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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 June 30, 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)



---

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 August 3, 2006 there were 38,115,235 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 June 30, 2006

Table of
Contents



|                              |  |                                                                                                                            |  |   
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | --
|Part I.
FINANCIAL INFORMATION
|                              |  |                                                                                                                           
|                              |  | Item 1.
Financial Statements                                                                                               |  |   
|                              |  |                                                                                                                           
|                              |  | Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2006 and 2005                         |  | 3 
|                              |  |                                                                                                                           
|                              |  | Consolidated Statements of Financial Condition as of June 30, 2006 and December 31, 2005                                   |  | 4 
|                              |  |                                                                                                                           
|                              |  | Consolidated Statements of Changes in Stockholders Equity as of June 30, 2006 and December 31, 2005 and December 31, 2004 |  | 5 
|                              |  |                                                                                                                           
|                              |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005                                      |  | 6 
|                              |  |                                                                                                                           
|                              |  | Notes to Consolidated Financial Statements                                                                                 |  | 7 
|                              |  |                                                                                                                           
|                              |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 14
|                              |  |                                                                                                                           
|                              |  | Item 3.
Quantitative and Qualitative Disclosure about Market Risk                                                          |  | 32
|                              |  |                                                                                                                           
|                              |  | Item 4.
Controls and Procedures                                                                                            |  | 32
|                              | 
|Part II.
OTHER INFORMATION    |  |                                                                                                                           
|                              |  |                                                                                                                           
|                              |  | Item 1.
Legal Proceedings                                                                                                  |  | 34
|                              |  |                                                                                                                           
|                              |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                                |  | 34
|                              |  |                                                                                                                           
|                              |  | Item 6.
Exhibits                                                                                                           |  | 35
|                              | 
|Signatures                    |  | 35                                                                                                                        



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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 Ended June 30, |        | Six Months Ended June 30,
|                                               |  | 2006                        |        | 2005                      |   | 2006   |  | 2005
|                                               |  | (Unaudited)                 |        | (Unaudited)              
|Revenues:                                      |  |                             |        |                           |   |        |  |      |        |  |   |       
|Transaction fees                               |  | $                           | 40,682 |                           | $ | 26,987 |  | $    | 77,549 |  | $ | 53,701
|Member fees and other                          |  |                             | 6,330  |                           |   | 5,214  |  |      | 11,952 |  |   | 10,760
|Market data                                    |  |                             | 4,095  |                           |   | 4,787  |  |      | 9,150  |  |   | 9,413 
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total revenues                                 |  |                             | 51,107 |                           |   | 36,988 |  |      | 98,651 |  |   | 73,874
|Cost of revenues:                              |  |                             |        |                           |   |        |  |      |        |  |   |       
|Activity remittance fees                       |  |                             | 3,706  |                           |   | 3,022  |  |      | 8,051  |  |   | 5,724 
|License fees                                   |  |                             | 2,321  |                           |   | 1,323  |  |      | 3,946  |  |   | 2,254 
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total cost of revenues                         |  |                             | 6,027  |                           |   | 4,345  |  |      | 11.997 |  |   | 7,978 
|                                               |  |                             |        |                          
|Gross margin                                   |  |                             | 45,080 |                           |   | 32,643 |  |      | 86,654 |  |   | 65,896
|Expenses:                                      |  |                             |        |                           |   |        |  |      |        |  |   |       
|Compensation and benefits                      |  |                             | 11,476 |                           |   | 9,906  |  |      | 22,844 |  |   | 18,133
|Technology and communication                   |  |                             | 3,739  |                           |   | 3,251  |  |      | 7,257  |  |   | 6,633 
|Occupancy                                      |  |                             | 1,396  |                           |   | 1,054  |  |      | 2,714  |  |   | 2,159 
|Professional fees                              |  |                             | 1,443  |                           |   | 1,150  |  |      | 3,071  |  |   | 2,637 
|Marketing and business development             |  |                             | 816    |                           |   | 1,093  |  |      | 1,438  |  |   | 1,679 
|Depreciation and amortization                  |  |                             | 1,839  |                           |   | 1,511  |  |      | 3,356  |  |   | 3,009 
|Other                                          |  |                             | 1,538  |                           |   | 1,139  |  |      | 2,571  |  |   | 1,909 
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total direct expenses                          |  |                             | 22,247 |                           |   | 19,104 |  |      | 43,251 |  |   | 36,159
|Reorganization                                 |  |                             | 105    |                           |   |       |  |      | 129    |  |   | 102   
|Offering cost                                  |  |                             |       |                           |   | 54     |  |      |       |  |   | 54    
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Total expenses                                 |  |                             | 22,352 |                           |   | 19,158 |  |      | 43,380 |  |   | 36,315
|                                               |  |                             |        |                          
|Operating income                               |  |                             | 22,728 |                           |   | 13,485 |  |      | 43,274 |  |   | 29,581
|Interest and investment income                 |  |                             | 1,535  |                           |   | 1,027  |  |      | 3,146  |  |   | 1,349 
|Minority interest                              |  |                             | 272    |                           |   |       |  |      | 272    |  |   |      
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Income before provision for income taxes       |  |                             | 24,535 |                           |   | 14,512 |  |      | 46,692 |  |   | 30,930
|Provision for income taxes                     |  |                             | 10,832 |                           |   | 6,377  |  |      | 20,571 |  |   | 13,933
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Net income                                     |  | $                           | 13,703 |                           | $ | 8,135  |  | $    | 26,121 |  | $ | 16,997
|                                               |  |                             |        |                           |   |        |  |      |        |  |   |       
|Earnings per share:                            |  |                             |        |                           |   |        |  |      |        |  |   |       
|Basic                                          |  | $                           | 0.37   |                           | $ | 0.22   |  | $    | 0.70   |  | $ | 0.49  
|Diluted                                        |  | $                           | 0.35   |                           | $ | 0.21   |  | $    | 0.66   |  | $ | 0.46  
|Weighted average number of shares outstanding: |  |                             |        |                           |   |        |  |      |        |  |   |       
|Basic                                          |  |                             | 37,380 |                           |   | 36,741 |  |      | 37,242 |  |   | 34,910
|Diluted                                        |  |                             | 39,477 |                           |   | 38,818 |  |      | 39,411 |  |   | 36,911

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



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##### Table of Contents

INTERNATIONAL SECURITIES EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share amounts)



|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                |  | June 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                                                                                                |  | (Unaudited)   |         |   |                   |  
|ASSETS                                                                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                                                 |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                       |  | $             | 200,434 |   |                   | $ | 170,927 |  
|Accounts receivable, net                                                                                                                                                                                        |  |               | 39,844  |   |                   |   | 35,048  |  
|Income tax receivable                                                                                                                                                                                           |  |               | 2,919   |   |                   |   |        |  
|Securities owned                                                                                                                                                                                                |  |               | 4,957   |   |                   |   | 9,890   |  
|Other current assets                                                                                                                                                                                            |  |               | 3,333   |   |                   |   | 2,745   |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                                            |  |               | 251,487 |   |                   |   | 218,610 |  
|Securities owned                                                                                                                                                                                                |  |               | 4,909   |   |                   |   | 7,244   |  
|Accounts receivable                                                                                                                                                                                             |  |               |        |   |                   |   | 587     |  
|Fixed assets, net                                                                                                                                                                                               |  |               | 28,302  |   |                   |   | 29,205  |  
|Deferred tax asset, net                                                                                                                                                                                         |  |               | 22,365  |   |                   |   | 22,333  |  
|Other assets                                                                                                                                                                                                    |  |               | 6,569   |   |                   |   | 2,517   |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                    |  |               | 313,632 |   |                   |   | 280,496 |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|LIABILITIES                                                                                                                                                                                                     |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Accounts payable and accrued expenses                                                                                                                                                                           |  |               | 19,018  |   |                   |   | 15,406  |  
|Compensation and benefits payable                                                                                                                                                                               |  |               | 6,568   |   |                   |   | 8,371   |  
|Deferred revenue                                                                                                                                                                                                |  |               | 5,375   |   |                   |   | 4,687   |  
|Income taxes payable                                                                                                                                                                                            |  |               |        |   |                   |   | 372     |  
|Payment for order flow payable                                                                                                                                                                                  |  |               | 9,200   |   |                   |   | 12,233  |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                                       |  |               | 40,161  |   |                   |   | 41,069  |  
|Deferred revenue                                                                                                                                                                                                |  |               | 50,636  |   |                   |   | 50,238  |  
|Other liabilities                                                                                                                                                                                               |  |               | 3,841   |   |                   |   | 4,211   |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                               |  |               | 94,638  |   |                   |   | 95,518  |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Minority interest                                                                                                                                                                                               |  |               | 2,610   |   |                   |   |        |  
|Commitments and contingencies (Note 4)                                                                                                                                                                          |  |               |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Class A common stock, $0.01 par value, 150,000 authorized as of June 30, 2006 and December 31, 2005 and 37,417 and 37,025
shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively |  |               | 374     |   |                   |   | 370     |  
|Additional paid-in capital                                                                                                                                                                                      |  |               | 145,964 |   |                   |   | 136,918 |  
|Retained earnings                                                                                                                                                                                               |  |               | 70,067  |   |                   |   | 47,743  |  
|Accumulated other comprehensive loss                                                                                                                                                                            |  |               | (21     | ) |                   |   | (53     | )
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                      |  |               | 216,384 |   |                   |   | 184,978 |  
|                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total liabilities, minority interest and stockholders equity                                                                                                                                                   |  | $             | 313,632 |   |                   | $ | 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 |  | CommonStock |     | Additional Paid InCapital |   |         | RetainedEarnings |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome/(Loss) |     |   | TotalShareholders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                                                                 |  |       |  |             |    |                           |   |        |                  |  |   | 26,121               |   |  |                                            |    |   |                          |   |    |   |  |   | 26,121  |  
|Dividend                                                                   |  |       |  |             |    |                           |   |        |                  |  |   | (3,797               | ) |  |                                            |    |   |                          |   |    |   |  |   | (3,797  | )
|Amortization of stock based plan                                           |  |       |  |             |    |                           |   | 3,933   |                  |  |   |                     |   |  |                                            |    |   |                          |   |    |   |  |   | 3,933   |  
|Stock options exercised and restricted stock vested                        |  | 392    |  |             | 4   |                           |   | 584     |                  |  |   |                     |   |  |                                            |    |   |                          |   |    |   |  |   | 588     |  
|Shares repurchased                                                         |  |       |  |             |    |                           |   | (1,971  | )                |  |   |                     |   |  |                                            |    |   |                          |   |    |   |  |   | (1,971  | )
|Tax benefit for stock options exercised                                    |  |       |  |             |    |                           |   | 6,500   |                  |  |   |                     |   |  |                                            |    |   |                          |   |    |   |  |   | 6,500   |  
|Change in net unrealized gain/(loss) on available for sale securities, net |  |       |  |             |    |                           |   |        |                  |  |   |                     |   |  |                                            |    |   |                          |   | 32  |   |  |   | 32      |  
|                                                                           |  |        |  |             |     |                           |   |         |                  |  |   |                      |   |  |                                            |     |   |                          |   |     |   |  |   |         |  
|As of June 30, 2006 (Unaudited)                                            |  | 37,417 |  | $           | 374 |                           | $ | 145,964 |                  |  | $ | 70,067               |   |  | $                                          |    |   |                          | $ | (21 | ) |  | $ | 216,384 |  
|                                                                           |  |        |  |             |     |                           |   |         |                  |  |   |                      |   |  |                                            |     |   |                          |   |     |   |  |   |         |  

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)



|                                                                                        |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                        |  | Six Months EndedJune 30, |        
|                                                                                        |  | 2006                     |         |   | 2005 |  
|                                                                                        |  | (Unaudited)              |        
|Cash flows from operating activities:                                                   |  |                          |         |   |      |   |         |  
|Net income                                                                              |  | $                        | 26,121  |   |      | $ | 16,997  |  
|Adjustments to reconcile net income to cash provided by/(used in) operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                           |  |                          | 3,172   |   |      |   | 3,009   |  
|Asset impairment                                                                        |  |                          | 184     |   |      |   |        |  
|Minority interest                                                                       |  |                          | 2,610   |   |      |   |        |  
|Stock based compensation                                                                |  |                          | 3,933   |   |      |   | 1,869   |  
|Deferred taxes                                                                          |  |                          | (32     | ) |      |   | (3,845  | )
|Unrealized (gain)/loss on securities owned and available for sale securities, net       |  |                          | (159    | ) |      |   | (66     | )
|Excess tax benefits from share-based payment arrangements                               |  |                          | (6,500  | ) |      |   |        |  
|(Increase)/decrease in operating assets:                                                |  |                          |         |   |      |   |         |  
|Accounts receivable, net                                                                |  |                          | (4,209  | ) |      |   | 57      |  
|Income tax receivable                                                                   |  |                          | 3,581   |   |      |   | 7,539   |  
|Securities owned                                                                        |  |                          | 2,486   |   |      |   | 4,074   |  
|Other assets                                                                            |  |                          | (787    | ) |      |   | 2,710   |  
|Increase/(decrease) in operating liabilities:                                           |  |                          |         |   |      |   |         |  
|Accounts payable and accrued expenses                                                   |  |                          | 3,612   |   |      |   | 7,778   |  
|Compensation and benefits payable                                                       |  |                          | (1,803  | ) |      |   | (7,752  | )
|Income tax payable                                                                      |  |                          | (372    | ) |      |   |        |  
|Deferred revenue                                                                        |  |                          | 1,086   |   |      |   | 1,008   |  
|Payment for order flow payable                                                          |  |                          | (3,033  | ) |      |   | (421    | )
|Other liabilities                                                                       |  |                          | (370    | ) |      |   | (364    | )
|                                                                                        |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                               |  |                          | 29,520  |   |      |   | 32,593  |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                                   |  |                          |         |   |      |   |         |  
|Purchase of fixed assets                                                                |  |                          | (2,312  | ) |      |   | (1,236  | )
|Purchase of intangible assets                                                           |  |                          | (2,234  | ) |      |   |        |  
|Investment in ISE Stock Exchange, LLC                                                   |  |                          | (1,760  | ) |      |   |        |  
|Maturities of available for sale securities                                             |  |                          | 4,973   |   |      |   | 4,990   |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Net cash provided by/(used in) investing activities                                     |  |                          | (1,333  | ) |      |   | 3,754   |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                                   |  |                          |         |   |      |   |         |  
|Dividend                                                                                |  |                          | (3,797  | ) |      |   | (11,784 | )
|Net proceeds from initial public offering                                               |  |                          |        |   |      |   | 70,673  |  
|Proceeds from options exercised                                                         |  |                          | 588     |   |      |   |        |  
|Share repurchase                                                                        |  |                          | (1,971  | ) |      |   |        |  
|Excess tax benefits from share-based payment arrangements                               |  |                          | 6,500   |   |      |   |        |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Net cash provided by/(used in) financing activities                                     |  |                          | 1,320   |   |      |   | 58,889  |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Increase in cash and cash equivalents                                                   |  |                          | 29,507  |   |      |   | 95,236  |  
|Cash and cash equivalents, beginning of period                                          |  |                          | 170,927 |   |      |   | 44,847  |  
|                                                                                        |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                |  | $                        | 200,434 |   |      | $ | 140,083 |  
|                                                                                        |  |                          |         |   |      |   |         |  

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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##### Table of Contents

INTERNATIONAL SECURITIES EXCHANGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(Information as of June 30, 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 U.S. generally accepted accounting principles, or GAAP.
Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP 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 in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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 (Longitude). 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 represents The Goldman Sachs Group, Inc.s investment in Longitude LLC.

On April 18, 2006, the Company along with several strategic investors formed ISE Stock Exchange, LLC (ISE Stock Exchange). This new
venture represents the Companys entrance into the equities market. Under the terms of the Amended and Restated Limited Liability Company Agreement, the Company will retain a majority of the voting interest and any losses from the operations
will be allocated to the strategic investors. The company has determined that ISE Stock Exchange is a variable interest entity, or VIE, in accordance with FIN46(R) Consolidation of Variable Interest Entities. In general, a VIE is a
corporation, partnership, limited liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional
subordinated financial support; (ii) has a group of equity owners that are unable to make significant decisions about its activities; or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to
receive returns generated by its operations. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes. As the company is not currently required to absorb the losses of the VIE, it has determined that it is not the primary beneficiary of the VIE, and therefore the results of the VIE are not consolidated. The ISE Stock
Exchange may be consolidated in the future depending on various facts and circumstances. The Company has accounted for its investment under the equity method of accounting.

Use of Estimates

The
preparation of the Companys consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of 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 $8,555 and $6,476 for the three months ended June 30, 2006 and 2005, respectively, and $18,097 and $12,987 for the six months ended June 30, 2006 and 2005,
respectively. The Company waives or discounts certain trading fees.

Market data revenues are predominantly 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 net income based on its pro-rata share of industry trade (not contract)
volume. Revenue is recorded as transactions occur on a trade date basis.



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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 software; and regulatory and administrative fees. Other fees represent fees for services provided by Longitude.
Connectivity, access fees and communications, equipment and trading software fees and Longitude revenues are charged and recognized on a monthly basis based upon a specific fixed fee for each service. Revenue from the sale of Class B-2 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 48 Class B-2 memberships as of June 30, 2006. The Class B-2 memberships were each 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 purchase agreement grants immediate membership upon execution of the purchase 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.



|                                            |  |              |         |                  |   |        
|------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                            |  | June 30,2006 |         | December 31,2005
|Company funds                               |  | $            | 199,814 |                  | $ | 165,232
|Reserved for payment for order flow program |  |              | 620     |                  |   | 5,695  
|                                            |  |              |         |                  |   |        
|Total                                       |  | $            | 200,434 |                  | $ | 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:



|              |  |              |       |                  |   |       
|------------- |  | ------------ | ----- | ---------------- | - | ------
|              |  | June 30,2006 |       | December 31,2005
|U.S. treasury |  | $            | 4,957 |                  | $ | 9,890 
|Mutual funds  |  |              | 4,909 |                  |   | 7,244 
|              |  |              |       |                  |   |       
|Total         |  | $            | 9,866 |                  | $ | 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.

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.



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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 was 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 June 30, 2006
were $318 and $174 lower, respectively, and for the six months ended June 30, 2006 were $615 and $338 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 $1,029 and $1,555 for software licenses and software developed for internal use during the six months ended June 30, 2006
and the year ended December 31, 2005, respectively.

Marketing and Promotional Fees

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

Intellectual Property

All
costs related to patents on internally developed intellectual property are expensed when 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. During
the three months ended June 30, 2006, the company recorded an impairment charge of $0.2 million related to software licenses.

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.



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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 any 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 June 30, 2006 and 2005 were $1,745 and $1,526, respectively, and for the six months
ended June 30, 2006 and 2005 were $3,508 and $3,035, 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 $2,253 and $1,902 for the three months ended June 30, 2006 and 2005, respectively, and for the six months ended June 30, 2006 and 2005 were $4,391 and $3,854, respectively. In addition, the Company has entered into
contractual agreements with certain index providers for the rights to list index products. At June 30, 2006, future minimum payments for commitments are as follows:



|                                    |  |                 |  |       |  |       |  |      
|----------------------------------- |  | --------------- |  | ----- |  | ----- |  | -----
|                                    |  | OperatingLeases |  | OMX   |  | Other |  | Total
|Six months ending December 31, 2006 |  | 3,336           |  | 1,306 |  | 500   |  | 5,142
|Year ending December 31, 2007       |  | 4,635           |  | 4,137 |  | 500   |  | 9,272
|Year ending December 31, 2008       |  | 2,767           |  | 3,662 |  | 878   |  | 7,307
|Year ending December 31, 2009       |  | 1,963           |  | 2,587 |  |      |  | 4,550
|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 June 30, 2006 and
December 31, 2005, the Company provided letters of credit totaling $416 and $424, respectively, collateralized by certificates of deposit at a financial institution which are included in other assets.

Line of Credit

As of
June 30, 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 as of 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:



|                                 |  |              |        |   |                  |   |        |  
|-------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                 |  | June 30,2006 |        |   | December 31,2005 |  
|Trading related fees             |  | $            | 29,451 |   |                  | $ | 22,611 |  
|Payment for order flow program   |  |              | 8,580  |   |                  |   | 6,538  |  
|Class B-2 memberships:           |  |              |        |   |                  |   |        |  
|Current                          |  |              | 600    |   |                  |   | 6,000  |  
|Non-current                      |  |              |       |   |                  |   | 600    |  
|Unamortized discount             |  |              | (39    | ) |                  |   | (174   | )
|Due from ISE Stock Exchange, LLC |  |              | 1,197  |   |                  |   |       |  
|Other                            |  |              | 77     |   |                  |   | 96     |  
|Allowance for doubtful accounts  |  |              | (22    | ) |                  |   | (36    | )
|                                 |  |              |        |   |                  |   |        |  
|Total                            |  | $            | 39,844 |   |                  | $ | 35,635 |  
|                                 |  |              |        |   |                  |   |        |  



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6. MEMBER FEES AND OTHER

Member fees and other are comprised of the following:



|                                                               |  |                            |       |                          |   |       |  |      |        |  |   |       
|-------------------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                                               |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                                                               |  | 2006                       |       | 2005                     |   | 2006  |  | 2005
|Connectivity, access fees and other fees                       |  | $                          | 3,524 |                          | $ | 2,960 |  | $    | 6,745  |  | $ | 5,966 
|Communication, equipment and software fees                     |  |                            | 1,093 |                          |   | 767   |  |      | 1,778  |  |   | 1,570 
|Regulatory and administrative fees                             |  |                            | 502   |                          |   | 238   |  |      | 906    |  |   | 527   
|Revenue from sale of Class B-2 memberships                     |  |                            | 1,198 |                          |   | 1,127 |  |      | 2,388  |  |   | 2,218 
|Imputed interest on installment sales of Class B-2 memberships |  |                            | 13    |                          |   | 122   |  |      | 135    |  |   | 479   
|                                                               |  |                            |       |                          |   |       |  |      |        |  |   |       
|Total                                                          |  | $                          | 6,330 |                          | $ | 5,214 |  | $    | 11,952 |  | $ | 10,760
|                                                               |  |                            |       |                          |   |       |  |      |        |  |   |       

7. DIVIDEND

On May 11, 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 June 30, 2006, to holders of
record as of the close of business on June 23, 2006.

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 June 2016. A summary of the stock
option activity as of June 30, 2006 is as follows:



|                               |  |           |   |  |                                        |       |                                      |     |                    |           |                                                   |   |     
|------------------------------ |  | --------- | - |  | -------------------------------------- | ----- | ------------------------------------ | --- | ------------------ | --------- | ------------------------------------------------- | - | ----
|                               |  | Options   |   |  | WeightedAverageExercisePrice PerOption |       | WeightedAverageRemainingLife (years) |     | OptionsExercisable |           | WeightedAverageExercisePrice PerExercisableOption
|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  |                                      |     |                    |           |                                                   |   |     
|                               |  |           |   |  |                                        |       |                                      |     |                    |           |                                                   |   |     
|Outstanding, December 31, 2005 |  | 3,958,587 |   |  | $                                      | 3.88  |                                      | 6.9 |                    | 3,383,703 |                                                   | $ | 1.43
|Granted                        |  | 65,601    |   |  | $                                      | 39.37 |                                      | 9.9 |                    |          |                                                   |   |    
|Forfeited                      |  |          |   |  |                                        |      |                                      |     |                    |           |                                                   |   |    
|Exercised                      |  | (287,965  | ) |  | $                                      | 1.75  |                                      |     |                    |           |                                                   |   |     
|                               |  |           |   |  |                                        |       |                                      |     |                    |           |                                                   |   |     
|Outstanding, June 30, 2006     |  | 3,736,223 |   |  | $                                      | 4.67  |                                      | 6.5 |                    | 3,177,471 |                                                   | $ | 1.84
|                               |  |           |   |  |                                        |       |                                      |     |                    |           |                                                   |   |     

The weighted average estimated fair value of the options granted during the year ended
December 31, 2005 was $5.95 and the six months ended June 30, 2006 was $12.99 per option. The Company used a binomial model to value the options. The following assumptions were used:



|      |  |               |   |  |                     |   |  |               |   |  |                        
|----- |  | ------------- | - |  | ------------------- | - |  | ------------- | - |  | -----------------------
|Grant |  | DividendYield |   |  | Expected Volatility |   |  | Risk-FreeRate |   |  | ExpectedLife (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 the Omnibus Stock Plan primarily in connection with
year-end compensation and its initial public offering. All of the restricted stock outstanding as of



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June 30, 2006 require 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 the RSAs is set forth below:



|                               |  |                        |  
|------------------------------ |  | ---------------------- | -
|Grant                          |  | Restricted StockAwards |  
|Outstanding, December 31, 2005 |  | 645,117                |  
|Granted                        |  | 173,786                |  
|Forfeited                      |  | (15,841                | )
|Vested                         |  | (158,424               | )
|                               |  |                        |  
|Outstanding, June 30, 2006     |  | 644,638                |  

Stock compensation expenses related to RSAs were $1,510 and $1,209 for the three months
June 30, 2006 and 2005, respectively and $3,154 and $1,521 for the six months ended June 30, 2006 and 2005, respectively.

Restricted Stock Units

The Company has granted to its non-industry directors, and will continue to grant, restricted
stock units (RSUs) under the Omnibus Stock Plan at a value of $10 per non-industry director on a quarterly basis. Under the restriction, the stock cannot be sold until one year after their service on the Board is terminated. Stock
compensation expenses related to RSUs were $80 for the three months ended June 30, 2006 and $160 for the six months ended June 30, 2006.



|                               |  |                       
|------------------------------ |  | ----------------------
|Grant                          |  | Restricted StockAwards
|Outstanding, December 31, 2005 |  | 0                     
|Granted                        |  | 4,023                 
|Forfeited                      |  |                      
|Vested                         |  |                      
|                               |  |                       
|Outstanding, June 30, 2006     |  | 4,023                 

9. EARNINGS PER SHARE

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 EndedJune 30, |        | Six Months EndedJune 30,
|                                                                                               |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|Basic earnings per share:                                                                      |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net income                                                                                     |  | $                          | 13,703 |                          | $ | 8,135  |  | $    | 26,121 |  | $ | 16,997
|Weighted average shares outstanding                                                            |  |                            | 37,380 |                          |   | 36,741 |  |      | 37,242 |  |   | 34,910
|Basic earnings per share                                                                       |  | $                          | 0.37   |                          | $ | 0.22   |  | $    | 0.70   |  | $ | 0.49  
|Diluted earnings per share:                                                                    |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net income                                                                                     |  | $                          | 13,703 |                          | $ | 8,135  |  | $    | 26,121 |  | $ | 16,997
|Weighted average shares outstanding                                                            |  |                            | 37,380 |                          |   | 36,741 |  |      | 37,242 |  |   | 34,910
|Diluted effect of common stock equivalent shares related to stock options and restricted stock |  |                            | 2,097  |                          |   | 2,077  |  |      | 2,169  |  |   | 2,001 
|                                                                                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Weighted average shares outstandingdiluted                                                    |  |                            | 39,477 |                          |   | 38,818 |  |      | 39,411 |  |   | 36,911
|                                                                                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Diluted earnings per share                                                                     |  | $                          | 0.35   |                          | $ | 0.21   |  | $    | 0.66   |  | $ | 0.46  

Diluted EPS computation does not include the anti-dilutive effect of 28 and 536 options and RSAs
for the three months ended June 30, 2006 and 2005 respectively, and 18 and 333 options and RSAs for the six months ended June 30, 2006 and 2005 respectively.

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 EndedJune 30, |        |      | Six Months EndedJune 30, |      
|                                                             |  | 2006                       |        | 2005 |                          |       | 2006 |  | 2005 |       
|Net income                                                   |  | $                          | 13,703 |      | $                        | 8,135 |      |  | $    | 26,121 |  | $ | 16,997 |  
|Change in other comprehensive income:                        |  |                            |        |      |                          |       |      |  |      |        |  |   |        |  
|Unrealized loss on available for sale securities, net of tax |  |                            | 15     |      |                          | (43   | )    |  |      | 32     |  |   | (22    | )
|                                                             |  |                            |        |      |                          |       |      |  |      |        |  |   |        |  
|Total comprehensive income                                   |  | $                          | 13,718 |      | $                        | 8,092 |      |  | $    | 26,153 |  | $ | 16,975 |  
|                                                             |  |                            |        |      |                          |       |      |  |      |        |  |   |        |  

11. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

The Company has one reportable business segment, as an electronic exchange for equity and index options and related services. This segment comprises well
over 90% of the companys total revenues, profits, and assets. Revenues in the options business are derived in the U.S. and



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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 EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                      |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Members                               |  | 2                          |   |  | 2                        |   |  | 2    |   |  | 2    |  
|Approximate percent of total revenues |  | 23                         | % |  | 21                       | % |  | 23   | % |  | 20   | %



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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 the largest equity options exchange and among the leading options exchanges in the world. We are an innovative securities market, founded on the principle that technology and competition create better, more
efficient markets for investors. We developed a unique market structure for advanced screen-based trading systems and in May 2000 launched the first fully electronic U.S. options exchange. Our exchange currently 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 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 common stock at $30.00 per share. We did not receive any proceeds from the sale of common stock from this offering nor did we sell any shares of common stock.

We earned revenues of $51.1 million in the second quarter of 2006 compared to $37.0 million in the same period last year. Our gross margin (net
revenues) was $45.1 million in the second quarter of 2006 compared to $32.6 million in the same period last year. Our net income was $13.7 million in the second quarter of 2006 compared to $8.1 million in the same period last year.

Business Environment

The
options industry continues to operate in an increasingly dynamic and competitive environment. Our business is affected 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. remained favorable despite a backdrop of inflationary concerns, higher energy prices and continuing rate
increases by the U.S. Federal Reserve. The equity markets began to experience higher levels of volatility in the second quarter of 2006. The NASDAQ Composite Index decreased approximately 7% since the end of the first quarter of 2006
fluctuating between a high of 2,371 in mid-April to a low of 2,072 in mid-June. The Dow Jones Industrial Average ended the second quarter of 2006 essentially flat from the end of the first quarter of 2006; however, it fluctuated between a high of
11,643 in mid-May and a low of 10,706 in mid-June. Average daily volume for New York Stock Exchange-listed and Nasdaq-quoted stocks increased approximately 26% in the second quarter of 2006 compared to the comparable period in 2005.

We believe the higher volatility in the equity markets, particularly in the second quarter of 2006, partly contributed to an increase in overall trading
volumes in the options industry. Options industry average daily equity and index options volume increased approximately 52% to 8.3 million in the second quarter of 2006 from 5.4 million in the comparable period in 2005. Average daily
volume for equity options increased approximately 52% and average daily volume for index options increased approximately 61% over this period. Our average daily equity options volume increased approximately 48% from 1.6 million to
2.4 million over the same period; however, our market share decreased to 31.8% from 32.5%. Our average daily index volume increased to 36,000 in the second quarter of 2006 from 18,000 in the comparable period in 2005. We began to actively
market our index trading initiative in 2005. Higher volatility in the second quarter of 2006 may have offset the effect of lower volumes typically experienced during this time period due to seasonality.

On May 16, 2006, we traded our 1.5 billionth contract, which occurred approximately one year after we traded our one billionth contract on
May 24, 2005. We began trading on May 26, 2000.

Industry Developments

Pennies

In June 2006 we, along with
the other options exchanges, received a letter from the SEC requesting the exchanges plan for the implementation of a pilot to quote certain options in pennies by January 29, 2007. The SEC specifically requested the pilot cover a small number
of options, such as the QQQQ and a few other classes to allow an assessment on transparency and system capacity. In subsequent discussions with the SEC and the options exchanges, it was decided that the pilot would begin on January 26,
2006 and would include 13 stocks and ETFs covering a full range of trading characteristics - one issue selected by each exchange, six from the SEC and the QQQQ. The SEC instructed the pilot be conducted with trading increments of one cent for
options trading up to $3.00 and in five cent increments for options trading above $3.00 and the QQQQ in one-cent increments. We provided a list of 13 issues to the SEC that covered a broad spectrum of trading characteristics and provided a
preference for two of those 13 symbols. Based on tests we have performed with our technology partners, we believe our trading system currently has the capacity to process the options in the pilot program with quoting in penny increments. If the SEC
were to decide to extend the pilot to a significantly greater number of symbols, we may incur additional costs to upgrade our systems.



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Trading in penny increments might benefit investors with small orders because they might receive more
favorable prices; however, penny trading may also lead to decreased liquidity for large size orders and decreased market makers profitability. Decreased market makers profitability could lead to pricing pressures on exchanges.
Additionally, penny trading could lead to increased costs across the industry to upgrade broker-dealer, exchange and market data provider systems to handle increased quote traffic. Moving to penny increments for all quotes and trades may have a
negative effect on certain participants in the options industry and our business.

Order Flow Practices

Recently, an official from the SEC commented that the SECs recent examination on options order routing and best execution practices revealed order
flow providers may rely on factors other than price to determine order routing decisions such as payment for order flow, internalization, reciprocal arrangements, and other inducements. The official also commented that broker-dealers may not be
taking full advantage of price improvement mechanisms offered through some exchanges for a meaningful amount of their order flow. The official commented that creating execution quality statistics, similar to those currently available in the equities
markets, may provide brokers with information to assess execution quality across exchanges and enable customers to monitor their brokers handling of their orders. While the views expressed by the SEC official are his/her own, and not
necessarily that of the SEC, we believe comments by senior SEC officials provide insight to the overall views or directions the SEC may take in certain matters. It is unclear at this time what effect, if any, the creation of execution reports would
have on us.

We have explicitly stated that we are opposed to all forms of payment for order flow programs. Nonetheless, in order to remain
competitive, we maintain a payment for order flow program where we impose a fee on market makers, creating a pool of money to pay for order flow. In July 2006, we increased the fee thereby increasing the pool market makers can pay to order flow
providers. We increased this amount in light of similar fee changes at CBOE.

Cross-Border Exchange Mergers

In June 2006, the SEC released a fact sheet regarding potential cross-border exchange mergers. This fact sheet addressed the SECs view on regulatory
and registration issues related to non-U.S. exchange-listed companies compliance with U.S regulation, in particular the Sarbanes-Oxley Act of 2002. The fact sheet stated joint ownership of a U.S. exchange and a non-U.S. exchange would not result in
automatic application of U.S. securities regulation to the listing or trading activities of the non-U.S. exchange. This SEC announcement may attract interest in additional cross-border affiliations or ownership between U.S. and foreign exchanges.

Competitive Landscape

There continues to be discussions by industry observers of the possibility of increased consolidation among exchanges due to the increasing number of announcements of mergers and demutualizations as well as filings of initial public
offerings by exchanges. For example:



| |  |  | On May 19, 2006, the Nasdaq Stock Market, Inc. announced that it had increased its ownership stake in the London Stock Exchange Group plc to approximately 25%.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 1, 2006, the NYSE Group, Inc. and Euronext N.V. announced an agreement to combine to create a global securities exchange trading cash and derivatives securities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 17, 2006, NYMEX Holdings, Inc., parent company of the New York Mercantile Exchange, Inc., announced that it had filed a registration statement of Form S-1 and a
preliminary proxy statement with the SEC.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 18, 2006, the Philadelphia Stock Exchange (PHLX) announced that Citadel Derivatives Group LLC, Merrill Lynch, Citigroup, Credit Suisse, Morgan Stanley, and
UBS exercised warrants resulting in them collectively holding 89.4% of PHLXs outstanding shares.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 27, 2006, the Chicago Board Options Exchange, our largest competitor in terms of volume, announced that its Board of Directors authorized the filing of a registration
statement of Form S-4 with the SEC as part of its demutualization process. The demutualization process would result in the conversion of memberships into shares of common stock and provide the ability to pursue an initial public offering.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidations and alliances among our current competitors as well as exchanges becoming larger, well-capitalized
organizations, 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,
our 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.

In addition, on June 30, 2006, the NYSE,
which became a direct competitor to us through their acquisition of Archipelago Holdings, Inc. which had previously acquired the Pacific Stock Exchange, one of our competitors, announced pricing changes for its options trading platform decreasing
certain transaction fees and increasing certain non-transaction related fees. Also, on August 1, 2006, the NYSE announced that the SEC had approved rules allowing NYSE to replace its current options trading platform, acquired with the Pacific
Stock Exchange, to a new enhanced and improved automated trading system. On July 17, 2006, the Boston Options Exchange (BOX), the only other fully electronic options exchange, announced it had completed phase one of its migration to its
new enhanced trading engine platform which it licensed from the Montreal Exchange.

We continually examine our fee structure and implement
strategic enhancements to our trading system in light of competitive changes in the marketplace. We believe market participants evaluate many factors in determining where to trade, including an exchanges liquidity, reliability and robustness
of its trading system, market quality, such as size and bid/ask spread, and customer service. We believe our overall market offering allows us to remain extremely competitive and in the forefront of the options industry.



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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



|                                           |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|------------------------------------------ |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                           |  | Q1-04 |   |  | Q2-04 |   |  | Q3-04 |   |  | Q4-04 |   |  | Q1-05 |   |  | Q2-05 |   |  | Q3-05 |   |  | Q4-05 |   |  | Q1-06 |   |  | Q2-06 |  
|Industry equity options ADV (in thousands) |  | 4,697 |   |  | 4,062 |   |  | 3,747 |   |  | 4,699 |   |  | 5,223 |   |  | 4,923 |   |  | 5,203 |   |  | 6,387 |   |  | 7,202 |   |  | 7,460 |  
|Our equity options ADV (in thousands)      |  | 1,485 |   |  | 1,360 |   |  | 1,290 |   |  | 1,590 |   |  | 1,727 |   |  | 1,598 |   |  | 1,694 |   |  | 2,035 |   |  | 2,356 |   |  | 2,372 |  
|Our equity options market share            |  | 31.6  | % |  | 33.5  | % |  | 34.4  | % |  | 33.8  | % |  | 33.1  | % |  | 32.5  | % |  | 32.6  | % |  | 31.9  | % |  | 32.7  | % |  | 31.8  | %

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 our revenue driver. 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.

UPDATE ON OUR STRATEGY

Growing Our Institutional Business

Options trading is predominantly comprised of retail investors. We estimate that approximately 60% of the options industry volume originates from retail or individual investors. We believe an opportunity exists for us to expand our offering
and volumes by introducing trading enhancements and functionality catered to institutional investors. While the quality of our markets has attracted institutional order flow, we believe a substantial segment of institutional order flow is executed
on trading floors or traded off-exchange. Through trading system enhancements and introduction of new functionality as well as our marketing and sales efforts, we have seen an increase in institutional order flow. Some examples of functionality we
have introduced which are gaining adoption include:



| |  |  | Spreads - buying and selling option contracts with different strike prices or expiration dates in the same class;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Buy-Writes  for example, purchase of the underlying stock and sale of an option at the same time;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Delta-Neutral - hedging a stock by trading the number of options contracts specified by the delta of the option;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Facilitation Mechanism  allows members to provide liquidity to block size orders;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Solicitation Mechanism  allows members to cross trades.
| | - |  | --------------------------------------------------------



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##### Table of Contents

Approximately 20% of our volume is now derived from the functionalities that we developed specifically appealing to
institutional investors. In particular, we experienced an increase in the use of our solicitation mechanism in the second quarter of 2006. The following chart reflects the average daily trading volume from institutional functionalities:

LOGO

Developing New Products and Diversifying Product Base

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 24 indexes. Most recently, in May 2006 we launched
index options on the FTSE 100® and FTSE 250® through an innovative mini contract structure whereby the index represents 1/10th of the full value of the full-size FTSE 100® and FTSE 250®. The following chart reflects the
growth in our index options volume since 2005:

LOGO



|                                          |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|----------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                          |  | Q1-05 |   |  | Q2-05 |   |  | Q3-05 |   |  | Q4-05 |   |  | Q1-06 |   |  | Q2-06 |  
|Industry index options ADV (in thousands) |  | 477   |   |  | 516   |   |  | 531   |   |  | 619   |   |  | 626   |   |  | 830   |  
|Our index options ADV (in thousands)      |  | 5     |   |  | 18    |   |  | 23    |   |  | 24    |   |  | 28    |   |  | 36    |  
|Our index options market share            |  | 1.1   | % |  | 3.6   | % |  | 4.2   | % |  | 3.9   | % |  | 4.5   | % |  | 4.3   | %



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Premium Products

As a result of competitive pressures, we generally do not charge our members for executing non-broker-dealer customer orders on our exchange. Beginning in 2005, we began charging for non-broker-dealer customer
transactions on certain option classes, which we define as premium products. Premium products are those which we believe warrant the same or higher pricing for non-broker-dealer customer orders as our broker-dealer orders. These products
include options on all licensed and proprietary index options we offer, and options on most other exchange traded funds, or ETFs. The revenue capture we earn from members executing non-broker-dealer customer transactions on premium products is
higher than regular option classes.

We continue to see growth in our premium products. During the second quarter of 2006, we experienced
an approximate 183% increase in trading in these products from the same period in the prior year. This increased trading volume contributed significantly to the increase in our average net transaction fee per side. In particular, trading in iShares
Russell 2000 Index Fund comprised approximately 40% of the increase we experienced over the period. The following chart reflects our average daily volume in premium products since 2005.

LOGO



|                       |  |       |  |       |  |       |  |       |  |       |  |      
|---------------------- |  | ----- |  | ----- |  | ----- |  | ----- |  | ----- |  | -----
|ADV (in thousands)     |  | Q1-05 |  | Q2-05 |  | Q3-05 |  | Q4-05 |  | Q1-06 |  | Q2-06
|Indexes                |  | 5     |  | 18    |  | 23    |  | 24    |  | 28    |  | 36   
|ETFs                   |  | 84    |  | 104   |  | 114   |  | 175   |  | 181   |  | 309  
|                       |  |       |  |       |  |       |  |       |  |       |  |      
|Total premium products |  | 89    |  | 122   |  | 137   |  | 199   |  | 209   |  | 345  

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
which aggregate liquidity and produce fair and efficient market-driven prices. The new entity, Longitude LLC (Longitude), became an operating unit of ISE, which retains majority-ownership in the partnership. Goldman Sachs is the minority
investor. Since late 2002 Goldman Sachs has used the Longitude platform to clear risk and build liquidity through auctions on a wide range of 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. Our results for the second quarter of 2006 reflect the operating results of Longitude. We do not expect the operating results of Longitude to have a material effect on our financial
results in 2006..

ISE Stock Exchange

On April 19, 2006, we announced that we were entering the equities market through the launch of ISE Stock Exchange, LLC (ISE Stock Exchange) in partnership with key strategic investors. ISE Stock
Exchange, 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. In July 2006, we announced three additional investors to the ISE Stock Exchange.



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Under U.S generally accepted accounting principles, or GAAP, we do not currently consolidate the results
of the ISE Stock Exchange. Under the terms of the Amended and Restated Limited Liability Company Agreement, we retain a majority of the voting interest. Losses from the operations of the ISE Stock Exchange are allocated to the strategic investors.
We have determined that ISE Stock Exchange is a variable interest entity, or VIE, in accordance with FIN46(R) Consolidation of Variable Interest Entities. In general, a VIE is a corporation, partnership, limited liability corporation,
trust or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support; (ii) has a group of
equity owners that are unable to make significant decisions about its activities; or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. All VIEs with
which we are involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. As we are not currently required to absorb
the losses of the VIE, we have determined that we are not the primary beneficiary of the VIE, and therefore the results of the VIE are not consolidated. We incurred expenses of approximately $117,000, $225,000, $203,000, $299,000 and $900,000 for
the three months ended March 31, 2005, June 30, 2005, September 30, 2005, December 31, 2005 and March 31, 2006, respectively, in developing ISE Stock Exchange, which were included in our consolidated results.

Other New Products



| |  |  | Quarterlies - On May 30, 2006, we announced a new options product, Quarterlies, which expire at the end of the calendar quarter. Options currently expire on
the Saturday following the third Friday of each month. We developed this new product in response to member interest in an alternative expiration structure that allows options to expire at the end of each calendar quarter. We began trading
Quarterlies on July 10, 2006. We do not expect revenues from trading Quarterlies to have a material effect on our revenues or expenses in 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Second Market - On July 5, 2006, we announced a second market (Second Market) that will list approximately 850 additional equity options. The Second Market
will leverage our existing technology and infrastructure and double the number of options classes we list. We currently list equity options that represented approximately 90% of the total industry volume. Options classes traded in the Second Market
will comply with our existing listing requirements rules. Existing or new market makers will be eligible to make markets in the Second Market without purchasing additional or new memberships, but rather pay a single monthly access fee. In addition,
we will charge a transaction fee for non-broker-dealer customer orders and not maintain a payment for order flow program. Trading is scheduled to begin in the third quarter of 2006, pending SEC approval. We do not expect revenues from trading in the
Second Market to have a material effect on our revenues or expenses in 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SEC Oversight

As part of our strategy to provide our members with value added services and to diversify our revenue streams, we seek to add new functionality and
products to our offering which may require SEC approval. This approval process subjects us to certain competitive disadvantages due to the time it takes to obtain SEC approval.

Enhancing Our Trading System

On July 19, 2006, we rolled out PrecISE Trade (PrecISE), our new front-end trading application for broker-dealers to access our markets. PrecISE offers users a lighter application with reduced bandwidth requirements
and a faster, flexible trading interface that provides greater flexibility to support future enhancements. PrecISE will provide users with a straightforward means to enter Facilitation of Spreads and Facilitation of Tied to
Stock orders. PrecISE also enables access to Away Market Routing to provide users with the ability to tap into liquidity on other options exchanges from a single workstation, along with other enhancements. We believe this new
front-end trading application offers our members a fast and flexible way to support smarter trading across multiple markets through one interface. PrecISE was developed internally by our technology team to allow faster time to market and to meet
member demand. PrecISE could also be configured to support new business opportunities, such as ISE Stock Exchange and Longitude.

OTHER

Litigation

On June 16, 2006, the United States Court of Appeals for the Second Circuit unanimously affirmed the ruling of the United States District Court for the Southern District of New York which
dismissed the complaints of Dow Jones & Company, Inc. (Dow Jones) and Standard & Poors (S&P), a division of the McGraw-Hill Companies, Inc., against us. In 2005, we announced our intention to trade options
on SPDRs® and DIAMONDS® ETFs without a license. S&P and Dow Jones brought suit against us alleging that our unlicensed trading infringed their intellectual property rights. The District Court ruled that our unlicensed trading did not
infringe the plaintiffs intellectual property rights and dismissed the complaints. The Court of Appeals unanimously affirmed the District Court, finding that our creating, listing, trading, and clearing of options on the shares of exchange
traded funds that track the performance of stock market indexes does not constitute misappropriation of the stock market index owners intellectual property or unfair competition, and that our use of the SPDR® and DIAMONDS® trademarks
in listing those options does not constitute trademark infringement or dilution. The Court of Appeals found that the allegations of Dow Jones and S&P were legally insufficient. S&P and Dow Jones have until September 2006 to
petition the United States Supreme Court to hear an appeal of the Court of Appeals decision; however, there is no guarantee the Supreme Court will agree to hear their appeal.

Changes to our Board

On May
11, 2006, Ivers W. Riley stepped down as our Chairman but remained on our Board of Directors and Dr. Frank J. Jones, Ph.D., then Vice Chairman, became Chairman and Dr. John F. Marshall, Ph.D., then a director, became Vice Chairman. In
addition,



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Peter J. Bottini, Executive Vice President of Trading/Customer Service at optionsXpress, Inc, and Edward Boyle, Vice President, Equity Derivatives of TD
Securities Derivative Equities Group, joined our Board of Directors to serve as industry representatives.

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 national 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 from the
SEC on April 21, 2006 and anticipate completing our reorganization by the end of the third quarter of 2006.

BUSINESS TRENDS AND DRIVERS

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. Higher volatility in the second quarter of 2006 may have offset the seasonal effect of lower volumes typically experienced during this time period.

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 premium products. 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 been increasing, reaching a high of
43.1% during the three months ended March 31, 2006, and then decreasing to 41.0% during the three months ended June 30, 2006. We have also experienced an increase in firm proprietary trading as a percent of our overall trading mix reaching
a high of 13.3% in the three months ended June 30, 2006. We believe this increase is an indicator of increased institutional use of our trading platform.

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 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; therefore,
increased trading in firm proprietary and premium products has a positive effect on our net transaction fee per side. We continually examine our fee structure in light of competitive changes in the marketplace.

Member Fees and Other

Member fees
and other are primarily driven by (a) the number of participants that become members of our exchange; (b) 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; and (c) revenue from the sale of Class B-2 memberships. As of June 30, 2006, we sold 48 Class B-2 memberships, including one during the three months ended June 30, 2006. We anticipate selling
the remaining 12 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. Other fees
represent revenues from our recent acquisition, Longitude.

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 our market share of trades and OPRAs profitability.



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Our market share of trades is partly driven by our trade size or our average contracts per trade. With the exception of the first quarter of 2006, we have
experienced an increasing number of contracts per trade. We believe the increase in number of contracts per trade is an indicator of increased trading by institutional investors, who generally trade in larger size than retail investors. To the
extent we are successful in our efforts to increase trading by institutional investors, we may experience a decrease in our market data revenues; however, this decrease would be more than offset by increased transaction fee revenues due to the
increased trading. Also, 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 began to record revenues from our own market data offering. We do not expect the revenues generated from this offering to be material to our 2006 results.

Cost of Revenues

We record direct
costs associated with our revenues as Cost of revenues on our consolidated statement of income. These costs are 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 in 2005, 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 $7.6 million in 2006, which includes $1.3 million for options expense and $6.3 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 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 12 Class B-2 memberships. We may continue to
increase our headcount to support our business initiatives which will lead to higher compensation and benefits expense. We also may experience fluctuations in our incentive compensation as a portion of that expense is based on our profitability.

Technology and Communication

Technology and communication expense is primarily driven by costs associated with our 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. In addition, if the SEC were to decide to extend its penny quoting pilot to a significantly greater number of options, we may incur additional costs to upgrade our systems.

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 to perform certain of these functions. 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, leasehold improvements and intangible
assets 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.



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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.

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 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. We may incur certain costs in anticipation of certain transaction volume levels and make significant expenditures related to technological innovations over long periods of time, so that our operating margins and profitability
could be adversely affected. In addition, a component of our incentive compensation is dependent upon our operating results. 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.

NON-GAAP FINANCIAL MEASURES

In an effort to provide additional information regarding our results as determined by 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 EndedJune 30,             |         |   | Six Months EndedJune 30,               |  
|                                     |  | 2006                                   |         |   | 2005                                   |   |         | 2006 |  |   | 2005    |  
|                                     |  | (in thousands, exceptper side amounts) |         |   | (in thousands, exceptper side amounts) |  
|Transaction fees                     |  | $                                      | 40,682  |   |                                        | $ | 26,987  |      |  | $ | 77,549  |   |  | $ | 53,701  |  
|Less cost of revenues:               |  |                                        |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Activity remittance fees             |  |                                        | 3,706   |   |                                        |   | 3,022   |      |  |   | 8,051   |   |  |   | 5,724   |  
|ETF and index license fees           |  |                                        | 2,321   |   |                                        |   | 1,323   |      |  |   | 3,946   |   |  |   | 2,254   |  
|                                     |  |                                        |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Total cost of revenues               |  |                                        | 6,027   |   |                                        |   | 4,345   |      |  |   | 11,997  |   |  |   | 7,978   |  
|                                     |  |                                        |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Net transaction fees                 |  | $                                      | 34,655  |   |                                        | $ | 22,642  |      |  | $ | 65,552  |   |  | $ | 45,723  |  
|Total sides                          |  |                                        | 303,410 |   |                                        |   | 206,844 |      |  |   | 599,041 |   |  |   | 418,219 |  
|Average transaction fee per side     |  | $                                      | 0.134   |   |                                        | $ | 0.130   |      |  | $ | 0.129   |   |  | $ | 0.128   |  
|Average cost of revenues per side    |  |                                        | (0.020  | ) |                                        |   | (0.021  | )    |  |   | (0.020  | ) |  |   | (0.019  | )
|                                     |  |                                        |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Average net transaction fee per side |  | $                                      | 0.114   |   |                                        | $ | 0.109   |      |  | $ | 0.109   |   |  | $ | 0.109   |  



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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 June 30, 2006, we have sold 48 Class B-2 memberships. The Class B-2 memberships were each 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 purchase agreement grants immediate membership upon execution of the purchase
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 $2.4 million during the six months ended June 30, 2006 from the sale of Class B-2 memberships.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in a Companys financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. We do not believe this Interpretation will have a material impact on our financial results.



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KEY STATISTICAL INFORMATION

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



|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                   |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                   |  | 2006                       |         |   | 2005                     |   |         | 2006 |  |   | 2005    |  
|Trading Days                                                       |  |                            | 63      |   |                          |   | 64      |      |  |   | 125     |   |  |   | 125     |  
|Average daily trading volume: (1) (2)                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Equity and Index Options                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total U.S. industry equity and index options traded (in thousands) |  |                            | 8,290   |   |                          |   | 5,439   |      |  |   | 8,061   |   |  |   | 5,566   |  
|Our equity and index options traded (in thousands)                 |  |                            | 2,408   |   |                          |   | 1,616   |      |  |   | 2,396   |   |  |   | 1,673   |  
|Our market share of equity and index options traded                |  |                            | 29.0    | % |                          |   | 29.7    | %    |  |   | 29.7    | % |  |   | 30.1    | %
|Equity Options                                                     |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total U.S. industry equity options traded (in thousands)           |  |                            | 7,460   |   |                          |   | 4,923   |      |  |   | 7,332   |   |  |   | 5,070   |  
|Our equity options traded (in thousands)                           |  |                            | 2,372   |   |                          |   | 1,598   |      |  |   | 2,364   |   |  |   | 1,661   |  
|Our market share of equity options traded                          |  |                            | 31.8    | % |                          |   | 32.5    | %    |  |   | 32.2    | % |  |   | 32.8    | %
|Index Options                                                      |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total U.S. industry index options traded (in thousands)            |  |                            | 830     |   |                          |   | 516     |      |  |   | 729     |   |  |   | 497     |  
|Our index options traded (in thousands)                            |  |                            | 36      |   |                          |   | 18      |      |  |   | 32      |   |  |   | 12      |  
|Our market share of index options traded                           |  |                            | 4.3     | % |                          |   | 3.6     | %    |  |   | 4.4     | % |  |   | 2.4     | %
|Our member total trading volume (sides, in thousands): (3)         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Customer                                                           |  |                            | 124,486 |   |                          |   | 86,031  |      |  |   | 251,788 |   |  |   | 173,538 |  
|Firm proprietary                                                   |  |                            | 40,365  |   |                          |   | 18,367  |      |  |   | 72,597  |   |  |   | 36,586  |  
|Market maker                                                       |  |                            | 138,559 |   |                          |   | 102,446 |      |  |   | 274,656 |   |  |   | 208,095 |  
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total sides                                                        |  |                            | 303,410 |   |                          |   | 206,844 |      |  |   | 599,041 |   |  |   | 418,219 |  
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Our market share of total industry trading: (4)                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Customer                                                           |  |                            | 29.2    | % |                          |   | 29.8    | %    |  |   | 30.6    | % |  |   | 30.3    | %
|Firm proprietary                                                   |  |                            | 26.3    | % |                          |   | 20.8    | %    |  |   | 25.7    | % |  |   | 21.0    | %
|Market maker                                                       |  |                            | 29.8    | % |                          |   | 32.0    | %    |  |   | 30.2    | % |  |   | 32.3    | %
|Revenue:                                                           |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Average transaction fee per side (5)                               |  | $                          | 0.134   |   |                          | $ | 0.130   |      |  | $ | 0.129   |   |  | $ | 0.128   |  
|Average cost of transaction fee per side (6)                       |  | $                          | (0.020  | ) |                          | $ | (0.021  | )    |  | $ | (0.020  | ) |  | $ | (0.019  | )
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Average net transaction fee per side (6)                           |  | $                          | 0.114   |   |                          | $ | 0.109   |      |  | $ | 0.109   |   |  | $ | 0.109   |  
|Average transaction fee per revenue side (7)                       |  | $                          | 0.173   |   |                          | $ | 0.180   |      |  | $ | 0.175   |   |  | $ | 0.180   |  
|Our trades: (8)                                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Average contracts per trade                                        |  |                            | 18.7    |   |                          |   | 17.2    |      |  |   | 17.4    |   |  |   | 17.2    |  
|Average trades per day (in thousands)                              |  |                            | 128.5   |   |                          |   | 93.9    |      |  |   | 138.0   |   |  |   | 97.4    |  
|Total trades (in thousands)                                        |  |                            | 8,098   |   |                          |   | 6,010   |      |  |   | 17,225  |   |  |   | 12,173  |  
|Our market share of industry trades                                |  |                            | 30.6    | % |                          |   | 34.6    | %    |  |   | 32.2    | % |  |   | 35.1    | %
|Our listed issues: (9)                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Average number of issues traded during the period                  |  |                            | 898     |   |                          |   | 730     |      |  |   | 875     |   |  |   | 718     |  
|Our members (average number trading during period):                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|PMMs                                                               |  |                            | 10      |   |                          |   | 10      |      |  |   | 10      |   |  |   | 10      |  
|CMMs                                                               |  |                            | 144     |   |                          |   | 136     |      |  |   | 143     |   |  |   | 137     |  
|EAMs                                                               |  |                            | 102     |   |                          |   | 95      |      |  |   | 102     |   |  |   | 94      |  
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total                                                              |  |                            | 256     |   |                          |   | 241     |      |  |   | 255     |   |  |   | 241     |  
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Employees (at end of period)                                       |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total full-time                                                    |  |                            | 206     |   |                          |   | 177     |      |  |   | 206     |   |  |   | 177     |  
|Full-time equivalent (10)                                          |  |                            | 180     |   |                          |   | 177     |      |  |   | 180     |   |  |   | 177     |  
|                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

---

|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(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 June 30, 2006 and 2005, we have waived and discounted $8,555 and $6,476 of our fees, respectively. For the six months ended June 30, 2006 and 2005, we have waived and
discounted $18,097 and $12,987 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(10) | Excludes full-time equivalent employees of ISE Stock Exchange, LLC, beginning April 2006.
|---- | -----------------------------------------------------------------------------------------

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.



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THREE MONTHS ENDED JUNE 30, 2006 VERSUS JUNE 30, 2005

Overview

Net income increased 68.4% to $13.7 million
during the three months ended June 30, 2006 from $8.1 million during the comparable period in 2005, primarily due to increased trading volumes on our exchange. Our expenses increased 16.7% to $22.4 million during the three months ended
June 30, 2006 from $19.2 million during the comparable period in 2005, primarily due to increased compensation and benefits costs.

Revenues



|                         |  |                             |      |      |   |        |  |   |          |   |  |       |   
|------------------------ |  | --------------------------- | ---- | ---- | - | ------ |  | - | -------- | - |  | ----- | --
|                         |  | Three Months Ended June 30, |     
|                         |  | 2006                        |      | 2005 |   | Change |  |   | % Change |  
|                         |  | (in millions)               |     
|Revenues:                |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Transaction fees         |  | $                           | 40.7 |      | $ | 27.0   |  | $ | 13.7     |   |  | 50.7  | % 
|Member fees and other    |  |                             | 6.3  |      |   | 5.2    |  |   | 1.1      |   |  | 21.4  | % 
|Market data              |  |                             | 4.1  |      |   | 4.8    |  |   | (0.7     | ) |  | (14.5 | )%
|                         |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Total revenues           |  |                             | 51.1 |      |   | 37.0   |  |   | 14.1     |   |  | 38.2  | % 
|                         |  |                             |      |     
|Cost of revenues:        |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Activity remittance fees |  |                             | 3.7  |      |   | 3.0    |  |   | 0.7      |   |  | 22.6  | % 
|License fees             |  |                             | 2.3  |      |   | 1.3    |  |   | 1.0      |   |  | 75.4  | % 
|                         |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Total cost of revenues   |  |                             | 6.0  |      |   | 4.3    |  |   | 1.7      |   |  | 38.7  | % 
|                         |  |                             |      |     
|Gross margin             |  | $                           | 45.1 |      | $ | 32.6   |  | $ | 12.4     |   |  | 38.1  | % 

Transaction Fees

Transaction fee revenues increased 50.7% to $40.7 million during the three months ended June 30, 2006 from $27.0 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 June 30, 2006 increased 51.5% from the comparable period in 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ADV increased 48.4% over the same period; however, our market share decreased to 31.8% from 32.5%.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Our ADV in index options was 36,000 during the three months ended June 30, 2006 compared to 18,000 in the comparable period in 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

Our average transaction fee per side increased 2.8% to $0.134 during the three months ended June 30, 2006 from $0.130 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 $0.173 primarily as a result of reaching certain overall volume thresholds.

Our average net transaction fee per side, a measure we use to evaluate our revenues which excludes activity remittance fees and ETF and license fees,
increased 4.3% to $0.114 during the three months ended June 30, 2006 from $0.109 during the comparable period in 2005. This increase was primarily due to increased volumes in our premium products. 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 $0.007
less during the three months ended June 30, 2006. Also affecting the increase was a change in our trading mix. Firm proprietary trading activity, as a percent of our overall volumes, increased to 13.3% in the three months ended June 30,
2006 from 8.9% in the comparable in 2005. We believe this shift in mix is a sign of increased institutional trading.

Member Fees and Other

Member fees and other increased 21.4% to $6.3 million during the three months ended June 30, 2006 from $5.2 million during the
comparable period in 2005. The increase was primarily driven by revenue in Longitude, which we acquired in April 2006, as well as an increase in connectivity fees due to a pricing change. In April 2006, we changed our member connectivity fees to be
based on a members quote capacity usage versus login activity. Partly offsetting this increase was lower imputed interest from our sale of Class B-2 memberships. For Class B-2 memberships sold on an installment basis, we record imputed
interest over the term of the installment sale. As installments were paid earlier than scheduled, we accelerated the remaining unrecognized interest in 2005.

Market Data

Market data revenues decreased 14.5% to $4.1 million during the three months ended June 30, 2006
from $4.8 million during the comparable period in 2005. The decrease was primarily attributable to our lower market share of industry trades. We accounted for 30.6% of total industry trades



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during the three months ended June 30, 2006 and 34.6% during the comparable period in 2005. The decrease in our
market share may be attributable to an increasing number of average contracts per trade. We traded on average 18.7 contracts per trade in the three months ended June 30, 2006 compared to 17.2 in the comparable period in 2005. We believe the
increase in number of contracts per trade is an indicator of increased trading by institutional investors, who generally trade in larger size than retail investors.

Expenses



|                                   |  |                             |      |      |   |        |  |   |          |   |  |       |   
|---------------------------------- |  | --------------------------- | ---- | ---- | - | ------ |  | - | -------- | - |  | ----- | --
|                                   |  | Three Months Ended June 30, |     
|                                   |  | 2006                        |      | 2005 |   | Change |  |   | % Change |  
|                                   |  | (in millions)               |     
|Expenses:                          |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Compensation and benefits          |  | $                           | 11.5 |      | $ | 9.9    |  | $ | 1.6      |   |  | 15.8  | % 
|Technology and communications      |  |                             | 3.7  |      |   | 3.3    |  |   | 0.5      |   |  | 15.0  | % 
|Occupancy                          |  |                             | 1.4  |      |   | 1.1    |  |   | 0.3      |   |  | 32.4  | % 
|Professional fees                  |  |                             | 1.4  |      |   | 1.2    |  |   | 0.3      |   |  | 25.5  | % 
|Marketing and business development |  |                             | 0.8  |      |   | 1.1    |  |   | (0.3     | ) |  | (25.3 | )%
|Depreciation and amortization      |  |                             | 1.8  |      |   | 1.5    |  |   | 0.3      |   |  | 21.7  | % 
|Other                              |  |                             | 1.5  |      |   | 1.1    |  |   | 0.4      |   |  | 35.0  | % 
|                                   |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Total direct expenses              |  |                             | 22.2 |      |   | 19.1   |  |   | 3.1      |   |  | 16.5  | % 
|Reorganization                     |  |                             | 0.1  |      |   |       |  |   | 0.1      |   |  | N/M   |   
|Offering costs                     |  |                             |     |      |   | 0.1    |  |   | (0.1     | ) |  | N/M   |   
|                                   |  |                             |      |      |   |        |  |   |          |   |  |       |   
|Total expenses                     |  | $                           | 22.4 |      | $ | 19.2   |  | $ | 3.2      |   |  | 16.7  | % 
|                                   |  |                             |      |      |   |        |  |   |          |   |  |       |   

Compensation and Benefits

Compensation and benefits expense increased 15.8% to $11.5 million during the three months ended June 30, 2006 from $9.9 million during the
comparable period in 2005. The increase was primarily due to higher incentive compensation expense as a result of increased profitability. Our full-time equivalent headcount, which excludes staff allocated to ISE Stock Exchange, increased to 180 as
of June 30, 2006 from 177 as of June 30, 2005.

Technology and Communication

Technology and communication expense increased 15.0% to $3.7 million during the three months ended June 30, 2006 from $3.3 million during the
comparable period in 2005. Fees paid to OMX increased $0.3 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 $0.1 million as we continue to direct members to obtain their own connectivity.

Occupancy

Occupancy expense increased 32.4% to $1.4 million during the three months ended
June 30, 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 as well data center space assumed with the acquisition of Longitude.

Professional Fees

Professional fees increased
25.5% to $1.4 million during the three months ended June 30, 2006 from $1.2 million during the comparable period in 2005. This increase was primarily due to $0.2 million in higher regulatory fees paid to the NASD. We have an agreement with the
NASD, where NASD Regulation personnel operate as agents for us in performing certain regulatory functions. We also incurred increased advisory fees of $0.2 million related to new business initiatives and $0.1 million in higher accounting fees
related to us preparing for compliance with the Sarbanes Oxley Act of 2002. Partly offsetting these increases was a $0.3 million decrease in legal fees as the year ago period included litigation costs related to our decision to trade certain
ETFs without a license.

Marketing and Business Development

Marketing and business development expenses decreased 25.3% to $0.8 million during the three months ended June 30, 2006 from $1.1 million during the
comparable period in 2005. The decrease was attributable to lower levels of spending on ISE branding campaigns compared to the same period last year.

Depreciation and Amortization

Depreciation and amortization expenses increased 21.7%
to $1.8 million during the three months ended June 30, 2006 from $1.5 million during the comparable period in 2005. This increase was primarily due to a $0.2 million write-down of our software licenses from OMX based on our decision to develop
our equities trading system internally. In September 2003, we purchased a broadened



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license from OMX which gave us the right to use their trading software to trade equities, fixed income, currency and commodities. Also contributing to the
increase was amortization of intangible assets acquired with Longitude of $0.1 million.

Other Expenses

Other expenses increased 35.0% to $1.5 million during the three months ended June 30, 2006 from $1.1 million during the comparable period in 2005.
The increase was attributable to higher board fees as well as an increase in other general expenses to support our overall growth.

Reorganization

We incurred $0.1 million of reorganization costs during the three months ended June 30, 2006. These expenses consisted
primarily of legal fees related to our reorganization into a holding company structure.

Interest and Investment Income

Interest and investment income increased to $1.5 million during the three months ended June 30, 2006 from $1.0 million during the comparable period
in 2005. The increase was attributable to $0.8 million of additional interest income on higher average cash balances partly offset by higher unrealized losses on securities owned of $0.3 million.

Minority Interest

We recorded $0.3 million in
minority interest during the three months ended June 30, 2006. This amount represents Goldman Sachs minority shareholders interest in the loss from our Longitude subsidiary.

Provision for Income Taxes

Our tax provision
increased to $10.8 million during the three months ended June 30, 2006 from $6.4 million during the comparable period in 2005. Over the same period our effective tax rate remained at approximately 44%.

Six Months Ended June 30, 2006 versus June 30, 2005

Overview

Net income increased 53.7% to $26.1 million during the six months ended June 30, 2006 from $17.0 million
during the comparable period in 2005, primarily due to increased trading volumes on our exchange. Our expenses increased 19.5% to $43.4 million during the six months ended June 30, 2006 from $36.3 million during the comparable period in 2005,
primarily due to increased compensation and benefits costs.

Revenues



|                         |  |                           |      |      |   |        |  |   |          |   |  |      |   
|------------------------ |  | ------------------------- | ---- | ---- | - | ------ |  | - | -------- | - |  | ---- | --
|                         |  | Six Months Ended June 30, |     
|                         |  | 2006                      |      | 2005 |   | Change |  |   | % Change |  
|                         |  | (in millions)             |     
|Revenues:                |  |                           |      |      |   |        |  |   |          |   |  |      |   
|Transaction fees         |  | $                         | 77.5 |      | $ | 53.7   |  | $ | 23.8     |   |  | 44.4 | % 
|Member fees and other    |  |                           | 12.0 |      |   | 10.8   |  |   | 1.2      |   |  | 11.1 | % 
|Market data              |  |                           | 9.2  |      |   | 9.4    |  |   | (0.3     | ) |  | (2.8 | )%
|                         |  |                           |      |      |   |        |  |   |          |   |  |      |   
|Total revenues           |  |                           | 98.7 |      |   | 73.9   |  |   | 24.8     |   |  | 33.5 | % 
|                         |  |                           |      |     
|Cost of revenues:        |  |                           |      |      |   |        |  |   |          |   |  |      |   
|Activity remittance fees |  |                           | 8.1  |      |   | 5.7    |  |   | 2.3      |   |  | 40.7 | % 
|License fees             |  |                           | 3.9  |      |   | 2.3    |  |   | 1.7      |   |  | 75.1 | % 
|                         |  |                           |      |      |   |        |  |   |          |   |  |      |   
|Total cost of revenues   |  |                           | 12.0 |      |   | 8.0    |  |   | 4.0      |   |  | 50.4 | % 
|                         |  |                           |      |     
|Gross margin             |  | $                         | 86.7 |      | $ | 65.9   |  | $ | 20.8     |   |  | 31.5 | % 

Transaction Fees

Transaction fee revenues increased 44.4% to $77.5 million during the six months ended June 30, 2006 from $53.7 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 six months ended June 30, 2006 increased 44.6% from the comparable period in 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our ADV increased 42.3% over the same period; however our market share decreased slightly to 32.2% from 32.8%.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Our ADV in index options was 32,000 during the six months ended June 30, 2006 compared to 12,000 in the comparable period in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

Our average transaction fee per side increased to $0.129 during the six months ended June 30, 2006 from $0.128 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 $0.175 primarily as a result of reaching certain overall volume thresholds.

Our average net transaction fee per side, a measure we use to evaluate our revenues which excludes activity remittance fees and ETF and license fees,
remained at $0.109 during the six months ended June 30, 2006 and the comparable period in 2005. The decrease in average pricing was wholly offset by an increase in customer charged premium products. Also affecting the increase was a change in
our trading mix. Firm proprietary trading activity, as a percent of our overall volumes, increased to 12.1% in the six months ended June 30, 2006 from 8.7% in the comparable in 2005. We believe this shift in mix is a sign of increased
institutional trading.

Member Fees and Other

Member fees and other increased 11.1% to $12.0 million during the six months ended June 30, 2006 from $10.8 million during the comparable period in 2005. The increase was primarily driven by an 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 revenue from four additional Class B-2 memberships in the six months ended June 30, 2006.
Additionally, income from regulatory fines increased $0.1 million. Partly offsetting this increase was lower imputed interest on the sale of Class B-2 memberships 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 decreased 2.8% to $9.2 million during the six months ended June 30, 2006 from $9.4 million during the comparable period in 2005.
The decrease was primarily attributable to our lower market share of industry trades. We accounted for 32.2% of total industry trades during the six months ended June 30, 2006 and 35.1% during the comparable period in 2005. The decrease in our
market share may be attributable to an increasing number of average contracts per trade. We traded on average 17.4 contracts per trade in the six months ended June 30, 2006 compared to 17.2 in the comparable period in 2005. We believe the
increase in number of contracts per trade is an indicator of increased trading by institutional investors, who generally trade in larger size than retail investors. The effect of lower market share was partly offset by higher profitability by OPRA
compared to the year ago period.

Expenses



|                                   |  |                           |      |      |   |        |  |   |          |   |  |       |   
|---------------------------------- |  | ------------------------- | ---- | ---- | - | ------ |  | - | -------- | - |  | ----- | --
|                                   |  | Six Months Ended June 30, |     
|                                   |  | 2006                      |      | 2005 |   | Change |  |   | % Change |  
|                                   |  | (in millions)             |     
|Expenses:                          |  |                           |      |      |   |        |  |   |          |   |  |       |   
|Compensation and benefits          |  | $                         | 22.8 |      | $ | 18.1   |  | $ | 4.7      |   |  | 26.0  | % 
|Technology and communications      |  |                           | 7.3  |      |   | 6.6    |  |   | 0.6      |   |  | 9.4   | % 
|Occupancy                          |  |                           | 2.7  |      |   | 2.2    |  |   | 0.6      |   |  | 25.7  | % 
|Professional fees                  |  |                           | 3.1  |      |   | 2.6    |  |   | 0.4      |   |  | 16.5  | % 
|Marketing and business development |  |                           | 1.4  |      |   | 1.7    |  |   | (0.2     | ) |  | (14.4 | )%
|Depreciation and amortization      |  |                           | 3.4  |      |   | 3.0    |  |   | 0.3      |   |  | 11.5  | % 
|Other                              |  |                           | 2.6  |      |   | 1.9    |  |   | 0.7      |   |  | 34.7  | % 
|                                   |  |                           |      |      |   |        |  |   |          |   |  |       |   
|Total direct expenses              |  |                           | 43.3 |      |   | 36.2   |  |   | 7.1      |   |  | 19.6  | % 
|                                   |  |                           |      |     
|Reorganization                     |  |                           | 0.1  |      |   | 0.1    |  |   |         |   |  | 26.5  | % 
|Offering costs                     |  |                           |     |      |   | 0.1    |  |   | (0.1     | ) |  | N/M   |   
|                                   |  |                           |      |      |   |        |  |   |          |   |  |       |   
|Total expenses                     |  | $                         | 43.4 |      | $ | 36.3   |  | $ | 7.1      |   |  | 19.5  | % 
|                                   |  |                           |      |      |   |        |  |   |          |   |  |       |   

Compensation and Benefits

Compensation and benefits expense increased 26.0% to $22.8 million during the six months ended June 30, 2006 from $18.1 million during



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the comparable period in 2005. The increase was primarily due to higher stock based compensation costs, higher cash
incentive compensation resulting from increased profitability 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 $0.9 million. This increase includes the full period effect of the expense in the six months ended June 30, 2006. Our full-time equivalent headcount, which excludes staff allocated to ISE Stock Exchange, increased to 180 as of
June 30, 2006 from 177 as of June 30, 2005.

Technology and Communication

Technology and communication expense increased 9.4% to $7.3 million during the six months ended June 30, 2006 from $6.6 million during the comparable
period in 2005. Fees paid to OMX increased $0.5 million due to additional enhancements and maintenance of our trading system. Other costs relating to our trading system increased $0.4 million, primarily for capacity upgrades. Partly offsetting these
increases was a decrease in expenses for our member trading network of $0.3 million as we continue to direct members to obtain their own connectivity.

Occupancy

Occupancy expense increased 25.7% to $2.7 million during the six months ended June 30, 2006 from $2.2
million during the comparable period in 2005, primarily due to additional office space we leased in January 2006 to support our growth as well as data center space assumed with the acquisition of Longitude.

Professional Fees

Professional fees increased
16.5% to $3.1 million during the six months ended June 30, 2006 from $2.6 million during the comparable period in 2005. This increase was primarily due to $0.5 million in higher accounting advisory fees related to our preparations to comply
with the Sarbanes-Oxley Act of 2002 and $0.3 million in higher technology consulting related to the development of the ISE Stock Exchange. Partly offsetting these increases was a $0.7 million decrease in legal fees from the year ago period which
included services in anticipation of us becoming a public company as well as litigation costs related to our decision to trade certain ETFs without a license.

Marketing and Business Development

Marketing and business development expenses decreased
14.4% to $1.4 million during the six months ended June 30, 2006 from $1.7 million during the comparable period in 2005. The decrease was attributable to lower levels of spending on ISE branding campaigns compared to the year ago period.

Depreciation and Amortization

Depreciation and amortization expenses increased 11.5% to $3.4 million during the six months ended June 30, 2006 from $3.0 million during the comparable period in 2005. This increase was primarily due to a $0.2 million write-down of
our OMX Broadened License based on our decision to develop our equities trading system internally. Also contributing to the increase was amortization of intangible assets acquired with Longitude of $0.1 million.

Other Expenses

Other expenses increased 34.7%
to $2.6 million during the six months ended June 30, 2006 from $1.9 million during the comparable period in 2005. The increase was attributable to higher board fees as well as an increase in other general expenses to support our overall growth.

Reorganization

We incurred
$0.1 million of reorganization costs during the six months ended June 30, 2006. These expenses consisted primarily of legal fees related to our reorganization into a holding company structure.

Interest and Investment Income

Interest and
investment income increased to $3.1 million during the six months ended June 30, 2006 from $1.3 million during the comparable period in 2005. The increase was attributable to $1.7 million of additional interest income on higher average cash
balances and higher unrealized gains on securities owned of $0.1 million.

Minority Interest

We recorded $0.3 million in minority interest during the six months ended June 30, 2006. This amount represents Goldman Sachs minority
shareholders interest in the loss from Longitude.

Provision for Income Taxes

Our tax provision increased to $20.6 million during the six months ended June 30, 2006 from $13.9 million during the comparable period in 2005. Over
the same period our effective tax rate decreased to 44.1% from 45.0% primarily due to a lower tax rate on returns from our invested cash.



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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:



|                                                    |  |                          |         |   |      |   |        
|--------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------
|                                                    |  | Six Months EndedJune 30,
|                                                    |  | 2006                     |         |   | 2005
|                                                    |  | (Unaudited)             
|Net cash provided by operating activities           |  | $                        | 29,520  |   |      | $ | 32,593 
|Net cash (used in)/provided by investing activities |  |                          | (1,333  | ) |      |   | 3,754  
|Net cash provided by/(used in) financing activities |  |                          | 1,320   |   |      |   | 58,889 
|                                                    |  |                          |         |   |      |   |        
|Increase in cash and cash equivalents               |  |                          | 29,507  |   |      |   | 95,236 
|Cash and cash equivalents, beginning of period      |  |                          | 170,927 |   |      |   | 44,847 
|                                                    |  |                          |         |   |      |   |        
|Cash and cash equivalents, end of period            |  | $                        | 200,434 |   |      | $ | 140,083

Cash and cash equivalents increased to $200.4 million as of June 30, 2006 from $170.9 million as of
December 31, 2005:



| |  |  | Our net cash provided by operating activities was $29.5 million for the six months ended June 30, 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 used in investing activities was $1.3 million for the six months ended June 30, 2006. We purchased intangible assets of $2.2 million primarily related to our
acquisition of intellectual property and other related assets of Longitude, Inc and made a capital contribution of $1.8 million in ISE Stock Exchange. We also had maturities of U.S. Treasury securities of $5.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net cash provided by financing activities was $1.3 million for the six months ended June 30, 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 dividends of $3.8 million during the period.
Partly offsetting these decreases was a tax benefit of $6.5 million we recorded related to options exercised by our employees in the first six 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 30, 2006, included in cash and cash
equivalents is $0.6 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 June 30, 2006, we had a letter of credit agreement totaling
$416,000 to satisfy lease commitments and administrative obligations.

Financial Condition

Our total assets increased to $313.6 million as of June 30, 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 $9.9 million as of June 30, 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 June 30, 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 six months ended June 30, 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other assets increased to $9.9 million as of June 30, 2006 from $5.3 million as of December 31, 2005 primarily due to the purchase of intangible assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Our total liabilities decreased from $95.5 million as of December 31, 2005 to $94.6 million as of
June 30, 2006. This decrease was primarily due to a decrease in our payment for order flow payable as a result of lower levels of members cash held in the program as well as lower 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 six months ended June 30, 2006. Partly offsetting these decreases was an increase in our payable for activity assessment fees due to
higher trading volumes.

We recorded $2.6 million of minority interest representing Goldman Sachs interest in Longitude.

Contractual Obligations

The following table
summarizes our future cash payments associated with contractual obligations as of June 30, 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 than1 Year |   | 1 to 3 Years |  | 3 to 5 Years |        | After 5Years
|                           |  | (in thousands)        
|Operating leases           |  | $                      | 23,965 |                 | $ | 3,336        |  | $            | 7,402  |              | $ | 3,930 |  | $ | 9,297
|OMX purchase obligations   |  | $                      | 14,279 |                 | $ | 1,306        |  | $            | 7,799  |              | $ | 5,174 |  | $ |     
|Other purchase obligations |  | $                      | 1,878  |                 |   | 500          |  | $            | 1,378  |              | $ |      |  | $ |     
|                           |  |                        |        |                 |   |              |  |              |        |              |   |       |  |   |      
|Total                      |  | $                      | 40,122 |                 | $ | 5,142        |  | $            | 16,579 |              | $ | 9,104 |  | $ | 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.

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 two years, which totaled $204.8 million and $175.1 million as of June 30, 2006 and December 31, 2005, 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 do we 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 $0.4 million and $0.5 million as of June 30, 2006 and December 31, 2005 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 such term is defined in Rule 13a-15(e) or Rule
15d-15(e) under the Exchange Act) in providing reasonable assurance that information required to be disclosed in our reports



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##### Table of Contents

filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
SECs rules and forms, and is effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated by the Companys management,
including the Companys Chief Executive Officer and President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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) or Rule 15d-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.



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##### Table of Contents

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 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting
of Stockholders on May 11, 2006. The stockholders voted on the following matters:



| | 1. | the election of four non-industry directors (elected by Class A shareholders);
| | -- | ------------------------------------------------------------------------------



| | 2. | the election of the Chief Executive Officer as a director (elected by Class A shareholders);
| | -- | --------------------------------------------------------------------------------------------



| | 3. | the election of (a) one Class B-1 industry director (elected by Class B-1 shareholders voting together as a single class); (b) one Class B-2 industry director (elected by
Class B-2 shareholders voting together as a single class); and (c) one Class B-3 industry director (elected by Class B-3 shareholders voting together as a single class); and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | the ratification of our Finance and Audit Committees appointment of Ernst & Young LLP as our independent registered public accounting firm for the 2006 fiscal year
(ratified by Class A shareholders).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All nominees for election to the board were elected to the terms of office set forth in the Proxy
Statement dated April 6, 2006. The stockholders vote ratified the appointment of the independent registered public accounting firm. No other business properly came before the Annual Meeting. The number of votes cast for, against, or
withheld, and the number of abstentions and broker non-votes with respect to each proposal, is set forth below. The Companys independent inspectors of election reported the vote of stockholders as follows:



|                                                              |  |            |  |          |  |         |  |         |  |                    
|------------------------------------------------------------- |  | ---------- |  | -------- |  | ------- |  | ------- |  | -------------------
|Election of Directors                                         |  | For        |  | Withheld |  | Against |  | Abstain |  | Broker Non-Vote (1)
|Nominee:                                                      |  |            |  |          |  |         |  |         |  |                    
|Frank J. Jones (non-industry director)                        |  | 28,292,848 |  | 155,761  |  | *       |  | *       |  | *                  
|John F. Marshall (non-industry director)                      |  | 28,294,218 |  | 154,391  |  | *       |  | *       |  | *                  
|Sarah A. Miller (non-industry director)                       |  | 28,363,448 |  | 85,161   |  | *       |  | *       |  | *                  
|Carleton Day Pearl (non-industry director)                    |  | 28,362,721 |  | 85,888   |  | *       |  | *       |  | *                  
|David Krell (Chief Executive Officer director)                |  | 28,364,377 |  | 84,232   |  | *       |  | *       |  | *                  
|Jason Lehman (Class B-1 industry director)                    |  | 10         |  |         |  | *       |  |        |  | *                  
|Edward Boyle (Class B-2 industry director)                    |  | 121        |  | 10       |  | *       |  |        |  | *                  
|Peter J. Bottini (Class B-3 industry director)                |  | 66         |  | 5        |  | *       |  |        |  | *                  
|Ratification of Independent Registered Public Accounting Firm |  | 28,381,866 |  | *        |  | 46,661  |  | 20,082  |  | *                  

---

|(1) | A broker-non vote occurs when a broker does not vote on some matter on the proxy card because the broker does not have the discretionary voting power for that particular item and
has not received instructions from the beneficial owner.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|* | Not applicable.
|- | ---------------

The following is a list of the directors whose term is
continuing after the 2006 Annual Meeting of Stockholders:

Barbara B. Diamond (non-industry director)

Mark P. Kritzman (non-industry director)

Ivers W. Riley (non-industry director)

Richard Schmalensee (non-industry director)



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##### Table of Contents

Sean Flynn (Class B-1 industry director)

James V. Harkness (Class B-2 industry director)

William A. Porter (Class B-3 industry director)

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: August 11, 2006 |  | By:                                     |  | /s/ Bruce Cooperman                                      
|                       |  | Name:                                   |  | Bruce Cooperman                                          
|                       |  | Title:                                  |  | Chief Financial Officer                                  
|                       |  |                                         |  | (Duly Authorized Officer and Principal Financial Officer)



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