Edgar Filing: ESPEED INC

(State or Other Jurisdiction of Incorporation)

(I.R.S. Employer Identification No.)

110 East 59th, New York, New York

(Address of Principal Executive Offices)

(Zip Code)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)


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

For the fiscal year ended December 31, 2005


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

For the transition period from to

Commission File Number 0-28191

eSpeed^®, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(212) 938-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $. 01 par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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 No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. Large Accelerated Filer Accelerated Filer Non-accelerated Filer

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

The aggregate market value of voting common equity held by non-affiliates of the registrant, based upon the closing price of the Class A common stock on June 30, 2005 as reported on the Nasdaq National Market, was approximately $238,744,867.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE.

None.

eSPEED, INC.
2005 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS


		Page
PART I		2
ITEM 1.	BUSINESS	2
ITEM 1A.	RISK FACTORS	18
ITEM 1B.	UNRESOLVED STAFF COMMENTS	32
ITEM 2.	PROPERTIES	32
ITEM 3.	LEGAL PROCEEDINGS	32
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	34
PART II		35
ITEM 5.	MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	35
ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA	36
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	53
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	84
ITEM 9A.	CONTROLS AND PROCEDURES	84
ITEM 9B.	OTHER INFORMATION	85
PART III		86
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	86
ITEM 11.	EXECUTIVE COMPENSATION	89
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	91
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	93
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	102
PART IV		103
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	103

Forward-Looking Information — Safe Harbor Statement

The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ ‘‘continue,’’ ‘‘strategy,’’ ‘‘believes,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘expects,’’ ‘‘intends’’ and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the expectations discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the costs and expenses of developing, maintaining and protecting our intellectual property, including judgments or settlements paid or received and their related costs, the possibility of future losses and negative cash flow from operations, the effect of market conditions, including trading volume and volatility, our pricing strategy and that of our competitors, our ability to develop new products and services, to enter new markets, to secure and maintain market share, to enter into marketing and strategic alliances, including acquisitions, partnering opportunities, and joint ventures, to hire new personnel, to expand the use of our technology, for both integrated hybrid voice-assisted and fully electronic trading, to induce clients to use our marketplaces and services and to effectively manage any growth we achieve, the effects of the attacks on the World Trade Center on September 11, 2001, and other factors that are discussed under ‘‘Risk Factors’’ in this Annual Report on Form 10-K (the ‘‘Report’’). We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in our Consolidated Financial Statements and the accompanying Notes thereto appearing elsewhere in this filing.

PART I


ITEM 1.	BUSINESS

OVERVIEW

Throughout this document eSpeed, Inc. will be referred to as ‘‘eSpeed’’ and, together with its subsidiaries, as the ‘‘Company’’, ‘‘We’’, ‘‘Us’’ or ‘‘Our.’’

We are a leader in developing and deploying electronic marketplaces and related trading technology that offers traders access to the most efficient, innovative and neutral financial markets in the world. We provide an array of financial technology products which assist clients in managing market risk. We operate multiple buyer, multiple seller real-time electronic marketplaces for the global capital markets, including the world’s largest government bond markets, the world’s largest foreign exchange markets, and other financial marketplaces, which may be accessed through fully electronic transactions for some products or through an integrated hybrid voice-assisted network accessed by voice-brokers. Our suite of marketplace tools provides end-to-end transaction solutions for the purchase and sale of financial products over our global private network or via the Internet. Our neutral platform, reliable network, straight-through processing and proven solutions make us a trusted source for fully electronic and integrated hybrid voice-assisted trading at the world’s largest fixed income and foreign exchange trading firms, major exchanges and leading equities trading firms in the world.

We commenced operations in March 1999 as a division of Cantor Fitzgerald Securities, a subsidiary of Cantor Fitzgerald, L.P. (‘‘Cantor’’). Our initial focus was the global government bond markets of the world, specifically U.S., Europe, Canada and Japan. Our relationships with Cantor and with BGC Partners, L.P. (‘‘BGC’’), a subsidiary of Cantor formed in connection with a Cantor reorganization in 2004, have enabled us to become an innovator in what today we consider our core electronic marketplaces, the government bond markets of the world. Cantor is a leading financial services provider that offers an array of financial products and services in the equity, fixed income and foreign exchange capital markets. BGC is a leading global interdealer broker to wholesale fixed income, interest rate, and foreign exchange and derivative markets worldwide. Our goal is to offer an electronic trading platform for a full range of financial products currently traded in today’s global capital markets, which includes fully electronic trading of wholesale fixed income, foreign exchange, futures, options and equities and integrated hybrid voice-assisted trading of treasury-spreads, off-the-run and when issued U.S. Treasury securities, repurchase agreements and U.S. Government Agency Securities, as well as other products. Our relationships with Cantor and BGC are critical to our meeting that goal, especially as it relates to integrated hybrid voice-assisted trading.

Our products are efficient. They enable market participants to transact business more quickly, more effectively and at lower cost than with traditional markets and methods. Our systems were built to support multiple interactive marketplaces, in a completely neutral, efficient and real-time environment. In 2005, we processed approximately 6.9 million electronic transactions, totaling more than $59 trillion of transactional volume. Our clients include the largest fixed income, foreign exchange and equities trading firms and leading exchanges in the world. We have offices in the U.S., U.K., Canada and Asia that collectively can transact trading 24 hours a day, around the world. In the course of conducting their core businesses, our clients are required to manage substantial market risk. Night and day, they trust our solutions to assist them in this critical function. We believe we offer among the most robust, large-scale, instantaneous and reliable transaction processing systems in the world. Our global private network permits market participants to view information and execute transactions in milliseconds.

We are innovators. Our proprietary software provides an end-to-end solution, including unique front-end applications, customized order and trade input devices, proprietary transaction matching and processing engines, credit and risk management tools and back-office and clearance systems, enabling straight-through processing. We also leverage our electronic marketplace expertise and reputation to sell software products and services directly to participants in these marketplaces.

We are neutral in the financial markets. We neither act as a participant in customer transactions, nor do we risk our own capital in transactions or extend credit to market participants. Our revenues consist primarily of fixed payments, transaction fees and licensing fees, and we market our services to clients, partners and prospects.

Our objective is to be the leading provider of trading and market risk management technology and interactive marketplaces for the world’s capital markets, where we believe there is a substantial opportunity for both fully electronic and integrated hybrid voice-assisted trading. Specifically, we believe we are well-positioned to take advantage of the attractive opportunities currently presented throughout our core fixed income market, as well as the foreign exchange, futures, options and equities markets of the world in which we have introduced new products and services. We believe that the scalability and extendibility of our eSpeed suite of products, and our relationships with Cantor and BGC, enable us to enter new markets and distribute products and services quickly, cost effectively and seamlessly.

As a result of the terrorist attacks of September 11, 2001, our offices in the World Trade Center were destroyed and we lost 180 of our employees, including many members of our senior management (the ‘‘September 11 Events’’). The loss of these assets and employees and the need to relocate our employees have negatively impacted our business. See ‘‘Risk Factors’’.

THE INDUSTRY

Historically, voice-only trading of over-the-counter financial and nonfinancial products has been an inefficient process for the most liquid benchmark securities. Buying, selling or trading activity is traditionally effected through (i) a central physical location, like a trading pit or auction house, where market participants have to access the market through this central location or its members; (ii) a bilateral arrangement between a buyer or seller; or (iii) several layers of middlemen and salespersons who assist in handling orders. Each of these approaches is labor and time intensive, which adds to the direct and indirect cost of the product being bought or sold.

Traditional voice-only over-the-counter financial markets and methods facilitate trading in less liquid securities where transaction risk is significant. Nevertheless, they have the following significant shortcomings: information leakage; limited direct access and, therefore, inefficient pricing; high transaction costs and slow execution due to the number of people involved in a traditional voice-only transaction; significant expense incurred in manual processing, confirming and clearing processes; and compliance and regulatory risk associated with traditional voice-only transactions and non-automated audit trails. While the value added by voice facilitation outweighs these disadvantages in many less liquid instruments and more complex transactions, these shortcomings are unacceptable in the markets for the most liquid and high volume benchmark securities. Whereas in less liquid markets the market, background and negotiation provided by a voice broker can assist in facilitating a trade that might not otherwise occur, in the most liquid securities there is no information or background necessary other than the intention of a market participant to offer a trade. In addition, traditional financial markets have difficulty in implementing program trading of liquid securities, especially those programs designed to automatically and simultaneously execute multiple trades in different, but related products. Additional inefficiencies of traditional transaction execution include lack of real-time price information, small disparate groups of interested buyers and sellers, limited liquidity and problems associated with executing trades as market prices change. After a buy or sell order is executed, there are the additional tasks of recording, accounting, tracking, delivering and financially settling the transaction. Each of these tasks, if done manually, can add potential cost and error to the process as additional participants or systems enter the transaction cycle. As a market matures and benchmark securities appear, these costs and inefficiencies prevent a market from realizing its full potential.

Electronic marketplaces have emerged as effective means of conducting transactions and creating markets. In an electronic marketplace, substantially all of the participants’ actions are facilitated through an electronic medium, such as a private electronic network or over the Internet, which reduces the need for actual face-to-face or voice-to-voice participant interaction to those functions where people provide the greatest value, thereby reducing the inefficiencies inherent in a traditional voice-only market.

Electronic marketplaces have proven that the inefficiencies of traditional voice-only markets and methods have inhibited participant access to many potentially profitable trading opportunities. The elimination of these inefficiencies has opened access to these opportunities, increasing trading profits, investment returns and market volumes, and made possible creation of new financial products and strategies that have further contributed to increased market volumes. These increased trading volumes have in turn driven increased demand for newer, ever-more sophisticated financial technology products.

Many financial exchanges worldwide, including certain exchanges in the U.S., France, Canada, Germany, Japan, Sweden, Switzerland and the United Kingdom, are now partially or completely electronic. Additionally, even in markets for less commoditized products where customers place orders through a voice-broker who implements a transaction electronically, companies will benefit from liquidity, pricing, robust interactive trading, post-trade processing and other services of our marketplace technology. Further, we believe that market participants will seek to outsource customized solutions for the electronic distribution of their products to avoid the difficulty and cost of developing and maintaining their own electronic solutions, and to improve the quality and reliability of these solutions.

OUR SOLUTION

Our electronic marketplace end-to-end solution includes real-time and auction-based transaction processing, credit and risk management tools and back-end processing and billing systems, all accessible through our privately managed global high-speed data network and over the Internet. Because of the scale and adaptability of our system, our products have applications across a broad range of customers, market participants, industries, and marketplaces, including any global financial marketplace involving multiple buyers and multiple sellers. In addition, we license our software to provide a complete outsourced solution to our clients, enabling them to distribute their branded products to their customers through online offerings and auctions, including private and reverse auctions, and request-for-quote capabilities. Our products enable market participants to transact business and manage market risk instantaneously, more effectively and at lower cost than traditional voice-only financial markets methods.

Our business model and affiliated relationships with BGC and Freedom International Brokerage Company ("Freedom") provide us with a significant long-term pipeline of our product opportunity, both in terms of electronic transaction volume and increased revenues across our product and service offerings, as a marketplace for a particular product matures from telephones with computer assistance and migrates to integrated hybrid voice-assisted trading and eventual fully electronic trading. Historically, new markets have initially tended to trade by voice alone. As volumes improve and the structure and characteristics of the market standardize over time, its potential to leverage technology increases. The first stage of this migration occurs when open outcry trading provided by BGC is supplemented with market data screens provided by eSpeed, and for which we receive 2.5% of related trading revenue. The second stage is the migration of voice-brokers to the use of keyboards and computers to keep track of increasing volumes of orders and to match trades. This voice-assisted brokerage earns us 7% of related trading revenue. The third stage occurs with the appearance of benchmarks which over time tend to migrate towards fully electronic trading by the customers themselves, whether by keyboards and computers, or directly by computers themselves. For some products, the transition to fully electronic trading occurs from an ‘‘integrated’’ marketplace in which one pool of liquidity is accessed simultaneously by the customer through the keyboard, by a computer program or by a voice broker over a keyboard at the request of a customer. Fully electronic transactions that have migrated through these stages generally provide us 65% of related trading revenue, or 50% of net related trading revenue in cases of products which are in the process of migrating to fully electronic marketplaces from an integrated marketplace. The pace at which individual markets will migrate along our pipeline will vary among the different types of instruments and the nature of the marketplace.

Our solution is built on three core principles: speed, simplicity and service. We provide products that are designed to be the market leader in terms of their speed of execution. Integral to our mission are

solutions that are easy to understand and easy to use by our customers. Our clients trust our solutions to assist them in managing substantial market risk. We repay that trust with our focus on superior customer service across all facets of our business.

We expect to continue to improve our technology through additional investment in our core fixed income products, expanding into new markets and developing technology to improve our system and our trading environment. In 2005, we continued to upgrade our system, making it faster and easier to use, and added senior sales staff to promote our products, including a renewed focus on our foreign exchange product. Throughout our business, our focus is to provide our customers with the tailored tools they need as our products migrate through our pipeline of opportunity.

OUR MARKET FOCUS

We focus our business primarily on the wholesale fixed income business, as well as target opportunities in markets such as foreign exchange, futures and options and equity order routing. There has been a significant move towards the conversion of traditional open outcry markets to electronic trading. Significant business opportunities have arisen for the provision of front-end risk management and routing solutions that provide access to electronic marketplaces. We believe that there is significant opportunity in the continued conversion of these markets to fully electronic networks, such as our own.

Wholesale fixed income. The global fixed income market is one of the largest securities markets in the world based on total bond issuance and the amount of debt outstanding. The Bond Market Association (the ‘‘Association’’) estimates that, in the U.S. alone, in 2005, total bond issuance was over $5.5 trillion and there were approximately $23 trillion of fixed income securities outstanding (excluding Asset-Backed Securities). The Association also reports that, in 2005, approximately $555 billion a day in trading took place among the primary dealers and their clients in the U.S. Treasury market. We predict that over the next three years, the U.S. Treasury market will double in size, reaching approximately $1 trillion in average daily volume by the end of 2008.

Foreign exchange. The trading of currencies in all monetary pairs represents the largest and fastest growing trading volume market in the world. The Bank for International Settlements has estimated the daily volume traded in the foreign exchange markets to have been $1.9 trillion as of April 2004. Factors that have increased turnover include globalization of firms’ customers and suppliers, investors’ interest in foreign exchange as a tradeable asset class in itself, the more active role of asset managers, and the growing importance of hedge funds.

Futures and options. Futures and options trading is a leading financial activity throughout the world, with contracts traded on a wide variety of financial instruments, commodities and indexes. According to the Futures Industry Association, in 2005, nearly two billion futures and options contracts were traded in the U.S. futures and options markets. According to the Futures Industry Association, in 2005, over 9 billion futures and options contracts were traded in the global futures and options markets. According to the International Swaps and Derivatives Association, the global market for interest rate swaps, interest rate options and currency swaps had over $201.4 trillion in notional value outstanding as of the first half of 2005.

Equity order-routing. In 2005, over $14 trillion was traded on the New York Stock Exchange and over $5.3 trillion was traded on the Nasdaq. In the international equity markets, £5.2 trillion was traded on the London Stock Exchange, ¥5.23 trillion was traded on the Tokyo Stock Exchange, €1.783 trillion was traded on Euronext, and €3.8 trillion was traded on the Deutsche Börse. Our order-routing system allows equity market participants multiple points of entry and simultaneous access to the world’s largest exchanges, market makers and electronic communications networks (‘‘ECNs’’).

OUR FINANICAL MARKETS SOLUTION

Our products cover various financial markets, including a network for trading U.S. Treasury securities, European, Japanese and Canadian government bonds, equities, interest rate swaps, futures, options,

foreign exchange, repurchase agreements, U.S. Agency securities, U.S. Treasury swaps, Euro bonds and basis trades. Cantor has historically been a major facilitator and, in some cases, provider of liquidity in numerous financial products through its offices in the U.S., Canada, Europe, Asia and Australia. In October 2004, Cantor began to reorganize its global wholesale interdealer business and formed a separate partnership, BGC, that provides voice brokerage services to the wholesale fixed income, interest rate, foreign exchange and derivative markets worldwide. In May 2005, BGC acquired voice broker Maxcor Financial Group Inc. and its subsidiaries, including EuroBrokers Inc. Our eSpeed system provides the only electronic means of access to Cantor’s and BGC’s marketplaces. Through our affiliation with Freedom, eSpeed also powers the electronic platform of Freedom, the leading interdealer broker of Canadian fixed income and other capital markets products.

Our private electronic network for wholesale financial markets is connected to the largest financial institutions worldwide. We have installed in the offices of our existing client base the technology infrastructure necessary to provide price information and trade execution on an instantaneous basis in a broad range of securities and financial instruments. We believe our eSpeed portfolio of products enables us to introduce and distribute a broad mix of financial products and services quickly, efficiently, and at a lower cost than traditional methods.

With our financial technology, participants in hybrid marketplaces may either electronically execute trades themselves or call brokers, who then input trade orders into an integrated hybrid marketplace for them. In our fully electronic marketplace, all stages of the trade occur electronically. The participant inputs buy or sell order instructions directly into our electronic trading system using our software, a web-browser or electronically through an application programming interface or other software. Our system provides to the participant on-screen confirmation that the participant’s order has been accepted. The system normally responds to all orders in less than 300 milliseconds. Simultaneously, an electronic confirmation is typically sent to the participant’s back office and risk system, providing straight-through processing and enabling risk management capabilities for the participant. Our core U.S. Government Securities marketplace is fully electronic, and we have also established fully electronic solutions for our less-established foreign exchange, futures and options and equities businesses.

We see opportunities to expand our business by working more closely with Cantor and BGC, and by licensing our technology to other voice brokers and financial services firms in addition to Cantor and BGC, as well as to exchanges and other financial institutions.

eSPEED PRODUCTS AND SERVICES – FOUNDATION AND GROWTH BUSINESSES

We organize our business into two main categories. First, we focus on the business lines that create a solid foundation on which we can build. Electronic trading of government bonds is the first building block in our foundation. Relationships with voice-brokerage trading firms such as BGC and Freedom, our strong intellectual property portfolio and Software Solutions services make up the remainder of our foundation businesses. Second, we look to areas of opportunity from which we expect to grow. We are focusing on generating increased volume in the program trading of U.S. Treasury securities, expanding further into the fully electronic foreign exchange, futures, options and equities markets, and developing innovative trading tools that enhance eSpeed’s platform and attract traders to our screens.

Foundation Businesses:

Government Bonds

Currently, most of our revenues are derived from fully electronic transactions in the government bond markets in which participants electronically execute trades using a keyboard, mouse or computer program. These include U.S., European, Canadian and Japanese government securities, primarily concentrated in U.S. Treasury securities. Our full-service eSpeed system, combining all of our proprietary software and our global high-speed private network, currently operates in some of the largest and most complex government bond marketplaces in the world. It is designed to be extendible to any multiple-buyer, multiple-seller marketplace and can support massive liquidity and fluctuation in

many markets. Our customers in these markets include the largest financial institutions in the world. These customers access our eSpeed system primarily through our global high-speed private network. In addition, the system for these products is also available over the Internet. Our eSpeed system enables us to operate an integrated network with the inherent scale and leverage to engage in electronic trading in multiple products, marketplaces and market structures on a global basis and is a comprehensive platform providing volume, access, speed of execution and ease of use.

Voice-Assisted Trading

A substantial portion of our revenues is also derived from integrated hybrid voice-assisted trading. A voice-assisted trade is executed in substantially the same manner as an electronic trade, except that the participant telephones a broker, who then inputs the participant’s order into our electronic marketplace system. This integrated hybrid voice-assisted trading model also serves as a pipeline for potential future fully electronic transactions.

In 2001, we entered the Canadian fixed income market through our investment in and technology agreement with Freedom, the leading Canadian interdealer broker of fixed income products and other capital products. In May 2005, BGC acquired the Euro Brokers voice brokerage network. BGC provides voice brokerage services to the wholesale fixed income, interest rate, foreign exchange and derivative markets worldwide. In late 2005, BGC acquired ETC Pollack, a leading French interdealer broker, which adds to the pipeline of potential hybrid voice-assisted transactions.

Relationships with leading interdealer brokers like BGC and Freedom allow us to tap into the enormous opportunities in voice-brokered businesses in which less commoditized products are traded. Our technology enables voice-brokers to provide superior client service. Through integrated hybrid voice-assisted trading, we see opportunities to increase our presence in the world’s voice-brokered markets in products like Treasury spreads, off-the-run Treasury securities, when-issued U.S. Treasury securities and U.S. Government Agency securities.


•	Treasury spreads are financial products (e.g. interest rate swaps) that trade in relation to U.S. Treasury on-the-run benchmarks, the most recently issued Treasury securities that are the standard trading instruments in the bond market. A Treasury spread is derived from the price or yield difference between the financial product being traded and the benchmark.


•	Off-the-run securities are Treasury bonds and notes that were formerly on-the-run benchmarks but have been supplanted by more recently issued securities. When a new on-the-run benchmark is issued, the current on-the-run becomes an off-the-run.


•	When-issued U.S. Treasury securities represent new issues that will be created through the auction process and will become the new on-the-run benchmarks. A when-issued instrument has been authorized and may be traded although it has not yet been issued.


•	A U.S. Government Agency security is debt issued by a Government Sponsored Enterprise, such as the Federal Home Loan Bank (‘‘FHLB’’), Freddie Mac, Fannie Mae, TVA and TAPS. U.S. Agencies pay interest and are believed to have little or no credit risk, although they are not backed by the U.S. Government.


•	Treasury Inflation Protection Securities (‘‘TIPS’’) are debt issued by the U.S. Treasury that offer protection against inflation because their principal and interest payments are linked to inflation.

In addition, our voice-broker customers are providing opportunities to enter new markets for voice-brokered products, such as interest rate swaps. Launched in Europe in December 2003, our interest rate swaps product provides an electronic solution for voice-assisted trading of benchmark one-year to 10-year U.S. dollar- and Euro-denominated products, which are the most high-volume, commodity-like products in the swaps market. By providing straight-through processing and targeting the inter-bank market only, we have created a market where the largest banks can do business with each other without volume or credit limitations.

It is also likely that over time more of the traditional voice-brokered products, such as emerging market debt, credit default swaps, corporate bonds, repurchase agreements and interest rate swaps,

will fit the hybrid voice-assisted model. In December 2005, BGC announced the first integrated hybrid voice-assisted and electronic U.S. Dollar repo trading platform for primary dealers powered by eSpeed’s technology. This BGC repo platform allows primary dealers to execute and process overnight and term specials, Treasury bills and off-the-run Treasury repo trades either through fully electronically or through voice-assisted trading. This platform is expected to be rolled out during the first half of 2006.

Intellectual Property Licensing

We have a strong intellectual property portfolio, and we are committed to adding to its value as we continue to develop more proprietary technology, as well as to licensing our technology and defending and protecting our technology from time to time through litigation. Patented innovations to our technology allow us to differentiate our product offerings, create barriers to entry, and improve our products and services. Our patents include the Wagner patent, which addresses automated futures trading, the Lawrence patent, which relates to the electronic trading of municipal bonds and electronic auctions of fixed income securities and interest rate products, and the ‘‘580’’ patent, which covers a system and method for auction-based trading of specialized items such as fixed income instruments. See ‘‘Our Intellectual Property.’’ Certain of our intellectual property, including the 580 Patent, is the subject of litigation. See ‘‘Legal Proceedings.’’

With respect to our patents and other intellectual property, we have entered into long-term licensing agreements with the InterContinentalExchange, Inc. (‘‘ICE’’), the Chicago Mercantile Exchange, Inc. (‘‘CME’’), the Board of Trade of the City of Chicago Inc. (‘‘CBOT’’), the New York Mercantile Exchange Inc. (‘‘NYMEX’’) and the New York Board of Trade (‘‘NYBOT’’).

eSpeed Software Solutions^SM

Through our services agreements and our eSpeed Software Solutions business, we provide customized software to broaden distribution capabilities and provide electronic solutions to both related and unrelated parties. In addition to providing technology infrastructure to related parties such as Cantor, BGC and Freedom, eSpeed Software Solutions leverages our global infrastructure, our software and systems, our portfolio of intellectual property and our electronic trading expertise to provide unrelated customers with electronic marketplaces and exchanges and real-time auctions to enhance debt issuance and to customize trading interfaces. eSpeed Software Solutions takes advantage of the scalability, flexibility and functionality of our eSpeed system to enable our clients to distribute their branded products to their customers through online offerings and auctions, including private and reverse auctions, via our trading platform and global network. Using eSpeed Software Solutions, customers are able to develop a marketplace, trade with their customers, issue debt, trade odd lots, access program trading interfaces and access our network and our intellectual property.

In addition to long-term licensing agreements, we have signed Software Solutions agreements with a number of U.S. and international enterprises, including the FHLB:


•	For the World Bank, eSpeed’s trading engine and network connect the World Bank to its dealer clients anonymously through our Internet-based, real-time auction platform. This system was released in June 2003 and has handled over $12 billion of the World Bank’s interest rate swap volume to date.


•	The FHLB is a U.S. Government-sponsored enterprise and one of the largest issuers in the global short-term securities market. Our electronic auction-based technology has powered the FHLB’s primary discount note auctions since August 2002.

Growth Businesses:

Program Trading in the U.S. Treasury Market

In recent years, the growth of electronic trading in the U.S. Treasury market has contributed to an explosion in trading volume. We believe another wave of volume growth is beginning to be driven by

program trading. Program trading, also known as ‘‘Black Box Trading,’’ is the use of sophisticated computer programs to manage and automatically execute securities trades from mathematical and risk formulas and the relationships among various securities and markets. These trades tend to be in large volumes. eSpeed’s trading platform is well-suited for this type of quantitative trading. We are enhancing our trading platform and system tools to accommodate the needs of program traders, as well as the new needs program trading creates among other market participants. As program trading becomes more wide-spread, we believe that we will be well positioned to capture a portion of the increase in volumes in the market.

Trading of Other Fully Electronic Financial Products

We have identified opportunities to leverage our position in the global government bond markets into a variety of other key financial markets and are actively developing technology and initiatives for trading less-established products. For example, we have rolled out technology for trading in foreign exchange, equities and order routing in the futures markets. We focused on investing in these businesses by adding dedicated, experienced sales professionals to focus on these products by penetrating new markets and enhancing customer service. In 2006, we are continuing to refine our sales and service efforts in order to develop more demand for these new products.

Foreign Exchange. Launched in 2003, our foreign exchange (‘‘FX’’) product uses a unique model that allows the introduction of a central counterparty through Continuous Linked Settlement (‘‘CLS^®’’) to eliminate the customer’s substantial intra-day settlement risk of traditional inter-bank settlement methods. We have created an anonymous platform that provides professional traders with access to wholesale market prices. At the same time, our foreign exchange product offers competitive quotes and introduces new-value added features. This product offers global, scalable and real-time trading in all major CLS^® currencies, including U.S. Dollars, Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars and Swiss Francs.

Futures and Options. In December 2002, we entered into an agreement with the CBOT to distribute futures products through our eSpeed system, providing customers with the ability to trade both cash and futures in one neutral, fully electronic marketplace. By routing CBOT futures trades over our existing eSpeed network and providing front-end integration to our clients, cash traders and the CBOT’s futures traders have direct, instantaneous access to both markets. In 2004, our eSpeed system was fully integrated into the CBOT and EUREX and in 2005 to the CME, giving users of these exchanges direct access through eSpeed’s platform. This combination of the cash and futures markets is a significant advantage to all traders accessing eSpeed’s platform. This integration extends eSpeed’s exposure and access to additional U.S. and European traders and has the potential to create greater crossover transactions between the cash and futures markets. In December 2004, under the agreement with NYBOT, we became the sole owner of the Cantor Financial Futures Exchange and the Commodity Futures Clearing Corporation of New York. Additionally, we agreed that NYBOT will provide processing services for futures contracts or options on futures contracts listed on the Cantor Financial Futures Exchange or other exchanges designated by us. In October 2004, we acquired United Kingdom-based ITSEcco Holdings Limited and its subsidiaries (collectively, ‘‘ECCO’’), a highly specialized software developer focused on the financial markets. ECCO provides a multi-asset class user interface for electronic trading incorporating automated cross market spreading functionality. During 2005, the ECCO product was interfaced with the eSpeed platform, facilitating the integrated trading of futures and eSpeed's U.S. Treasury and foreign exchange markets.

Equities. In November 2003, we moved into the equities market with the launch of eSpeed Equities, an order-routing system for the institutional equities market. eSpeed Equities provides an order routing and execution platform that affords equity market participants multiple points of entry and simultaneous electronic access to the world’s largest exchanges, market makers and ECNs. During 2005, we enhanced our intelligent order handling capabilities, such that traders can automatically access the best prices available at multiple venues with a single order. This simplifies the trader’s task, achieves better results for the customer, and minimizes market impact.

Repos. In December 2005, BGC announced the first integrated hybrid voice-assisted U.S. Dollar repo trading platform for the primary dealer community, powered by eSpeed’s technology, which will

be rolled out during the first half of 2006. The integrated platform offers a wide range of U.S. Treasury repo products that can be either electronically traded directly by the customer or managed through a voice-assisted broker.

New Trading Tools

We are developing new trading tools in order to improve customer service and provide greater access to our markets. For example, in 2005, we introduced a number of new trading tools to our customers:


	•	In May 2005, we introduced the eSpeedometer, an innovative way to trade in the cash and futures markets. eSpeedometer’s multi-asset trading view helps alert traders to new profit opportunities and has built-in safety mechanisms such as optimal mouse tracking to enhance trading accuracy and operation and greater speed and ease of use. The system is fully integrated into major futures exchanges including the CBOT, CME, and Eurex, and provides unique spreading technology that offers electronic trading of basis, execution of cash and futures trades simultaneously on the same screen.


	•	In June 2005, we and Sprint Nextel announced the launch of the first wireless trading solution for institutional trading of benchmark U.S. Treasury bonds. This product is available exclusively on the BlackBerry 7520^TM over Sprint Nextel’s nationwide network. Using this device, authorized bond traders can access the same eSpeed application they use on their desktop at work, effecting trades and managing risk from a BlackBerry.

OUR STRATEGY

Our objective is to be the world’s leading provider of fully electronic and integrated hybrid voice-assisted marketplaces and related software solutions to a broad range of financial marketplaces. Our strategy includes the following key elements:

Expand system functionality and develop new products, software and services for our existing financial markets

We plan to continue to expand the types of financial and other products traded in our marketplaces, both in the U.S. and abroad. We are currently focused on fixed income, as well as developing our sales in foreign exchange, equities, futures and options. For example, we believe that our foreign exchange product has the potential to offer new efficiencies to the foreign exchange markets. We plan, over time, to seek to serve additional marketplaces that can benefit from more efficient, centralized, electronic trading facilities. Our goal is to include in our electronic marketplaces a full range of the most commodity-like financial products that are currently traded in today’s capital markets worldwide. We believe we are well positioned to leverage the significant costs and efforts that have been incurred developing our eSpeed system to create electronic markets in a wide range of such financial products.

Develop and enhance integrated hybrid voice-assisted marketplaces

In markets that are less commodity-based, we have developed and will continue to develop relationships with voice brokers, including our affiliates, BGC and Freedom, to provide voice-assisted brokerage services to their marketplaces. We plan to capitalize on and develop these relationships to increase our presence in the world’s integrated hybrid voice-brokered markets by incentivizing voice brokers to use our electronic system for multiple products and in additional products such as Treasury spreads, off-the-run Treasury securities, when issued Treasury securities, U.S. Government Agency securities, repurchase agreements and TIPs.

Customized pricing alternatives for our foundation businesses

We plan to improve upon on our position as a pioneer and innovator in electronic trading of U.S. Treasury securities through improvements to our platform and product offerings for current and future customers. In January 2005, we removed the Price Improvement feature from our trading platform in

response to requests of clients. Also in 2005, we negotiated new pricing arrangements with many of our largest customers for U.S. Treasury products that provide a greater share of fixed payments versus variable commissions, thus creating incentives for more trading volume. Certain of our other largest customers continue to pay transaction fees based on trading volume although we believe that as U.S. Treasury volumes increase over time, customers with variable price agreements will qualify for volume discounts and fixed price arrangements. Our goal is to maximize trading volumes and related revenues as we respond to customer demands on our platform.

License our software to a broad range of market participants and provide an outsourced eSpeed Software Solution for distribution of their products

Through our Software Solutions division, we plan to continue to capitalize on our global infrastructure, intellectual property and electronic trading expertise to provide a complete outsourced solution to our clients to enable them to access exchanges and electronic markets and distribute their branded products to their customers through online offerings, auctions, including private and reverse auctions, and direct dealing capabilities and customized trading interfaces. Our sales force is focused on licensing our eSpeed Software Solutions technology to existing and new clients worldwide.

Leverage our intellectual property portfolio

We have a strong intellectual property portfolio and are committed to developing, maintaining and protecting our existing portfolio and developing and protecting new enhancements, products and inventions. We have entered into long-term licensing agreements with respect to our intellectual property with a number of customers and exchanges and, from time to time, are engaged in legal action to protect or defend our intellectual property. See ‘‘Item 3. Legal Proceedings.’’ We plan to continue our strategy of developing, maintaining and protecting these existing and new technologies. Our strategy may also include licensing such intellectual property for royalties, joint venturing with other marketplaces or exchanges or exclusively using patents in our marketplaces.

Expand electronic foreign exchange marketplace

Our foreign exchange product is an anonymous, neutral, real- time, instantaneous electronic trading system. We plan to leverage our technology and customer arrangements to add increased liquidity and trading clients to this marketplace. In 2004 and 2005, we hired an experienced sales team and reorganized our foreign exchange initiatives. We continue to invest in our foreign exchange platform.

Capitalize on expected market growth from ‘‘Black Box’’ proprietary trading by expanding trading and products in this marketplace

Many of our customers and other firms are adding program or ‘‘Black Box’’ automated trading to their operations to manage portfolios and automatically execute trades. We plan to further develop software and other products and services to add new methods to continue to make our system faster and easier for these automated traders to use. We have positioned our technology and service of our eSpeed platform to provide products and services that will capitalize on this market change and growth.

Pursue strategic alliances, acquisitions and other partnering opportunities

We are continually exploring opportunities to maximize stockholder value by expanding our fully electronic, integrated hybrid voice-assisted and other markets, enhancing our other partnering opportunities, product and service offerings, and generating future growth and market position, including through any one or more strategic alliances, acquisitions or combinations, strategic alliances, customer agreements, joint ventures, equity issuances, reorganizations and recapitalizations in our core business as well as in strategic or complimentary businesses. From time to time, we seek to enter into acquisitions, partnership arrangements, joint ventures, customer agreements and other strategic alliances to create liquidity in new and existing product markets, to develop and enhance technology

offerings and services, to fully utilize our patents and to attract new participants to trade products in those markets. We have employed this strategy in our alliance with Freedom and in our other ventures, as well as in our acquisition of ECCO and our relationships with Cantor and BGC, and will consider additional strategic opportunities with these and other potential partners in the coming periods.

Emphasize fundamental principles through dedication to customer service

We have recognized that our foundation and growth business objectives cannot be achieved without continuous focus on our fundamental principles of speed, simplicity and service. To put these principles into practice, we continue to explore opportunities and dedicate resources to strong customer service. We have hired an experience sales team and are dedicated to providing timely and effective service to customers, responding to and anticipating customer needs and requests and making our platform more user-friendly. We plan to continue to dedicate our time and effort to these principles.

TECHNOLOGY

Our eSpeed system is accessible to our clients through (i) our proprietary front-end trading software, (ii) our application programming interface (‘‘API’’), which is a dedicated software library linking our clients’ networks to our system, (iii) the Internet, via a browser interface or Java application, and (iv) software developed in alliances with independent software vendors. Our system runs on large-scale hardware located in data centers in the U.S. and the U.K. and is distributed either over our multiple-path global network or via the Internet through links to multiple global Internet service providers.

Our electronic marketplaces operate on a technology platform and network that emphasize scalability, performance, adaptability and reliability. Our technology platform consists of:


•	our proprietary, internally developed real-time global network distribution system;


•	our proprietary transaction processing software, which includes interactive matching auction engines, fully integrated credit and risk management systems, pricing engines, analytics and associated middle- and back-office operations systems; and


•	customized inventory distribution and auction protocols designed to be used by our clients and partners in their distribution and trading systems and client interfaces ranging from Windows, Java, UNIX, our proprietary API and proprietary vendor access.

Together, these components enable our clients to effect transactions in real-time, with straight-through processing.

Network distribution system

Our eSpeed system contains a proprietary hub-and-spoke digital network. This network uses Cisco Systems’ network architecture, and we have Cisco-certified engineers on-site. Our network’s high-speed points of presence comprise the major business centers of the world, including New York, London, Tokyo, Milan, Chicago, Los Angeles and Toronto. Altogether, we manage 24 hubs linked by over 50,000 miles of cable, over 500 Cisco network devices and more than 900 high-capacity Sun Microsystems and Hewitt Packard servers located in data centers in London, Chicago, New York and New Jersey that are able to process over 300 transactions per second, per auction instrument or product. The redundant structure of our system provides multiple backup paths and re-routing of data transmission if one spoke of a hub fails. We believe that we operate one of the largest and most robust interactive trading network distribution systems currently in operation, with the substantial majority of our personnel dedicated to our trading technology and committed to developing new products and services.

Our trading system accepts orders and postings and distributes responses, generally in under 150 milliseconds. We estimate that our network is currently running at approximately 15% of capacity over a 24-hour period.

In addition to our own network system, we also receive and distribute secure trading information from clients using the services of multiple, major Internet service providers throughout the world. These connections enable us to offer our products and services via the Internet to our global clients.

Transaction processing software

Our software applications have been developed internally and are central to the success of our eSpeed system. Our auction and trading engines operate in real-time, facilitating efficient interaction between buyers and sellers. Our credit and risk management systems monitor and regulate these buyers and sellers. Our pricing engines provide prices for illiquid financial products derived from multiple trades in other related financial instruments. These critical applications work together seamlessly and are supported by middle- and back-office software that verifies, confirms, reports, stores, tracks and, if applicable, enables the settlement of each transaction. Our transaction processing software includes verification mechanisms at various stages of the execution process, which result in significantly reduced manual intervention, decreased probability of erroneous trades and more accurate execution for clients.

eSpeed auction and transaction engines

Our auction and transaction engines use Interactive Matching, our proprietary rules-based method, to process in excess of 150 transactions per second per auction, instrument or product. These engines were developed to support trading in the largest capital markets in the world, such as government bonds and futures contracts, and the more diverse, fragmented and database intensive markets, such as U.S. municipal bonds (with over 1.7 million different issues), corporate bonds and Eurobonds. These transaction engines are designed to be modular and flexible to allow modification in order to apply them to other markets and auction types. In Europe, for example, we have added a component that allows us to process transactions and auctions in multiple currencies simultaneously. Our transaction engines have embedded security features and an added messaging layer, via our proprietary API, to provide security from unauthorized use. In addition, we use encryption to protect our clients that transact business over the Internet.

We believe our marketplace expertise and rules-based systems provide incentives for clients to actively participate in our marketplaces. For example, Interactive Matching provides incentives to participate in our marketplaces by encouraging participants to expose their orders to the market. In standard auctions, the incentive is for participants to wait until the last moment to make a bid or offer. Our priority rules encourage trading activity by giving the last successful active participant a time-based right of first refusal on the next sale or purchase. In addition, in many markets, we have structured our pricing policy to provide incentives. The party that provides auction products for the market or creates liquidity (by inputting a price to buy or sell) pays less commission than the participant that consummates the trade by acting on that price. With our pricing policies and proprietary priority rules, our system is designed to increase liquidity and to draw participants into the market. This proprietary rules-based system is adaptable and, as part of our business strategy, we intend to apply it across other non-financial markets for multiple products and services.

eSpeed Credit Master^SM credit and risk management systems

Our eSpeed Credit Master credit and risk management systems are an important part of the operation of our electronic marketplaces. These systems (i) continuously monitor trades of our clients to help prevent them from exceeding their credit limits, (ii) automatically prevent further trading once a client has reached a pre-determined credit limit and (iii) evaluate transactions and calculate both individual positions and risk exposure across various products and credit limits. Our proprietary credit and risk management systems have also been made available to our global clients to enable them to monitor the position of their traders and are integrated with our Software Solutions systems so our global clients can monitor the credit of their customers who transact directly with them online. These systems will store client data relevant to credit and risk management, such as financial statements, credit documents, contacts and internal analyses. These systems also enable our clients to make our electronic marketplaces available to their customers while maintaining control of their customers’ trading activity and risk.

eSpeed Name Give-Up Matrix^SM — credit monitoring

Through the use of our name give-up matrix, we enable our market participants to create counterparty credit exposure limits to manage the counterparties with which they transact in non-central counterparty markets. In these markets, participants settle transactions directly with other participants. Using this matrix module, the participants can pre-select the counterparties that they are willing to transact with in that market. The module displays all prices to market participants, and highlights and enables execution on prices that are from approved counterparties. Additionally, the module has features that permit each participant to manage the activities of its traders on a real-time basis.

eSpeed pricing engines and analytics

We have developed a number of analytical software tools that permit us to price products that trade in less liquid markets and for which current pricing information is not readily available. For example, our TOPS system is a proprietary computer application that enables us to link multiple markets, offer prices and create and enhance marketplaces for products that have limited liquidity. In our financial markets, TOPS currently uses data from existing cash and futures markets to calculate pricing for transactions where no market prices currently exist, thereby facilitating liquidity. These multi-variable trades are extremely difficult to execute in voice-based markets due to their complexity and the slow speed of manual execution.

eSpeed middle- and back-office applications

Our middle- and back-office applications support clearance, settlement, tracking and reporting of trades and provide links to outside clearing entities. For example, in the financial markets, we outsource our fulfillment services to Cantor and Freedom (for Canadian markets), where both parties to a trade send either cash or securities to Cantor or Freedom and Cantor or Freedom settles the trade and sends each party the cash or securities due. Our reporting and accounting systems are designed to track and record all charges and commissions for a trade. Our eSpeed system and products automate previously paper- and telephone-based transaction processing, confirmation and other functions, substantially improving and reducing the cost of many of our clients’ back offices and enabling straight-through processing.

OUR CLIENTS

Our clients include banks, dealers, brokers, professional trading firms, futures commission merchants and other professional market participants and other financial institutions. We are a trusted source for electronic trading at the world's largest fixed income and foreign exchange trading firms and major exchanges. Other than Cantor and BGC, no client of ours accounts for more than 10% of our revenues.

We provide access to the electronic marketplaces and broker-assisted services supported by our eSpeed system. We expect that a portion of our clients who use voice brokers will migrate to fully electronic access over the coming years or will use our integreated hybrid voice-assisted products and brokerage services. We intend to continue to license our intellectual property. We also expect to add clients for eSpeed Software Solutions from the financial markets. In addition, we intend to build relationships with new clients, including traditional competitors of Cantor and BGC. We further intend to provide third parties with the infrastructure, including systems administration, internal network support and operations and disaster recovery services, that is critical to providing fully electronic marketplaces in a wide variety of products.

PRICING POLICIES

Pursuant to certain transaction fee agreements with our largest customers, our customers receive brokerage services for the electronic arrangement and execution of financial transactions for a variety of fixed income securities. These agreements typically provide for payment by each customer of a

fixed periodic payment and/or product-specific transaction fees based on the aggregate notional value of securities bought or sold by the customers plus, where applicable, exchange fees and costs. In our U.S. Treasury business, the initial terms of these agreements typically last between one and four years, with provision for automatic renewal unless elected otherwise by either party. In addition, we have engaged in some arrangements with certain participants on our FX trading platform to provide for revenue sharing with such certain participants at certain trading volumes.

In the third quarter of 2004, we announced a strategic shift in our pricing strategy for our U.S. Treasury business that increased the component of fixed pricing and reduced the percentage of variable pricing in contracts with certain of our largest clients. During the second half of 2004 and throughout 2005, we have worked with these clients to create customized pricing arrangements that lower their marginal cost of trading on the eSpeed platform, and encourage greater market participation. In January 2005, we removed the Price Improvement feature from our trading platform in response to requests of clients, thereby reducing the effective variable cost of transaction on our eSpeed network. We believe that this has resulted, and will continue to result, in more predictable market volumes on the eSpeed platform. In addition, in anticipation of a projected doubling of U.S. Treasury volumes by 2008, we believe that more customers with variable pricing in contracts will qualify for such volume for discounts and fixed price arrangements.

Beginning in March 2006, we instituted a new pricing policy for eSpeed foreign exchange designed to reward providers of liquidity with commission rebates. Our pricing in this market allows us to pay commissions to participants who place passive bids and offers on our screen that lead to executions. Participants who aggress against standing bids and offers pay a slightly higher commission to compensate for the cost of these rebates.

SALES, MARKETING AND CORPORATE DEVELOPMENT

We promote our electronic marketplaces and services to our existing and prospective clients through a combination of sales, marketing and co-marketing campaigns. We leverage our client relationships through a variety of direct marketing and sales initiatives and build and enhance our brand image through marketing and communications campaigns targeted at a diverse audience, including traders, potential partners and the investor and press communities. We may market to our existing and prospective clients through a variety of co-marketing/co-branding initiatives with our partners. We have designed our sales and marketing efforts to promote brand awareness and educate our audience regarding the nature of our electronic marketplaces, products and services and the advantages associated with the automation of trading activities.

Our senior management staff actively works to establish strategic relationships, develop new markets for our technology and structure and execute investments and acquisitions. Our staff promotes eSpeed at conferences, conventions, events and speaking engagements that advance both our technology and our brand name. In many cases, these engagements are focused within specific markets that we intend to develop in the future. All of these efforts are intended to enhance our image, customer awareness and profitability.

In 2004, we made a committed effort to expand our management team, including the hiring of Kevin Foley as President, Paul Saltzman as Chief Operating Officer and Jay Ryan as Chief Financial Officer. In 2005, we hired experienced sales heads for a number of our products and services.

SOFTWARE DEVELOPMENT

We devote substantial efforts to the development and improvement of our electronic marketplaces and licensed software products and services. We work with our clients to identify their specific requirements and make modifications to our software, network distribution systems and technologies that are responsive to those needs. Our efforts focus on internal development, strategic partnering, acquisitions and licensing. As of December 31, 2005, we employed 337 technology professionals.

One of our technology team’s main objectives is to develop new products and services in order to provide superior electronic marketplace solutions to our clients. We also focus our efforts on

enhancing our Internet interfaces to facilitate real-time markets and comply with standard Internet security and future security protocols in order to capitalize on the development of new commercial marketplaces. We are continuing to develop new marketplaces and products and services using our internally developed application software.

COMPETITION

The development and operation of electronic marketplaces are evolving. Because our business is driven by a number of different products, we face different levels of competition with respect to each market and product. As a result, competition in these marketplaces is currently fragmented. We face competition from a number of different sources varying in size, business objectives and strategy, some of which are larger than we are and have greater financial resources.

Although we do not believe that there is another fully integrated, multi-asset platform offering electronic trading across futures, FX, fixed income and equities, there are a number of competitors in each of those markets. Our current and prospective competitors are numerous and include interdealer brokerage firms, multi-dealer trading companies, technology companies and market data and information vendors, securities and futures exchanges, electronic communications networks, crossing systems, software companies, consortia, business-to-business marketplace infrastructure companies and niche market energy and other commodity Internet-based trading systems. BrokerTec Global LLC, a global electronic bond trading platform owned by ICAP, PLC, an interdealer broker in the financial markets, is a significant competitor for us in electronic trading of government securities. In foreign exchange, we compete with EBS and Reuters, as well as a number of smaller electronic trading platforms. In January 2006, ICAP confirmed that it was in preliminary discussions regarding the possible acquisition of EBS. In addition, Knight Capital Group, Inc., a trade execution specialist, announced in January 2006, that it has agreed to acquire Hotspot FX, Inc., a firm that provides institutions and dealers with spot foreign exchange trade execution through a fully electronic platform. The futures market also has a number of different order-routing and Independent Software Vendor (‘‘ISV’’) solutions for electronic trading, including Trading Technologies International, Inc. and other providers. GFI Group, Inc. is currently active in credit derivatives, a market in which we compete with them. We believe that we may also face future competition from large computer software companies, media and technology companies and some securities brokerage firms that are currently our clients as well as from any future strategic alliances, joint ventures, or other partnerships created by one of more of our competitors.

The electronic marketplace solutions we provide to our clients enable them to expand the range of services they provide to their ultimate customers to trade across multiple marketplaces. We believe our electronic marketplaces compete primarily on the basis of speed, functionality, efficiency, price, system stability and ability to provide market participants with access to liquidity. We also believe that the time and expense required to develop technology and create electronic marketplaces will serve as significant barriers to entry for our competitors.

PROTECTION OF OUR INTELLECTUAL PROPERTY

We have adopted a comprehensive intellectual property program to protect our proprietary technology. We currently have licenses covering eight of Cantor's patents in the U.S. Four patents relate to a system and method for auction-based trading of specialized items such as fixed income instruments. Three patents relate to a fixed income portfolio index processor. One patent relates to a system for shared remote access of multiple application programs by one or more computers. Foreign counterpart applications for some of these U.S. patents have been filed. The licenses are exclusive, except in the event that we do not seek to or are unable to provide to Cantor any requested services covered by the patents and Cantor elects not to require us to do so.

We also have an agreement to license several pending U.S. patent applications relating to various other aspects of our electronic trading systems, including both functional and design aspects. We have filed a number of patent applications to further protect our proprietary technology and innovations, and have received patents that have issued from some of those applications.

In April 2001, we purchased the Wagner Patent, which addresses automated futures trading and provides for bids and offers to be placed and matched electronically. In August 2002, we and Electronic Trading Systems Corporation (‘‘ETS’’), the former owner of the Wagner Patent, entered into a Settlement Agreement with CME and CBOT to resolve litigation with CME and CBOT related to the Wagner Patent. Under the terms of the Settlement Agreement, CME and CBOT will each pay $15.0 million to eSpeed for a license, for a total of $30.0 million. Each $15.0 million payment includes $5.0 million, which was received in 2002, and $2.0 million per year until 2007. Of the $30.0 million to be received by eSpeed, $5.75 million may be paid to ETS. On March 29, 2002, we entered into a long-term licensing agreement with ICE, granting use of our Wagner Patent to ICE. Under the terms of the agreement, ICE will pay an annual royalty of $2.0 million per year, of which 12% is paid to ETS. ICE will also pay to us $0.10 for each contract that participants submit to the electronic futures exchange for trading, or $0.20 for each contract contained in matched trades on the electronic futures exchange. The ICE agreement will remain in effect until February 7, 2007, or for the duration of the life of the patent, unless certain conditions are not met. In December 2002, we entered into an agreement with CBOT to distribute futures products over our eSpeed system. In December 2003, we entered into a Settlement Agreement with NYMEX to resolve litigation with NYMEX related to the Wagner Patent. Under the terms of the Agreement, in exchange for a license, NYMEX agreed to pay us $8.0 million in annual installments of $2.0 million, beginning in December 2003 and concluding in 2006. Of the $8.0 million to be received by eSpeed under the NYMEX Settlement Agreement, $1.2 million may be paid to ETS. The patent involves automated futures trading systems in which transactions are completed by computerized matching of bids and offers of futures contracts on an electronic platform.

In July 2004, we and the NYBOT renegotiated an agreement (the ‘‘NYBOT Agreement’’) that originated between Cantor and the New York Cotton Exchange in 1997. As part of the NYBOT Agreement, which expires in 2017, all previous agreements between NYBOT/New York Clearing Corporation companies and Cantor/eSpeed companies have been terminated. As a result of the NYBOT Agreement, we are the sole owner of the Cantor Financial Futures Exchange and the Commodity Futures Clearing Corporation of New York. Additionally, we have agreed with NYBOT that NYBOT will provide processing services for futures contracts or options on futures contracts listed on the Cantor Financial Futures Exchange or other exchange designated by us. Under the terms of the NYBOT Agreement, NYBOT will pay $5.5 million to us; $2.5 million was paid in July 2004, with three annual installments of $1.0 million year (or $3.0 million) payable until 2007. In December 2004, the NYBOT Agreement was amended. As such, we received $3.0 million from NYBOT, thereby satisfying all future installment payments.

In July 2001, we purchased a patent, the Lawrence Patent, which relates to a computer-implemented municipal bond trading system having a capability to conduct a private electronic auction of bids wanted between a central broker's broker and multiple prospective remote bidders. The Lawrence Patent enables traders to respond more quickly and profitably, enabling the broker more easily to consummate a satisfactory sale for a selling trader.

In May 2003, Cantor was granted U.S. Patent No. 6,560,580 for an Automated Auction Control Processor. The 580 Patent covers a system and methods for auction-based trading of specialized items such as fixed income instruments, which promotes fast and reliable trade execution, market liquidity and transparency, as well as fairness and neutrality in trading procedures. The patent, which was issued on May 6, 2003, expires in 2016. We are the exclusive licensee of the patent. This patent is the subject of litigation. See ‘‘Item 3. Legal Proceedings.’’

We cannot at this time determine the significance of any of the foregoing patents, or future patents, if issued, to our business. We can give no assurance that any of the foregoing patents will be found by a court to be valid and enforceable, or that any of these patents would not be infringed by a third party competing or seeking to compete with our business. Our business strategy may include licensing such patents for royalties, joint venturing with other marketplaces or exchanges, or exclusively using the patents in our marketplaces and other product and service offerings.

EMPLOYEES

As of December 31, 2005, we had 380 employees, six of whom are our executive officers. None of these employees are represented by a union. We believe that we have good relations with our employees.

WEBSITE ACCESS TO REPORTS

Our Internet website address is www.espeed.com. Through our Internet website, we make available the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our annual report on Form 10-K; our quarterly reports on Form 10-Q; our current reports on Form 8-K; and amendments to those reports. Our Internet website also contains copies of our Code of Business Conduct and Ethics, Audit Committee Charter and Complaint and Investigation Procedures for Accounting, Internal Accounting Controls, or Auditing Matters. Our Proxy Statements for our Annual Meetings are also available through our Internet website. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Report.


ITEM 1A.	RISK FACTORS

In addition to the other information in this Report, the following risk factors should be considered carefully in evaluating us and our business:

RISKS RELATED TO OUR BUSINESS

We may incur losses in the future.

While we were profitable in 2005, as we continue to develop our systems and infrastructure and expand our brand recognition and client base through increased hiring of sales and other personnel, we may incur losses in the future.

Our revenues and profitability may be adversely affected by changes in the U.S. Treasury markets and a reduction in our market position in the U.S. Treasury markets.

Our business is highly dependent upon the volume of bonds being traded through our eSpeed system. We believe that we have historically been a leader in the U.S. Treasury benchmark market, and our revenues are concentrated in this business. Because our business is highly concentrated in the government bond markets of the world, particularly U.S. Treasuries, our business, revenues and profitability could be adversely impacted by various factors, including U.S. Treasury market position declines and interest rate volatility, as well as competition within the marketplace. During 2004 and the beginning of 2005, our market position in the U.S. Treasury market declined, resulting in a material adverse impact on our revenues and profitability. Although our position in the U.S. Treasury market has improved in recent quarters relative to 2005 lows, market position declines from current levels would adversely affect our business revenues and profitability.

If we do not expand the use of our electronic systems, or if our clients do not use our marketplaces or services, our revenues and profitability could be adversely affected.

The success of our business plan depends, in part, on our ability to maintain and expand the network of trading firms, dealers, banks and other financial institutions that use our interactive electronic marketplaces. This is particularly important in the early years of a new marketplace where we attempt to attract a critical mass of participants or in a mature marketplace where certain revenues are concentrated from key clients. We cannot assure you that we will be able to continue to expand our marketplaces, or that we will be able to retain the current participants in our marketplaces. Although some of our agreements with market participants require certain minimum payments, none of our agreements with market participants require them to use our electronic marketplaces and from time to time, we may experience departures of key clients or reduction in volumes from such clients which

may adversely affect our revenues. Additionally, we currently expect to enter into strategic alliances with other market participants, such as retail brokers, exchanges, market makers, consortia, clearinghouses, major market participants and technology companies, in order to increase client access to and use of our electronic marketplaces. We cannot assure you that we will be able to continue to enter into these strategic alliances on terms that are favorable to us, or at all. In addition, we cannot assure you that our current or future strategic alliances will be successful.

If we experience low trading volume in products or if we are unable to capture demand for new products, our revenues and profitability could suffer.

From time to time, we have experienced significant fluctuations in the aggregate trading volume of products being traded in our marketplaces. We believe that fluctuations in the trading volume of products traded in our marketplaces could occur in the future from time to time and in such event, could have a direct impact on our future operating results. This could cause significant fluctuations in our revenues and profitability when the trading volumes are low. In addition, we may experience difficultly in creating demand for new fully-electronic products or in attracting customers or market makers on a large scale with respect to certain new products. Failure to capture customers for such products may have an adverse impact on our revenues or profitability.

Our revenues and profitability could be limited or otherwise adversely affected by pricing plans relating to commissions and fees on our trading platform.

We negotiate from time to time with certain of our customers (including many of our largest customers) to enter into customized pricing plans. In many of these pricing plans, the aggregate amount of transaction fees payable by a client for certain products is capped on a monthly, quarterly or other basis. While the fee cap is designed to encourage our clients to be more active on our electronic trading platform, the fee cap limits the maximum amount of commissions payable to us by certain of our most active clients, which could limit our revenues and constrain our profitability.

If we are unable to enter into additional marketing and strategic alliances or our current or future strategic alliances are not successful, we may not generate increased trading in our integrated hybrid voice-assisted and our fully electronic marketplaces.

We expect to continue to enter into strategic alliances with other market participants, such as retail brokers, exchanges, market makers, consortia, clearinghouses, major market participants and technology companies, in order to increase client access to and use of our electronic marketplaces. We cannot assure you that we will be able to continue to enter into these strategic alliances on terms that are favorable to us, or at all. In addition, we cannot assure you that our current or future strategic alliances will be successful. The success of our current and future relationships will depend on the amount of increased trading in our integrated hybrid voice-assisted and our fully electronic marketplaces and the liquidity generated therein. These arrangements may not generate the expected number of new clients or increased trading volume we are seeking.

If Cantor or we are unable to protect the intellectual property rights we own or license from Cantor, our ability to operate electronic marketplaces may be materially adversely affected.

Our business is highly dependent on proprietary technology and other intellectual property rights. We license some of our patented technology from Cantor. The license arrangement is exclusive, except in the event that (i) we are unwilling to provide to Cantor any requested services covered by the patents with respect to a marketplace and Cantor elects not to require us to do so, or we are unable to provide such services or (ii) we do not exercise our right of first refusal to provide to Cantor or its affiliates electronic brokerage services with respect to a marketplace, in which case Cantor retains a limited right to use the patents and patent applications solely in connection with the operation of that marketplace. We cannot guarantee that the concepts which are the subject of the patents and patent applications covered by the license from Cantor or that we own are patentable or that issued patents are or will be valid and enforceable or that such concepts will be marketable or profitable for our

business. Where patents are granted in the U.S., we can give no assurance that equivalent patents will be granted in Europe or elsewhere, as a result of differences in local laws affecting patentability and validity. Moreover, we cannot guarantee that Cantor’s issued patents or our issued patents are valid and enforceable, or that third parties competing or intending to compete with us will not infringe any of these patents. Despite precautions we or Cantor has taken or may take to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to monitor unauthorized use of our proprietary technology and intellectual property rights. We cannot assure you that the steps we have taken will prevent misappropriation of our technology or intellectual property rights.

We have had to resort to costly litigation to protect and defend certain of our intellectual property rights; some rulings to date have not been in our favor.

We are currently involved in costly litigation to protect and defend certain of our intellectual property rights and may be subject to such litigation in the future. Some rulings to date have not been in our favor. See ‘‘Item 3. Legal Proceedings.’’ We may have to continue to resort to litigation to protect our intellectual property, determine the validity and scope of the proprietary rights of others or defend ourselves from claims of invalidity or unenforceability. We may incur substantial costs and diversion of resources as a result of litigation, even if we win. In the event we do not win, we may have to pay the attorneys’ fees and costs of the other party. We may also have to expend resources to modify existing products or lose opportunities to generate potential future revenues or create future barriers to entry. The outcome of these cases may result in an adverse financial impact on our business, including a charge to earnings as a result of impairment of our intellectual property or payments, required by any adverse decision or loss of intellectual property rights. Such results may be unpredictable and may from time to time have a material impact on our financial conditions, results of operations or cash flows in a given period.

If we infringe on the intellectual property of others, we could become involved in costly litigation and suffer adverse results.

Intellectual property rights of third parties may have an important bearing on our ability to offer certain of our products and services. We cannot assure you that we are or will be aware of all patents or copyrights containing claims that may pose a risk of infringement by our products and services. We are currently defending a patent infringement claim. See ‘‘Item 3. Legal Proceedings.’’ In addition, patent applications in the U.S. are generally confidential until a patent is issued. As a result, we cannot evaluate the extent to which our products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of our products or services were to infringe patents held by others, we may be required to stop developing or marketing the products or services, to pay damages, to obtain licenses to develop and market the products and services from the holders of the patents or to redesign the products or services in such a way as to avoid infringing on the patent claims, which could limit the manner in which we conduct our operations, adversely affect our market position, lead to increased competition in the marketplaces in which we provide our products and services and otherwise have a material impact on our financial condition, results of operations or cash flows in a given period. Defense and litigation of third-party infringement claims against us, with or without merit, have been and may continue to be costly to us.

If our software licenses from third parties are terminated, our ability to operate our business may be materially adversely affected.

We license database and other software from third parties, much of which is integral to our systems and our business. The licenses are terminable if we breach our obligations under the license agreements. If any of these relationships were terminated or if any of these third parties were to cease doing business, we may be forced to spend significant time and money to replace the licensed software. However, we cannot assure you that the necessary replacements will be available on reasonable terms, if at all.

If the strength of our brand names is diluted, the value of our proprietary rights may decrease.

We own many Internet domain names, including ‘‘www.espeed.com.’’ The regulation of domain names in the U.S. and in foreign countries may change and the strength of our brand names could be diluted. We may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.

We use our eSpeed registered trademark and service mark for the products and services described herein and have registered that trademark and service mark in a number of jurisdictions around the world. We are not presently aware of any third-party objections to our use or registration of our eSpeed registered trademark or service mark in any countries, or of any third-party trademark or service marks that are likely to pose an impediment to our use or registration of our eSpeed registered trademark or service mark in any countries. Nevertheless, there is always a possibility that an objection by a third-party trademark or service mark owner could potentially affect the registration, and/or limit our use, of our eSpeed registered trademark or service mark in one or more countries, thereby requiring us to adopt and use another trademark or service mark for our products and services in such country or countries.

We have been named in a purported class action litigation, the defense of which is likely to be costly, and an adverse decision could result in a material impact on our financial condition, results of operations or cash flows in a given period.

In the first quarter of 2005, we were named in a number of purported class action complaints against us, Cantor and certain affiliated entities, as well as three of our executive officers Howard Lutnick, Lee Amaitis and Joseph Noviello, and one former officer, Jeffrey Chertoff. The class action was purportedly filed on behalf of all persons who purchased the securities of eSpeed from August 12, 2003 to July 1, 2004, alleging that we made ‘‘material false positive statements during the class period’’ and violated certain provisions of the Exchange Act, and certain rules and regulations thereunder. See ‘‘Item 3. Legal Proceedings.’’ Defending ourselves from these purported class action claims is likely to be costly. Although we believe such claims are without merit, outcomes are unpredictable and an adverse decision could have a material impact on our financial condition, results of operations and cash flows in a given period.

Due to intense competition, our market position and financial performance have suffered and may continue to suffer.

The electronic trading and Internet-based financial services markets are highly competitive, and many of our competitors are more established and have greater financial resources than us. Many of our competitors also have greater market presence, financial, engineering and marketing capabilities and technological and personnel resources than we do. As a result of this intense competition, our market position and financial performance have suffered in the past and may continue to suffer as a result of competitive pressures. We expect that competition will intensify in the future. In particular, our market position and financial performance may continue to suffer if our competitors:


•	develop and expand their network infrastructures and service offerings more efficiently or more quickly;


•	adapt more swiftly to new or emerging technologies and changes in client requirements;


•	take advantage of acquisitions and other opportunities more effectively;


•	devote greater resources to the marketing and sale of their products and services;


•	aggressively reduce their pricing to enter into or expand their market share to build client relationships in market segments in which we have significant market share today; and


•	leverage relationships with clients and strategic partners more effectively or exploit more recognized brand names to market and sell their services.

Our current and prospective competitors are numerous and include interdealer brokerage firms, multi-dealer trading companies, technology companies and market data and information vendors,

securities and futures exchanges, electronic communications networks, crossing systems, software companies, consortia, business-to-business marketplace infrastructure companies and niche market energy and other commodity business-to-business Internet-based trading systems. BrokerTec Global LLC, a global electronic bond trading platform, owned by ICAP, an interdealer broker in the financial markets, is a significant competitor for us in electronic trading of government securities. In foreign exchange, we compete with EBS and Reuters, as well as a number of smaller electronic trading platforms. The futures market has a number of different order-routing and ISV solutions for electronic trading, including Trading Technologies and other providers. GFI Group, Inc. is currently active in credit derivatives, a market in which we compete with them. We believe that we may also face future competition from large computer software companies, media and technology companies and some securities brokerage firms that are currently our clients as well as from any future strategic alliances, joint ventures, or other partnerships created by one of more of our competitors.

The number of businesses providing Internet-based financial and non-financial services is rapidly growing, and other companies, in addition to those named above, have entered into or are forming joint ventures or consortia to provide services similar to those provided by us. Others may acquire the capabilities necessary to compete with us through acquisitions.

If we experience computer systems failures or capacity constraints, our ability to conduct our operations could be harmed.

We internally support and maintain many of our computer systems and networks. Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner would have a material adverse effect on our ability to conduct our operations. Our data centers could be subject to failure due to environmental factors, power outage and other factors. Accordingly, we may be subject to system failures and outages which might impact our revenues and relationship with customers. In addition, we are subject to risk in the event that systems of our partners, customers, clients or vendors, including Cantor and BGC, are subject to failures and outages.

We also rely and expect to rely on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, clearance organizations and software and hardware vendors. Our systems, or those of our third-party providers, may fail or operate slowly, causing one or more of the following:


•	unanticipated disruptions in service to our clients;


•	slower response times;


•	delays in our clients’ trade execution;


•	failed settlement of trades;


•	incomplete or inaccurate accounting, recording or processing of trades;


•	financial losses;


•	litigation or other client claims; and


•	regulatory sanctions.

We experienced systems and telecommunications failures in connection with the September 11 Events. We cannot assure you that we will not experience additional systems failures in the future from power or telecommunications failure, acts of God or war, terrorist attacks, human error, natural disasters, fire, power loss, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism and similar events. Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name.

The financial markets in which we operate are generally affected by seasonality.

Traditionally, the financial markets around the world experience lower volume during the summer and at the end of the year due to a general slowdown in the business environment and, therefore, our

transaction volume levels may decrease during those periods. The timing of the holidays also affects transaction volume. These factors could have a material adverse impact on our financial performance in a given period.

We operate in a rapidly evolving business environment. If we are unable to adapt our business effectively to keep pace with these changes, our ability to succeed will be adversely affected.

The pace of change in our market is extremely rapid. Operating in such a rapidly changing business environment involves a high degree of risk. Our ability to succeed will depend on our ability to adapt effectively to these changing market conditions.

If we are unable to keep up with rapid technological changes, we may not be able to compete effectively.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and features of our proprietary software, network distribution systems and technologies. Our business environment is characterized by rapid technological changes, changes in use and client requirements and preferences, frequent product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing proprietary technology and systems obsolete. Our success will depend, in part, on our ability to:


•	develop, license and defend intellectual property useful in our business;


•	enhance our existing services;


•	develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective clients; and


•	respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements. The development of proprietary electronic trading technology entails significant technical, financial and business risks. Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify, adapt and defend our technology. We cannot assure you that we will successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standard, or that we will be able to successfully defend any challenges to any technology we develop.

Our networks and those of our third-party service providers may be vulnerable to security risks, which could make our clients hesitant to use our electronic marketplaces.

We expect the secure transmission of confidential information over public networks to be a critical element of our operations. Our networks and those of our third-party service vendors, including Cantor and BGC and associated clearing corporations, and our clients may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully use our information or cause interruptions or malfunctions in our operations, which could make our clients hesitant to use our electronic marketplaces. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.

The September 11 Events have had and may continue to have an adverse effect on our business.

Our losses

Our previous headquarters were in the World Trade Center. As a result of the September 11 Events, our offices in the World Trade Center were destroyed, and we lost approximately 180 of our

employees, including many members of our senior management. The destruction of our assets, the loss of all those employees, including product development personnel, and the need to relocate the surviving employees have negatively impacted our business.

Cantor’s losses

Cantor and TradeSpark lost an aggregate of 478 employees and critical equipment and systems as a result of the September 11 Events. Cantor also lost its headquarters. Such losses have negatively impacted our revenues and may continue to adversely impact our revenues in the future since, among other things, Cantor is not currently trading many of the financial products its voice brokers historically traded using our eSpeed system. In addition, the loss of Cantor’s assets and brokers will negatively affect our strategy to convert certain of the products that those brokers were trading in voice-assisted transactions to products that are traded fully electronically over our eSpeed system, or to provide integrated hybrid voice-assisted trading services to such voice-brokers.

If we were to lose the services of members of management and employees who possess specialized market knowledge and technology skills, we may not be able to manage our operations effectively or develop new electronic marketplaces.

Our future success depends, in significant part, on the continued service of Howard Lutnick, our Chairman and Chief Executive Officer, Lee Amaitis, our Vice Chairman, Kevin Foley, our President, Paul Saltzman, our Chief Operating Officer, and our other executive officers, managers and sales and technical personnel who possess extensive knowledge and technology skills in our markets. We cannot assure you that we would be able to find an appropriate replacement for Mr. Lutnick or other executive officers if the need should arise. Any loss or interruption of Mr. Lutnick’s services could result in our inability to manage our operations effectively and/or develop new electronic marketplaces. Although we have entered into employment agreements with Messrs. Foley and Saltzman, we have not entered into employment agreements with any of our other executive officers or other personnel, including Mr. Lutnick or Mr. Amaitis. Although we have obtained $15 million in ‘‘key person’’ life insurance on the life of Mr. Lutnick, we do not have ‘‘key person’’ life insurance policies on any of our other executive officers or personnel. Mr. Foley and Mr. Saltzman, while solely employees of eSpeed, are also partners of Cantor. All of the other members of our senior management team are also officers, partners or key employees of Cantor or BGC and most have substantial investments in Cantor through partnership unit ownership. As a result, they dedicate only a portion of their professional efforts to our business and operations. We cannot assure you that the time these persons devote to our business and operations in the future will be adequate and that we will not experience an adverse effect on our operations due to the demands placed on our management team by their other professional obligations. We intend to strive to provide high-quality services that will allow us to establish and maintain long-term relationships with our clients. Our ability to do so will depend, in large part, upon the individual employees who represent us in our dealings with clients. The market for qualified programmers, technicians and sales persons is extremely competitive and has grown more so in recent periods as electronic commerce has experienced growth. We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel.

If the value of the dollar against the other currencies in which we pay expenses continues to decline, our profitability could suffer.

Because our business is global, dramatic changes in currency rates can impact our results. Significant downward movements in the U.S. Dollar against other currencies in which we pay expenses may have an adverse impact on our financial results if we do not have an equivalent amount of income denominated in the same currency. For example, the British Pound has appreciated significantly since the third quarter of 2003.

If adverse economic and political conditions occur, substantial declines in the U.S. and global financial services markets may result and our results of operations and profitability could suffer.

The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may

cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume and turnover. These events could have a material adverse effect on our results and profitability. These factors include:


•	economic and political conditions in the U.S. and elsewhere in the world;


•	terrorist attacks or war;


•	concerns over inflation and wavering institutional/consumer confidence levels;


•	the availability of cash for investment by mutual funds and other wholesale and retail investors;


•	fluctuating interest and exchange rates;


•	legislative and regulatory changes; and


•	currency values.

Because we expect to continue to expand our operations internationally, we may face special economic and regulatory challenges that we may not be able to meet.

We operate integrated hybrid voice-assisted and fully electronic marketplaces throughout Europe and Asia and we plan to further expand our operations throughout these regions and other regions in the future. There are certain risks inherent in doing business in international markets, particularly in the regulated brokerage industry. These risks include:


•	less developed automation in exchanges, depositories and national clearing systems;


•	unexpected changes in regulatory requirements, tariffs and other trade barriers;


•	difficulties in staffing and managing foreign operations;


•	fluctuations in exchange rates;


•	reduced protection for intellectual property rights;


•	seasonal reductions in business activity during the summer months; and


•	potentially adverse tax consequences.

We are required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business. These may include laws, rules and regulations relating to any aspect of the securities business, including sales methods, capital structure, record-keeping, broker-dealer and employee registration requirements and the conduct of directors, officers and employees. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction.

The growth of the Internet as a means of conducting international business has also raised many legal issues regarding, among other things, the circumstances in which countries or other jurisdictions have the right to regulate Internet services that may be available to their citizens from service providers located elsewhere. In many cases, there are no laws, regulations, judicial decisions or governmental interpretations that clearly resolve these issues. This uncertainty may adversely affect our ability to use the Internet to expand our international operations, and creates the risk that we could be subject to disciplinary sanctions or other penalties for failure to comply with applicable laws or regulations.

As we enter new financial markets, we may not be able to successfully adapt our technology and marketing strategy for use in those markets.

We are leveraging our eSpeed system to enter new financial markets. We cannot assure you that we will be able to successfully adapt our proprietary software, electronic distribution networks and technology for use in other markets. Even if we do adapt our software, networks and technology, we cannot assure you that we will be able to attract clients and compete successfully in any such new markets. We cannot assure you that our marketing efforts or our pursuit of any of these opportunities

will be successful. If these efforts are not successful, we may realize less than expected earnings, which in turn could result in a decrease in the market value of our common stock. Furthermore, these efforts may divert management attention or inefficiently utilize our resources. We intend to create electronic marketplaces for many financial markets and extend into others, but there is no guarantee that we will be able to do so.

If we or our customers or affiliates acquire other companies, we may not be able to integrate their operations effectively.

Our business strategy contemplates expansion through the acquisition of exchanges and other companies providing services or having technologies and operations that are complementary to ours. In addition, BGC has experienced significant growth through acquisitions of brokers both in the U.S. and abroad in recent periods. Acquisitions entail numerous risks, including:


•	difficulties in the assimilation of acquired operations and products;


•	diversion of management’s attention from other business concerns;


•	assumption of unknown material liabilities of acquired companies;


•	amortization of acquired intangible assets, which would reduce future reported earnings; and


•	potential loss of clients or key employees of acquired companies.

We cannot assure you that we or our customers or affiliates will be able to integrate successfully any operations, personnel, services or products that might be acquired in the future, and the failure to do so could adversely affect our revenues and profitability.

Because our business is subject to extensive government and other regulation, we may face restrictions with respect to the way we conduct our operations and our customers and affiliates may be subject to limitations on their operations as a result of government regulation.

The Securities and Exchange Commission, NASD, Commodity Futures Trading Commission and other agencies extensively regulate the U.S. financial industry. Our international operations may become subject to similar regulations in specific jurisdictions. Certain of our U.S. subsidiaries are required to comply strictly with the rules and regulations of these agencies. As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets. Most aspects of our U.S. broker-dealer subsidiaries are highly regulated, including:


•	the way we deal with our clients;


•	our capital requirements;


•	our financial and Securities and Exchange Commission reporting practices;


•	required record-keeping and record retention procedures;


•	the licensing of our employees; and


•	the conduct of our directors, officers, employees and affiliates.

If we or our affiliates, including Cantor or BGC, fail to comply with any of these laws, rules or regulations, we or our affiliates may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of our registration as a broker-dealer. Changes in laws or regulations or in governmental policies could have a material adverse effect on the conduct of our business. These agencies have broad powers to investigate and enforce compliance and punish non-compliance with their rules and regulations. We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with, and will not be subject to, claims or actions by these agencies.

The products and services we offer through our integrated hybrid voice-assisted and fully electronic marketplaces are likely to be regulated by federal, state and foreign governments. Our ability to

provide such services will be affected by these regulations. In addition, as we expand our business to other financial markets, it is likely that we will be subject to additional federal, state and foreign regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs or cause the development of affected markets to become impractical.

Further, the Securities and Exchange Commission, NASD and various other regulatory agencies have stringent rules and regulations with respect to the maintenance of specific levels of net capital by regulated companies such as our subsidiaries, affiliates and customers. Net capital is the net worth of a broker or dealer, less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the Securities and Exchange Commission or NASD, and suspension or expulsion by these regulators could ultimately lead to the firm’s liquidation. If these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations of our customers, affiliates or subsidiaries that require the intensive use of capital would be limited. Also, our ability to withdraw capital from broker-dealer subsidiaries could be restricted, which in turn could limit our ability to pay dividends, repay debt and redeem or purchase shares of our outstanding stock. A large operating loss or charge against net capital could adversely affect the ability to expand or even maintain our present levels of business by us, our customers and affiliates and subsidiaries, which could have a material adverse effect on our business. In addition, we may become subject to net capital requirements in foreign jurisdictions.

Because brokerage services involve substantial risks of liability, we may become subject to risks of litigation.

Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients frequently make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We and our clients may become subject to these claims as the result of failures or malfunctions of systems and services provided by us, and third parties may seek recourse against us. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could result in our obligation to pay substantial damages.

If we cannot deter employee misconduct, we may be harmed.

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. Misconduct by employees could include hiding unauthorized or unsuccessful activities from us. In either case, this type of conduct could result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use of confidential information, which could result in regulatory sanctions and serious reputational harm. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

We cannot predict our future capital needs or our ability to secure additional financing.

We anticipate, based on management’s experience and current industry trends, that our existing cash resources will be sufficient to meet our anticipated working capital, capital expenditure and regulatory net capital requirements for at least the next 12 months. However, we believe that there are a significant number of capital intensive opportunities for us to maximize our growth and strategic position, including, among other things, acquisitions, joint ventures, strategic alliances, reorganizations, recapitalizations or other investments. As a result, we may need to raise additional funds to:


•	increase the regulatory net capital necessary to support our operations;


•	support more rapid growth in our business;


•	develop new or enhanced services and products;


•	respond to competitive pressures;


•	acquire complementary technologies;


•	enter into strategic alliances, acquisitions or joint ventures;


•	acquire companies with marketplace or other specific domain expertise; and


•	respond to unanticipated requirements.

We cannot assure you that we will be able to obtain additional financing when needed on terms that are acceptable, if at all.

The market price of our Class A common stock has fluctuated and may fluctuate in the future, and future sales of our shares could adversely affect the market price of our Class A common stock. We have also repurchased our shares from time to time, and we may cease doing so at anytime.

The market price of our Class A common stock has fluctuated widely since our initial public offering and may continue to fluctuate widely, depending upon many factors, including our actual results of operations and perceived prospects, the prospects of our competition and of the financial marketplaces in general, differences between our actual financial and operating results and those expected by investors and analysts, changes in analysts’ recommendations or projections, seasonality, changes in general valuations for companies in our business segment, changes in general economic or market conditions and broad market fluctuations.

Future sales of our shares also could adversely affect the market price of our Class A common stock. If our existing stockholders sell a large number of shares, or if we issue a large number of shares of our common stock in connection with future acquisitions, strategic alliances or otherwise, the market price of our Class A common stock could decline significantly. Moreover, the perception in the public market that these stockholders might sell shares of Class A common stock could depress the market price of our Class A common stock.

We have registered under the Securities Act 30,000,000 shares of our Class A common stock, which are reserved for issuance upon exercise of options, restricted stock and other incentive compensation granted under our incentive compensation plan. These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates. In addition, we have registered under the Securities Act 425,000 shares of our Class A common stock issuable under our stock purchase plan. We also will be issuing new shares of our Class A common stock in connection with our matching program for our 401(k) plan. The maximum number of new shares we will be issuing in connection with our 401(k) plan is $3,000 worth per employee per year.

Since June 9, 2002, approximately 5.9 million shares of our Class A common stock that have been distributed to partners of Cantor as part of a deferred stock distribution by Cantor have been eligible for resale in the public market subject to Rule 144(k) under the Securities Act. The availability for sale of such number of shares may have an adverse effect on the market price of our Class A common stock.

In addition, we have issued shares of our Class A common stock, warrants and convertible preferred stock and have granted registration rights in connection with certain of our strategic alliances. See ‘‘Item 13. Certain Relationships and Related Transactions.’’

During the year ended December 31, 2005, we repurchased an aggregate of 3.5 million shares of our Class A common stock for a total of $28.9 million. The reacquired shares have been designated treasury shares and will be used for general corporate purposes. As of December 31, 2005, our Board of Directors had authorized the repurchase of up to an additional $58.7 million of our outstanding Class A common stock. We will consider making additional stock repurchases in 2006, and we may cease making repurchases at anytime.

Unless we add an independent director to our Board of Directors or one of our executives resigns from our Board of Directors by the date of our next annual meeting, we will be out of compliance with Nasdaq listing requirements.

One of our independent directors, William J. Moran, resigned from our Board of Directors in November 2005 and a replacement has not been appointed. We are required to replace Mr. Moran

with an independent director or remove one of our executive officers on our Board of Directors by the earlier of our next annual meeting or one year from the effective date of the resignation to be in compliance with the continued listing requirements.

RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR, BGC AND THEIR RESPECTIVE AFFILIATES

Because we continue to depend on Cantor’s and BGC’s businesses, events which adversely affect Cantor’s or BGC’s business, or that of respective affiliates or customers, including a sale, dissolution, liquidation or winding-up recapitalizations of Cantor or BGC, may have a material adverse effect on our revenues and profitability.

Since inception, we have recognized a significant portion of our revenues in connection with our relationship with Cantor and its affiliates, including BGC, which was formed in October 2004. Consequently, our business was adversely affected by the effect of the September 11 Events on Cantor’s business. See ‘‘Risk Factors — The events of September 11, 2001 have had and may continue to have an adverse effect on our business.’’ In addition, any other future events which adversely affect Cantor’s or BGC’s business or operating results, including a sale, dissolution, liquidation, winding-up or recapitalization of all or a material portion of Cantor’s or BGC’s business, could have a material adverse effect on our most significant source of revenues. We also are a general creditor of Cantor and BGC to the extent that there are transaction revenues and software solutions fees owing to us from those entities. Events that adversely affect Cantor’s or BGC’s financial position and its ability to remit to us our share of transaction revenues and software solutions fees could have a material adverse effect on our revenues and profitability.

Conflicts of interest and competition with Cantor and BGC may arise.

Various conflicts of interest between us and Cantor or BGC may arise in the future in a number of areas relating to our past and ongoing relationships, including potential acquisitions of businesses or properties, the election of new directors, payment of dividends, incurrence of indebtedness, tax matters, financial commitments, marketing functions, indemnity arrangements, service arrangements, issuances of our capital stock, sales or distributions by Cantor of its shares of our common stock and the exercise by Cantor of control over our management and affairs. Three of our directors and a majority of our officers also serve as directors, officers and/or partners of Cantor or BGC and/or their respective affiliates. Simultaneous service as an eSpeed director or officer and service as a director or officer of Cantor or BGC, or status as a partner of Cantor could create or appear to create potential conflicts of interest when such directors, officers and/or partners are faced with decisions that could have different implications for us and for Cantor or BGC. Mr. Lutnick, our Chairman and Chief Executive Officer, is the sole stockholder of the managing general partner of Cantor and indirectly of BGC. As a result, Mr. Lutnick controls Cantor and BGC. Cantor owns shares of our Class A common stock and Class B common stock representing approximately 88.8% of the Total Voting Power of our capital stock. Similarly, our Vice Chairman, Lee Amaitis, is the Chairman and Chief Executive Officer of BGC and a partner of Cantor. Although all related party transactions between eSpeed and Cantor, BGC and related entities are approved by our Audit Committee, Mr. Lutnick’s simultaneous service as our Chairman and Chief Executive Officer and his control of Cantor and BGC as well as Mr. Amaitis’ simultaneous service with us and BGC, as well as the Cantor partnerships interests held by both men, could create or appear to create potential conflicts of interest when Mr. Lutnick or Mr. Amaitis is faced with decisions that could have varying implications for us and for Cantor and BGC.

Our relationship with Cantor and BGC results in agreements that are between related parties. As a result, the prices charged to us or by us for services provided under agreements with Cantor or BGC may be higher or lower than prices that may be charged by third parties and the terms of these agreements may be more or less favorable to us than those that we could have negotiated with third parties. However, transactions between us and Cantor, BGC and/or their other affiliates are subject to the approval of a majority of our Audit Committee, which is comprised of independent directors. In addition, Cantor can compete with us under certain circumstances.

Because our Joint Services Agreement with Cantor and its affiliates has a perpetual term and contains non-competition provisions and restrictions on our ability to pursue strategic transactions, this agreement may become burdensome to our business.

Although Cantor and BGC have agreed, subject to certain conditions, not to compete with us in providing electronic brokerage services, Cantor and BGC are currently engaged in securities transaction and other financial instruments execution and processing operations and other activities that are related to the electronic trading services we provide. Our Joint Services Agreement obligates us to perform technology support and other services for Cantor and its affiliates, including BGC, at cost, whether or not related to our electronic brokerage services, sets forth the ongoing revenue sharing arrangements between Cantor, including BGC, and its affiliates and us and subjects us and Cantor and its affiliates to non-competition obligations. The Joint Services Agreement precludes us from entering into lines of business in which Cantor, BGC and their affiliates, now or in the future may engage, or providing, or assisting any third party in providing, voice-assisted brokerage services, clearance, settlement and fulfillment services and related services, except under limited circumstances. Although we believe neither Cantor nor BGC has plans to form, acquire or commence any other operations similar to ours, the Joint Services Agreement permits Cantor and its affiliates, including BGC, to perform, in limited circumstances, electronic brokerage operations. In addition, the Joint Services Agreement imposes limitations on our ability to pursue strategic alliances, joint ventures, partnerships, business combinations, acquisitions and similar transactions. Because the Joint Services Agreement has a perpetual term, even in the event of a breach by one of the parties, and does not provide for modification under its terms, this agreement may become burdensome for us, may distract us from focusing on our internal operations, may deter or discourage a takeover of our company and may limit our ability to expand our operations.

Because agreements between us and Cantor and its affiliates, including BGC, are between related parties, we may receive lower service fees from, and pay higher service fees to, Cantor and BGC than we would with respect to third-party service providers.

In connection with the transactions which occurred when eSpeed was initially spun off from Cantor, we entered into Assignment and Assumption Agreements, an Administrative Services Agreement, a Joint Services Agreement and several other agreements with Cantor relating to the provision of services to each other and third parties, which agreements have been amended and revised from time to time, including agreements with respect to BGC. Because Cantor controls us, the prices charged to us or by us for services provided under the agreements may be higher or lower than prices that may be charged by third parties and the terms of these agreements may be generally less favorable to us than those that we could have negotiated with third parties.

Because we depend on services and access to operating assets provided by third parties to Cantor and BGC, we may not have recourse against those third parties.

Many of the assets and services provided by Cantor and BGC under the terms of the Administrative Services Agreement are leased or provided by third-party vendors. As a result, in the event of a dispute between Cantor or BGC and a third-party vendor, we could lose access to, or the right to use, as applicable, office space, personnel, corporate services and operating assets. In such a case, we would have no recourse with respect to the third-party vendor. Our inability to use these services and operating assets for any reason, including any termination of the Administrative Services Agreement between us and Cantor or the agreements between Cantor and third-party vendors, could result in serious interruptions of our operations.

Our reputation may be affected by actions taken by Cantor or BGC and their affiliates.

Cantor and BGC and their affiliates are currently our most significant clients. Cantor holds direct and indirect ownership and management interests in numerous other entities, including BGC, that engage in a broad range of financial services and securities-related activities. Actions taken by, and events involving, Cantor, BGC or their affiliates which are perceived negatively by the securities markets, or

the public generally, could have a material adverse effect on our business, financial position, cash flows or operations or could affect the price of our Class A common stock. In addition, events that negatively affect the financial condition of Cantor or BGC may negatively affect us. These events could cause Cantor or BGC or their affiliates to lose clients that may trade in our marketplaces, could impair Cantor’s or BGC’s ability to perform its obligations under the Joint Services Agreement, the Administrative Services Agreement and other agreements Cantor or BGC enters into with us and could cause Cantor or BGC or their affiliates to liquidate investments, including by selling or otherwise transferring shares of our common stock.

If we become subject to litigation and other legal proceedings, we may be harmed.

From time to time, we and Cantor or BGC may become involved in litigation and other legal proceedings relating to claims arising from our and their operations in the normal course of business. We cannot assure you that these or other litigation or legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect us. See ‘‘Item 3. Legal Proceedings.’’

RISKS RELATED TO OUR CAPITAL STRUCTURE

Because the voting control of our common stock is concentrated among the holders of our Class B common stock, the market price of our Class A common stock may be adversely affected by disparate voting rights.

As of December 31, 2005, Cantor beneficially owned approximately 88.8% of the combined voting power of all classes of our voting stock. As long as Cantor beneficially owns a majority of the combined voting power of our common stock, it will have the ability, without the consent of the public stockholders, to elect all of the members of our Board of Directors and to control our management and affairs. In addition, it will be able to determine the outcome of matters submitted to a vote of our stockholders for approval and will be able to cause or prevent a change in control of our company. In certain circumstances, the shares of our Class B common stock issued to Cantor may be transferred without conversion to our Class A common stock.

The holders of our Class A common stock and Class B common stock have substantially identical rights, except that holders of our Class A common stock are entitled to one vote per share, while holders of our Class B common stock are entitled to 10 votes per share on all matters to be voted on by stockholders in general. This differential in the voting rights and our ability to issue additional Class B common stock could adversely affect the market price of our Class A common stock.

Delaware law and our charter may make a takeover of our company more difficult and dilute your percentage of ownership of our common stock.

Provisions of Delaware law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our company. In addition, our Amended and Restated Certificate of Incorporation authorizes the issuance of preferred stock, which our Board of Directors can create and issue without prior stockholder approval and with rights senior to those of our common stock, as well as additional shares of our Class B common stock and warrants to purchase our common stock. Any such issuances would make a takeover of our company more difficult and may dilute your percentage ownership of our common stock. Our Amended and Restated Certificate of Incorporation and our Second Amended and Restated By-Laws include provisions, which restrict the ability of our stockholders to take action by written consent and provide for advance notice for stockholder proposals and director nominations. These provisions may have the effect of delaying or preventing changes of control or management of our company, even if such transactions would have significant benefits to our stockholders. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our Class A common stock.

Delaware law may protect decisions of our Board of Directors that have a different effect on holders of our Class A and Class B common stock.

Stockholders may not be able to challenge decisions that have an adverse effect upon holders of our Class A common stock if our Board of Directors acts in a disinterested, informed manner with respect

to these decisions, in good faith and in the belief that it is acting in the best interests of our stockholders. Delaware law generally provides that a board of directors owes an equal duty to all stockholders, regardless of class or series, and does not have separate or additional duties to either group of stockholders, subject to applicable provisions set forth in a company’s charter.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2.	PROPERTIES

We have offices in the U.S., U.K. and Asia. Our principal executive offices are located at 110 East 59th Street, New York, New York. During the first quarter of 2005, we relocated our principal executive office to 110 East 59th Street, New York, New York. Under the Administrative Services Agreement, we are obligated to Cantor for our pro rata portion (based on square footage used) of rental expense during the 15-year term of the lease for such space. For 2006, such rental expense is anticipated to be approximately $1.2 million. Our largest presence outside of the New York metropolitan area is in London, where we currently have the right to use approximately 15,000 square feet of Cantor's existing office space. Our right to use this space expires at the earlier of (1) the time that Cantor's lease expires in 2016 or (2) when Cantor ceases to be an affiliate of ours and Cantor asks us to vacate. We pay Cantor rent expense of approximately $1.7 million annually for use of this space. In the second quarter of 2006, we will be relocating our principal London office to 40 Bank Street, Canary Wharf, London, UK. We occupy approximately 24,000 square feet of space in our concurrent computing center in Rochelle Park, New Jersey. We incur rent expense to Cantor for approximately $0.7 million annually for the use of the Rochelle Park space. We occupy approximately 70 square feet of space in our office in Singapore. We pay Cantor rent expense of approximately $2,000 annually for the use of the Singapore space. Additionally, in December 2005, we relocated our Chicago office to 222 W. Adams Street, Chicago, Illinois. We occupy 5,870 square feet and pay Cantor rent expenses of approximately $135,000 annually for use of this space. Our new Midwest data center occupies approximately 500 sq ft in Chicago at an annual rent of approximately $300,000.


ITEM 3.	LEGAL PROCEEDINGS

By Summons and Complaint, dated October 30, 2002, eSpeed commenced an action in New York State Supreme Court against Municipal Partners LLC (‘‘MPLLC’’) seeking, among other things, damages as a result of MPLLC’s breach of a License and Services Agreement, under which MPLLC failed to pay eSpeed for ancillary information technology services and products provided to eSpeed, and failed to pay eSpeed a percentage of certain revenues derived by MPLLC from electronic trading. On November 19, 2002, MPLLC answered the Complaint. On April 1, 2004, MPLLC filed an amended Answer and Counterclaim. On May 25, 2004, eSpeed filed its reply to MPLLC’s Counterclaim. The parties have suspended active litigation pending settlement discussions.

In June 2003, we filed a patent infringement suit against BrokerTec USA, LLC, BrokerTec Global, LLC, its parent, ICAP, PLC, Garban, LLC, its technology provider, OM Technology, and its parent company, OM AB (collectively, ‘‘BrokerTec’’), in the United States District Court for the District of Delaware. The parties thereafter agreed to substitute the defendant OM AB Technology for defendant OM AB and dismiss claims against BrokerTec Global, LLC. By Order dated September 13, 2004, ICAP was dismissed as a defendant. The suit centers on BrokerTec's and Garban's alleged infringement of U.S. Patent No. 6,560,580 issued on May 6, 2003, which expires in 2016, with respect to which eSpeed is the exclusive licensee. The patent covers a system and methods for auction-based trading of specialized items such as fixed income instruments. A jury trial began on February 7, 2005. In a pre-trial ruling on February 7, 2005, the U.S. District Court in Delaware ruled that the BrokerTec ETN did not infringe our 580 Patent. On February 22, 2005, the jury found that the Garban GTN did infringe our 580 Patent but that there was a deficiency in the application which led to the 580 Patent, finding that we ‘‘failed to provide adequate written description of each and every element recited’’ in certain claims of the 580 Patent. Briefing of post-trial motions and on issues

including unenforceability was completed on June 27, 2005. Both parties requested attorneys' fees from the other party, which may be awarded by the court in exceptional cases. Oral argument was held on October 12, 2005. By Memorandum Order, dated December 5, 2005, the Court denied eSpeed's Motion for Judgment as a Matter of Law, or, in the Alternative, for a New Trial, and also denied BrokerTec's Motion for Judgment as a Matter of Law on Invalidity and Non-Infringement. In Post-Trial Findings of Fact and Conclusions of Law dated February 22, 2006, the Court found that the 580 Patent was unenforceable due to inequitable conduct, but denied the defendants’ request for an award of attorneys’ fees. We are currently awaiting entry of final judgment. We expect to appeal certain rulings to the U.S. Court of Appeals for the Federal Circuit.

In August 2004, Trading Technologies International, Inc. (‘‘TT’’) commenced an action in the United States District Court, Northern District of Illinois, Eastern Division, against us. In its complaint, TT alleged that we infringed and continue to infringe U.S. Patent No. 6,766,304, which issued on July 20, 2004 and U.S. Patent 6,772,132, which issued on August 3, 2004. TT also filed a motion for preliminary injunction seeking to preclude us from making, selling, and offering to sell a product that allegedly infringes such patents. A hearing on TT's motion for preliminary injunction was held on December 2, 2004. On February 9, 2005, the Court denied TT's motion for a preliminary injunction. The Court determined that we had not raised a substantial question concerning the validity or infringement of the patents but that TT had not proved that it would suffer irreparable harm absent an injunction. A trial date for this case has not yet been set. On March 16, 2005, TT filed an amended Complaint against us and added infringement allegations against Ecco and ITSEcco. On April 6, 2005, eSpeed and Ecco answered the Complaint in which we denied the infringement allegations. At the same time, eSpeed and Ecco filed a Counterclaim seeking a declaration that the patents in suit are invalid, we do not make, use or sell any product that infringes any claims of the patents in suit, and the patents in suit are unenforceable because of inequitable conduct before the U.S. Patent and Trademark Office during the prosecution of the patents. On April 18, 2005, ITSEcco filed a motion to dismiss TT's complaint against it for lack of personal jurisdiction. TT agreed to dismiss ITSEcco from the lawsuit but added eSpeed International and EccoWare LLC as defendants in a Second Amended Complaint. On January 5, 2006, we answered TT's Second Amended Complaint in which we denied the infringement allegations. At the same time, we filed an Amended Counterclaim seeking a declaration that the patents in suit are invalid, we do not make, use or sell any product that infringes any claims of the patents in suit, the patents in suit are unenforceable because of inequitable conduct before the U.S. Patent and Trademark Office during the prosecution of the patents, and that the patents are unenforceable due to TT's patent misuse. Discovery is ongoing, and the Court consolidated for certain discovery and Markman hearing purposes our case with other patent infringement cases brought by TT against other defendants. The Court set a discovery cut-off date of March 27, 2006, a Markman hearing for March 27, 28 and 29, 2006, and a trial date to begin on August 14, 2006. If TT ultimately prevails in this litigation, we may be required to pay TT damages and/or certain costs and expenses, and we may be forced to modify or withdraw certain products from the market. Both parties requested attorneys' fees from the other party, which may be awarded by the court in exceptional cases.

In the first quarter of 2005, we were named as a defendant in a number of purported class action complaints on behalf of all persons who purchased the securities of eSpeed from August 12, 2003, to July 1, 2004, alleging that we made ‘‘material false positive statements during the class period’’ and violated certain provisions of the Exchange Act, and certain rules and regulations thereunder. On April 8, 2005, the District Court consolidated the purported class action complaints, and subsequently the Court appointed lead plaintiffs and lead counsel. We received the consolidated and amended complaint (‘‘Amended Complaint’’) on September 27, 2005, which names as defendants the following: eSpeed; three officers, Howard Lutnick, Lee Amaitis, and Joseph Noviello; and one former officer, Jeffrey Chertoff. In the Amended Complaint, plaintiffs allege violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and allege violations of Section 20(a) against the individual defendants. The Amended Complaint alleges that defendants made material misstatements regarding the success of eSpeed’s Price Improvement product. We believe the lawsuit is without merit. We filed and served a Motion to Dismiss the Consolidated Amended Class Action Complaint

(‘‘Motion’’) on November 16, 2005. Plaintiffs’ papers in opposition to the Motion were served on January 6, 2006, and our reply brief in further support of the Motion was filed on February 10, 2006.


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

No matter was submitted to a vote of security holders during the fourth quarter of 2005.

PART II


ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Class A Common Stock

Our Class A common stock is traded on the NASDAQ National Market under the symbol ‘‘ESPD.’’ For each quarter of the prior two years and through March 7, 2006, the high and low sales prices for our Class A common stock, as reported by NASDAQ, were as follows:


	High		Low
2006
First Quarter (through March 7, 2006)	$	9.57	$	7.51
2005
First Quarter	$	12.58	$	8.13
Second Quarter	$	9.25	$	7.65
Third Quarter	$	9.11	$	7.50
Fourth Quarter	$	8.71	$	6.73
2004
First Quarter	$	25.17	$	18.28
Second Quarter	$	22.09	$	16.59
Third Quarter	$	17.73	$	8.55
Fourth Quarter	$	13.10	$	9.12

On March 7, 2006, the last reported closing price of our Class A common stock on the NASDAQ National Market was $7.88. As of March 7, 2006, there were 398 holders of record of our Class A common stock and two holders of record of our Class B common stock.

Dividend Policy

We intend to retain our future earnings, if any, to help finance the growth and development of our business. We have never declared or paid a cash dividend on our common stock and we do not expect to pay any cash dividends on our common stock in the foreseeable future.

In the event we decide to declare dividends on our common stock in the future, such declaration will be subject to the discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our stockholders or by our subsidiaries to us and any such other factors as our Board of Directors may deem relevant.

Issuer Purchases of Equity Securities

On August 5, 2004, our Board of Directors authorized the repurchase of up to $100 million of outstanding Class A common stock to replace the remaining $20.5 million authorized from the prior plan. As of December 31, 2005, approximately $58.7 million from this plan was available for further share repurchases. As of December 31, 2005, we repurchased an aggregate of 6.4 million shares of our Class A common stock for a total purchase price of $60.8 million.For the twelve months ended December 31, 2005, we repurchased an aggregate of 3.5 million shares of our Class A common stock for a total purchase price of $28.9 million, of which approximately 0.3 million shares were repurchased from partners of Cantor at the fair market value on the date of purchase. The reacquired shares have been designated treasury shares and will be used for general corporate purposes. We may consider making additional stock repurchases in 2006.

The following table details our share repurchase activity during the fourth quarter of 2005, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of our publicly announced plans and the approximate dollar value that may yet be purchased under these plans.


	Total Number of Shares Purchased⁽¹⁾		Average Price Paid per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
Oct 1, 2005 through Oct 31, 2005		—		—		—	$58.7 million
Nov 1, 2005 through Nov 30, 2005		—		—		—	$58.7 million
Dec 1, 2005 through Dec 31, 2005		32,766		7.82		—	$58.7 million


⁽¹⁾	These columns reflect the surrender to the Company of 32,766 shares of Common Stock to satisfy tax withholding obligations in connection with the vesting of restricted stock to employees.


ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the last five years ended December 31, 2005. This selected consolidated financial data should be read in conjunction with ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and our Consolidated Financial Statements and the accompanying Notes thereto included elsewhere in this Report.


	Year Ended December 31,
	2005		2004		2003		2002			2001
Total revenues	$	152,943	$	166,509	$	156,615	$	139,238		$	124,969
Expenses:
Compensation and employee benefits		50,633		40,671		36,114		36,499			53,437
Occupancy and equipment:
Amortization of software development costs and other intangibles		20,134		16,235		12,902		9,027			4,310
Other occupancy and equipment		30,678		25,202		23,733		19,173			25,717
Professional and consulting fees		8,788		5,594		3,519		5,658			10,568
Impairment of long-lived assets		2,386		6,268		—		—			—
Communications and client networks		8,157		6,487		6,714		6,335			8,109
Marketing		1,596		1,442		1,454		4,778			4,355
Administrative fees to related parties		13,938		13,228		10,442		9,134			9,798
Amortization of business partner and non-employee securities⁽¹⁾		318		856		2,167		2,059			1,223
Acquisition costs		3,327
Loss on unconsolidated investments		—		—		—		950			3,834
Provision for September 11, 2001 events		—		—		—		(1,200	)		13,323
Other		9,896		8,219		6,334		4,380			8,091
Total operating expenses		149,851		124,202		103,379		96,793			142,765
Income (loss) before income taxes		3,092		42,307		53,236		42,445			(17,796	)
Provision for income taxes		1,048		16,457		17,140		479			531
Net income (loss)	$	2,044	$	25,850	$	36,096	$	41,966		$	(18,327	)
Per share data:
Basic earnings (loss) per share	$	0.04	$	0.47	$	0.65	$	0.76		$	(0.34	)
Diluted earnings (loss) per share	$	0.04	$	0.46	$	0.63	$	0.74		$	(0.34	)
Basic weighted average shares of common stock outstanding		51,349		54,978		55,345		54,991			54,297
Diluted weighted average shares of common stock outstanding		52,066		56,318		57,499		56,784			54,297
Cash and cash equivalents	$	178,435	$	209,688	$	228,500	$	187,999		$	159,899
Total assets		280,934		310,133		297,568		252,711			210,741
Total liabilities		34,830		39,919		25,883		34,256			37,559
Total stockholders' equity		246,104		270,214		271,685		218,455			173,182


(1)	See ‘‘Item 8. Financial Statements and Supplementary Data, Note 14, Business Partner and Non-Employee Transactions.’’


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

Introduction

This discussion summarizes the significant factors affecting our results of operations and financial condition during the years ended December 31, 2005, 2004 and 2003. This discussion is provided to increase the understanding of, and should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes thereto included elsewhere in this Report.

Forward-Looking and Cautionary Statements and Factors that May Affect Future Results

The information in this Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ ‘‘continue,’’ ‘‘strategy,’’ ‘‘believes,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘expects,’’ ‘‘intends’’ and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the costs and expenses of developing, maintaining and protecting our intellectual property, including judgments or settlements paid or received and their related costs, the possibility of future losses and negative cash flow from operations, the effect of market conditions, including trading volume and volatility, our pricing strategy and that of our competitors, our ability to develop new products and services, to enter new markets, to secure and maintain market share, to enter into marketing and strategic alliances, to hire new personnel, to expand the use of our electronic system, to induce clients to use our marketplaces and services and to effectively manage any growth we achieve, the effects of the attacks on the World Trade Center on September 11, 2001, and other factors that are discussed under ‘‘Risk Factors’’ in this Report. We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in our Consolidated Financial Statements and the accompanying Notes thereto appearing elsewhere in this Report.

Overview

For a description and overview of our business, industry, products and strategy, see ‘‘Item 1. Business’’.

The 2005 year was challenging for us, as we experienced a significant decline in our net income as compared to the prior two years. This decline was mainly driven by lower revenues in our core U.S. Treasury business as we experienced the full year impact of the competitive pricing environment which developed in the latter half of 2004. This market event caused a permanent change in our business model that transitioned many of our clients to fixed fee pricing arrangements. Additionally, expenses have increased for the last three years primarily related to new hires in senior management, technology and sales, and our continued investment in new products. We expect our business to grow from 2005 levels and, as discussed in detail below, we are optimistic regarding the future growth of our business.

U.S Treasuries

We consider the trading of U.S. Treasury securities to be both a foundation for our company and an area for growth. During 2005, we experienced growth in our market position. We believe this growth

was the direct result of favorable user reaction to our improved customer service levels, the provision of customized technology solutions that make trading on eSpeed faster and easier, enhanced reliability and stability of our trading system and the impact of incentives to trade at marginally lower commissions that are contained in many of our new pricing arrangements.

Despite our improved market position, our fully electronic revenue per transaction declined during 2005. This decline was due to an increase in trading volumes among those customers with fixed fee pricing contracts. Further, our January 2005 strategic decision to remove Price Improvement from our technology platform also contributed to the 2005 revenue decline.

We remain well positioned for the expected growth in the overall U.S. Treasury market. With computer-assisted trading being the primary factor, we expect U.S. Treasury volumes to double by 2008 as traders utilize computers to augment and implement their trading strategies. We are in a prominent position to capitalize on and facilitate this growth, due to our focus as a technology company, and our core team of dedicated application specialists. As with most of our new clients, computer-assisted traders usually commence trading under variable-price arrangements, so that early growth from these incremental traders will add both volume and variable revenue. However, as these clients develop their trading model and execute more trades, the trend is for these customers to migrate to a customized pricing arrangement that may include a fixed component as well as some variable components.

Hybrid Voice-Assisted Products

BGC’s continued growth and expansion resulted in substantial revenue growth in 2005 across our hybrid voice-assisted and screen-assisted businesses compared with 2004 and continues to present us with significant opportunities globally.

During 2005, BGC acquired Maxcor Financial Group, Inc. (‘‘Maxcor’’), a domestic and international inter-dealer broker for a broad range of financial instruments, and ETC Pollak (‘‘Pollak’’), one of France’s leading inter-dealer brokers. As a result, Maxcor’s and Pollak’s brokerage transactions are subject to the terms and conditions of the Joint Services Agreement. Additionally, we have assumed financial responsibility for certain technology personnel consistent with our relationship with BGC.

Our revenue for voice-assisted transactions grew at slower rate than screen-assisted open outcry transactions as the integration of certain BGC brokering desks resulted in their volumes moving from voice-assisted brokerage into Maxcor’s screen-assisted and open outcry desks. Over time, we expect these volumes to migrate back to voice-assisted transactions, and some will grow to include fully electronic transactions.

Our hybrid model provides us a significant long-term pipeline opportunity, both in terms of fully electronic transaction volume and for increased revenues across our product offerings. The lifecycle of our hybrid model is the maturity of a market place from telephones to computer-assisted trading. Historically, new markets have initially tended to trade by voice alone. As volumes increase and the structure and characteristics of a market standardize over time, the potential to leverage technology and create new hybrid and fully electronic traded products increases, thereby allowing us to generally capture up to 65% revenue share versus 7% for voice-assisted products. There is uncertainty, however, regarding the pace at which individual markets or financial instruments migrate from voice-only to computer-assisted trading.

New Products

Despite disappointing revenue growth in new product related revenues in 2005, we remain committed to growing, developing and fostering our new products such as foreign exchange, futures, equities and repurchase agreements.

With regard to foreign exchange, we offer a trading platform that provides FX spot traders with what we believe is a better way to trade. We continued to invest in our FX platform during 2005 with the introduction of new technology features and experienced salespersons. However, we encountered difficulties sustaining e-commerce support from market makers. This impeded our ability to increase the number of market participants that use our system to trade.

We are not satisfied with our FX results to date, and are making strategic adjustments to our platform that include trading incentives for market makers and the addition of e-commerce feeds, algorithmic trading and growth in desktop traders. Additionally, we added an industry veteran as Global Head of Foreign Exchange Sales.

While experiencing little growth in 2005, our futures business is showing momentum. We have developed a unique platform where certain kinds of trading in cash U.S. Governments and futures may be executed simultaneously. We expect this will allow us to capture more of a trader’s government bond trades by satisfying futures trading needs on the same platform. We are progressing with the development of a cash-futures platform for spot FX, and we are continuing to pursue a strategy to increase distribution of our front-end products, further driving the volumes traded through eSpeed. Additionally, we are adding new features to our equities product, which we believe will result in volume and revenue growth.

In December 2005, BGC announced the launch of the first integrated voice and electronic U.S. Dollar repo trading platform for the primary dealer community. We are providing the trading platform’s technology and support, for which we earn a share of BGC's revenues. This is an example of a traditional voice business with liquid instruments moving from being solely voice-assisted to a hybrid platform.

Operations

We remain a leading innovator in the provision of financial technology. In 2005, we devoted significant energy to the development of new and proprietary methods and technologies that we expect to incorporate in new products and product enhancements in 2006 and beyond. We target our innovation to create new opportunities for our clients to gain trading advantage and increase trading profits and to meet new client needs that are generated by the rapid pace of change in their businesses. We believe that such continued delivery of new technologies that add value to our clients will create for us additional trading volume, new revenue opportunities and barriers against competition. For example, in June 2005, we announced an agreement with Sprint-Nextel to launch the world’s first wireless government bond trading solution. This enables our customers to trade virtually anywhere in real-time through an eSpeed trading application on their Blackberry devices. Customer response has been positive.

During the fourth quarter, we established an additional data center in the Midwest. This investment provides us scale and capacity for the expected growth of electronic trading volumes. Additionally, this creates a hub to service our Midwestern accounts and for our customers who trade with the Chicago exchanges.

Our expenses increased in 2005 as a result of new hires in technology and sales, as well as the first full-year impact of our senior management hires and of our ECCO acquisition. There also were increased expenses associated with the granting and the resulting amortization, of restricted stock as we transitioned from an option-based compensation model to a restricted stock-based model. In addition, we continued to invest in eSpeed's technical platform to support the growth of our fully-electronic businesses and to support the continuing growth of BGC and its associated voice-assisted revenues.

We expect expenses to increase in 2006 as we continue to devote significant resources to the innovation and development of technology. We will incur increased communication and network costs for supporting our new wireless product, establishing voice and screen connectivity related to BGC’s expansion and for our new Midwest data center.

Critical Accounting Policies and Estimates

The following discussion is based upon our Consolidated Financial Statements and the accompanying Notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions which affect the reported amounts of assets

and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate our estimates and assumptions related to stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe that the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our Consolidated Financial Statements and the accompanying Notes thereto.

Related party transactions

We share revenues with Cantor, BGC, Freedom, MPLLC and CO2e. In addition, we provide technology support services to Cantor, BGC, Freedom, MPLLC and CO2e, and Cantor provides administrative services to us.

Since Cantor holds a controlling interest in us, and holds a significant interest in BGC and Freedom, such transactions among and between us and Cantor, BGC and Freedom are on a basis that might not be replicated if such services or revenue sharing arrangements were between, or among, unrelated parties.

We recognize Software Solutions fees from related parties based on the allocated portion of our costs of providing services to our related parties. Such allocation of costs requires us to make estimates and judgments as to the equitable distribution of such costs. In addition, we receive administrative services from Cantor, for which we pay a fee based on Cantor's good faith determination of an equitable allocation of the costs of providing such services. There is no assurance that we could realize such revenues, or obtain services at such costs, if we had to replicate such arrangements with unrelated parties.

Patents

Intangible assets consist of purchased patents, costs incurred in connection with the filing and registration of patents and the costs to defend and enforce our rights under patents. The costs of acquired patents are amortized over a period not to exceed 17 years or the remaining life of the patent, whichever is shorter, using the straight-line method. Capitalized costs related to the filing of patents are generally amortized on a straight-line basis over a period not to exceed three years. The costs to defend and enforce our rights under these patents consist primarily of external litigation costs related to the pursuit of patent infringement lawsuits by us, and consist of fees for outside attorneys, technology experts and litigation support services. These costs are capitalized when such costs serve to enhance the value of the related patent, and are amortized over the remaining life of such patent. Should it be determined that the capitalized costs no longer serve to enhance the value of the related patent, such as a situation in which our patent is held to be invalid, these capitalized costs would be expensed in the period in which such determination was made. We believe the inherent value of the patents exceeds their carrying value. However, if the rights afforded us under the patents are not enforced or the patents do not provide the competitive advantages that we anticipated at the time of purchase, we may have to write-down the patents, and such charges could be substantial. See Note 5, Goodwill and Other Intangible Assets, and Note 9, Commitments and Contingencies, of the accompanying Notes to Consolidated Financial Statements for further discussion.

Goodwill

We review goodwill and indefinite lived intangible assets for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying value of an asset may not be

recoverable in accordance with Statement of Financial Accounting Standards (‘‘SFAS’’) No. 142, Goodwill and Other Intangible Assets. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as a purchase. Goodwill is no longer amortized, but instead is subject to periodic testing for impairment. Goodwill impairment is determined using a two-step approach. The first step of the goodwill test compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that difference.

Determining the fair value of goodwill assets is judgmental in nature and involves the use of significant estimates and assumptions. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

Impairment of long lived assets

We review long-lived assets, such as property, plant, and equipment, and definite lived intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, (‘‘SFAS 144’’). Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. We recognized impairment charges for long lived assets of $2.4 million, $6.3 million and $0 for the twelve months ended December 31, 2005, 2004 and 2003, respectively. See Note 4, Fixed Assets, and Note 5, Intangible Assets, to the accompanying Notes to the Consolidated Financial Statements for more information regarding these impairment charges.

Income taxes

SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Estimates and judgment are required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

RESULTS OF OPERATIONS

Revenues

The following table sets forth certain Consolidated Statements of Income data expressed as a percentage of total revenues for the periods indicated:


	Year Ended December 31, 2005		Percentage of Total Revenue			Year Ended December 31, 2004		Percentage of Total Revenue			Year Ended December 31, 2003		Percentage of Total Revenue
	(in thousands)
Transaction revenues with related parties
Fully electronic transactions	$	74,669		48.8	%	$	108,033		64.9	%	$	110,015		70.2	%
Voice-assisted brokerage transactions		25,192		16.5	%		22,125		13.3	%		19,505		12.5	%
Screen-assisted open outcry transactions		2,863		1.9	%		846		0.5	%		538		0.3	%
Total transaction revenues with related parties		102,724		67.2	%		131,004		78.7	%		130,058		83.0	%
Software Solutions fees from related parties		25,818		16.9	%		18,642		11.2	%		15,124		9.7	%
Software Solutions and licensing fees from unrelated parties		15,534		10.2	%		13,418		8.1	%		9,125		5.8	%
Insurance recovery		1,692		1.1	%		—		0.0	%		—		0.0	%
Gain on sale of investments		1,015		0.6	%		—		0.0	%		—		0.0	%
Interest income		6,160		4.0	%		3,445		2.1	%		2,308		1.5	%
Total revenues	$	152,943		100.0	%	$	166,509		100.0	%	$	156,615		100.0	%

Revenues – Comparison of the years ended December 31, 2005 and 2004

Transaction revenues with related parties

Transaction revenues with related parties for 2005 were $102.7 million compared to $131.0 million in 2004. There were 250 trading days in both years. Transaction revenues per trading day decreased by $113,000, or 21.6%, to $411,000 for 2005 from $524,000 for 2004. Volumes transacted on our trading system increased by $15,947 billion (approximately $15.9 trillion), or 36.9%, to $59,178 billion (approximately $59.2 trillion) for 2005 from $43,231 billion (approximately $43.2 trillion) for 2004. During 2005, fully-electronic and voice-assisted transactions contributed 72.6% and 24.5% of our transaction revenues, respectively, compared to 82.5% and 16.9%, respectively, in 2004.

Fully-electronic revenues for 2005 were $74.7 million, a decrease from $108.0 million in 2004. This decrease was primarily the result of a competitive pricing environment and our customers’ transition to fixed fee pricing from a variable fee commission model. Additionally, in January 2005, we removed the Price Improvement feature from our technology platform, which also contributed to the decrease. This decline was partially offset by an increase in U.S. Treasury volume of 11.5%, or $14.3 trillion, to $138.7 trillion in 2005 from $124.4 trillion in 2004 and by growth in our market position.

Voice-assisted brokerage revenues for 2005 were $25.2 million, an increase of 13.9% from $22.1 million in 2004. This increase was primarily due to BGC's investment and expansion in the voice brokerage business including BGC's acquisition of Maxcor.

Screen-assisted open outcry revenues for 2005 were $2.9 million, a substantial increase from $0.8 million during the comparable period in 2004. The increase was primarily due to BGC's investment and expansion in the voice brokerage business and to BGC's acquisition of Maxcor and ETC Pollak.

Our revenues are highly dependent on transaction volume in the global financial product markets. Accordingly, among other things, equity market volatility, economic and political conditions in the United States and elsewhere in the world, concerns over inflation, institutional and consumer confidence levels, the availability of cash for investment by mutual funds and other wholesale and retail investors, fluctuating interest and exchange rates and legislative and regulatory changes and currency values may have an impact on our volume of transactions. In addition, a significant amount of our revenues is currently received in connection with our relationship with related parties, Cantor and BGC.

Software Solutions fees from related parties

Software Solutions fees from related parties for 2005 were $25.8 million compared to $18.6 million in 2004, an increase of 38.5%. This increase resulted from an increase in demand for our support services due to the growth of both the Cantor and BGC businesses.

Software Solutions and licensing fees from unrelated parties

Software Solutions and licensing fees from unrelated parties for 2005 were $15.5 million compared to $13.4 million in 2004, a 15.8% increase. This increase was primarily due to incremental revenues generated by our acquisition of ECCO in 2004. Additionally, we have continued to earn revenues of approximately $7.9 million associated with the Wagner Patent during 2005. The Wagner Patent expires in the first quarter of 2007. While we have some uncertainty regarding our licensing fee revenues from unrelated parties subsequent to the first quarter of 2007, we have a broad intellectual property patent portfolio that we believe is highly valuable. See Note 5, Goodwill and Other Intangible Assets, of the accompanying Notes to Consolidated Financial Statements for further discussion.

Insurance recovery

In 2005, we recognized a gain of $1.7 million for insurance proceeds received from Cantor related to the September 11 Events. See Note 3, September 11 Events, of the accompanying Notes to Consolidated Financial Statements for a more detailed discussion of the insurance proceeds received.

Gain on sale of investments

During 2005, we sold the secured convertible bond issued by EasyScreen PLC. As a result, we recorded a pre-tax gain of $1.0 million. There were no gains on sale of investments in the comparable period in 2004.

Interest income

For 2005, the blended weighted average interest rate that we earned on overnight reverse repurchase agreements and money market Treasury funds was 3.3% compared to 1.3% in 2004. As a result of the increase in the weighted average interest rate and average balances between years, we generated interest income of $6.2 million for 2005 compared to $3.4 million for 2004, an increase of 78.8%.

Revenues – Comparison of the years ended December 31, 2004 and 2003

Transaction revenues with related parties

Transaction revenues with related parties for 2004 were $131.0 million compared to $130.1 million in 2003. There were 250 trading days in both years. Transaction revenues per trading day increased by $4,000, or 1%, to $524,000 for 2004 from $520,000 for 2003. Volumes transacted on our trading system increased by $690 billion (approximately $0.7 trillion), or 2%, to $43,231 billion (approximately $43.2 trillion) for 2004 from $42,541 billion (approximately $42.5 trillion) for 2003. During 2004, fully-electronic and voice-assisted transactions contributed 82% and 17% of our transaction revenues, respectively, compared to 84.6% and 15%, respectively, in 2003.

Fully-electronic revenues for 2004 were $108.0 million, a slight decrease from $110.0 million in 2003. During 2004, we encountered a competitive pricing environment in U.S. Treasury trading that led to the erosion of our market position and declining revenues. This decline in market position was partially offset by an increase in U.S. Treasury volume of 14%, or $124.4 trillion, in 2004 from $108.8 trillion in 2003.

Voice-assisted brokerage revenues for 2004 were $22.1 million, an increase of 13% from $19.5 million in 2003. The increase was primarily due to BGC’s investment and expansion in the voice brokerage business.

Screen-assisted open outcry revenues for 2004 were $0.8 million, an increase from $0.5 million during the comparable period in 2003. This increase was primarily due to BGC's expansion in the voice brokerage business.

Software Solutions fees from related parties

Software Solutions fees from related parties for 2004 were $18.6 million compared to $15.1 million in 2003, an increase of 23%. This increase resulted from an increase in demand for our support services from Cantor and the growth of BGC.

Software Solutions and licensing fees from unrelated parties

Software Solutions and licensing fees from unrelated parties for 2004 were $13.4 million compared to $9.1 million in 2003, a 47% increase, due primarily to licensing fees earned as part of the Wagner Patent settlement agreement with CBOT, CME, NYMEX and NYBOT and our licensing agreement with ICE.

Interest income

For 2004, the blended weighted average interest rate that we earned on overnight reverse repurchase agreements and money market Treasury funds was 1.3% compared to 1.0% in 2003. As a result of the increase in the weighted average interest rate and average balances between years, we generated interest income of $3.4 million for 2004 compared to $2.3 million for 2003, an increase of 49%.

Expenses

The following table sets forth certain Consolidated Statements of Income data expressed as a percentage of total expenses for the periods indicated:


	Year Ended December 31, 2005		Percentage of Total Expenses			Year Ended December 31, 2004		Percentage of Total Expenses			Year Ended December 31, 2003		Percentage of Total Expenses
	(in thousands)
Compensation and employee benefits	$	50,633		33.8	%	$	40,671		32.7	%	$	36,114		34.9	%
Amortization of software development costs and other intangibles		20,134		13.4	%		16,235		13.1	%		12,902		12.5	%
Other occupancy and equipment		30,678		20.5	%		25,202		20.3	%		23,733		23.0	%
Professional and consulting fees		8,788		5.9	%		5,594		4.5	%		3,519		3.4	%
Impairment of long-lived assets		2,386		1.6	%		6,268		5.0	%		—		0.0	%
Communications and client networks		8,157		5.4	%		6,487		5.2	%		6,714		6.5	%
Marketing		1,596		1.1	%		1,442		1.2	%		1,454		1.4	%
Administrative fees to related parties		13,938		9.3	%		13,228		10.7	%		10,442		10.1	%
Amortization of business partner and non-employee securities		318		0.2	%		856		0.7	%		2,167		2.1	%
Acquisition related costs		3,327		2.2	%		—		0.0	%		—		0.0	%
Other		9,896		6.6	%		8,219		6.6	%		6,334		6.1	%
Total operating expenses	$	149,851		100.0	%	$	124,202		100.0	%	$	103,379		100.0	%

Expenses – Comparison of the years ended December 31, 2005 and 2004

Compensation and employee benefits

Compensation costs for 2005 were $50.6 million compared to $40.7 million for 2004. The $9.9 million increase, or 24.5%, in compensation costs resulted from additional salaries and benefits associated with the hiring of new technology and sales personnel, the full year impact of our senior management hires and of our ECCO acquisition and a transition from a stock option based to a restricted stock based compensation model.

Substantially all of our employees are full-time employees located predominately in the New York metropolitan area and London. Compensation costs include salaries, bonuses, payroll taxes and costs of employer-provided benefits for our employees.

Amortization of software development costs and other intangibles

In accordance with the provisions of Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, (‘‘SOP 98-1’’), we capitalize qualifying computer software costs incurred during the application development stage, and amortize them over their estimated useful life of three years on a straight-line basis.

Amortization of software development costs and other intangibles was $20.1 million for 2005, an increase of $3.9 million, or 24.0%, compared to $16.2 million in 2004. This increase was primarily related to increased investment in software development activities as we continued to devote significant resources to the innovation and development of technology and protection of our

intellectual property portfolio. In addition, the full-year impact from amortization of purchased intangible assets from our ECCO acquisition contributed to the increase.

Other occupancy and equipment costs

Occupancy and equipment costs were $30.7 million for 2005, a $5.5 million increase, or 21.7%, compared to $25.2 million for 2004. This increase was primarily attributable to additional depreciation expense associated with IT equipment purchases and relocation to our permanent corporate headquarters in New York City.

Occupancy expenditures primarily consisted of the rent and facilities costs of our offices in the New York metropolitan area and our offices in London and Tokyo. During the first quarter of 2005, we relocated employees to our new global headquarters at 110 E. 59^th Street in New York's midtown Manhattan. Occupancy and equipment costs may increase in 2006 as we complete work on our global headquarters and relocate our London employees to our new offices located in the Canary Wharf section of London.

Professional and consulting fees

Professional and consulting fees were $8.8 million for 2005 compared to $5.6 million for 2004, an increase of $3.2 million, or 57.1%. This increase was primarily the result of legal expenses incurred in connection with patent litigation defense costs.

Impairment of long-lived assets

Impairment charges were $2.4 million for 2005 compared to $6.3 million for 2004, a decrease of $3.9 million, or 61.9%. In 2004, impairment charges were recorded for capitalized costs related to our 580 patent and removal of the PI software feature. In 2005, we incurred impairment charges for discarded software development and fixed assets no longer in service. For further discussion, see Note 4, Fixed Assets, and Note 5, Goodwill and Other Intangible Assets, of the accompanying Notes to Consolidated Financial Statements.

Communications and client networks

Communications costs were $8.2 million for 2005 compared to $6.5 million in 2004, an increase of $1.7 million, or 26%. This increase was primarily due to duplicate communication costs incurred at our temporary and permanent headquarters, and upgraded communications costs at our permanent headquarters. Also in 2005, we incurred additional costs related to the opening of a Midwest-based data center and our roll-out of a wireless government bond trading solution that allows clients to trade through an eSpeed application on Blackberry devices.

We anticipate expenditures for communications and client networks will increase in the future as we continue to connect additional customers to our network.

Administrative fees to related parties

Under an Administrative Services Agreement, Cantor provides various administrative services to us, including accounting, tax, legal, human resources and facilities management, for which we reimburse Cantor for the direct and indirect costs of providing such services. Administrative fees to related parties are dependent upon both the costs incurred by Cantor and the portion of Cantor’s administrative services that is utilized by us. Administrative fees to related parties are therefore partially correlated to our business growth. Administrative fees to related parties amounted to $13.9 million for 2005, an increase of $0.7 million, or 5.4%, compared to $13.2 million in 2004.

Amortization of business partner and non-employee securities

We enter into strategic alliances with other industry participants in order to expand our business and to enter into new marketplaces. As part of these strategic alliances, we have issued warrants and convertible preferred stock. These securities do not require cash outlays and do not represent a use of

our assets. The expense related to these issuances is based on the value of the securities being issued and the structure of the transaction. Generally, this expense is amortized over the term of the related agreement.

Charges in relation to the amortization of business partner and non-employee securities were $0.3 million for 2005 compared to $0.9 million in 2004. This $0.6 million decrease resulted primarily from a warrant agreement that became fully amortized at the end of the first quarter of 2004, and thus contributed no amortization expense during 2005.

Acquisition related costs

During 2005, we recorded $3.3 million of acquisition related costs in connection with our MTS offer. These costs primarily included legal, accounting, advisory and other related expenses. See Note 10, Acquisitions, of the accompanying Notes to Consolidated Financial Statements for further discussion. There were no acquisition related costs in 2004.

Other expenses

Other expenses consist primarily of insurance costs, travel, promotional and entertainment expenditures. For 2005, other expenses were $9.9 million, an increase of $1.7 million, or 20.4%, compared to other expenses of $8.2 million for the comparable period in 2004. This increase was principally due to employee recruiting costs, moving expenses related to our new office and travel and entertainment-related expenses.

Income taxes

During 2005, we recorded an income tax provision of $1.0 million corresponding to a 33.9% effective tax rate compared to an income tax provision of $16.6 million corresponding to a 38.9% effective tax rate in 2004. Our consolidated effective tax rate can vary from period to period depending on, among other factors, permanent differences and the geographic and business mix of our earnings.

Expenses – Comparison of the years ended December 31, 2004 and 2003

Compensation and employee benefits

At December 31, 2004, we had 400 employees, which was an increase of 65 employees, or 19%, from the 335 employees we had at December 31, 2003. Compensation costs for 2004 were $40.7 million compared to $36.1 million for 2003. The $4.6 million increase, or 13%, in compensation costs resulted mainly from the expansion and strengthening of our senior management team, senior sales personnel and additional headcount from our acquisition of ECCO.

Amortization of software development costs and other intangibles

Amortization of software development costs and other intangibles was $16.2 million for 2004, an increase of $3.3 million, or 26%, compared to $12.9 million in 2003. This was primarily related to increased investment in software development activities and increases in the amortization of intangible assets as we continued to devote significant resources to the innovation and development of technology and protection of our intellectual property portfolio. In addition, amortization of purchased intangible assets from our ECCO acquisition contributed to the increase.

Other occupancy and equipment costs

Occupancy and equipment costs were $25.2 million for 2004, a $1.5 million increase, or 6%, compared to $23.7 million for 2003. The increase was primarily attributable to additional depreciation expense associated with IT equipment purchases caused by the occupancy and build-out of our temporary corporate headquarters in New York City.

Professional and consulting fees

Professional and consulting fees were $5.6 million for 2004 compared to $3.5 million for 2003, an increase of $2.1 million, or 59%. This increase was primarily the result of legal expenses incurred in connection with litigation defense costs and consulting fees associated with Sarbanes-Oxley compliance.

Impairment of long-lived assets

Impairment charges of $6.3 million were recorded during the fourth quarter of 2004 for capitalized costs related to our 580 patent and removal of the PI software feature as discussed in Note 4, Fixed Assets, and Note 5, Goodwill and Other Intangible Assets, of the accompanying Notes to Consolidated Financial Statements. There were no asset impairment charges during 2003.

Communications and client networks

Communications costs were $6.5 million for 2004 compared to $6.7 million for 2003, a decrease of $0.2 million, or 3%. Cost controls resulted in reductions in communications rates and usage charges.

Marketing

We incurred marketing expenses of $1.4 million in 2004 compared to $1.5 million in 2003. This decrease was the result of lower advertising expenses.

Administrative fees to related parties

Under an Administrative Services Agreement, Cantor provides various administrative services to us, including accounting, tax, legal, human resources and facilities management, for which we reimburse Cantor for the direct and indirect costs of providing such services. Administrative fees to related parties are dependent upon both the costs incurred by Cantor and the portion of Cantor’s administrative services that are utilized by us. Administrative fees to related parties are therefore partially correlated to our business growth. Administrative fees to related parties amounted to $13.2 million for 2004, an increase of $2.8 million, or 27%, compared to $10.4 million in 2003.

Amortization of business partner and non-employee securities

Charges in relation to the amortization of business partner and non-employee securities were $0.9 million for 2004 compared to $2.2 million in 2003. This $1.3 million, or 61%, decrease resulted primarily from the fact that the value of a warrant agreement became fully amortized at the end of the first quarter of 2004, and thus contributed no amortization to the final three quarters of 2004. The amendment of another warrant agreement that had the effect of extending the term over which the related warrant value is amortized further contributed to this decrease.

Other expenses

Other expenses consist primarily of insurance costs, hiring and recruiting costs, travel, promotional and entertainment expenditures. For 2004, other expenses were $8.2 million, an increase of $1.9 million, or 30%, compared to other expenses of $6.3 million for 2003. This increase was principally due to the employee hiring and recruiting costs and the impact of unfavorable currency effects from the weakening of the dollar against the euro.

Income taxes

During 2004, we recorded an income tax provision of $16.5 million corresponding to a 38.9% effective tax rate compared to an income tax provision of $17.1 million corresponding to a 32.2% effective tax rate in 2003. Our consolidated effective tax rate can vary from period to period depending on, among other factors, permanent differences and the geographic and business mix of our earnings.

SEASONALITY

The financial markets in which we operate are generally affected by seasonality. Traditionally, the financial markets around the world experience lower volume during the summer and at the end of the year due to a general slowdown in the business environment and, therefore, transaction volume levels may decrease during those periods. The timing of the holidays generally contributes to a slowdown in transaction volume.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our operating cash flow and strong balance sheet. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating, investing and financing needs. At December 31, 2005, we had cash and cash equivalents of $178.4 million, a decrease of $31.3 million, or 14.9%, compared to $209.7 million at December 31, 2004.

Operating Activities

During 2005, our operating activities provided cash of $27.7 million compared to $64.1 million in 2004. The decrease of $36.4 million, or 56.8%, was attributable to substantially lower 2005 net income of $2.0 million (adjusted for non-cash items of $35.8 million primarily consisting of depreciation and amortization of $31.1 million, asset impairment charges of $2.4 million and amortization of employee stock based compensation of $1.9 million, partially offset by a gain on sale of investment of $1.0 million) and a $6.4 million decrease in accounts payable. Additionally, in 2004 we received one-time payments of $3.0 million from the NYBOT and $3.1 million of the WTC Business Recovery from Disproportionate Loss Program grant from Cantor. Both payments were treated as deferred income with no similar payments received in 2005.

Our operating cash flows consist of transaction revenues with related parties and Software Solutions fees from related and unrelated parties, various fees paid to or costs reimbursed to Cantor, other costs paid directly by us and interest income. In its capacity as a fulfillment service provider, Cantor processes and settles transactions and, as such, collects and pays the funds necessary to clear transactions with the counterparty. In doing so, Cantor receives our portion of the transaction fee and, in accordance with the Joint Services Agreement, remits the amount owed to us. In addition, we have entered into similar services agreements with BGC, Freedom, MPLLC and CO2e. Under the Administrative Services Agreement, the JSA and the services agreements with BGC, Freedom, MPLLC and CO2e, any net receivable or payable is settled monthly.

Investing Activities

During 2005, we used cash in investing activities of $30.2 million compared to $54.4 million in 2004. This decrease was primarily due to our acquisition of ECCO for $14.0 million in the prior year, the $5.8 million received for the sale of the Easyscreen bond and lower capitalized legal costs related to patent defense in 2005 as compared with 2004.

Financing Activities

During 2005, we used cash in financing activities of $28.7 million compared to cash used for financing activities of $28.6 million in 2004. During 2005, we repurchased approximately 3.5 million shares of our Class A common stock for a total purchase price of $28.9 million. Our Board of Directors has authorized the repurchase of up to an additional $100 million of our outstanding Class A common stock, of which $58.7 million remained available for repurchase at December 31, 2005. At the price levels at which we have been repurchasing shares, we believe the eSpeed shares represent an attractive investment, and, therefore, we may continue to repurchase shares opportunistically. In addition, proceeds from exercises of employee stock options and business partner warrants were lower in 2005 mainly because of lower overall market prices of our shares during 2005.

We anticipate, based on management’s experience and current industry trends, that our existing cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. However, we believe that there are a significant number of capital intensive opportunities for us to maximize our growth and strategic position, including, among other things, acquisitions, strategic alliances and joint ventures potentially involving all types and combinations of equity, debt, acquisition, recapitalization and reorganization alternatives. As a result, we may need to raise additional funds to:


•	increase the regulatory net capital necessary to support our operations;


•	support more rapid growth in our business;


•	develop new or enhanced services and products;


•	respond to competitive pressures;


•	acquire complementary technologies; and


•	respond to unanticipated requirements.

We cannot assure you that we will be able to obtain additional financing when needed on terms that are acceptable, if at all. We are continually considering such options, including the possibility of additional repurchases of our Class A common stock, and their effect on our liquidity and capital resources.

AGGREGATE CONTRACTUAL OBLIGATIONS

As of December 31, 2005, our significant contractual obligations amounted to $75.3 million, consisting of the following minimum payments:


Contractual Obligations	2006		2007		2008		2009		2010		2011 and thereafter
Leases⁽¹⁾	$	4,142	$	4,378	$	4,340	$	4,345	$	4,359	$	36,225
Purchase Obligations⁽²⁾		17,499		—		—		—		—		—
Total Contractual Cash Obligations	$	21,641	$	4,378	$	4,340	$	4,345	$	4,359	$	36,225


(1)	Operating lease obligations were to Cantor, principally related to office space and computer equipment.


(2)	Purchase obligations include amounts which are classified as trade payables, accrued payroll and benefits, and accrued taxes on our Consolidated Statement of Financial Condition as of December 31, 2005.

As of December 31, 2005, we did not have any long-term debt.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2005, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 123 (revised 2004), Share-Based Payment (‘‘SFAS 123(R)’’), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (‘‘SFAS 123’’) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees (‘‘APB25’’). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We will adopt SFAS 123(R) in the first quarter of 2006 using the modified prospective method. Under the modified prospective method, we will recognize compensation expense based on the requirements of SFAS 123(R) for all share-based compensation arrangements granted after the effective date and for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

In response to these changes in accounting rules, prior to December 31, 2005, our Board of Directors accelerated the vesting of 6.3 million shares of unvested ‘‘out-of-the-money’’ stock options with a fair value of $17.6 million previously awarded to employees and officers. Under the intrinsic value method, as prescribed in APB 25, there was no compensation expense associated with this action as the exercise prices related to the accelerated options were above the fair market value of our common stock on the day the acceleration was affected. As a result of the acceleration, we will not recognize share based after-tax compensation expense of approximately $15.2 million in 2006, $2.0 million in 2007 and $0.4 million in 2008.

The adoption of SFAS 123(R)'s fair value method will impact our results of operations, although it will have no material impact on our overall financial position. The adoption of SFAS 123(R) will increase our operating expenses. We anticipate these increases will be approximately $300,000, $140,000 and $60,000 for the years ended December 31, 2006, 2007 and 2008, respectively, for options that remain unvested as of December 31, 2005. The full impact of adoption of SFAS 123(R) cannot be reasonably estimated at this time because it will depend on levels and type of share-based compensation arrangements in the future, along with the valuation model used and related assumptions. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income (loss) per share, as discussed in Note 2, Significant Accounting Policies, in the accompanying Notes to Consolidated Financial Statements.

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143, (‘‘FIN 47’’), to clarify the timing of the recording of certain asset retirement obligations required by SFAS No. 143, Accounting for Asset Retirement Obligations. FIN 47 is effective December 31, 2005. The adoption of FIN 47 did not have a material impact on our consolidated results of operations or financial condition.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, (‘‘SFAS 154’’), which replaces Accounting Principles Board Opinions No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will apply SFAS 154 in future periods when it becomes applicable.


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2005, we had invested $141.4 million of our cash in securities purchased under reverse repurchase agreements, $59.2 million of which is fully collateralized by U.S. government securities and $82.2 million of which is fully collateralized by eligible equity securities, both of which are held in a third-party custodial account. These reverse repurchase agreements have an overnight maturity and, as such, are highly liquid. Additionally, at December 31, 2005, we had invested $25.0 million in a money market fund held at overnight durations. This fund solely invests in short-term U.S. government fixed income securities.

We generally do not use derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions. Accordingly, we believe that we are not subject to any material risks arising from changes in interest rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. Our policy is to invest our cash in a manner that provides us with an appropriate level of liquidity.

We are a global business, have operations in North America, Europe and Asia, and are therefore exposed to currency exchange rate fluctuations between the U.S. Dollar and the Canadian Dollar, British Pound Sterling, Euro, Hong Kong Dollar and Japanese Yen. Significant downward movements in the U.S. Dollar against currencies in which we pay expenses may have an adverse impact on our financial results if we do not have an equivalent amount of revenue denominated in the same currency. Management has presently decided not to engage in derivative financial instruments as a means of hedging this risk.

We estimate that a hypothetical 10.0% adverse change in foreign exchange rates would have resulted in a decrease in net income in our international operations of $0.9 million for the year ended December 31, 2005.


ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

eSpeed, Inc.

Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003

Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Consolidated Statements of Financial Condition

Consolidated Statements of Income

Consolidated Statements of Cash Flow

Consolidated Statements of Stockholders’ Equity

Notes to Consolidated Financial Statements

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of eSpeed is responsible for establishing and maintaining adequate internal control over financial reporting. eSpeed's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management's authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and communication flows are effective and to monitor performance, including performance of internal control procedures.

eSpeed's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2005, the Company's internal control over financial reporting was effective.

eSpeed's independent registered public accounting firm has audited and issued their report on management's assessment of eSpeed's internal control over financial reporting, which appears herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
eSpeed, Inc.:

We have audited management's assessment, included within this December 31, 2005 Form 10-K of eSpeed, Inc. and subsidiaries (the "Company") at Item 8 under the heading "Management's Report on Internal Control Over Financial Reporting," that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 2005 and the related consolidated statement of income, cash flows and changes in shareholders' equity for the year ended December 31, 2005 of the Company and our report dated March 15, 2006 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
New York, New York
March 15, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
eSpeed, Inc.:

We have audited the accompanying consolidated statements of financial condition of eSpeed, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of eSpeed, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in ‘‘Internal Control – Integrated Framework’’ issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
New York, New York
March 15, 2006

eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)


	December 31,
	2005			2004
Assets
Cash and cash equivalents	$	37,070		$	19,884
Reverse repurchase agreements with related parties		141,365			189,804
Total cash and cash equivalents		178,435			209,688
Fixed assets, net		58,291			50,605
Investments		7,742			12,709
Goodwill		12,184			11,949
Other intangibles, net		11,356			16,097
Receivable from related parties (Note 13)		4,345			1,630
Other assets		8,581			7,455
Total assets	$	280,934		$	310,133
Liabilities and Stockholders' Equity
Current liabilities:
Payable to related parties (Note 13)	$	7,588		$	7,113
Accounts payable and accrued liabilities		19,649			24,795
Total current liabilities		27,237			31,908
Deferred income		7,593			8,011
Total liabilities		34,830			39,919
Commitments and contingencies (Note 9)		—			—
Stockholders' Equity:
Class A common stock, par value $.01 per share; 200,000,000 shares authorized; 34,387,380 and 34,289,773 shares issued at December 31, 2005 and 2004, respectively		343			343
Class B common stock, par value $.01 per share; 100,000,000 shares authorized; 22,139,270 and 22,139,270 shares issued and outstanding at December 31, 2005 and 2004, respectively, convertible to Class A common stock		221			221
Additional paid-in capital		294,987			294,115
Unearned stock-based compensation		(1,592	)		(3,080	)
Treasury stock, at cost: 6,488,047 and 3,082,815 shares of Class A common stock at December 31, 2005 and 2004, respectively		(62,486	)		(33,972	)
Retained earnings		14,631			12,587
Total stockholders' equity		246,104			270,214
Total liabilities and stockholders' equity	$	280,934		$	310,133

The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.

eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)


	Year Ended December 31,
	2005		2004		2003
Revenues:
Transaction revenues with related parties
Fully electronic transactions	$	74,669	$	108,033	$	110,015
Voice-assisted brokerage transactions		25,192		22,125		19,505
Screen-assisted open outcry transactions		2,863		846		538
Total transaction revenues with related parties (Note 13)		102,724		131,004		130,058
Software Solutions fees from related parties (Note 13)		25,818		18,642		15,124
Software Solutions and licensing fees from unrelated parties		15,534		13,418		9,125
Insurance recovery		1,692		—		—
Gain on sale of investments		1,015		—		—