Ltd’s condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”). All references to “2010”, “2009”, “third quarter”, “nine months”, or “the period” refer to, as the context requires, the three month and nine month periods ended September 30, 2010 and September 30, 2009.

Forward-Looking Statements and Certain Factors that May Affect Our Business

Management has included in Parts I and II of this Form 10-Q, including in its MD&A, statements that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in our Form 10-K under the caption “Risk Factors,” including the following:

•

a decline in general economic conditions or the global financial markets,

•

losses caused by financial or other problems experienced by third parties,

•

losses due to unidentified or unanticipated risks,

•

a lack of liquidity, i.e., ready access to funds, for use in our businesses, and

•

competitive pressure on our businesses and on our ability to retain our employees.

These risks and uncertainties are not exhaustive. Other sections of the Form 10-K may include additional factors, which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.

Forward-looking statements include, but are not limited to, statements about the:

•

business’ possible or assumed future results of operations and operating cash flows,

•

business’ strategies and investment policies,

•

business’ financing plans and the availability of short-term borrowing,

•

business’ competitive position,

•

future acquisitions, including the consideration to be paid and the timing of consummation,

•

potential growth opportunities available to our businesses,

•

recruitment and retention of our managing directors and employees,

•

target levels of compensation expense,

•

business’ potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,

•

likelihood of success and impact of litigation,

•

expected tax rates,

•

changes in interest and tax rates,

•

expectations with respect to the economy, securities markets, the market for mergers, acquisitions and strategic advisory and restructuring activity, the market for asset management activity and other industry trends,

•

effects of competition on our business, and

•

impact of future legislation and regulation on our business.

The Company is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, the Company uses its websites to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information and the posting of updates of assets under management (“AUM”) in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC and its subsidiaries (“LAM”). Monthly updates of these funds are posted to the LAM website (www.lazardnet.com) on the third business day following the end of each month. Investors can link to Lazard Ltd, Lazard Group and their operating company websites through http://www.lazard.com. Our websites and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-Q.

Business Summary

The Company’s principal sources of revenue are derived from activities in the following business segments:

•

Financial Advisory, which includes providing general strategic and transaction-specific advice on mergers and acquisitions (“M&A”) and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters, and

•

Asset Management, which includes strategies for the management of equity and fixed income securities and alternative investment and private equity funds.

LFB is a registered bank regulated by the Banque de France and its primary operations include asset and liability management for Lazard Group’s businesses in France through its money market desk and commercial banking operations, deposit taking and, to a lesser extent, financing activities and custodial oversight over assets of various clients. LFB engages in underwritten offerings of securities in France and we expect that it may expand its scope to include placements elsewhere in Europe.

Lazard also has a long history of making alternative investments with its own capital, usually alongside capital of qualified institutional and individual investors. At the time of Lazard Ltd’s equity public offering and as a part of the separation, we transferred to LFCM Holdings LLC (“LFCM Holdings”) all of our alternative investment activities, except for Fonds Partenaires Gestion SA (“FPG”), our private equity business in France. Such activities

transferred to LFCM Holdings represented the alternative investment activities of Lazard Alternative Investments Holdings LLC (“LAI”) and included private equity investments of Corporate Partners II Limited (“CP II”) and Lazard Senior Housing Partners LP. CP II was managed by a subsidiary of LAI until February 16, 2009. Effective February 17, 2009, ownership and control of CP II was transferred to the investment professionals who manage CP II. We also transferred to LFCM Holdings certain principal investments by Lazard Group in the funds managed by the separated businesses, subject to certain options by us to reacquire such investments, while we retained our investment in our French private equity funds. Since 2005, consistent with our obligations to LFCM Holdings, we have engaged in a number of alternative investments and private equity activities. Effective September 30, 2009, the Company sold FPG to a fund management company forming part of a group that manages investment companies and funds, in some of which Lazard could earn carried interests. The managing directors and staff conducting this activity were accordingly transferred to the buyer. The sale of FPG did not have a material impact on our financial condition or results of operations. Operating results of FPG have been included in our consolidated financial statements through the effective date of sale.

We continue to explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies. In that regard, on July 15, 2009, the Company established a private equity business with The Edgewater Funds (“Edgewater”), a Chicago-based private equity firm, through the acquisition of Edgewater’s management vehicles. The acquisition was structured as a purchase by Lazard of interests in a holding company that owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”) (see Note 8 of Notes to Condensed Consolidated Financial Statements). Also, consistent with our obligations to LFCM Holdings, we may explore discrete capital markets opportunities.

The Company’s consolidated net revenue was derived from the following segments:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Financial Advisory		56	%		63	%		59	%		65	%
Asset Management		46			39			45			38
Corporate		(2	)		(2	)		(4	)		(3	)

Total		100	%		100	%		100	%		100	%

Business Environment

In the first nine months of 2010, economic and market conditions in general in the U.S. and globally have shown signs of a gradual, but uneven recovery, with the respective equity markets generally experiencing modest increases, albeit with significant volatility in the second and third quarters. Also contributing to the recovery in the first nine months of 2010 were healthier credit markets, improved corporate earnings and continued low interest rates. When compared to the first nine months of 2009, economic and market conditions have improved, which contributed to the improvement in our operating performance in both Financial Advisory and Asset Management during 2010.

Lazard operates in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for Lazard’s management to predict all risks and uncertainties, nor can Lazard assess the impact of all potentially applicable factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See the section entitled “Risk Factors” in our Form 10-K. Furthermore, net income

and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter.

Financial Advisory

Global and trans-atlantic completed and announced M&A transactions for the third quarter and the first nine months of 2010 increased versus the corresponding prior year periods, as shown in the following table, which sets forth industry statistics regarding the value of such transactions in the periods:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2010		2009		% Incr/(Decr)			2010		2009		% Incr/(Decr)
	($ in billions)
Completed M&A Transactions:
Global	$	420	$	388		8	%	$	1,290	$	1,190		8	%
Trans-Atlantic		22		23		(4	)%		92		84		10	%

Announced M&A Transactions:
Global		607		436		39	%		1,648		1,379		20	%
Trans-Atlantic		74		58		28	%