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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended March 31, 2006

or



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

For the transition period from  to

Commission file number 001-32435



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International
Securities Exchange, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 01-0681729                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|60 Broad Street, New York, New York                            |  | 10004                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(212) 943-2400

(Registrants telephone number, including area code)

N/A

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



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

Indicate by check mark whether the registrant 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. (Check one):



|                         |  |                    |  |                        
|------------------------ |  | ------------------ |  | -----------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer x

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

As of May 5, 2006, there were 38,044,329 shares of the registrants Class A common stock outstanding (voting).



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##### Table of Contents

INTERNATIONAL SECURITIES EXCHANGE, INC.

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended March 31, 2006

Table of
Contents



|                                                                                                                            |  |   
|--------------------------------------------------------------------------------------------------------------------------- |  | --
|Part I. FINANCIAL INFORMATION                                                                                               |  |   
|Item 1.
Financial Statements                                                                                                |  |   
|Consolidated Statements of Income for the Three Months March 31, 2006 and 2005                                              |  | 3 
|Consolidated Statements of Financial Condition as of March 31, 2006 and December 31, 2005                                   |  | 4 
|Consolidated Statements of Changes in Stockholders Equity as of March 31, 2006 and December 31, 2005 and December 31, 2004 |  | 5 
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005                                    |  | 6 
|Notes to Consolidated Financial Statements                                                                                  |  | 7 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 15
|Item 3.
Quantitative and Qualitative Disclosure about Market Risk                                                           |  | 28
|Item 4.
Controls and Procedures                                                                                             |  | 28
|                                                                                                                            | 
|Part II. OTHER INFORMATION                                                                                                  |  |   
|Item 1.
Legal Proceedings                                                                                                   |  | 28
|Item 1A.
Risk Factors                                                                                                       |  | 28
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 30
|Item 5.
Other Information                                                                                                   |  | 30
|Item 6.
Exhibits                                                                                                            |  | 30
|                                                                                                                            | 
|Signatures                                                                                                                  |  | 30



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##### Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL SECURITIES EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)



|                                               |  |                             |        |      |   |       
|---------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                               |  | Three Months EndedMarch 31,
|                                               |  | 2006                        |        | 2005
|                                               |  | (Unaudited)                
|Revenues:                                      |  |                             |        |      |   |       
|Transaction fees                               |  | $                           | 36,867 |      | $ | 26,714
|Other member fees                              |  |                             | 5,622  |      |   | 5,546 
|Market data                                    |  |                             | 5,055  |      |   | 4,625 
|                                               |  |                             |        |      |   |       
|Total revenues                                 |  |                             | 47,544 |      |   | 36,885
|                                               |  |                            
|Cost of revenues:                              |  |                             |        |      |   |       
|Activity remittance fees                       |  |                             | 4,345  |      |   | 2,702 
|License fees                                   |  |                             | 1,625  |      |   | 931   
|                                               |  |                             |        |      |   |       
|Total cost of revenues                         |  |                             | 5,970  |      |   | 3,633 
|                                               |  |                            
|Gross margin                                   |  |                             | 41,574 |      |   | 33,252
|                                               |  |                            
|Expenses:                                      |  |                             |        |      |   |       
|Compensation and benefits                      |  |                             | 11,368 |      |   | 8,227 
|Technology and communication                   |  |                             | 3,518  |      |   | 3,383 
|Occupancy                                      |  |                             | 1,318  |      |   | 1,105 
|Professional fees                              |  |                             | 1,628  |      |   | 1,487 
|Marketing and business development             |  |                             | 622    |      |   | 586   
|Depreciation and amortization                  |  |                             | 1,517  |      |   | 1,498 
|Other                                          |  |                             | 1,033  |      |   | 769   
|                                               |  |                             |        |      |   |       
|Total direct expenses                          |  |                             | 21,004 |      |   | 17,055
|                                               |  |                            
|Reorganization                                 |  |                             | 24     |      |   | 102   
|                                               |  |                             |        |      |   |       
|Total expenses                                 |  |                             | 21,028 |      |   | 17,157
|                                               |  |                            
|Operating income                               |  |                             | 20,546 |      |   | 16,095
|                                               |  |                            
|Interest and investment income                 |  |                             | 1,611  |      |   | 322   
|                                               |  |                             |        |      |   |       
|Income before provision for income taxes       |  |                             | 22,157 |      |   | 16,417
|Provision for income taxes                     |  |                             | 9,739  |      |   | 7,556 
|                                               |  |                             |        |      |   |       
|Net income                                     |  |                             | 12,418 |      |   | 8,861 
|                                               |  |                             |        |      |   |       
|Earnings per share:                            |  |                             |        |      |   |       
|Basic                                          |  | $                           | 0.33   |      | $ | 0.27  
|Diluted                                        |  | $                           | 0.32   |      | $ | 0.25  
|Weighted average number of shares outstanding: |  |                             |        |      |   |       
|Basic                                          |  |                             | 37,102 |      |   | 33,059
|Diluted                                        |  |                             | 39,254 |      |   | 34,946

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



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INTERNATIONAL SECURITIES EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share amounts)



|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                  |  | March 31, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                                                                                                  |  | (Unaudited)    |         |   |                   |  
|ASSETS                                                                                                                                                                                                            |  |                |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                         |  | $              | 179,289 |   |                   | $ | 170,927 |  
|Accounts receivable, net                                                                                                                                                                                          |  |                | 39,364  |   |                   |   | 35,048  |  
|Income tax receivable                                                                                                                                                                                             |  |                | 2,944   |   |                   |   |        |  
|Securities owned                                                                                                                                                                                                  |  |                | 4,934   |   |                   |   | 9,890   |  
|Other current assets                                                                                                                                                                                              |  |                | 2,164   |   |                   |   | 2,745   |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                                              |  |                | 228,695 |   |                   |   | 218,610 |  
|Securities owned                                                                                                                                                                                                  |  |                | 5,507   |   |                   |   | 7,244   |  
|Accounts receivable                                                                                                                                                                                               |  |                | 600     |   |                   |   | 587     |  
|Fixed assets, net                                                                                                                                                                                                 |  |                | 28,557  |   |                   |   | 29,205  |  
|Deferred tax asset, net                                                                                                                                                                                           |  |                | 21,197  |   |                   |   | 22,333  |  
|Other assets                                                                                                                                                                                                      |  |                | 4,503   |   |                   |   | 2,517   |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                      |  |                | 289,059 |   |                   |   | 280,496 |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                              |  |                |         |   |                   |   |         |  
|LIABILITIES                                                                                                                                                                                                       |  |                |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                                              |  |                |         |   |                   |   |         |  
|Accounts payable and accrued expenses                                                                                                                                                                             |  |                | 13,944  |   |                   |   | 15,406  |  
|Compensation and benefits payable                                                                                                                                                                                 |  |                | 3,373   |   |                   |   | 8,371   |  
|Deferred revenue                                                                                                                                                                                                  |  |                | 5,161   |   |                   |   | 4,687   |  
|Income taxes payable                                                                                                                                                                                              |  |                |        |   |                   |   | 372     |  
|Payment for order flow payable                                                                                                                                                                                    |  |                | 10,044  |   |                   |   | 12,233  |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                                         |  |                | 32,522  |   |                   |   | 41,069  |  
|Deferred revenue                                                                                                                                                                                                  |  |                | 50,441  |   |                   |   | 50,238  |  
|Other liabilities                                                                                                                                                                                                 |  |                | 4,034   |   |                   |   | 4,211   |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                                 |  |                | 86,997  |   |                   |   | 95,518  |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Minority interest                                                                                                                                                                                                 |  |                | 2,882   |   |                   |   |        |  
|                                                                                                                                                                                                                  |  |               
|Commitments and contingencies (Note 4)                                                                                                                                                                            |  |                |         |   |                   |   |         |  
|                                                                                                                                                                                                                  |  |               
|STOCKHOLDERS EQUITY                                                                                                                                                                                              |  |                |         |   |                   |   |         |  
|Class A common stock, $0.01 par value, 150,000 authorized as of March 31, 2006 and December 31, 2005 and 37,264 and 37,025
shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively |  |                | 373     |   |                   |   | 370     |  
|Additional paid-in capital                                                                                                                                                                                        |  |                | 140,576 |   |                   |   | 136,918 |  
|Retained earnings                                                                                                                                                                                                 |  |                | 58,267  |   |                   |   | 47,743  |  
|Accumulated other comprehensive loss                                                                                                                                                                              |  |                | (36     | ) |                   |   | (53     | )
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                        |  |                | 199,180 |   |                   |   | 184,978 |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                        |  | $              | 289,059 |   |                   | $ | 280,496 |  
|                                                                                                                                                                                                                  |  |                |         |   |                   |   |         |  

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



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INTERNATIONAL SECURITIES EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands)



|                                                                           |  |        |  |              |     |                            |   |         |                   |  |   |                       |   |  |                                               |     |   |                            |   |     |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------ |  | ------------ | --- | -------------------------- | - | ------- | ----------------- |  | - | --------------------- | - |  | --------------------------------------------- | --- | - | -------------------------- | - | --- | - |  | - | ------- | -
|                                                                           |  | Shares |  | Common Stock |     | Additional Paid In Capital |   |         | Retained Earnings |  |   | Unearned Compensation |   |  | Accumulated Other Comprehensive Income/(Loss) |     |   | Total Shareholders Equity |  
|As of December 31, 2004                                                    |  | 32,139 |  | $            | 321 |                            | $ | 57,011  |                   |  | $ | 24,180                |   |  | $                                             | (14 | ) |                            | $ | (39 | ) |  | $ | 81,459  |  
|                                                                           |  |        |  |              |     |                            |  
|Net income                                                                 |  |       |  |              |    |                            |   |        |                   |  |   | 35,347                |   |  |                                               |    |   |                            |   |    |   |  |   | 35,347  |  
|Dividend                                                                   |  |       |  |              |    |                            |   |        |                   |  |   | (11,784               | ) |  |                                               |    |   |                            |   |    |   |  |   | (11,784 | )
|Net proceeds from initial public offering                                  |  | 4,602  |  |              | 46  |                            |   | 70,693  |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 70,739  |  
|Amortization of stock based plan                                           |  |       |  |              |    |                            |   | 4,811   |                   |  |   |                      |   |  |                                               | 14  |   |                            |   |    |   |  |   | 4,825   |  
|Stock options exercised                                                    |  | 284    |  |              | 3   |                            |   | 392     |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 395     |  
|Tax benefit for stock options exercised                                    |  |       |  |              |    |                            |   | 4,011   |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 4,011   |  
|Change in net unrealized gain/(loss) on available for sale securities, net |  |       |  |              |    |                            |   |        |                   |  |   |                      |   |  |                                               |    |   |                            |   | (14 | ) |  |   | (14     | )
|                                                                           |  |        |  |              |     |                            |   |         |                   |  |   |                       |   |  |                                               |     |   |                            |   |     |   |  |   |         |  
|As of December 31, 2005                                                    |  | 37,025 |  |              | 370 |                            |   | 136,918 |                   |  |   | 47,743                |   |  |                                               |    |   |                            |   | (53 | ) |  |   | 184,978 |  
|                                                                           |  |        |  |              |     |                            |  
|Net income                                                                 |  |       |  |              |    |                            |   |        |                   |  |   | 12,418                |   |  |                                               |    |   |                            |   |    |   |  |   | 12,418  |  
|Dividend                                                                   |  |       |  |              |    |                            |   |        |                   |  |   | (1,894                | ) |  |                                               |    |   |                            |   |    |   |  |   | (1,894  | )
|Amortization of stock based plan                                           |  |       |  |              |    |                            |   | 1,944   |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 1,944   |  
|Stock options exercised and restricted stock vested                        |  | 239    |  |              | 3   |                            |   | 371     |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 374     |  
|Shares repurchased                                                         |  |       |  |              |    |                            |   | (1,971  | )                 |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | (1,971  | )
|Tax benefit for stock options exercised                                    |  |       |  |              |    |                            |   | 3,314   |                   |  |   |                      |   |  |                                               |    |   |                            |   |    |   |  |   | 3,314   |  
|Change in net unrealized gain/(loss) on available for sale securities, net |  |       |  |              |    |                            |   |        |                   |  |   |                      |   |  |                                               |    |   |                            |   | 17  |   |  |   | 17      |  
|                                                                           |  |        |  |              |     |                            |   |         |                   |  |   |                       |   |  |                                               |     |   |                            |   |     |   |  |   |         |  
|As of March 31, 2006 (Unaudited)                                           |  | 37,264 |  | $            | 373 |                            | $ | 140,576 |                   |  | $ | 58,267                |   |  |                                               |    |   |                            | $ | (36 | ) |  | $ | 199,180 |  
|                                                                           |  |        |  |              |     |                            |   |         |                   |  |   |                       |   |  |                                               |     |   |                            |   |     |   |  |   |         |  

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



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INTERNATIONAL SECURITIES EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                        |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                        |  | Three Months Ended March 31, |        
|                                                                                        |  | 2006                         |         |   | 2005 |  
|                                                                                        |  | (Unaudited)                  |        
|Cash flows from operating activities:                                                   |  |                              |         |   |      |   |         |  
|Net income                                                                              |  | $                            | 12,418  |   |      | $ | 8,861   |  
|Adjustments to reconcile net income to cash provided by/(used in) operating activities: |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                                           |  |                              | 1,517   |   |      |   | 1,498   |  
|Minority interest                                                                       |  |                              | 2,882   |   |      |   |        |  
|Stock based compensation                                                                |  |                              | 2,024   |   |      |   | 379     |  
|Deferred taxes                                                                          |  |                              | 1,136   |   |      |   | (1,513  | )
|Unrealized (gain)/loss on securities owned and available for sale securities, net       |  |                              | (296    | ) |      |   | 58      |  
|Excess tax benefits from share-based payment arrangement                                |  |                              | (3,314  | ) |      |   |        |  
|(Increase)/decrease in operating assets:                                                |  |                              |         |   |      |   |         |  
|Accounts receivable, net                                                                |  |                              | (4,329  | ) |      |   | (3,498  | )
|Income tax receivable                                                                   |  |                              | 370     |   |      |   | 8,195   |  
|Securities owned                                                                        |  |                              | 2,033   |   |      |   | 3,895   |  
|Other assets                                                                            |  |                              | 578     |   |      |   | 3,216   |  
|Increase/(decrease) in operating liabilities:                                           |  |                              |         |   |      |   |         |  
|Accounts payable and accrued expenses                                                   |  |                              | (1,462  | ) |      |   | 5,917   |  
|Compensation and benefits payable                                                       |  |                              | (4,998  | ) |      |   | (10,250 | )
|Income tax payable                                                                      |  |                              | (372    | ) |      |   |        |  
|Deferred revenue                                                                        |  |                              | 677     |   |      |   | (768    | )
|Payment for order flow payable                                                          |  |                              | (2,189  | ) |      |   | 8,602   |  
|Other liabilities                                                                       |  |                              | (177    | ) |      |   | (183    | )
|                                                                                        |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities                                               |  |                              | 6,498   |   |      |   | 24,409  |  
|                                                                                        |  |                              |         |   |      |   |         |  
|Cash flows from investing activities:                                                   |  |                              |         |   |      |   |         |  
|Purchase of fixed assets                                                                |  |                              | (852    | ) |      |   | (274    | )
|Purchase of intangible assets                                                           |  |                              | (2,000  | ) |      |   |        |  
|Maturities of available for sale securities                                             |  |                              | 4,973   |   |      |   |        |  
|                                                                                        |  |                              |         |   |      |   |         |  
|Net cash provided by/(used in) investing activities                                     |  |                              | 2,121   |   |      |   | (274    | )
|                                                                                        |  |                              |         |   |      |   |         |  
|Cash flows from financing activities:                                                   |  |                              |         |   |      |   |         |  
|Dividend                                                                                |  |                              | (1,894  | ) |      |   | (11,784 | )
|Net proceeds from initial public offering                                               |  |                              |        |   |      |   | 70,673  |  
|Proceeds from options exercised                                                         |  |                              | 294     |   |      |   |        |  
|Share repurchases                                                                       |  |                              | (1,971  | ) |      |   |        |  
|Excess tax benefits from share-based payment arrangements                               |  |                              | 3,314   |   |      |   |        |  
|                                                                                        |  |                              |         |   |      |   |         |  
|Net cash provided by/(used in) financing activities                                     |  |                              | (257    | ) |      |   | 58,889  |  
|                                                                                        |  |                              |         |   |      |   |         |  
|Increase in cash and cash equivalents                                                   |  |                              | 8,362   |   |      |   | 83,024  |  
|Cash and cash equivalents, beginning of period                                          |  |                              | 170,927 |   |      |   | 44,847  |  
|                                                                                        |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                |  | $                            | 179,289 |   |      | $ | 127,871 |  
|                                                                                        |  |                              |         |   |      |   |         |  

Non-cash activities:

In February 2005, the Company declared and paid a stock dividend of eight shares of Class A common stock per share of Class A common stock outstanding.

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



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INTERNATIONAL SECURITIES EXCHANGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Information as of March 31, 2006 and 2005 is unaudited and for the Twelve Months

Ended
December 31, 2005 is audited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

The International Securities Exchange, Inc. (the Company or ISE), a Delaware corporation, operates a fully electronic exchange for
equity and index options and related services utilizing a market structure which combines the efficiencies of electronic trading with auction market principles. The Company was founded in September 1997 as a limited liability company. In February
2000, the Company received regulatory approval to become an exchange and in May 2000, the Company formally commenced trading on its exchange. The Company reorganized into a corporation in April 2002. The Company is regulated by the U.S. Securities
and Exchange Commission (SEC). On March 14, 2005, the Company completed its initial public offering.

2. BASIS OF PRESENTATION AND
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements have been prepared pursuant to the rules and regulations of the SEC and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles in the United
States of America. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. have been condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the disclosures are adequate to make the information presented not misleading. The nature of the Companys business is such that the results of an interim period are not necessarily indicative of the results for the
full year. These unaudited financial statements should be read in conjunction with the Companys audited financial statements and notes thereto included elsewhere herein.

Principles of Consolidation

The Company has one wholly owned subsidiary, ETC Acquisition Corp. which has remained dormant since 2002, and a majority owned subsidiary, Longitude LLC. The accompanying consolidated financial statements include the accounts of ETC
Acquisition Corp. as well as Longitude LLC. All inter-company transactions have been eliminated in consolidation. Minority interest in the consolidated statements of financial condition represents Goldman Sachs Group, Inc.s original
investment.

Use of Estimates

The preparation of the Companys consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses for the period presented. Actual results could differ from those estimates.

Revenue Recognition

Transaction fees are earned based on contracts executed on the Companys exchange and are recorded as transactions occur on a trade date basis. Transaction fees are recorded net of discounts of $9,541 and $6,511 for the three months
ended March 31, 2006 and 2005, respectively. The Company waives or discounts certain trading fees.

Market data revenues are earned
from the sale of the Companys buy and sell transaction information and quotes through the Options Price Reporting Authority (OPRA). The Company earns a portion of OPRAs revenue based on its pro-rata share of industry trade
(not contract) volume. Revenue is recorded as transactions occur on a trade date basis.

Other member fees are comprised of revenues earned
for connectivity and access to the Companys exchange; revenue from the sale of Class B-2 memberships; fees for use of the Companys communication network, equipment and trading



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software; and regulatory and administrative fees. Connectivity and access fees and communications, equipment and trading
software fees are charged and recognized on a monthly basis based upon a specific fixed fee for each service. Revenue from the sale of Class B memberships is deferred and recognized on a straight-line basis over 14 years. Administrative fees are
charged and recognized as incurred. Regulatory fees are charged on an annual basis and recognized over a twelve-month period.

Deferred Revenue

The Company has sold 47 Class B-2 memberships as of March 31, 2006. The Class B-2 memberships
were sold pursuant to a purchase agreement for $1.5 million each. Certain Class B-2 memberships were paid in full on the purchase date, while others are payable in annual installments; however, the agreement grants immediate membership upon
execution of the agreement. The Company currently recognizes revenue from the sale over 14 years, the estimated useful life, on a straight-line basis. The estimated useful life was determined based upon an analysis of certain factors driving the
securities industry that could have an effect on the Companys operations in providing services to its members. Such factors included significant historical operating, regulatory and technology changes which have affected market participants
and trading venues. Based upon the analysis, the Company estimated a life of 14 years; however, this period may be subject to change in the future.

On a periodic basis, or if certain circumstances come to its attention, the Company reviews the original factors or assumptions used in determining the estimated service period to ascertain the effect, if any, current events may have on
those factors and assumptions. If the current facts warrant a change in the estimated service period, the Company will adjust the remaining revenue to be recognized in accordance with the new estimated service life using the prospective method. The
service period may increase or decrease from the current estimate of 14 years based upon the facts and circumstances.

Cash
Equivalents

The Company considers all highly liquid investments with a maturity of less than 90 days from the statement of
financial condition date to be classified as cash equivalents.



|                                            |  |                |         |                   |   |        
|------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                            |  | March 31, 2006 |         | December 31, 2005
|Company funds                               |  | $              | 178,637 |                   | $ | 165,232
|Reserved for payment for order flow program |  |                | 652     |                   |   | 5,695  
|                                            |  |                |         |                   |   |        
|Total                                       |  | $              | 179,289 |                   | $ | 170,927
|                                            |  |                |         |                   |   |        

Securities Owned

The Company has, through a Rabbi Trust, investments in various mutual funds in connection with the Companys previous long-term deferred compensation
plan. Investments are carried at market value with realized and unrealized gains or losses reported in other revenue on the Consolidated Statements of Income. The Company has since replaced this plan with a stock-based plan (Note 8).

The Company also invests cash in excess of short-term operating needs in U.S. treasury securities with maturities ranging from three to 24 months which
it classifies as available for sale. Unrealized gains and losses are included in accumulated other comprehensive income on the statement of changes in stockholders equity until realized. On a periodic basis, the Company reviews its portfolio
for impairment. If a decline in fair value is deemed to be other than temporary, the security is written down to its fair value through earnings. Securities owned consist of the following:



|              |  |                |        |                   |   |       
|------------- |  | -------------- | ------ | ----------------- | - | ------
|              |  | March 31, 2006 |        | December 31, 2005
|U.S. treasury |  | $              | 4,934  |                   | $ | 9,890 
|Mutual funds  |  |                | 5,507  |                   |   | 7,244 
|              |  |                |        |                   |   |       
|Total         |  | $              | 10,441 |                   | $ | 17,134
|              |  |                |        |                   |   |       

Income Taxes

The Company files a consolidated tax return for federal, state and local income tax purposes. In addition, the Company records deferred tax assets and
liabilities for differences between the financial statement and income tax basis of assets and liabilities, using currently enacted tax rates. Deferred tax benefits and expenses are recognized for changes in deferred tax assets and liabilities.



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Payment for Order Flow

The Company imposes fees upon market makers to fund payments to order flow providers under a program administered by the Company. These fees are
distributed to certain order flow providers as an economic inducement to route their customer orders to the Companys exchange. The market makers have full discretion regarding the payment. Pursuant to Emerging Issues Task Force
(EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company reflects the assessments and payments on a net basis, with no impact on revenues or expenses. When fees are assessed, the
Company records an asset (Accounts Receivable) with a corresponding liability (Payment for Order Flow Payable).

Payment for order flow
cash is reflected in cash and cash equivalents on the Companys Consolidated Statements of Financial Condition. These funds are not legally restricted and can be used for general corporate purposes.

Stock-Based Compensation

Effective January 1, 2005 and in connection with its initial public offering, the Company began to account for stock-based employee compensation in accordance with SFAS No. 123(R), Share-Based Payment, using the
modified prospective adoption method. Under this method of adoption, compensation expense is recognized over the relevant service period based on the fair value of stock options and restricted stock awards granted on or after January 1, 2005
and future years. In addition, compensation cost is recognized in 2005 for awards granted prior to the adoption date for which the requisite service period has not been rendered. No unearned compensation is included in stockholders equity for
such stock options and restricted stock awards granted. Rather, such stock options and restricted stock units are included in stockholders equity under SFAS No. 123(R) when services required from employees in exchange for the awards are
rendered and expensed.

Compensation expense resulting from stock options granted prior to the adoption of SFAS No. 123(R) were
accounted for under the intrinsic-value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by SFAS No. 123, and accordingly, compensation expense was measured as the excess of
the estimated fair value per share of the Company at the date of grant over the options exercise price and is recognized over the vesting period.

As a result of adopting SFAS No. 123(R), the Companys income before income taxes and net income for the three months ended March 31, 2006 were $297 and $164 lower, respectively, than if it had continued to account for
share-based compensation under APB Opinion No. 25.

Fixed Assets

Fixed assets consist of software licenses, computer hardware, furniture and fixtures, equipment and leasehold improvements. Capitalized fixed assets are
depreciated utilizing the straight-line method over the estimated useful lives as follows:



|                                  |  |             
|--------------------------------- |  | ------------
|Trading related software licenses |  | 5 to 7 years
|Other software licenses           |  | 3 to 5 years
|Hardware and equipment            |  | 3 to 5 years
|Furniture and fixtures            |  | 7 years     

Leasehold improvements are amortized on a straight-line basis over the lesser of the lease term or
its estimated useful life.

Software Costs

Costs for internal software are assessed to determine whether they should be capitalized or expensed in accordance with American Institute of Certified Public Accountants Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and other related guidance. Software development costs incurred during the preliminary project stage are expensed as incurred, while costs
incurred during the application development stage are capitalized and amortization is computed using the straight-line method over the softwares estimated useful life, generally three to seven years, depending on the type of software.
Amortization of these capitalized costs begins only when the software becomes ready for its intended use. Capitalization of costs ceases when the post implementation/operation stage of the software development process is reached.

The Company capitalized $615 and $1,555 for software licenses and software developed for internal use during the three months ended March 31, 2006
and the year ended December 31, 2005, respectively.



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Marketing and Promotional Fees

Advertising costs, including media advertising and production costs, are expensed when incurred.

Intellectual Property

All
costs related to internally developed patents are expensed as incurred.

Impairment of Long-Lived Assets

On a periodic basis, the Company performs a review for the impairment of long-lived assets when events or changes in circumstances indicate that the
estimated undiscounted future cash flows expected to be generated by the assets are less than their carrying amounts or when other events occur which may indicate that the carrying amount of an asset may not be recoverable.

Fair Value of Financial Instruments

SFAS No. 107, Disclosure about Fair Value of Financial Instruments, requires the disclosure of the fair value of financial instruments, including assets and liabilities recognized on the Consolidated Statements of Financial
Condition. Management estimates that the aggregate net fair value of all financial instruments recognized on the Consolidated Statements of Financial Condition approximates their carrying value, as such financial instruments are short term in nature
and bear interest at current market rates.

3. INITIAL PUBLIC OFFERING

On March 14, 2005 the Company completed its initial public offering in which it sold 4,602,115 shares of Class A common stock at $18.00 per share. Proceeds to the Company, less commissions and other direct
selling expenses, were $70,739.

4. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company is involved in various routine reviews, regulatory
audits and inspections by the SEC as well as legal proceedings arising in the ordinary course of business. While any litigation contains an element of uncertainty, it is the opinion of management, after consultation with counsel, that the outcomes
of such proceedings or claims are unlikely to have a material adverse effect on the business, financial condition or operating results of the Company.

Contractual Obligations

The Company has entered into obligations under operating leases with
initial non-cancelable terms in excess of one year for office space and computer equipment. Expenses recorded under these agreements for the three months ended March 31, 2006 and 2005 were $1,680 and $1,509, respectively. The Company also has
entered into a contractual agreement for technology enhancements and support with OMX (US) Inc. and its affiliates (collectively OMX). Expenses related to OMX were $2,138 and $1,952 for the three months ended March 31, 2006 and
2005, respectively. In addition, the Company has entered into contractual agreements with certain index providers for the rights to list index products. At March 31, 2006, future minimum payments for commitments are as follows:



|                                     |  |                  |  |       |  |       |  |      
|------------------------------------ |  | ---------------- |  | ----- |  | ----- |  | -----
|                                     |  | Operating Leases |  | OMX   |  | Other |  | Total
|Nine months ending December 31, 2006 |  | 5,010            |  | 4,059 |  | 750   |  | 9,819
|Year ending December 31, 2007        |  | 4,588            |  | 4,137 |  | 500   |  | 9,225
|Year ending December 31, 2008        |  | 2,719            |  | 3,662 |  | 900   |  | 7,281
|Year ending December 31, 2009        |  | 1,939            |  | 2,587 |  |      |  | 4,526
|Year ending December 31, 2010        |  | 1,967            |  | 2,587 |  |      |  | 4,554
|Thereafter                           |  | 9,297            |  |      |  |      |  | 9,297

Letter of Credit

In the normal course of business, the Company collateralizes certain leases through standby letters of credit. As of March 31, 2006 and
December 31, 2005, the Company provided letters of credit totaling $417 and $424, respectively, collateralized by certificates of deposit at a financial institution which are included in other assets.



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Line of Credit

As of March 31, 2006 and December 31, 2005, the Company had access to a $10,000 uncommitted credit line from a commercial banking institution to
be used to meet the Companys normal short-term capital needs. There were no borrowings outstanding under this credit line at any of those dates.

Guarantees

The Company applies the provisions of the FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which provides accounting and disclosure requirements for certain guarantees. The Companys trading
rules, which Class B members are bound by, limit the Companys liability for losses suffered while conducting business on the Companys exchange. The Companys trading rules do not extend to the customers of its Class B members.
However, contractually the Company agrees to indemnify its Class B members for losses they suffer in very limited circumstances. The potential for the Company to be required to make payments related to such contractual indemnifications is deemed
remote.

5. ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:



|                                |  |                |        |   |                   |   |        |  
|------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                |  | March 31, 2006 |        |   | December 31, 2005 |  
|Trading related fees            |  | $              | 23,878 |   |                   | $ | 22,611 |  
|Payment for order flow program  |  |                | 9,392  |   |                   |   | 6,538  |  
|Class B-2 memberships:          |  |                |        |   |                   |   |        |  
|Current                         |  |                | 6,000  |   |                   |   | 6,000  |  
|Non-current                     |  |                | 600    |   |                   |   | 600    |  
|Unamortized discount            |  |                | (52    | ) |                   |   | (174   | )
|Other                           |  |                | 171    |   |                   |   | 96     |  
|Allowance for doubtful accounts |  |                | (25    | ) |                   |   | (36    | )
|                                |  |                |        |   |                   |   |        |  
|Total                           |  | $              | 39,964 |   |                   | $ | 35,635 |  
|                                |  |                |        |   |                   |   |        |  



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6. OTHER MEMBER FEES

Other member fees are comprised of the following:



|                                                               |  |                              |       |      |   |      
|-------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                                               |  | Three Months Ended March 31,
|                                                               |  | 2006                         |       | 2005
|Connectivity and access fees                                   |  | $                            | 3,221 |      | $ | 3,006
|Communication, equipment and software fees                     |  |                              | 685   |      |   | 803  
|Regulatory and administrative fees                             |  |                              | 405   |      |   | 289  
|Revenue from sale of Class B-2 memberships                     |  |                              | 1,189 |      |   | 1,091
|Imputed interest on installment sales of Class B-2 memberships |  |                              | 122   |      |   | 357  
|                                                               |  |                              |       |      |   |      
|Total                                                          |  | $                            | 5,622 |      | $ | 5,546
|                                                               |  |                              |       |      |   |      

7. DIVIDEND

On March 16, 2006, the Companys Board of Directors declared a quarterly dividend of $0.05 per outstanding share of its Class A common stock. The dividend was paid on March 31, 2006, to holders of
record as of the close of business on March 23, 2006.

In February 2005, the Company declared and paid a stock dividend of eight
shares of Class A common stock per share of Class A common stock outstanding. The stock dividend was designed to have the effect of a stock split at a ratio of nine shares per share or a 9-1 stock split. Accordingly, all share and per
share amounts have been adjusted to give effect to this event.

In January 2005, the Company declared and paid a special dividend of $0.37
per share of Class A common stock to stockholders of record as of January 7, 2005, which represented a distribution of $11,784 related to the sale of its Class B-2 memberships.

8. STOCK-BASED PLANS

Stock Options

The Company has two stock option plansthe 2002 Stock Option Plan (the 2002 Plan), which was adopted in 2002, and the Omnibus Stock Plan,
which was adopted in 2005. Under the plans, options on the Companys common stock are issued for terms of 10 years and generally vest over three years. Options issued in connection with the 2002 Plan were issued with an exercise price
significantly less than the estimated fair market value of the Company on the date of grant. Options issued under the Omnibus Stock Plan were issued with an exercise price equal to the estimated fair market value of the Company on the date of grant.
Options expire on dates ranging from May 2012 to January 2016. A summary of the stock option activity as March 31, 2006 is as follows:



|                               |  |           |   |  |                                            |       |                                         |     |                     |           |                                                        |   |     
|------------------------------ |  | --------- | - |  | ------------------------------------------ | ----- | --------------------------------------- | --- | ------------------- | --------- | ------------------------------------------------------ | - | ----
|                               |  | Options   |   |  | Weighted Average Exercise Price Per Option |       | Weighted Average Remaining Life (years) |     | Options Exercisable |           | Weighted Average Exercise Price Per Exercisable Option
|Outstanding, December 31, 2004 |  | 3,697,650 |   |  |                                            | 1.49  |                                         | 7.4 |                     | 3,610,944 |                                                        |   | 1.39
|Granted                        |  | 544,884   |   |  |                                            | 18.75 |                                         | 9.5 |                     |          |                                                        |   |    
|Forfeited                      |  |          |   |  |                                            |      |                                         |     |                     |           |                                                        |   |    
|Exercised                      |  | (283,947  | ) |  |                                            | 1.39  |                                         |     |                     |           |                                                        |   | 1.39
|                               |  |           |   |  |                                            |       |                                         |     |                     |           |                                                        |   |     
|Outstanding, December 31, 2005 |  | 3,958,587 |   |  | $                                          | 3.88  |                                         | 6.9 |                     | 3,383,703 |                                                        | $ | 1.43
|Granted                        |  | 11,601    |   |  |                                            | 36.55 |                                         | 9.8 |                     |          |                                                        |   |    
|Forfeited                      |  |          |   |  |                                            |      |                                         |     |                     |           |                                                        |   |    
|Exercised                      |  | (136,263  | ) |  |                                            | 2.15  |                                         |     |                     |           |                                                        |   |     
|                               |  |           |   |  |                                            |       |                                         |     |                     |           |                                                        |   |     
|Outstanding, March 31, 2006    |  | 3,833,925 |   |  | $                                          | 4.04  |                                         | 6.7 |                     | 3,329,173 |                                                        | $ | 1.82
|                               |  |           |   |  |                                            |       |                                         |     |                     |           |                                                        |   |     



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The weighted average estimated fair value of the options granted during the year ended December 31,
2005 was $5.95 and the nine months ended March 31, 2006 was $12.06 per option. The Company used a binomial model to value the options. The following assumptions were used:



|      |  |                |   |  |                     |   |  |                |   |  |                         
|----- |  | -------------- | - |  | ------------------- | - |  | -------------- | - |  | ------------------------
|Grant |  | Dividend Yield |   |  | Expected Volatility |   |  | Risk-Free Rate |   |  | Expected Life (in years)
|2005  |  | 1.8            | % |  | 31.3                | % |  | 3.94           | % |  | 5.0                     
|2006  |  | 0.6            | % |  | 44.9                | % |  | 4.41           | % |  | 3.5                     

Restricted Stock

The Company issued restricted stock awards (RSAs) to employees and certain directors under its Omnibus Stock Plan primarily in connection with
year-end compensation and its initial public offering. All of the restricted stock outstanding as of March 31, 2006 required future service as a condition to the delivery of the underlying shares of common stock along with certain other
requirements outlined in the award agreements. The RSAs vest over a period of two or five years. Information related to these RSAs is set forth below:



|                               |  |                        |  
|------------------------------ |  | ---------------------- | -
|Grant                          |  | Restricted StockAwards |  
|Outstanding, December 31, 2005 |  | 645,117                |  
|Granted                        |  | 173,161                |  
|Forfeited                      |  | (1,225                 | )
|Vested                         |  | (158,241               | )
|                               |  |                        |  
|Outstanding, March 31, 2006    |  | 658,812                |  

Stock compensation expenses related to RSAs were $1,645 and $311 for the three months
March 31, 2006 and March 31 2005, respectively.

Restricted Stock Units

The Company granted 1,921 restricted stock units on March 31, 2006 to its non-industry directors. Under the restriction, the stock cannot be sold
until one year after their service on the Board is terminated.

9. EARNINGS PER SHARE (shares in thousands)

Basic earnings per share, or EPS, is computed by dividing net income by the weighted average number of common stock outstanding for the period. Diluted
EPS reflects the potential reduction in earnings per share that could occur if securities or contracts to issue common stock were exercised or converted into common stock. EPS under the basic and diluted computations are as follows:



|                                                                                               |  |                              |        |      |   |       
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                                                                               |  | Three Months Ended March 31,
|                                                                                               |  | 2006                         |        | 2005
|Basic earnings per share:                                                                      |  |                              |        |      |   |       
|Net income                                                                                     |  | $                            | 12,418 |      | $ | 8,861 
|Weighted average shares outstanding                                                            |  |                              | 37,102 |      |   | 33,059
|Basic earnings per share                                                                       |  | $                            | 0.33   |      | $ | 0.27  
|                                                                                               |  |                             
|Diluted earnings per share:                                                                    |  |                              |        |      |   |       
|Net income                                                                                     |  | $                            | 12,418 |      | $ | 8,861 
|Weighted average shares outstanding                                                            |  |                              | 37,102 |      |   | 33,059
|Diluted effect of common stock equivalent shares related to stock options and restricted stock |  |                              | 2,152  |      |   | 1,887 
|                                                                                               |  |                              |        |      |   |       
|Weighted average shares outstandingdiluted                                                    |  |                              | 39,254 |      |   | 34,946
|                                                                                               |  |                              |        |      |   |       
|Diluted earnings per share                                                                     |  | $                            | 0.32   |      | $ | 0.25  

Diluted EPS computation does not include the anti-dilutive effect of 146 options and RSAs for the
three months ended March 31, 2006 and 124 options as of March 31, 2005.



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10. COMPREHENSIVE INCOME

Comprehensive income includes net income and changes in stockholders equity except those resulting from investments by, or distributions to, stockholders. Comprehensive income is as follows:



|                                                             |  |                              |        |      |   |       |  
|------------------------------------------------------------ |  | ---------------------------- | ------ | ---- | - | ----- | -
|                                                             |  | Three Months Ended March 31, |       
|                                                             |  | 2006                         |        | 2005 |  
|Net income                                                   |  | $                            | 12,418 |      | $ | 8,861 |  
|Change in other comprehensive income:                        |  |                              |        |      |   |       |  
|Unrealized loss on available for sale securities, net of tax |  |                              | 17     |      |   | (43   | )
|                                                             |  |                              |        |      |   |       |  
|Total comprehensive income                                   |  | $                            | 12,435 |      | $ | 8,818 |  
|                                                             |  |                              |        |      |   |       |  

11. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

The Company operates as one business segment, as an electronic exchange for equity and index options and related services. Revenues are derived in the
U.S. and all of the Companys assets are located in the U.S. The Company considers significant customers to be those who account for more than 10% of the Companys gross margin. The following is customer concentration information:



|                                      |  |                             |   |  |      |  
|------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                      |  | Three Months EndedMarch 31, |  
|                                      |  | 2006                        |   |  | 2005 |  
|Members                               |  | 2                           |   |  | 1    |  
|Approximate percent of total revenues |  | 24                          | % |  | 10   | %

12. SUBSEQUENT EVENT

On May 11, 2006, the Company declared a quarterly dividend of $0.05 per share of Class A common stock to stockholders on record as of June 23, 2006. This dividend is payable on June 30, 2006.



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

You
should read the following discussions together with the consolidated financial statements and related notes. Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as
anticipate, estimate, expect, project, intend, plan, believe, will, and other words and terms of similar meaning in connection with any discussion of
future operating or financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including market and general economic conditions in the U.S. and elsewhere
in the world, growth of our market share, our ability to keep up with rapid technological change, our business strategy, our offering of new products including index options and market data products, consolidation in our member base and within our
industry and legislative and regulatory changes relating to our business and operations or activities, and other risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in the Companys other filings with the SEC or in materials
incorporated therein by reference.

Overview

We are a fully electronic securities exchange. We are the largest equity options exchange and among the leading options exchanges in the world. Our exchange provides a trading platform in listed equity and index
options and related services that are designed to improve the market for options and the speed and quality of trade execution for our members.

On March 14, 2005, we completed our initial public offering, in which we sold 4,602,115 shares and certain of our stockholders sold 6,954,590 shares of our Class A common stock at $18.00 per share. The proceeds to us, less
commissions and other direct selling expenses, were $70.7 million.

On December 13, 2005, we completed a secondary offering for
selling stockholders, in which our stockholders sold 8,000,000 shares of our Class A common stock at $30.00 per share. We did not receive any proceeds from the sale of Class A common stock from this offering nor did we sell any shares of
Class A common stock.

Business Environment

The options industry continues to operate in an increasingly competitive environment. Our business is impacted by macroeconomic factors impacting the U.S.
economy as well as factors specific to the securities industry.

The pace of economic growth in the U.S. continues and the
U.S. Federal Reserve continued to raise its federal funds rate target. For the first three months of 2006, the equities markets posted modest gainsthe NASDAQ Composite Index increased 6.1%; the Dow Jones Industrial Average increased 3.7%;
and the S&P 500 Index increased 3.7%. Average daily volume for New York Stock Exchange-listed and Nasdaq-quoted stocks increased 12.3% in the first three months of 2006 compared to the comparable period in 2005.

In the options industry, average daily equity and index options volume increased 37.3% to 7.8 million for the first three months of 2006 from
5.7 million in the comparable period in 2005. Average daily volume for equity options increased 37.9% and average daily volume for index options increased 31.2% over this period. Our average daily equity options volume increased 36.4% from
1.7 million to 2.4 million over the same period; however, our market share decreased to 32.7% from 33.1%. Our average daily index volume increased to 28,000 in the first three months of 2006 from 5,000 in the comparable period in 2005. We
began to actively market our index trading initiative in 2005. We set several records during the first three months of 2006 including:



| |  |  | A new daily trading volume record of 4.6 million equity and index options contracts on January 20, 2006.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | A new average daily volume record of 2.4 million equity and index options contracts traded for the quarter.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | A new record for the single largest equity options transaction at the exchange when 165,000 Microsoft calls traded on February 21, 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

Our operating results for the first three months of 2006 reflected strong trading levels. We continue to see this favorable trend into the second
quarter, though we expect sequential volumes may decline due to seasonal factors historically experienced in the summer months.

Competitive Landscape

There continues to be discussions by industry observers of the possibility of consolidation
among global exchanges. On March 7, 2006, the NYSE Group became a direct competitor to us through their acquisition of Archipelago Holdings, Inc., which acquired the Pacific Stock Exchange, one of our competitors. Most recently, Nasdaq
announced that as of May 10, 2006, it had purchased 24.1% of the outstanding shares of the London Stock Exchange, following the withdrawal on March 30, 2006 of its previously launched takeover bid.



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Consolidations and alliances among our current competitors may create larger liquidity pools than we
offer. The resulting larger liquidity pools may attract orders away from us, leading to a decline in our trading volumes and liquidity which would result in decreased revenues. In addition, consolidations or alliances among our current competitors
may achieve cost reductions or other increases in efficiency, which may allow them to offer better prices or services than we do. At this time, it is unclear what effect, if any, these consolidations and alliances will ultimately have upon the
competitive landscape of the options industry if exchanges become part of larger, well-capitalized organizations.

Industry
Developments

An official from the SEC recently commented that that the SECs limited analysis indicated that, for most
actively traded options, the national best bid and offer is at the minimum increment for more than 50% of the trading day and that narrower spreads would benefit investors. Therefore, the staff may ask the SEC to consider setting a date by
which exchanges interested and ready to quote in pennies could do so in a limited number of options classes. Overall, we continue to believe moving to penny increments for all quotes and trades could have a negative effect on the options
industry and our business. In February 2006, we, along with certain of our members, sent a letter to the SEC proposing a roadmap for them to use in allowing a decrease minimum trading increments in a methodical phased approach in order to
properly measure the effect on the options industry and investors. The official further commented that quoting in pennies in a small number of options would allow the assessment on transparency and system capacity.

The official also commented that they completed their review of options order routing and best execution practices and expressed concerns over best
execution practices in that brokers cannot ignore price improvement opportunities in meeting their best execution obligations.

Our
Trading Volumes and Market Share

Our average daily volume, or ADV, of equity options has grown significantly; however, we have
experienced seasonal fluctuations in our volumes on a quarterly basis. While our trading volumes have generally been increasing, over the same time period our market share has fluctuated. The following chart depicts our average daily volume of
equity options and our market share since 2004 on a quarterly basis:

LOGO



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|                                           |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|------------------------------------------ |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                           |  | Q1-04 |   |  | Q2-04 |   |  | Q3-04 |   |  | Q4-04 |   |  | Q1-05 |   |  | Q2-05 |   |  | Q3-05 |   |  | Q4-05 |   |  | Q1-06 |  
|Industry equity options ADV (in thousands) |  | 4,697 |   |  | 4,062 |   |  | 3,747 |   |  | 4,699 |   |  | 5,223 |   |  | 4,923 |   |  | 5,203 |   |  | 6,387 |   |  | 7,202 |  
|                                           |  |       |   |  |       |   |  |       |  
|Our equity options ADV (in thousands)      |  | 1,485 |   |  | 1,360 |   |  | 1,290 |   |  | 1,590 |   |  | 1,727 |   |  | 1,598 |   |  | 1,694 |   |  | 2,035 |   |  | 2,356 |  
|                                           |  |       |   |  |       |   |  |       |  
|Our equity options market share            |  | 31.6  | % |  | 33.5  | % |  | 34.4  | % |  | 33.8  | % |  | 33.1  | % |  | 32.5  | % |  | 32.6  | % |  | 31.9  | % |  | 32.7  | %

While we do monitor our market share, we do not believe it is the primary indicator of the health
of our business relative to absolute volume growth, which is what drives our revenues. Our market share can be negatively impacted by the execution of large crossing transactions (commonly referred to as dividend trades) on the floor-based
exchanges, which attract trades through fee caps and market structures that allow greater control of executions in a non-anonymous environment. We believe profitable market share growth comes through the introduction of innovative functionality and
new products. We continue to believe our strategy will support this growth.

Index Options

We have expanded our offerings and beginning in 2003, we implemented the technological and regulatory foundation to trade index options. In 2005, we began
to actively market our index trading initiative which includes both proprietary and licensed indexes. Prior to 2005, our volume in index options trading was minimal. We currently have listed options on 19 indexes. The following chart reflects the
growth in our index options volume since 2005:

LOGO



|                                          |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|----------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                          |  | Q1-05 |   |  | Q2-05 |   |  | Q3-05 |   |  | Q4-05 |   |  | Q1-06 |  
|                                          |  |       |   |  |      
|Industry index options ADV (in thousands) |  | 477   |   |  | 516   |   |  | 531   |   |  | 619   |   |  | 626   |  
|                                          |  |       |   |  |      
|Our index options ADV (in thousands)      |  | 5     |   |  | 18    |   |  | 23    |   |  | 24    |   |  | 28    |  
|                                          |  |       |   |  |      
|Our index options market share            |  | 1.1   | % |  | 3.6   | % |  | 4.2   | % |  | 3.9   | % |  | 4.5   | %

In January 2006, we launched options trading on three additional proprietary indexes; ISE-B&S
Water Index, ISE-CCM Nanotechnology Index, and ISE-CCM Alternative Energy Index.

New Business Initiatives

Market Data Product Suite

In
January 2006, we announced the launch of a new market data product which provides historical market data to traders and investors to improve the effectiveness of their respective trading strategies. This product is the latest offering in our suite
of market data products which will soon expand to include depth-of-book and enhanced sentiment market data offerings. Additional introductions of new products in this area will enable us to monetize the significant amount of proprietary data that we
store in the normal course of our operations.



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Longitude

On March 24, 2006, we acquired the intellectual property and other related assets of Longitude, Inc., inventor of a proprietary and patented technology that uses parimutuel principles to run derivatives auctions
that aggregate liquidity and produce fair and efficient market-driven prices. The new entity, Longitude LLC, became an operating unit of ISE, which retains majority-ownership in partnership with Goldman Sachs Group, Inc. Since late 2002 Goldman
Sachs has used the Longitude platform to clear risk and build liquidity for a wide range of auction products. Currently, the products offered include options on economic data in partnership with the Chicago Mercantile Exchange and options on certain
energy market statistics in partnership with ICAP Energy and the New York Mercantile Exchange. This acquisition is part of our strategy of delivering expanded product offerings for the industry that demonstrate our commitment to growth and
innovative technology.

ISE Stock Exchange

On April 19, 2006, we announced that we were entering the equities market through the launch of ISE Stock Exchange, LLC in partnership with key strategic investors. ISE Stock Exchange, LLC, which will operate as
a facility of ISE and which ISE will manage, will introduce its first product, MidPoint Match, or MPM, in the third quarter of 2006, subject to regulatory authorization. MPM is a continuous, instantaneous, fully automated, and anonymous
matching platform for trading stock. MPMs matching platform will execute orders at the midpoint price of the National Best Bid and Offer, or NBBO, throughout the trading day. We anticipate that MPM will be followed by an integrated
displayed market offering in the fourth quarter of 2006, subject to regulatory approval. Under the capital structure of ISE Stock Exchange, ISE will not recognize any losses incurred by ISE Stock Exchange.

Our Reorganization

In 2004, we began the process to
reorganize into a holding company structure to allow us to have greater organizational flexibility, facilitate our access to the capital markets, promote new business opportunities, facilitate future acquisitions and the formation of strategic
alliances and create a framework for future growth. As a registered securities exchange, we are required to submit all changes to our organizational documents to the SEC for approval and certain changes to the organizational documents are generally
deemed necessary to create the holding company structure. We received this approval on April 21, 2006.

Seasonality

In the securities trading industry, quarterly revenue fluctuations are common and are due primarily to variations in trading volumes. We believe we
experience increased levels of trading activity in the first and fourth quarters, and decreased levels of trading activity in the second and third quarters. As a result of this and other factors described elsewhere herein, period-to-period
comparisons of our revenues and operating results are not necessarily meaningful, and the results of any quarter are not necessarily indicative of results of any future period.

Business Trends and Drivers

Revenues

Transaction Fees

Transaction
fees have accounted for, and continue to account for, a majority of our revenues and are primarily driven by contract trading volumes, pricing changes and the proportion of non-broker-dealer customer volume in the trading mix. As a result of
competitive pressures, we generally do not charge our members for executing non-broker-dealer customer orders on our exchange with the exception of what we define as premium products. Premium products are those which we believe warrant the same
pricing for non-broker-dealer customer orders and our other members. These products include options on SPDRs®, most other licensed and proprietary index options we offer, and, beginning in August 1, 2005, options on most other exchange traded funds, or ETFs. Generally, an increase in our
non-broker-dealer customer orders reduces our average revenue per side. As a percent of our total sides, non-broker-dealer customer sides have continued to increase, reaching a high of 43.1% during the three months ended March 31, 2006.

Our transaction fee has varied based upon the overall contract trading volume on our exchange. Historically, this variable fee applied to
market maker, firm proprietary, and customer premium product transactions. However, beginning in December 2005, we modified our fee schedule to apply the variable fee only to market maker transactions. Based on our



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##### Table of Contents

current fee structure, our transaction fee for member market makers will change when our monthly ADV reaches the
following thresholds:



|                           |  |                 |     
|-------------------------- |  | --------------- | ----
|Monthly ADV (in thousands) |  | Transaction Fee
|1,045 - 1,343              |  | $               | 0.19
|1,343 - 1,880              |  | $               | 0.18
|1,880 - 3,133              |  | $               | 0.17
|3,133 - 9,400              |  | $               | 0.16
|Greater than 9,400         |  | $               | 0.15

The transaction fee for firm proprietary and customer premium product
transactions is currently $0.18.

We continually examine our fee structure in light of competitive changes in the
marketplace.

Other Member Fees

Other member fees are primarily driven by the number of participants that become members of our exchange, the number of users logging onto our trading system and the capacity requirements that are dictated by the
number of quotes, or orders submitted to our trading system as well as the communication method chosen by the member. As of March 31, 2006, we sold 47 Class B-2 memberships, including one during the three months ended March 31, 2006. We
anticipate selling the remaining 13 Class B-2 memberships, and may effect such sales at any time. However, we have no present agreements with any entity with respect to the purchase of such Class B-2 memberships and cannot assure any such sales will
occur.

Market Data Fees

Market data revenues are primarily driven by the proportional number of trades executed on our exchange as well as OPRAs profits. We expect our market data revenues to continue to fluctuate based upon trading volumes and OPRAs
profitability. If the options markets begin quoting in penny increments, we would expect OPRA to have increased costs for upgrading the capacity of its systems which may reduce our market data revenues. Additionally, beginning in the second quarter
of 2006, we will begin to record revenues from our own market data offering, see Offering a Market Data Product Suite. We do not expect the revenues generated from this offering to be material to our 2006 results.

Cost of Revenues

Cost of
revenues is comprised of:



| |  |  | Activity remittance fees we pay to the SEC pursuant to Section 31 of the Securities Exchange Act of 1934, as amended (the Exchange Act). These fees are designed to
recover costs to the government for the supervision and regulation of securities markets and securities professionals. This expense is wholly offset by activity assessment fees we charge our members which is included in transaction fees.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | License fees we pay for our members to trade licensed products, primarily options on ETFs and indexes. This expense is offset by surcharges we charge our members for trading these
products which is included in transaction fees.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Expenses

Compensation and Benefits

Employee compensation and benefits expense is primarily driven by changes in our headcount and levels of incentive compensation. In connection with our initial public offering, we changed our long-term performance-based profit sharing plan
to a stock based plan, which will likely result in higher expenses than our previous long-term deferred compensation plan. Additionally, we have expensed stock options in accordance with SFAS No. 123(R). We expect to incur stock based
compensation costs of approximately $8.1 million in 2006, which includes $1.2 million for options expense and $6.9 million for restricted stock we granted to our employees as part of 2005 compensation and in connection with our initial public
offering to recognize their contributions to our success. We expect our headcount to continue to increase as we grow our business. We may also incur costs for a success bonus, in the form of cash and/or stock, payable to our executive officers and
certain directors if and when we sell our remaining 13 Class B-2 memberships.



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##### Table of Contents

Technology and Communication

Technology and communication expense is primarily driven by costs associated with our central trading system and generally fluctuates based upon long-term
trends in our business activity. Certain elements of this expense, which we incur in anticipation of certain transaction volume levels, have both a fixed and variable nature. Once we incur these expenses initially, we may not incur them going
forward on a recurring, annual basis. As a result of the importance of our systems to the viability of our business, we continue to invest heavily in areas such as system capacity and reliability, increased functionality and performance and
security. We also must modify our systems from time to time to comply with various regulatory requirements and competitive responses. The expenses we incur for these modifications may vary substantially from period to period. We anticipate
technology and communication expense to fluctuate with increases in volumes and trading system enhancements as well as technology changes in the industry.

Occupancy

Occupancy expense is primarily driven by our facility needs due to headcount or
system needs as well as back-up facilities. We occupied additional office space in January 2006 and anticipate higher occupancy costs in the future to support our growth, computer operations and disaster recovery needs.

Professional Fees

Professional fees are generally discretionary in nature; however there are fixed components. As a self-regulatory organization, or SRO, we are required to regulate our members and as such, we employ the services of the NASD, Inc., or NASD,
to perform certain of these functions. We also believe that, as an SRO, we will likely be subject to additional corporate governance, transparency, oversight and ownership rules proposed by the SEC in November 2004. We are presently evaluating and
monitoring developments with respect to the proposed rules and cannot predict or estimate the full extent to which these proposals, if adopted as proposed, may affect us or our operations or the amount of the additional costs we may incur or the
timing of such costs. Furthermore, certain expenses, such as those related to new business initiatives or litigation, may fluctuate from year to year. Also, as a result of becoming a public company, we have incurred higher legal and audit fees.

Marketing and Business Development

Marketing and business development expense is generally discretionary in nature and is primarily driven by our public relations and product promotion campaigns, such as our new index offerings, which we began to
actively market and advertise in 2005.

Depreciation and Amortization

Depreciation and amortization expense is primarily driven by purchases of software licenses and leasehold improvements we purchase and capitalize. We
expect to incur additional software amortization expense related to enhancements to our trading system in order to remain competitive. In addition, our leasehold improvements amortization may increase as we review our office space requirements,
computer operations and disaster recovery needs.

Other Expenses

Other expenses include Board of Director expenses, travel and entertainment related costs, general office expenses and liability insurance premiums. We
expect other expenses to increase to support our overall growth.

Interest and Investment Income

Interest and investment income is primarily driven by our available cash balances and changes in the market values of securities owned in our previous
long-term deferred compensation plan.

Provision for Income Taxes

Provision for income taxes is based on the application of prevailing federal, state and local tax rates. The difference between our effective tax rate and
the statutory tax rate may vary from period to period, but primarily results from state and local taxes and the effect of certain non-deductible expenses. We expect our effective tax rate to range from approximately 44% to 45% in 2006.



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##### Table of Contents

Public Company and SRO Corporate Governance Expenses

As a public company, we are subject to the requirements of the Sarbanes-Oxley Act of 2002, which requires us to incur significant expenditures to
establish systems and hire and train personnel to comply with these requirements. In addition, we have incurred additional costs for external advisors such as legal, accounting and auditing fees as well as additional marketing and investor relations
expenses.

We also believe that, as an SRO, we will likely be subject to additional corporate governance, transparency, oversight and
ownership rules proposed by the SEC in November 2004. We are presently evaluating and monitoring developments with respect to the proposed rules and cannot predict or estimate the full extent to which these proposals, if adopted as proposed, may
affect us or our operations or the amount of the additional costs we may incur or the timing of such costs.

Fixed and Variable Expenses

Our expense structure is predominantly fixed. However, there are some variable components that fluctuate with volumes. In addition, we incur certain
costs in anticipation of certain transaction volume levels. If demand for our services should decline suddenly and we are unable to adjust our fixed cost base on a timely basis, it could have a material adverse effect on our operating results and
financial condition. In addition, we may continue to make significant expenditures related to technological innovations over long periods of time, so that our operating margins and profitability could be adversely affected.

Non GAAP Financial Measures

In an effort to provide
additional information regarding our results as determined by U.S. generally accepted accounting principles, or GAAP, we also disclose certain non-GAAP information which we believe provides useful information. Our management reviews this non-GAAP
financial measurement when evaluating our financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP
measurements do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measures should be considered in the context with our GAAP results.

We have disclosed financial measures using our net transaction fees which we define as our transaction fees less activity remittance fees and ETF and
index license fees. Under GAAP, activity remittance fees and ETF and index license fees are required to be recorded on a gross basis. Since activity remittance fee and ETF and index license fees are wholly offset by corresponding amounts in
transaction fees, management believes presenting net transaction fees provides a clearer measure of our transaction related performance.



|                                     |  |                                         |         |   |      |   |         |  
|------------------------------------ |  | --------------------------------------- | ------- | - | ---- | - | ------- | -
|                                     |  | Three Months Ended March 31,            |        
|                                     |  | 2006                                    |         |   | 2005 |  
|                                     |  | (in thousands, except per side amounts) |        
|Transaction fees                     |  | $                                       | 36,867  |   |      | $ | 26,714  |  
|Less cost of revenues:               |  |                                         |         |   |      |   |         |  
|Activity remittance fees             |  |                                         | (4,345  | ) |      |   | (2,702  | )
|ETF and index license fees           |  |                                         | (1,625  | ) |      |   | (931    | )
|                                     |  |                                         |         |   |      |   |         |  
|Total cost of revenues               |  |                                         | (5,970  | ) |      |   | (3,633  | )
|                                     |  |                                         |         |   |      |   |         |  
|Net transaction fees                 |  | $                                       | 30,897  |   |      | $ | 23,081  |  
|                                     |  |                                        
|Total sides                          |  |                                         | 295,631 |   |      |   | 211,375 |  
|                                     |  |                                        
|Average transaction fee per side     |  | $                                       | 0.125   |   |      | $ | 0.126   |  
|Average cost of revenues per side    |  |                                         | (0.020  | ) |      |   | (0.017  | )
|                                     |  |                                         |         |   |      |   |         |  
|Average net transaction fee per side |  | $                                       | 0.105   |   |      | $ | 0.109   |  



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##### Table of Contents

Critical Accounting Policies

Our accounting policy related to our revenue recognition from the sale of Class B-2 memberships is our most critical accounting policy that requires management to make estimates and judgments that could affect our
results.

As of March 31, 2006 we have sold 47 Class B-2 memberships. The Class B-2 memberships were sold pursuant to a purchase
agreement for $1.5 million each. Certain Class B-2 memberships were paid in full on the purchase date, while others are payable in annual installments; however, the agreement grants immediate membership upon execution of the agreement.

The Class B-2 membership rights are transferable and have no contractual term. We have an implied performance obligation to maintain our marketplace
over the life of the membership, and therefore recognize the revenue from the sale of the membership rights over the estimated life of the membership, as the implied performance obligation is fulfilled. We have estimated the life of the membership
at 14 years, and recognize revenue over this period on a straight-line basis.

In order to determine the estimated service life of a
membership, we identified three broad factors affecting the securities industry that have a significant impact on our operations, and therefore, the estimated service life of the Class B-2 memberships  the securities industrys
challenging operating environment, regulatory changes and technology innovations. We identified specific historical events in the options industry and the broader securities industry for each of these factors, assigned an appropriate time horizon
for each event, and calculated an average time horizon for each factor. Based on this analysis, we used the average across all factors, 14 years, as an estimate for the service life of the Class B-2 memberships.

The occurrence of each historical event considered in the analysis has necessitated significant changes in the business models of the securities
exchanges and market participants. Each of the factors identified have had a significant impact on the options industry or broader securities industry, and will have a significant impact on our memberships.

On a periodic basis, or if certain circumstances come to our attention, we review the original factors or assumptions used in determining the estimated
service period to ascertain the effect, if any, current events may have on those factors and assumptions. If the current facts warrant a change in the estimated service period, we will adjust the remaining revenue to be recognized in accordance with
the new estimated service life using the prospective method. The service period may increase or decrease from our current estimate of 14 years based upon the facts and circumstances, and therefore, these revenues may fluctuate in the future.

We recognized revenue of $1.2 million during the three months ended March 31, 2006 from the sale of Class B-2 memberships.

Recently Issued Accounting Pronouncements

None



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##### Table of Contents

Key Statistical Information

In evaluating the performance of our business, management closely monitors these key statistics:



|                                                                   |  |                              |         |   |      |   |         |  
|------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                   |  | Three Months Ended March 31, |        
|                                                                   |  | 2006                         |         |   | 2005 |  
|Trading Days                                                       |  |                              | 62      |   |      |   | 61      |  
|                                                                   |  |                             
|Average daily trading volume: (1) (2)                              |  |                              |         |   |      |   |         |  
|Equity and Index Options                                           |  |                              |         |   |      |   |         |  
|Total U.S. industry equity and index options traded (in thousands) |  |                              | 7,828   |   |      |   | 5,700   |  
|Our equity and index options traded (in thousands)                 |  |                              | 2,384   |   |      |   | 1,733   |  
|Our market share of equity and index options traded                |  |                              | 30.5    | % |      |   | 30.4    | %
|Equity Options                                                     |  |                              |         |   |      |   |         |  
|Total U.S. industry equity options traded (in thousands)           |  |                              | 7,202   |   |      |   | 5,223   |  
|Our equity options traded (in thousands)                           |  |                              | 2,356   |   |      |   | 1,727   |  
|Our market share of equity options traded                          |  |                              | 32.7    | % |      |   | 33.1    | %
|Index Options                                                      |  |                              |         |   |      |   |         |  
|Total U.S. industry index options traded (in thousands)            |  |                              | 626     |   |      |   | 477     |  
|Our index options traded (in thousands)                            |  |                              | 28      |   |      |   | 5       |  
|Our market share of index options traded                           |  |                              | 4.5     | % |      |   | 1.1     | %
|                                                                   |  |                             
|Our member total trading volume (sides, in thousands): (3)         |  |                              |         |   |      |   |         |  
|Customer                                                           |  |                              | 127,302 |   |      |   | 87,507  |  
|Firm proprietary                                                   |  |                              | 32,232  |   |      |   | 18,219  |  
|Market maker                                                       |  |                              | 136,097 |   |      |   | 105,649 |  
|                                                                   |  |                              |         |   |      |   |         |  
|Total sides                                                        |  |                              | 295,631 |   |      |   | 211,375 |  
|                                                                   |  |                             
|Our market share of total industry trading: (4)                    |  |                              |         |   |      |   |         |  
|Customer                                                           |  |                              | 32.1    | % |      |   | 30.7    | %
|Firm proprietary                                                   |  |                              | 24.9    | % |      |   | 21.2    | %
|Market maker                                                       |  |                              | 30.6    | % |      |   | 32.6    | %
|                                                                   |  |                             
|Revenue:                                                           |  |                              |         |   |      |   |         |  
|Average transaction fee per side (5)                               |  | $                            | 0.125   |   |      | $ | 0.126   |  
|Average cost of transaction fee per side (6)                       |  | $                            | (0.020  | ) |      | $ | (0.017  | )
|                                                                   |  |                              |         |   |      |   |         |  
|Average net transaction fee per side (6)                           |  | $                            | 0.105   |   |      | $ | 0.109   |  
|Average transaction fee per revenue side (7)                       |  | $                            | 0.176   |   |      | $ | 0.180   |  
|                                                                   |  |                             
|Our trades: (8)                                                    |  |                              |         |   |      |   |         |  
|Average contracts per trade                                        |  |                              | 16.2    |   |      |   | 17.1    |  
|Average trades per day (in thousands)                              |  |                              | 147.2   |   |      |   | 101     |  
|Total trades (in thousands)                                        |  |                              | 9,126   |   |      |   | 6,163   |  
|Our market share of industry trades                                |  |                              | 33.8    | % |      |   | 35.6    | %
|                                                                   |  |                             
|Our listed issues: (9)                                             |  |                              |         |   |      |   |         |  
|Average number of issues traded during the period                  |  |                              | 854     |   |      |   | 705     |  
|                                                                   |  |                             
|Our members (average number trading during period):                |  |                              |         |   |      |   |         |  
|PMMs                                                               |  |                              | 10      |   |      |   | 10      |  
|CMMs                                                               |  |                              | 142     |   |      |   | 139     |  
|EAMs                                                               |  |                              | 102     |   |      |   | 94      |  
|                                                                   |  |                              |         |   |      |   |         |  
|Total                                                              |  |                              | 254     |   |      |   | 243     |  
|                                                                   |  |                              |         |   |      |   |         |  
|Employees at end of period                                         |  |                              | 189     |   |      |   | 164     |  
|                                                                   |  |                              |         |   |      |   |         |  

---

|(1) | Represents single counted contract volume. For example, a transaction of 500 contracts on our exchange is counted as a single 500 contract transaction for purposes of calculating
our volumes, even though we may receive transaction fees from parties on both sides of the transaction, one side of a transaction, or in some cases, neither side of a transaction.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our market share is calculated based on the number of contracts executed on our exchange as a percentage of total industry contract volume.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents each side of a buy or sell transaction. For example, a transaction of 500 contracts on our exchange is counted as two sides of 500 contracts, representing a buy and a
sell transaction. We do not currently receive transaction fees from non-broker-dealer customer sides, except for options on our premium products.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents our market share of total U.S. industry equity and index trading for members trading on our exchange based on contract trading volume.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | Average transaction fee per side is calculated by dividing our transaction fees by the total number of sides executed on our exchange. We have charged our members for executing
non-broker-dealer customer orders on our exchange except for options on our premium products. Comparing our average transaction fee per side to our average transaction fee per revenue side reflects the negative effect of our fee waivers or
reductions on our revenues, on a per side basis. For the three months ended March 31, 2006 and March 31, 2005, we have waived and discounted $9,541 and $6,511 of our fees, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Average cost of transaction fee per side is calculated by subtracting cost of revenues from transaction fees, which we refer to as net transaction fees, and dividing the result by
the total number of sides executed on our exchange.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Our average transaction fee per revenue side reflects the transaction fee we charge to our market participants per our publicly available pricing schedules. These schedules were
part of rule proposals that became effective upon filing pursuant to Section 19(b)(3)(A) of the Exchange Act. The SEC may abrogate such rule proposals within 60 days of filing if it determines that such action is necessary or
appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Exchange Act.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Members can have several contracts per trade. Trades represent the number of trades cleared through The Option Clearing Corporation, or the OCC. Market data revenue is generated on
a per trade basis, not on a contract basis.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | By issues we mean the number of securities underlying our options. We trade multiple options series on each underlying security.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

We derive our data from our own records and data for the markets in which we compete from information published by or prepared for the OCC and the OPRA.

Three Months Ended March 31, 2006 versus March 31, 2005

Overview

Net income increased 40.1% to $12.4 million during the three months ended March 31,
2006 from $8.9 million during the comparable period in 2005, primarily due to increased trading volumes on our exchange. Our expenses increased 22.6% to $21.0 million during the three months ended March 31, 2006 from $17.2 million during the
comparable period in 2005, primarily due to increased compensation and benefits costs.

Revenues

Transaction Fees

Transaction fee revenues
increased 38.0% to $36.9 million during the three months ended March 31, 2006 from $26.7 million during the comparable period in 2005, primarily due to increased trading volumes on our exchange. This volume growth was due to several factors,
including the following:



| |  |  | Industry ADV for equity options during the three months ended March 31, 2006 increased 37.9% from the comparable period in 2005. Our ADV increased 36.4% over the same period
and our market share decreased to 32.7% from 33.1%. Our ADV in index options was 28,000 during the three months ended March 31, 2006 compared to 5,000 in the comparable period in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The average number of issues available to trade on our exchange increased to 854 during the three months ended March 31, 2006 from 705 during the comparable period in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our average transaction fee per side decreased 1.0% to $0.125 during the three months ended March 31, 2006 from $0.126
during the comparable period in 2005 due to higher activity remittance fees and ETF and index license fees. Activity remittance fees increased due to higher assessments on our transactions pursuant to Section 31 of the Exchange Act. Also
increasing were licensing fees on ETF and index options due to increased volume in these products. Partly offsetting these increases was a decrease in our average pricing from $0.180 to $0.176 as a result of reaching certain overall volume
thresholds. Our average net transaction fee per side, which excludes activity remittance fees and ETF and license fees, decreased 4.1% to $0.105 during the three months ended March 31, 2006 from $0.109 during the comparable period in 2005. This
decrease was primarily due to the proportional increase in our non-broker-dealer customer sides. We currently do not charge any fees for most non-broker-dealer customer equity options transactions, except for options on our premium products. Had we
not charged non-broker-dealer customer sides for trading premium products, our average net transaction fee per side would have been $0.005 less during the three months ended March 31, 2006. Non-broker-dealer customer transactions represented
43.1% of all sides executed on our exchange during the three months ended March 31, 2006 compared to 41.4% during the comparable period in 2005. However, overall revenues generated from increased market maker and firm proprietary sides, on
which we do charge transaction fees, more than offset the increase in non-broker-dealer customer sides and the decrease in average net transaction fee per side.

Other Member Fees

Other member fees increased 1.4% to $5.6 million during the three months ended March 31, 2006
from $5.5 million during the comparable period in 2005. The increase was primarily driven increase in revenue recognized from the sale of Class B-2 memberships of $0.1 million and a corresponding increase in membership fees of $0.2 million. We
recognized



24



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##### Table of Contents

revenue from 4 additional Class B-2 memberships in the three months ended March 31, 2006. Additionally, income from
regulatory fines increased $0.1 million. Partly offsetting this increase was lower imputed interest and communication fees. Imputed interest from our sale of Class B-2 memberships decreased by $0.2 million due to the prepayments of installments as a
result of members selling their memberships to other broker-dealers. Communication fees decreased $0.1 million as we continue to direct our members to obtain and pay for their own communication lines to our network, which, in turn, reduces some of
our costs associated with these lines.

Market Data

Market data revenues increased 9.3% to $5.1 million during the three months ended March 31, 2006 from $4.6 million during the comparable period in 2005. The increase was primarily attributable to increased profit
by OPRA during the period as a result of a price increase in early 2006. Our number of trades increased 48.1% during the timeframe. We accounted for 33.8% of total industry trades during the three months ended March 31, 2006 and 35.6% during
the comparable period in 2005.

Expenses

Compensation and Benefits

Compensation and benefits expense increased 38.2% to $11.4 million during the three months
ended March 31, 2006 from $8.2 million during the comparable period in 2005. The increase was primarily due to higher stock based compensation costs and expenses for increased headcount. Stock-based compensation costs related to restricted
stock and options we granted on March 9, 2005, the date of our initial public offering, increased $1.0 million. This increase includes the full period effect of the expense in the three months ended March 31, 2006. Our headcount increased
to 189 as of March 31, 2006 from 164 as of March 31, 2005 driven by new business initiatives, including staff for the ISE Stock Exchange, as well as other support for our overall growth.

Technology and Communication

Technology and
communication expense increased 4.0% to $3.5 million during the three months ended March 31, 2006 from $3.4 million during the comparable period in 2005. Fees paid to OMX increased $0.1 million due to additional enhancements and maintenance of
our trading system. Other costs relating to our core trading system increased $0.1 million, primarily for capacity upgrades. Partly offsetting these increases was a decrease in expenses for our member trading network of $0.2 million as we continue
to direct members to obtain their own connectivity.

Occupancy

Occupancy expense increased 19.3% to $1.3 million during the three months ended March 31, 2006 from $1.1 million during the comparable period in 2005, primarily due to additional office space we leased in January
2006 to support our growth and preparation for ISE Stock Exchange.

Professional Fees

Professional fees increased 9.5% to $1.6 million during the three months ended March 31, 2006 from $1.5 million during the comparable period in 2005.
This increase was primarily due to $0.4 million in higher accounting advisory fees related to public company matters and $0.3 million in higher technology consulting related to the ISE Stock Exchange. Partly offsetting these increases was a $0.4
million decrease in legal fees as the year ago period included services in anticipation of us becoming a public company.

Other Expenses

Other expenses increased 34.3% to $1.0 million during the three months ended March 31, 2006 from $0.8 million during the
comparable period in 2005. Insurance expense increased $0.1 as a result of higher coverage subsequent to our initial public offering and other general expenses increased $0.1 million in conjunction with our overall growth.

Reorganization

We incurred $24,000 of
reorganization costs during the three months ended March 31, 2006 and $0.1 million during the comparable period in 2005. These expenses consisted primarily of legal, accounting and other professional fees related to our reorganization into a
holding company structure.



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##### Table of Contents

Interest and Investment Income

Interest and investment income increased to $1.6 million during the three months ended March 31, 2006 from $0.3 million during the comparable period
in 2005. The increase was attributable to $0.9 million of additional interest income on higher average cash balances and higher unrealized gains on securities owned of $0.4 million.

Provision for Income Taxes

Our tax provision increased to $9.7 million during the three
months ended March 31, 2006 from $7.6 million during the comparable period in 2005. Over the same period our effective tax rate decreased to 44.0% from 46.0% primarily due to a lower tax rate on returns from our invested cash.

Liquidity and Capital Resources

We presently finance
our business primarily through cash generated by our operating activities. On March 14, 2005, we sold 4,602,115 shares of Class A common stock at $18.00 per share in our initial public offering, for which we received net proceeds of $70.7
million. We believe that cash flows generated by our operating activities, together with net proceeds from our initial public offering, should be sufficient for us to fund our current operations for at least the next 12 months. In addition, we have
access to an uncommitted $10.0 million credit facility and may have the ability to raise capital through issuance of debt or equity to new or existing investors through private and public capital markets transactions, if necessary.

The following table sets forth our net cash flows from operating activities, investing activities and financing activities for the periods indicated:



|                                                    |  |                              |         |   |      |   |         |  
|--------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                    |  | Three Months Ended March 31, |        
|                                                    |  | 2006                         |         |   | 2005 |  
|                                                    |  | (Unaudited)                  |        
|Net cash provided by operating activities           |  | $                            | 6,498   |   |      | $ | 24,409  |  
|Net cash (used in)/provided by investing activities |  |                              | 2,121   |   |      |   | (274    | )
|Net cash provided by/(used in) financing activities |  |                              | (257    | ) |      |   | 58,889  |  
|                                                    |  |                              |         |   |      |   |         |  
|Increase in cash and cash equivalents               |  |                              | 8,362   |   |      |   | 83,024  |  
|Cash and cash equivalents, beginning of period      |  |                              | 170,927 |   |      |   | 44,847  |  
|                                                    |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period            |  | $                            | 179,289 |   |      | $ | 127,871 |  

Cash and cash equivalents increased to $179.3 million as of March 31, 2006
from $170.9 million as of December 31, 2005:



| |  |  | Our net cash provided by operating activities was $6.5 million for the three months ended March 31, 2006 primarily due to increased trading volumes on our exchange partly
offset by a decrease in our compensation and benefits payable related to cash payments we made to our employees as part of 2005 year end compensation as well as a decrease in our payment for order flow payable as a result of lower levels of our
members cash held under our payment for order flow program.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net cash provided by investing activities was $2.1 million for the three months ended March 31, 2006. We purchased intangible assets of $2.0 million primarily related to
our acquisition of intellectual property and other related assets of Longitude, Inc. We also had maturities of U.S. Treasury securities of $5.0 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net cash used in financing activities was $0.3 million for the three months ended March 31, 2006. We repurchased $2.0 million of our common stock tendered by our employees
to satisfy tax withholding obligations in connection with the vesting of awards of restricted stock. We repurchased these shares based on their fair market value on the vesting date. In addition, we paid a dividend of $0.05 per share on our common
stock or $1.9 million in March 2006. Partly offsetting these decreases was a tax benefit of $3.3 million we recorded related to options exercised by our employees in the first three months of 2006. Our taxes are reduced by the after tax effect of
the difference between the fair market value and strike price of the options our employees exercised.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

As of March 31, 2006, included in cash and cash equivalents is $0.7 million for our payment for
order flow program. Under this program we pay order flow providers on behalf of our market makers for order flow sent to the exchange. We assess fees to our market makers and distribute those funds to the order flow providers. Each market maker has
full discretion regarding the payment, and we administer the payments. Accordingly, we reflect the assessments and payments on a net basis with no impact on revenues or expenses. When fees are assessed, we record an asset with a corresponding
liability.

As of March 31, 2006, we had a letter of credit agreement totaling $417 to satisfy lease commitments and administrative
obligations.

Financial Condition

Our total assets increased to $289.1 million as of March 31, 2006 from $280.5 million as of December 31, 2005. This increase was primarily due to operating cash proceeds resulting from higher transaction
volumes. Also affecting our total assets were the following:



| |  |  | Our securities owned decreased to $10.4 million as of March 31, 2006 from $17.1 million as of December 31, 2005. Our securities owned are comprised of investments of our
excess cash in U.S. treasuries as well as investments in various mutual funds related to our long-term deferred compensation plan for our employees. U.S. treasuries decreased primarily due to the maturities of available for sale securities which
were transferred to cash and cash equivalents as well as the re-classification of shorter dated securities. Mutual fund investments decreased primarily due to the withdrawal of vested balances by employees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our income tax receivable was $2.9 million as of March 31, 2006 compared to a payable of $0.4 million as of December 31, 2005 primarily due to increased provision for
income taxes. The receivable balance resulted from tax benefits we realize as a result of options exercised in the three months ended March 31, 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other assets increased to $6.7 million as of March 31, 2006 from $5.3 million as of December 31, 2005 primarily due to the purchase of intangible assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net deferred tax asset decreased to $21.2 million as of March 31, 2006 from $22.3 million as of December 31, 2005 primarily due to the differences between the
financial statement and income tax basis we use to recognize software development costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our total liabilities decreased
from $95.5 million as of December 31, 2005 to $87.0 million as of March 31, 2006. This decrease was primarily due to a decrease in our compensation and benefits payable due to the payment of incentive compensation awards and exercises of
vested balances in our employee profit-sharing plan in the three months ended March 31, 2006.

We recorded $2.9 million of minority
interest representing interest of a minority shareholder in our subsidiary.

Contractual Obligations

The following table summarizes our future cash payments associated with contractual obligations as of March 31, 2006, which are primarily operating
leases for office space and equipment and contractual agreements for trading software license technology enhancements and support of our core trading system from OMX:



|                           |  |                        |        |                  |   |              |  |              |        |               |   |       |  |   |      
|-------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------ |  | ------------ | ------ | ------------- | - | ----- |  | - | -----
|                           |  | Payments Due by Period
|                           |  | Total                  |        | Less than 1 Year |   | 1 to 3 Years |  | 3 to 5 Years |        | After 5 Years
|                           |  | (in thousands)        
|Operating leases           |  | $                      | 25,520 |                  | $ | 5,010        |  | $            | 7,307  |               | $ | 3,906 |  | $ | 9,297
|OMX purchase obligations   |  | $                      | 17,032 |                  | $ | 4,059        |  | $            | 7,799  |               | $ | 5,174 |  | $ |     
|Other purchase obligations |  | $                      | 2,150  |                  | $ | 750          |  | $            | 1,400  |               | $ |      |  | $ |     
|                           |  |                        |        |                  |   |              |  |              |        |               |   |       |  |   |      
|Total                      |  | $                      | 44,702 |                  | $ | 9,819        |  | $            | 16,506 |               | $ | 9,080 |  | $ | 9,297
|                           |  |                        |        |                  |   |              |  |              |        |               |   |       |  |   |      

Our operating lease commitments primarily relate to obligations under operating leases with
initial non-cancelable terms in excess of one year for office space and computer equipment. OMX purchase obligations relate to contractual agreements for trading software licenses, technology enhancements and support of our core trading system from
OMX. Other purchase obligations relate to minimum license fees for certain index options.



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##### Table of Contents

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk to us generally represents
the risk of changes in value of a financial instrument that might result from fluctuations in interest rates and equity prices. We have internal processes governing our management of market risks in the normal course of our business operations.
Furthermore, we have not entered into any derivative contracts to mitigate such risks, though we may in the future.

Interest Rate
Risk

In order to maximize yields, we invest portions of our excess cash in short-term interest earning assets, primarily money
market instruments at commercial banks and U.S. treasuries with maturities of less than 2 years, which totaled $175.1 million and $183.6 million as of December 31, 2005 and March 31, 2006, respectively. We do not anticipate
that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.

Equity Price
Risk

As an exchange, we do not trade securities for our own account nor maintain inventories of securities for sale. However, we do
have investments in various mutual funds that we hold on behalf of our employees as part of our previous long-term performance-based profit-sharing plan. Under the plan, fund awards were granted to our employees, which they in turn invest in various
mutual fund investments. Employees vest in the distributions over a period of three years. The participating employees bear the risk of the vested portion of the investments, and we bear the risk of the unvested portion. In addition, we have
purchased U.S. treasuries with our available excess cash in order to increase our return. As a result, we are exposed to market price risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change
in quoted market prices and amounted to approximately $0.5 million and $0.4 million as of December 31, 2005 and March 31, 2006, respectively.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Companys
management evaluated, with the participation of the Companys Chief Executive Officer and President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).
Based upon that evaluation, the Chief Executive Officer and President and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective as of the period covered by this report. There have not been
any changes in the Companys internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

As an exchange, we are subject to routine reviews and inspections by the SEC as
well as legal proceedings arising in the ordinary course of business. We are not currently a party to any litigation or other legal proceedings that we believe are reasonably likely to have a material adverse effect on our operating results,
financial conditions or cash flows.

Item 1A. Risk Factors

Our business faces significant risks. The risks described below update the risk
factors described in our Annual Report on Form 10-K for the fiscal year ending 2005, and should be read in conjunction with those risk factors. The risk factors described in this Form 10-Q and our 2005 Form 10-K may not be the only
risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, results of operations or
prospects could be affected materially.



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##### Table of Contents

There are significant risks and uncertainties associated with the roll-out of ISE Stock Exchange.

On April 19, 2006, we announced that we were entering the equities market through the launch of ISE Stock Exchange, LLC in partnership with
key strategic investors. ISE Stock Exchange, LLC, which will operate as a facility of ISE and which ISE will manage, will introduce its first product, MidPoint Match, or MPM, in the third quarter of 2006, subject to regulatory authorization.
MPM is a continuous, instantaneous, fully automated, and anonymous matching platform for trading stock. MPMs matching platform will execute orders at the midpoint price of the NBBO, throughout the trading day. We anticipate that
MPM will be followed by an integrated displayed market offering in the fourth quarter of 2006, subject to regulatory approval. There are significant risks and uncertainties associated with this new business:



| |  |  | ISE Stock Exchange may not be accepted by the market as a reliable and effective trading platform or provide services at a price that is profitable. If ISE Stock Exchange is not
commercially successful, we may be required to find or provide additional funding or curtail or modify our business strategy, for which we may incur additional costs and expenses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although MPM has been successfully tested and operated on a trial basis, no sales or service has yet been provided in an actual trading market. In addition, we are in the
process of internally developing the displayed market offering to be rolled out in the fourth quarter of 2006, an endeavor we have not undertaken previously. Consequently, there has been no testing or operation of the displayed market offering yet.
Furthermore, we may not receive SEC authorization to launch the MPM or approval to launch the displayed market offering, and we may not successfully launch MPM or the displayed market offering in the time anticipated, or at all.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The successful integration of MPM and the displayed market offering may also face a number of significant challenges, such as integrating liquidity opportunities for MPM
and our displayed market offering, both on order entry and as prices change, while maintaining effective speed and responsiveness, as well as the uncertainties of the timing and impact of the implementation of Regulation NMS. Successful integration
of the two components may also depend on the ability and willingness of market participants to build new technology platforms. It is also dependent on the SECs timely approval of any necessary rule changes, which approval cannot be assured. We
may be unable to integrate the two components of ISE Stock Exchange successfully in the form or manner that we currently foresee.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we successfully develop and launch our displayed market offering, Regulation NMS, and changes in Regulation NMS, may adversely affect it. On April 6, 2005, the SEC adopted
Regulation NMS, which is a set of regulations that will govern certain aspects of trading on securities market centers. Its provisions are scheduled to become effective at various points throughout 2006. One of the principal features of Regulation
NMS is the modernization of the trade through rule. Among other things, Regulation NMS requires market centers to establish and maintain procedures to prevent trade throughs, or the execution of an order at a price inferior
to the best bid or offer displayed by another market center at the time of execution. Regulation NMS will protect and apply only to quotes available for immediate execution. We believe that the trade through rule implemented by
Regulation NMS may increase competition between markets, including ISE Stock Exchange.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that Regulation NMS will
not have a significant impact on our MPM, but may affect our displayed market offering if we successfully develop and launch it. For example, Regulation NMS, as currently formulated, will impose a cap of $0.003 per share on the access fees
charged by market centers to members (or customers) and non-members based on executions against the best bid or best offer displayed through the consolidated quote system. This system continuously provides the best bid quote and best offer quote in
listed equity securities to the public. As a result, the transaction fees that ISE Stock Exchange may charge for executions against its best bid and offer on the displayed market offering will be capped. This cap could decrease the amount of
transaction fees that ISE Stock Exchange earns and prevent it from increasing its revenues by charging higher prices. In addition, we have begun to develop business strategies in consideration of the rules in the current form of Regulation NMS. Any
delay in the implementation of Regulation NMS, beyond what is currently contemplated, as well as any amendment to Regulation NMS, may adversely affect our business strategies as they relate to the development and launch of the displayed market
offering.



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##### Table of Contents

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

Pending use, the net proceeds of our
initial public offering remain invested in short-term, interest-bearing money market investments. We intend to use the proceeds of the initial public offering for working capital and general corporate purposes, as described in our registration
statement on Form S-1 (File No. 333-117145). There has been no material change in the planned use of the initial public offering proceeds as described in our final Prospectus filed with the SEC pursuant to Rule 424(b).

The table below sets forth the information with respect to purchases made by the Company of our common stock during the three months ended March 31, 2006.



|                             |  |                                     |  |                              |       |                                                                                  |   |                                                                                |  
|---------------------------- |  | ----------------------------------- |  | ---------------------------- | ----- | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------ | -
|Period                       |  | Total Number of Shares Purchased(1) |  | Average Price Paid Per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |   | Maximum Number of Shares that May Yet Be
Purchased Under the Plans or Programs
|Jan. 1, 2006  Jan. 31, 2006 |  | 29,684                              |  | $                            | 27.52 |                                                                                  |  |                                                                                | 
|Mar. 1, 2006  Mar. 31, 2006 |  | 25,152                              |  | $                            | 45.32 |                                                                                  |  |                                                                                | 

---

|(1) | These shares represent shares of common stock that were tendered by employees to the Company to satisfy tax withholding obligations in connection with the vesting of
awards of restricted stock. Such shares are repurchased by the Company based on their fair market value on the vesting date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 5. Other Information

On May 11, 2006, the Company announced certain changes to the leadership
of its Board of Directors. After four years of service, Ivers W. Riley stepped down as Chairman of the ISE, but will remain on the Board of Directors. Dr. Frank J. Jones, Ph.D., who has been a director of the ISE since 2000 and was most
recently Vice Chairman of the Board, became Chairman. Dr. John F. Marshall, Ph.D., who has been a director of the ISE since 2000 and is currently Chairman of the Finance and Audit Committee, became Vice Chairman. The Company also announced
that two new members are joining the Board of Directors. Peter J. Bottini will serve as the representative of ISEs Electronic Access Members (EAMs). Edward Boyle will serve as the representative of ISEs Competitive Market Makers (CMMs).
Mr. Bottini and Mr. Boyle are replacing Brian Donnelley and John Koltes, who are leaving the Board.

On May 11, 2006, the
Company declared a quarterly dividend of $0.05 per share of Class A common stock to stockholders on record as of June 23, 2006. This dividend is payable on June 30, 2006.

Item 6. Exhibits



| | 31.1 | Certifications by the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ----------------------------------------------------------------------------------------------------------------------



| | 31.2 | Certifications by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------



| | 32.1 | Certifications by the Chief Executive Officer and President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                    |  |                                         |  |                                                          
|------------------- |  | --------------------------------------- |  | ---------------------------------------------------------
|                    |  | INTERNATIONAL SECURITIES EXCHANGE, INC.
|                    |  |                                        
|Dated: May 12, 2006 |  | By:                                     |  | /s/ Bruce Cooperman                                      
|                    |  | Name:                                   |  | Bruce Cooperman                                          
|                    |  | Title:                                  |  | Chief Financial Officer                                  
|                    |  |                                         |  | (Duly Authorized Officer and Principal Financial Officer)



30