**UNITED STATES SECURITIES AND EXCHANGE**

**COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(MARKONE)**

**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM       TO**

 

**COMMISSIONFILE NUMBER: 001-32274**

 

**ARCHIPELAGO HOLDINGS, INC.**

(Exact name ofRegistrant as specified in its charter)

 
| **DELAWARE**                     | ** ** | **86-1075595**          |
|----------------------------------|------------|-------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer        |
| incorporation or                 |       | Identification  Number) |
| organization)                    |       |                    |

 

**100South Wacker Drive, Suite 1800**

**Chicago,IL 60606**

**(312)960-1696**

(Address,including zip code, and

telephone numberincluding area code, of

Registrant’sprincipal executive offices)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.  Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes o No ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No ý

 

As of November 4,2005, the Registrant had approximately 47,276,000 shares of common stock, $0.01par value per share, outstanding.

 

 

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**ARCHIPELAGOHOLDINGS, INC.**

**QUARTERLYREPORT ON FORM 10-Q**

**TABLE OFCONTENTS**

 
| PART I – Financial  Information                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------|
| Item 1. Financial  Statements                                                                                                      |
| Condensed  Consolidated Statements of Financial Condition as of September 30, 2005  (unaudited) and December 31, 2004    |
| Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2005 and 2004 (unaudited) |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004 (unaudited)           |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                  |
| Item 2. Management’s Discussion and Analysis  of Financial Condition and Results of Operations                                |
| Item 3.  Quantitative and Qualitative Disclosure about Market Risk                                                                 |
| Item 4. Controls  and Procedures                                                                                                   |
| PART II – Other  Information                                                                                             |
| Item 1. Legal  Proceedings                                                                                                         |
| Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds                                                                |
| Item 5. Other  Information                                                                                                         |
| Item 6. Exhibits                                                                                                                   |
| Signatures                                                                                                                         |

 

**FORWARD-LOOKINGSTATEMENTS**

 

In addition to historicalinformation, this Quarterly Report on Form 10-Q contains forward-lookingstatements regarding Archipelago Holdings, Inc. and its subsidiaries(collectively “Archipelago”). These statements relate to future events or ourfinancial performance and may include information relating to pendingtransactions involving Archipelago (including the benefits of the transactionand future plans and expectations following the consummation of transaction)and are intended to be covered by the safe harbor for “forward-looking statements”provided by the Private Securities Litigation Reform Act of 1995.Forward-looking statements are based on the current belief of management andinvolve unknown risks, uncertainties and other factors that may cause ouractual results, levels of activity, performance or achievements, to bematerially different from those expressed or implied in this Report. In somecases, you can identify forward-looking statements with terminology such as “may”,“will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”,“predicts”, “potential”, “continue”, “pending” or the negative of these termsor other comparable terminology.  These statements are only predictions.You should not place undue reliance on forward-looking statements which speakonly as of the date of this Report.  Actual events or results may differmaterially and we undertake no on going obligation, other than that imposed bylaw, to update these statements. You should, however, consider any furtherdisclosures of a forward-looking nature Archipelago may make in our AnnualReports on Form 10-K, Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K as well as the registration statement on Form S-4filed by NYSE Group, Inc. with the Securities and Exchange Commissioncontaining a joint proxy statement/prospectus regarding the proposed mergerbetween Archipelago Holdings, Inc. and the New York Stock Exchange, Inc.which was declared effective on November 3, 2005.

 

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. These forward-looking statements are subject to numerous risksand uncertainties, including, but not limited to; general economic conditions;our future operating results; market penetration and financial condition;industry trading activity and fluctuations; regulatory changes and competition;the ability to obtain governmental approval of any pending transaction on theproposed terms and schedule; the failure to obtain stockholder approval for anypending transaction; the inability to integrate businesses successfullyfollowing the consummation of any pending transaction; the risk that anyexpected cost savings and any revenue synergies resulting from any pendingtransaction may not be fully realized or may take longer to realize thanexpected; the risk that disruption from any pending transaction may make itmore difficult to maintain relationships with clients, employees or suppliers;as well as the risks and uncertainties described under the section heading “CertainFactors That May Affect Our Business” in Part I, Item 1 of our Form 10-Kfiled with the Securities and Exchange Commission on March 23, 2005, thefactors discussed below under the section heading “Management’s Discussionand Analysis” and under Part II, Item 5 “Other Information,” as wellas the risks and uncertainties described under the section heading “RiskFactors” in the registration statement on Form S-4 filed by the NYSE Group,Inc. with the Securities and Exchange Commission which was declared effectiveon November 3, 2005.  You are urgedto carefully consider these factors. All forward-looking statementsattributable to us are expressly qualified in their entirety by the foregoingcautionary statements.

 

Therisks included here are not exhaustive. We operate in a rapidly changing andcompetitive environment. New risk factors emerge from time to time and it isnot possible for management to predict all such risk factors.  Further, it is not possible to assess theimpact of all risk factors on our business or the extent to which any factor,or combination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements.

 

2

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**Important Acquisition Informationwith Respect to Archipelago’s Merger with the New York Stock Exchange (NYSE)**

 

Inconnection with the proposed merger of the New York Stock Exchange, Inc.and Archipelago Holdings, Inc., NYSE Group, Inc. has filed aregistration statement on Form S-4 with the Securities and ExchangeCommission (SEC) containing a joint proxy statement/prospectus regarding theproposed transaction. The parties have filed other publicly available relevantdocuments concerning the proposed transaction with the SEC.  The SEC declared the Registration Statementeffective on November 3, 2005.

 

NYSEMEMBERS AND ARCHIPELAGO STOCKHOLDERS ARE URGED TO READ THE FINAL JOINT PROXYSTATEMENT/ PROSPECTUS REGARDING THE PROPOSED TRANSACTION BECAUSE IT WILLCONTAIN IMPORTANT INFORMATION. NYSE members and Archipelago stockholders canobtain a free copy of the final joint proxy statement/prospectus, as well asother filings containing information about NYSE and Archipelago without charge,at the SEC’s website (http://www.sec.gov). Copies of the final joint proxystatement/prospectus can also be obtained, without charge, once they are filedwith the SEC, by directing a request to the Office of the Corporate Secretary,New York Stock Exchange, Inc., 11 Wall Street, New York 10005, or calling(212) 656-2061, or to Archipelago Holdings, Inc., Attention: InvestorRelations, 100 South Wacker Drive, Suite 1800, Chicago, Illinois 60606, orcalling (888) 514-7284.

 

TheNYSE, Archipelago and their respective directors and executive officers andother members of management and employees may be deemed to be participants inthe solicitation of proxies from Archipelago stockholders in respect of theproposed transaction. Information regarding Archipelago’s directors andexecutive officers is available in Archipelago’s proxy statement for its 2005annual meeting of stockholders, dated March 31, 2005.

 

Additional informationregarding the interests of such potential participants will be included in thejoint proxy statement/prospectus and the other relevant documents filed withthe SEC when they become available. This correspondence shall not constitute anoffer to sell or the solicitation of an offer to buy any securities, nor shallthere be any sale of securities in any jurisdiction in which such offer,solicitation or sale would be unlawful prior to registration or qualificationunder the securities laws of any such jurisdiction. No offering of securitiesshall be made except by means of a prospectus meeting the requirements of Section 10of the Securities Act of 1933, as amended.

 

3

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**PART I– Financial Information**

 

**Item 1.Financial Statements**

 

ArchipelagoHoldings, Inc.

Condensed Consolidated Statements of FinancialCondition

(In thousands,except per share data)

 
| ** **                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Assets                                                                                                                                                       |       |                   |       |                  |       |
| Current  assets:                                                                                                                                             |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                   |       | $                      | 116,267    |                  | $          | 145,170 |   |
| Accounts  receivable, net                                                                                                                                    |       | 77,623                 |       | 72,686                |       |
| Total  current assets                                                                                                                                        |       | 193,890                |       | 217,856               |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Fixed  assets, net                                                                                                                                           |       | 65,429                 |       | 44,738                |       |
| Goodwill                                                                                                                                                     |       | 131,865                |       | 131,865               |       |
| Other  intangible assets, net                                                                                                                                |       | 107,235                |       | 92,169                |       |
| Deferred  tax asset, net                                                                                                                                     |       | 22,956                 |       | 5,434                 |       |
| Other  assets                                                                                                                                                |       | 10,164                 |       | 7,774                 |       |
| Total  non-current assets                                                                                                                                    |       | 337,649                |       | 281,980               |       |
| Assets  of discontinued operations (Note 4)                                                                                                                  |       | 20,227                 |       | 40,172                |       |
| Total  assets                                                                                                                                                |       | $                      | 551,766    |                  | $          | 540,008 |   |
|                                                                                                                                                         |       |                   |       |                  |       |
| Liabilities  and Stockholders’ Equity  Liabilities:                                                                                                     |       |                   |       |                  |       |
| Accounts  payable and accrued expenses                                                                                                                       |       | $                      | 96,055     |                  | $          | 58,710 |   |
| Deferred  tax liability                                                                                                                                      |       | 13,397                 |       | 3,595                 |       |
| Capital  lease obligations                                                                                                                                   |       | 1,916                  |       | 1,545                 |       |
| Total  current liabilities                                                                                                                                   |       | 111,368                |       | 63,850                |       |
| Liabilities  of discontinued operations (Note 4)                                                                                                             |       | 16,310                 |       | 15,285                |       |
| Total  liabilities                                                                                                                                           |       | 127,678                |       | 79,135                |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Commitments  and contingencies                                                                                                                               |       |                   |       |                  |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Stockholders’  equity  Common stock, $0.01 par value, 165,000 shares authorized; 47,265 and 47,138  shares issued; 45,620 and 47,138 shares outstanding |       | 473                    |       | 471                   |       |
| Common  stock held in treasury, at cost; 1,645 and 0 shares                                                                                                  |       | (65,570                | )          | —                |       |
| Additional  paid-in capital                                                                                                                                  |       | 462,633                |       | 451,625               |       |
| Unearned  stock-based compensation                                                                                                                           |       | (6,205                 | )          | (19                   | )          |
| Retained  earnings                                                                                                                                           |       | 32,757                 |       | 8,796                 |       |
| Total  stockholders’ equity                                                                                                                             |       | 424,088                |       | 460,873               |       |
| Total  liabilities and stockholders’ equity                                                                                                             |       | $                      | 551,766    |                  | $          | 540,008 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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ArchipelagoHoldings, Inc.

Condensed Consolidated Statements of Operations

(In thousands,except per share data)

(unaudited)

 
| ** **                                                                                                    | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                                                      |       |                   |       |                   |       |   |   |   |   |
| Transaction  fees ($39,680, $45,433, $129,084 and $140,007 with related parties)                              |       | $                      | 98,853     |                   | $          | 101,615 |   | $ | 310,323 |   | $ | 324,464 |   |
| Market  data fees ($7,374, $6,561, $21,446 and $15,827 with related parties)                                  |       | 15,080                 |       | 14,250                 |       | 45,747 |   | 38,268 |   |
| Listing  fees                                                                                                 |       | 135                    |       | 118                    |       | 376 |   | 324 |   |
| Total  revenues                                                                                               |       | 114,068                |       | 115,983                |       | 356,446 |   | 363,056 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Cost  of revenues                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Liquidity  payments ($11,715, $12,853, $37,573 and $39,327 with related parties)                              |       | 49,457                 |       | 48,087                 |       | 152,922 |   | 151,194 |   |
| Routing  charges ($7,255, $10,657, $25,040 and $35,586 with related parties)                                  |       | 15,684                 |       | 19,980                 |       | 50,967 |   | 67,664 |   |
| Clearance,  brokerage and other transaction expenses ($787, $2,621, $2,584 and $11,168  with related parties) |       | 1,357                  |       | 3,213                  |       | 4,319 |   | 11,761 |   |
| Total  cost of revenues                                                                                       |       | 66,498                 |       | 71,280                 |       | 208,208 |   | 230,619 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Gross  margin                                                                                                 |       | 47,570                 |       | 44,703                 |       | 148,238 |   | 132,437 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Indirect  expenses                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Employee  compensation and benefits                                                                           |       | 12,135                 |       | 9,526                  |       | 35,681 |   | 28,639 |   |
| Depreciation  and amortization                                                                                |       | 5,262                  |       | 4,071                  |       | 14,855 |   | 18,308 |   |
| Communications  ($425, $436, $1,346 and $791 with related parties)                                            |       | 4,803                  |       | 4,228                  |       | 14,322 |   | 11,729 |   |
| Marketing  and promotion ($0, $116, $0 and $357 with related parties)                                         |       | 4,689                  |       | 7,751                  |       | 17,907 |   | 12,186 |   |
| Legal  and professional ($600, $675, $1,800 and $1,363 with related parties)                                  |       | 3,121                  |       | 2,644                  |       | 8,465 |   | 8,282 |   |
| NYSE  merger costs ($0, $0, $3,500 and $0 with related parties)                                               |       | 2,993                  |       | —                 |       | 11,425 |   | — |   |
| Occupancy                                                                                                     |       | 1,504                  |       | 1,114                  |       | 4,108 |   | 2,921 |   |
| General  and administrative                                                                                   |       | 3,379                  |       | 2,893                  |       | 9,604 |   | 6,745 |   |
| Total  indirect expenses                                                                                      |       | 37,886                 |       | 32,227                 |       | 116,367 |   | 88,810 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Operating  income                                                                                             |       | 9,684                  |       | 12,476                 |       | 31,871 |   | 43,627 |   |
| Interest  and other, net                                                                                      |       | 1,372                  |       | 739                    |       | 3,261 |   | 913 |   |
| Income  from continuing operations before income tax provision (benefit)                                      |       | 11,056                 |       | 13,215                 |       | 35,132 |   | 44,540 |   |
| Income  tax provision (benefit)                                                                               |       | 4,533                  |       | (1,883                 | )          | 14,200 |   | (1,883 | ) |
| Income  from continuing operations                                                                            |       | 6,523                  |       | 15,098                 |       | 20,932 |   | 46,423 |   |
| Income  from discontinued operations (Note 4)                                                                 |       | 1,238                  |       | 2,017                  |       | 3,030 |   | 9,992 |   |
| Net  income                                                                                                   |       | 7,761                  |       | 17,115                 |       | 23,962 |   | 56,415 |   |
| Deemed  dividend on convertible preferred shares                                                              |       | —                 |       | (9,619                 | )          | — |   | (9,619 | ) |
| Net  income attributable to common stockholders                                                               |       | $                      | 7,761      |                   | $          | 7,496 |   | $ | 23,962 |   | $ | 46,796 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic  earnings (loss) per share from:                                                                        |       |                   |       |                   |       |   |   |   |   |
| Continuing  operations                                                                                        |       | $                      | 0.14       |                   | $          | 0.36 |   | $ | 0.44 |   | $ | 1.22 |   |
| Discontinued  operations                                                                                      |       | 0.03                   |       | 0.05                   |       | 0.06 |   | 0.26 |   |
| Deemed  dividend on convertible preferred shares                                                              |       | —                 |       | (0.23                  | )          | — |   | (0.25 | ) |
| Basic  earnings per share                                                                                     |       | $                      | 0.16       |                   | $          | 0.18 | (a) | $ | 0.51 |   | $ | 1.23 | (a) |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Diluted  earnings (loss) per share from:                                                                      |       |                   |       |                   |       |   |   |   |   |
| Continuing  operations                                                                                        |       | $                      | 0.14       |                   | $          | 0.34 |   | $ | 0.44 |   | $ | 1.12 |   |
| Discontinued  operations                                                                                      |       | 0.03                   |       | 0.05                   |       | 0.06 |   | 0.24 |   |
| Deemed  dividend on convertible preferred shares                                                              |       | —                 |       | (0.22                  | )          | — |   | (0.23 | ) |
| Diluted  earnings per share                                                                                   |       | $                      | 0.16       |                   | $          | 0.17 | (a) | $ | 0.50 |   | $ | 1.13 | (a) |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic  weighted average shares outstanding                                                                    |       | 47,206                 |       | 41,640                 | (a)        | 47,192 |   | 38,006 | (a) |
| Diluted  weighted average shares outstanding                                                                  |       | 48,292                 |       | 43,994                 | (a)        | 48,106 |   | 41,360 | (a) |

 

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(a) Adjusted toreflect our reorganization from a Delaware limited liability company to aDelaware corporation on August 11, 2004.

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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ArchipelagoHoldings, Inc.

Condensed Consolidated Statements of CashFlows

(In thousands)

(unaudited)

 
| ** **                                                                         | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                               |       |                   |       |   |   |
| Cash flows from  operating activities:                                             |       |                   |       |   |   |
| Income from continuing  operations                                                 |       | $                      | 20,932     |   | $ | 46,423 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization of fixed assets                                     |       | 13,582                 |       | 17,087 |   |
| Amortization  of intangible assets                                                 |       | 1,273                  |       | 1,221 |   |
| Provision  for doubtful accounts                                                   |       | (787                   | )          | (500 | ) |
| Deferred  taxes                                                                    |       | 5,832                  |       | (3,280 | ) |
| Stock-based  compensation                                                          |       | 2,239                  |       | 113 |   |
| Tax  benefit from stock option exercises                                           |       | 1,056                  |       | — |   |
| Changes  in operating assets and liabilities:                                      |       |                   |       |   |   |
| Accounts  receivable                                                               |       | 14,675                 |       | 403 |   |
| Other  assets                                                                      |       | (1,822                 | )          | (7,226 | ) |
| Accounts  payable and accrued expenses                                             |       | 431                    |       | (30,955 | ) |
| Net cash provided by  operating activities of continuing operations                |       | 57,411                 |       | 23,286 |   |
| Net cash provided by  operating activities of discontinued operations              |       | 5,560                  |       | 27,115 |   |
| Net  cash provided by operating activities                                         |       | 62,971                 |       | 50,401 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                   |       |   |   |
| Acquisition of  business, net of cash acquired                                     |       | (89,376                | )          | — |   |
| Additions to fixed and  intangible assets                                          |       | (20,922                | )          | (19,837 | ) |
| Net cash used in  investing activities of continuing operations                    |       | (110,298               | )          | (19,837 | ) |
| Net cash provided by  investing activities of discontinued operations              |       | 2,952                  |       | 406 |   |
| Net  cash used in investing activities                                             |       | (107,346               | )          | (19,431 | ) |
|                                                                               |       |                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                   |       |   |   |
| Capital contribution  from discontinued operations                                 |       | 24,000                 |       | 17,000 |   |
| Proceeds from initial  public offering, net of underwriting discounts              |       | —                 |       | 67,646 |   |
| Direct costs of initial  public offering                                           |       | —                 |       | (6,777 | ) |
| Cash distribution to  former Members                                               |       | —                 |       | (24,613 | ) |
| Principal payments  under capital lease obligations                                |       | (1,545                 | )          | (1,756 | ) |
| Proceeds from exercises  of stock options                                          |       | 1,529                  |       | — |   |
| Repayment of note  payable                                                         |       | —                 |       | (4,429 | ) |
| Net cash provided by  financing activities of continuing operations                |       | 23,984                 |       | 47,071 |   |
| Net cash used in  financing activities of discontinued operations                  |       | (24,000                | )          | (17,000 | ) |
| Net  cash provided by (used in) financing activities                               |       | (16                    | )          | 30,071 |   |
|                                                                               |       |                   |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | (44,391                | )          | 61,041 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 177,878                |       | 111,815 |   |
| Cash and cash  equivalents at end of period                                        |       | 133,487                |       | 172,856 |   |
| Cash and cash  equivalents of discontinued operations                              |       | 17,220                 |       | 27,926 |   |
| Cash and cash  equivalents of continuing operations                                |       | $                      | 116,267    |   | $ | 144,930 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental disclosures of  cash flow information**                             |       |                   |       |   |   |
| Cash paid for:                                                                     |       |                   |       |   |   |
| Interest                                                                           |       | $                      | 56         |   | $ | 266 |   |
| Income  taxes                                                                      |       | 12,994                 |       | 1,859 |   |
|                                                                               |       |                   |       |   |   |
| **Non-cash investing and  financing activities**                                   |       |                   |       |   |   |
| Conversion of  convertible preferred shares to common                              |       | —                 |       | 50,000 |   |
| Issuance of common  stock to former REDIBook Members                               |       | —                 |       | 2,199 |   |
| Issuance of common  stock to GAP Archa Holdings                                    |       | —                 |       | 9,619 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

6

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**ArchipelagoHoldings, Inc.**

**Notes toCondensed Consolidated Financia****l Statements (unaudited)**

**September 30,2005**

 

**1. ORGANIZATION AND BASIS OF PRESENTATION**

 

**Organization**

 

Archipelago Holdings, Inc.(“Archipelago”) operates the Archipelago Exchange, or ArcaEx® (“ArcaEx”), thefirst open all-electronic stock market in the United States for trading in allNYSE, Nasdaq, AMEX and Pacific Exchange-listed stocks. Following the September 26,2005 acquisition of PCX Holdings, Inc. (“PCXH”), and its subsidiaries (includingthe Pacific Exchange, Inc. (“PCX”) and PCX Equities, Inc. (“PCXEquities”),  Archipelago also operates anexchange for trading equity options as well as provides self regulatoryservices, including regulatory and market management services, for options andequity trading. See Note 3, PCX Holdings, Inc. Acquisition.

 

Archipelago Holdings,L.L.C. (“Holdings LLC”), a Delaware limited liability company and thepredecessor to Archipelago, was organized in January 1999.  In July 2000,Holdings LLC entered into a facility services agreement with PCX which allowedit to establish and operate ArcaEx. The Securities and Exchange Commission’s (“SEC”)approval of ArcaEx was announced in October 2001 and ArcaEx began tradingoperations for listed securities in March 2002 and for over-the-countersecurities in April 2003.

 

On August 11, 2004,Holdings LLC converted to a Delaware corporation, Archipelago Holdings, Inc. We refer to Archipelago Holdings, Inc. and, prior to its conversion to aDelaware corporation, Holdings LLC, as the “Company”.  On August 19,2004, the Company completed an initial public offering (“IPO”) of its commonstock. See below discussion of the “*ConversionTransaction*” and the “*InitialPublic Offering.*”

 

Through certainsubsidiaries, the Company also provides broker execution services toinstitutions for orders involving Nasdaq and listed securities, as well asintroducing broker services for ArcaEx to broker-dealers that do not hold anequity trading permit (“ETP”).

 

**ConversionTransaction**

 

On August 11, 2004,prior to the consummation of the IPO, Holdings LLC converted from a Delawarelimited liability company to a Delaware corporation, Archipelago Holdings, Inc.As a limited liability company, all income taxes were paid by the members ofHoldings LLC. As a corporation, the Company is responsible for the payment ofall federal and state corporate income taxes.

 

As a result of thereorganization of Holdings LLC from a Delaware limited liability company into aDelaware corporation, the members of Holdings LLC received 0.222222 shares ofcommon stock of the Company for each of their membership interests held by suchmember in Holdings LLC, which corresponds to a 4.5-for-1 reverse stock split.The weighted average number of shares used in the basic and diluted earningsper share computations gives retroactive effect to the 4.5-for-1 reverse stocksplit.

 

As approved by theCompany’s board of managers on July 16, 2004, the Company made a $24.6million cash distribution to the members of Holdings LLC immediately prior tothe conversion transaction. The cash distribution permitted the members to paythe taxes that the members owe for their share of the Company’s profits in 2004as a limited liability company through the date of the conversion transaction,calculated primarily based on the highest federal and state income tax rateapplicable for the tax withholding purposes to an individual.

 

**InitialPublic Offering**

 

On August 19, 2004,the Company completed the IPO of its common stock as a result of which theCompany sold 6,325,000 shares of common stock at $11.50 per share.  TheCompany received net proceeds of $67.6 million and incurred approximately $6.8million in expenses in connection with the IPO. In addition, 6,325,000 sharesof common stock were sold in the IPO by certain selling stockholders of theCompany, for which the Company received no proceeds.  The Company’s stockis listed on the Pacific Exchange and is traded on ArcaEx under the symbol “AX”. A summary of the terms of the IPO can be found in the Company’s RegistrationStatement on Form S-1 (File No. 333-113226), which was declaredeffective by the SEC on August 12, 2004.

 

**Basis ofPresentation**

 

The accompanyingcondensed consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America andinclude the accounts of the Company and its wholly-owned subsidiaries. Managementhas made estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities as of thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. 

 

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Management believes thatthe estimates utilized in preparing its financial statements are reasonable andprudent. Actual results could differ from these estimates.

 

In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included. All material intercompany accounts and transactions have beeneliminated in consolidation. Certain reclassifications have been made to theprior periods in order to conform to the current period’s presentation.Operating results for the three and nine months ended September 30, 2005are not necessarily indicative of the results that may be expected for the fullyear ending December 31, 2005.

 

Certain information andfootnote disclosures normally included in financial statements have beencondensed or omitted; however, management believes that the disclosures areadequate to make the information presented not misleading.

 

In connection with theacquisition of PCXH, the Company is in the process of divesting itswholly-owned subsidiary, Wave Securities, L.L.C (“Wave”). The operations of Waveare presented as discontinued. See Note 4, Discontinued Operations.

 

The condensedconsolidated financial statements are unaudited and should be read inconjunction with the Company’s audited financial statements as of and for theyear ended December 31, 2004, included in the Company’s Annual Report on

Form 10-K filed withthe SEC on March 23, 2005. Operating results for the three and nine monthsended September 30, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005.

 

**2. MERGER WITH NEW YORK STOCK EXCHANGE, INC. (“NYSE”)**

 

On April 20,2005, Archipelago entered into a definitive merger agreement (the “OriginalAgreement”) with the New York Stock Exchange, Inc., a New York Type Anot-for-profit corporation (the “NYSE”), pursuant to which Archipelago and theNYSE agreed to combine their businesses and become wholly-owned subsidiaries ofNYSE Group, Inc. (“NYSE Group”), a newly-created, for-profit andpublicly-traded holding company (the “NYSE Transaction”).  On July 20,2005, Archipelago, NYSE, NYSE Group and certain of their affiliates enteredinto a definitive Amended and Restated Agreement and Plan of Merger (“AmendedNYSE Agreement”) that amended and restated the terms and condition of theOriginal Agreement which was reported on a Current Report on Form 8-Kfiled on July 21, 2005.  On October 20, 2005, Archipelago, NYSE,NYSE Group and certain of their affiliates entered into an amendment (“NYSEAmendment No. 1”) to the Amended NYSE Agreement which was reported on aCurrent Report on Form 8-K filed on October 25, 2005.  On November 1,2005, Archipelago, NYSE and the NYSE Group and certain of their affiliatesentered into an amendment No. 2 to the Amended Agreement (“NYSE Amendment No. 2”)which was reported on a Current Report on Form 8-K filed on November 4,2005.

 

Through a single mergerwith a wholly-owned subsidiary of NYSE Group, under which the Company will bethe surviving entity: (i) each share of the issued and outstanding sharesof the Company’s common stock will convert automatically into the right toreceive one share of NYSE Group common stock; (ii) all outstanding stockoptions of the Company, whether vested or unvested, will convert into optionsto purchase an equivalent number of shares of NYSE Group common stock; and (ii) alloutstanding restricted stock units of the Company will convert into an equalnumber of restricted stock units of NYSE Group common stock. The aggregatenumber of shares (including shares underlying stock options and restrictedstock units) to be received by the Company’s stockholders will equal 30% of theissued and outstanding shares of NYSE Group common stock at the closing of theTransaction, on a diluted basis.

 

Under the terms of theOriginal NYSE Agreement, each NYSE member is entitled to receive in exchangefor its NYSE membership, $300,000 in cash, plus a pro rata portion of theaggregate number of shares of NYSE Group Common Stock issued to all of the NYSEmembers in the Transaction (the “Standard Mix of Consideration”). Under theterms of the Original NYSE Agreement which remain unchanged by the Amended NYSEAgreement, NYSE Amendment No. 1 and NYSE Amendment No. 2, theaggregate number of shares of NYSE Group Common Stock to be issued to all ofthe NYSE members in the Transaction, together with the aggregate number ofshares reserved for issuance to NYSE employees, will equal 70% of the NYSEGroup common stock issued and outstanding at the time of completion of themergers, on a diluted basis.

 

Under the terms of theAmended NYSE Agreement, however, instead of receiving the Standard Mix ofConsideration, each NYSE member will have the opportunity to make either a cashelection to increase the cash portion (and decrease the stock portion) of theirmerger consideration, or a stock election to increase the stock portion (anddecrease the cash portion) of their merger consideration. These elections aresubject to proration to ensure that in no event, will the total amount of cashpaid (not counting the cash paid in respect of fractional shares of the NYSEGroup Common Stock), and the total number of shares of NYSE Group Common Stockissued in the Transaction to the NYSE members, as a whole exceed the totalamount of cash and number of shares of NYSE Group Common Stock that would havebeen paid and issued if all NYSE members received the Standard Mix ofConsideration.

 

NYSE Amendment No. 1revised the mechanics of the issuance of the consideration (but not the amount)to be received by the NYSE members who elect to receive cash in the NYSETransaction. Specifically, NYSE Amendment No. 1 provides that shares ofmandatorily redeemable preferred stock (rather than cash) of a NYSE MergerCorporation Sub, Inc. a wholly-owned subsidiary of the NYSE, would beissued in the NYSE corporation merger. Under NYSE Amendment No. 1, theseshares of preferred stock would 

 

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automatically be redeemedthree hours after their issuance for $300,000 in cash per share. Although NYSEAmendment No. 1 modified the corporate mechanics by which NYSE memberswould receive cash in the mergers, NYSE Amendment No. 1 did not affect theamount of cash or number of shares of NYSE Group common stock that any NYSEmember would receive in the transaction or the consideration payable toArchipelago stockholders in the transaction. The reason for structuring thecash component of the consideration in this manner is to provide certain NYSEmembers that are not U.S. persons with deferral of certain non-U.S. income taxon their receipt of shares of NYSE Group common stock in the mergers.

 

NYSEAmendment No. 2 reduced by 20% each of the NYSE’s and Archipelago’srequired amount of net cash for purposes of the closing conditions of themergers, and for purposes of the payment of any permitted dividend.Specifically, prior to the amendment, Archipelago’s obligation to complete themergers was subject to the NYSE’s possession of at least $350 million of netcash at closing, and the NYSE’s obligation to complete the mergers was subjectto Archipelago’s possession of at least $150 million of net cash at closing.Upon execution of NYSE Amendment No. 2, the NYSE and Archipelago arerequired only to have at least $280 million and $120 million, respectively, ofnet cash at closing.  By reducing theminimum net cash required of the NYSE and Archipelago, the merger agreementamendment will permit the NYSE or Archipelago, as applicable, to increase theamount of its permitted dividend they may distribute to their respectivemembers or stockholders prior to the consummation of the NYSE Transaction.

 

Theparties agreed to reduce the minimum amount of net cash required of each partybecause, on July 22, 2005, Archipelago and PCXH amended theArchipelago-PCXH merger agreement so that all of the consideration paid to thePCXH stockholders in the merger would be paid in the form of cash (rather thanpart cash and part stock). In addition, under the terms of the merger agreementbetween Archipelago and PCXH, the consideration payable to PCXH was based inpart on the market price of Archipelago common stock during a periodimmediately prior to the date of the completion of Archipelago’s acquisition ofPCXH, and the market price of Archipelago common stock during this period wassignificantly higher than it was prior to the execution of the originalNYSE-Archipelago merger agreement in April 20, 2005.

 

The consummation of the NYSETransaction is subject to a number of customary closing conditions, includingthe receipt of approval by the NYSE members and the Company’s stockholders aswell as certain government approvals, including the SEC, and the expiration ortermination of the applicable waiting period under the Hart-Scott-Rodino Act.The Company anticipates that the NYSE Transaction will close in the firstquarter of 2006.

 

On November 3,2005, Archipelago and the NYSE issued a joint press release announcing that thespecial meetings of their respective stockholders and members have been set forDecember 6, 2005.

 

The Amended NYSEAgreement, as amended by the NYSE Amendments No. 1 and No. 2,  contains customary representations andwarranties, including the representation that each party has received: (i) therequisite approval of its board of directors to enter into the mergeragreement; and (ii) an opinion of its financial advisor stating, to theeffect that the consideration to be received in the Transaction is fair from afinancial point of view.

 

The Amended NYSEAgreement, as amended by the NYSE Amendments No. 1 and No. 2, alsocontains customary termination provisions which, under certain circumstances inthe event of a termination of the agreement, may subject the parties toliability for the payment of termination fees and reimbursement of expenses inan amount up to $40.0 million, and includes a provision which permits eitherparty to terminate the merger agreement if the Transaction fails to close by February 1,2006 (unless extended by the parties). Either party may extend the term of the AmendedNYSE Agreement, as amended by the NYSE Amendments No. 1 and No. 2, withoutthe consent of the other party for two separate three-month periods (with thefirst period ending on May 1, 2006 and the second ending on August 1,2006), provided that the only conditions that remain to be satisfied are thereceipt of the approvals of either the NYSE members, the Company’s stockholdersor any regulatory entity, and outstanding litigation.

 

The parties expect thatthe combined businesses will bring together the strength of NYSE’s auctionmarket and the speed and innovation of the Company and its technology andmanagement.  The parties believe this combination will create a strong anddynamic enterprise with diverse products that will be well positioned tocompete in the industry and possess enhanced growth potential.

 

In April 2005, theCompany entered into a letter agreement with a stockholder under which thestockholder agreed to perform certain services in relation to the proposedmerger of the Company and NYSE which included facilitating discussions betweenthe parties and providing certain valuation analysis.  The Company agreedto pay the stockholder a transaction fee of $3.5 million in cash uponconsummation of the NYSE Transaction. The Company also agreed to reimburse thestockholder for one-half of the stockholder’s reasonable out-of-pocket expenses(including the fees and disbursements of attorneys plus any sales, use orsimilar taxes) in an amount not to exceed $50,000 without the prior writtenconsent of the Company. In the event the NYSE Transaction is terminated or notconsummated, the Company will pay a transaction fee to be mutually agreed uponbetween the parties. The Company has not made any payments under this agreementas of September 30, 2005.

 

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**3. PCX HOLDINGS, INC. ACQUISITION**

 

On September 26,2005, the Company completed the acquisition of PCXH for a total purchase priceof approximately $93.9 million consisting of a $90.9 million cash payment toPCXH shareholders and certain employees of PCXH and its subsidiaries, andapproximately $3.0 million of direct costs incurred by Archipelago as part ofthis acquisition. The $90.9 million cash payment represented the total dollarvalue of 1,645,415 shares of Archipelago common stock held by PCX at the timeof the closing, or $66.3 million, plus $24.6 million.

 

PCX operates an exchangefor trading options as well as provides self regulatory services, includingregulatory and market management services, for options and equity trading. ThePCXH acquisition will enable the Company to offer all-electronic trading ofequity securities as well as equity options, and to expand and diversify theCompany’s business lines and products.

 

Eventhough the PCXH acquisition was consummated on September 26, 2005, for financial reporting purposesmanagement deemed the assets and liabilities of PCXH as of September 30, 2005 to be the basis for allocation ofthe purchase price. As such, the assets and liabilities of PCXH have beenincluded in the Company’s consolidated statement of financial condition as ofSeptember 30, 2005.However, the results of operations of PCXH will be included in the Company’sresults of operations from and after October 1, 2005. The results of operations of PCXHfor the four-day period ended September 30, 2005 were not material.

 

The purchase price wasallocated to those assets acquired and liabilities assumed based on theestimated fair value of PCXH’s net assets as of September 30, 2005. Thefollowing is a summary of the preliminary allocation of the purchase price inthe PCXH acquisition (dollars in thousands):

 
| Purchase  price                                         |   | $       | 90,863 |   |
|---------------------------------------------------------|--------|---------|--------|--------|
| Acquisition costs                                       |   | 3,030   |   |
| Total purchase price                                    |   | $       | 93,893 |   |
|                                                    |   |    |   |
| Historical net assets  acquired                         |   | $       | 56,360 |   |
| Reversal of deferred  revenues                          |   | 20,431  |   |
| Revaluation of fixed  assets                            |   | (10,673 | )      |
| National securities  exchange registration (See Note 5) |   | 15,883  |   |
| Liabilities for exit  and termination costs             |   | (12,180 | )      |
| Deferred tax impact of  purchase accounting adjustments |   | 24,072  |   |
| Total purchase price                                    |   | $       | 93,893 |   |

 

The reversal of deferredrevenues relates to the unrecognized portion of deferred revenue balancesrecorded by PCXH in connection with its May 2001 exchange facility agreementwith the Company.

 

Liabilities for exit andtermination costs are primarily associated with employee terminations,including accrued severance benefits and costs related to change in controlprovisions of certain PCXH and PCX employment contracts.

 

The allocation of thepurchase price to PCXH’s assets and liabilities are only preliminaryallocations based on estimates of fair values and may change when estimates arefinalized. Therefore, the information above is subject to change pending thefinal allocation of purchase price.

 

The following representsthe summary unaudited pro forma condensed combined results of operations as ifthe PCXH acquisition had occurred at the beginning of each of the periodspresented (dollars in thousands, except per share data):

 
| ** **                                             | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **September 30,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                   |       |                   |       |   |   |
| Total revenues                                         |       | $                      | 402,671    |   | $ | 398,800 |   |
| Income from continuing  operations                     |       | 19,055                 |       | 39,857 |   |
| Net income attributable  to common stockholders        |       | 22,085                 |       | 40,230 |   |
|                                                   |       |                   |       |   |   |
| Basic earnings per  share from continuing operations   |       | $                      | 0.42       |   | $ | 1.10 |   |
| Basic earnings per  share                              |       | $                      | 0.48       |   | $ | 1.00 |   |
|                                                   |       |                   |       |   |   |
| Diluted earnings per  share from continuing operations |       | $                      | 0.41       |   | $ | 1.11 |   |
| Diluted earnings per  share                            |       | $                      | 0.48       |   | $ | 1.01 |   |

 

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In October 2004, theCompany entered into a financial advisory services engagement with a stockholder,under which the stockholder agreed to perform financial advisory services inrelation to the PCXH acquisition.  As of September 30,2005, the Company had not made any payments under this agreement.

 

**4. DISCONTINUED OPERATIONS**

 

On September 22,2005, the SEC entered an order grantingapproval of the proposed rule change and Amendment No. 1 thereto, andnotice of filing and order granting accelerated approval to Amendment No. 2to the proposed rule change, to amend the certificate of incorporation ofPCXH, PCX Rules, and the Bylaws of Archipelago in relation to the acquisitionof PCXH by Archipelago. Under the SEC order, Archipelago undertook to divestWave by December 31, 2005. Wave offers agency brokerage services forinstitutional customers seeking to access ArcaEx and other U.S. market centerselectronically.

 

The results of operationsand financial position of Wave are presented as discontinued operations in thecondensed consolidated financial statements. All historical periods presentedhave been restated to reflect such presentation.

 

Summarized selectedfinancial information for discontinued operations was as follows (inthousands):

 

| ** **                           | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                   |       |                   |       |   |   |   |   |
| Revenues                             |       | $                      | 9,665      |                   | $          | 12,904 |   | $ | 31,925 |   | $ | 61,881 |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
|                                 |       |                   |       |                   |       |   |   |   |   |
| Income before income  tax provision  |       | $                      | 2,098      |                   | $          | 2,585 |   | $ | 5,110 |   | $ | 10,560 |   |
| Income tax provision                 |       | 860                    |       | 568                    |       | 2,080 |   | 568 |   |
| Income from  discontinued operations |       | $                      | 1,238      |                   | $          | 2,017 |   | $ | 3,030 |   | $ | 9,992 |   |

 

The major assets andliabilities of discontinued operations were as follows (in thousands):

 

| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                    |       |                   |       |                  |       |
| Cash and cash  equivalents              |       | $                      | 17,220     |                  | $          | 32,708 |   |
| Accounts receivable,  net               |       | 2,057                  |       | 2,405                 |       |
| Fixed assets, net                       |       | 655                    |       | 4,758                 |       |
| Other assets                            |       | 295                    |       | 301                   |       |
| Assets  of discontinued operations      |       | $                      | 20,227     |                  | $          | 40,172 |   |
|                                    |       |                   |       |                  |       |
| Accounts payable and  accrued expenses  |       | 16,310                 |       | 15,285                |       |
| Liabilities  of discontinued operations |       | $                      | 16,310     |                  | $          | 15,285 |   |

 

**5. GOODWILL AND OTHER INTANGIBLE ASSETS**

 

**Goodwill**

 

In March 2002, theCompany acquired REDIBook in a transaction accounted for as a purchase businesscombination. Approximately $20.8 million of the $150.5 million purchase pricewas assigned to the net tangible and intangible assets acquired, with theremaining value of $129.7 million ascribed to goodwill.  In August 2004,the Company issued contingent consideration to former REDIBook members in theform of 192,194 shares of the Company’s common stock valued at $11.50 per shareand recorded $2.2 million of additional goodwill.

 

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**OtherIntangible Assets**

 

Otherintangible assets consisted of the following (in thousands):

 

| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                       |       |                   |       |                  |       |
| National securities exchange  registration |       | $                      | 105,883    |                  | $          | 90,000 |   |
| Other                                      |       | 1,352                  |       | 2,169                 |       |
| Other intangible  assets, net              |       | $                      | 107,235    |                  | $          | 92,169 |   |

 

In May 2001, theCompany acquired the right to operate as the exclusive equity trading facilityof PCX Equities including the rights to certain revenue streams comprisedprimarily of transaction fees, market data fees, and listing fees, for anaggregate consideration of $90.0 million.

 

In September 2005,the Company acquired PCXH and its subsidiaries, including PCX Equities. As partof the preliminary allocation of the purchase price in the PCXH acquisition,the Company valued the eligibility to earn market data fees related to the PCXH’soption trading business at $15.9 million. See Note 3, PCX Holdings, Inc.Acquisition.

 

As of September 30,2005, the national securities exchange registration allows the Company to (i) generaterevenues from market data fees (both from equity and option trading activities)and listing fees, and (ii) to reduce its costs since clearing charges arenot incurred for trades matched internally on ArcaEx.

 

The Company determinedthat the $105.9 million national securities exchange registration has anindefinite life and, as such, it is not subject to amortization.

 

**6. RELATED PARTY TRANSACTIONS**

 

The following is asummary of the related party transactions involving the Company and certainformer members (i.e., owners of Holdings LLC prior to the IPO) and currentstockholders (i.e., stockholders of the Company after the IPO), PCX and otheraffiliates as part of its operations:

 
| ** **                                                                                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                         | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | **(In thousands)**     | ** ** |
| **Revenues**                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Transaction  fees earned from stockholders/former members and affiliates(1)                                                        |       | $                      | 39,680     |                   | 45,433     |   | $ | 129,084 |   | $ | 140,007 |   |
| Market  data fees received from PCX (net of amounts shared with customers of $5,907,  $5,914, $17,919 and $14,357)(2)              |       | 7,374                  |       | 6,561                  |       | 21,446 |   | 15,827 |   |
| **Cost of revenues**                                                                                                               |       |                   |       |                   |       |   |   |   |   |
| Liquidity  payments to stockholders/former members and affiliates(1)                                                               |       | 11,715                 |       | 12,853                 |       | 37,573 |   | 39,327 |   |
| Routing  charges:                                                                                                                  |       |                   |       |                   |       |   |   |   |   |
| Routing  fees paid to stockholder/former member(3)                                                                                 |       | 6,852                  |       | 10,404                 |       | 24,019 |   | 34,350 |   |
| Routing  fees for listed securities paid to stockholders/former members(4)                                                         |       | 403                    |       | 253                    |       | 1,021 |   | 1,236 |   |
| Clearance,  brokerage and other transaction expenses:                                                                              |       |                   |       |                   |       |   |   |   |   |
| Clearing  services provided by a stockholder/former member(5)                                                                      |       | 81                     |       | 1,970                  |       | 257 |   | 9,207 |   |
| Regulatory  services fees paid to PCX(6)                                                                                           |       | 2,062                  |       | 1,832                  |       | 6,066 |   | 5,337 |   |
| Registered  representative fees received from PCX(6)                                                                               |       | (1,356                 | )          | (1,181                 | )          | (3,739 | ) | (3,376 | ) |
| **Indirect expenses**                                                                                                              |       |                   |       |                   |       |   |   |   |   |
| Communications:                                                                                                                    |       |                   |       |                   |       |   |   |   |   |
| Software  related services provided by an affiliate (net of amounts charged to  customers of $1,019, $1,146, $2,971 and $3,537)(7) |       | 425                    |       | 436                    |       | 1,346 |   | 791 |   |
| Marketing  and promotion:                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Business  development costs(8)                                                                                                     |       | —                 |       | 116                    |       | — |   | 357 |   |
| Legal  and professional:                                                                                                           |       |                   |       |                   |       |   |   |   |   |
| Professional  fees for services provided by an affiliate(9)                                                                        |       | 450                    |       | 525                    |       | 1,350 |   | 1,163 |   |
| Consulting  fees for services from a firm whose principal serves a director of the  Company (10)                                   |       | 150                    |       | 150                    |       | 450 |   | 200 |   |
| NYSE  merger costs                                                                                                                 |       |                   |       |                   |       |   |   |   |   |
| Valuation  analysis and other services provided by a stockholder (11)                                                              |       | —                 |       | —                 |       | 3,500 |   | — |   |
|                                                                                                                                    |            |                        |            |                        |            |  |  |  |  |  |  |  |

 

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(1)          Certain stockholders/former members of Holdings LLC and affiliates executetransactions through ArcaEx, and previously through the Company’s ECN, and arecharged a transaction service fee by the Company for such activities. Liquiditypayments are made to stockholders/former members of Holdings LLC and affiliatesin relation to such transaction fees.

 

(2)          The Company participates in the consolidation, dissemination and sale of marketdata in U.S. exchange-listed securities and Nasdaq-listed securities throughArcaEx. In connection with that, the Company receives market data fees, basedon the level of trading activity on ArcaEx, for providing data to centralizedaggregators that in turn sell the data to third-party consumers. PCX is adirect participant in the plans governing the consolidation and disseminationof market data and as a direct participant in these plans collects taperevenues for trading activities on ArcaEx. Under the terms of the facilityservices agreement, the Company was entitled to all tape revenues earned inconnection with trading activities on ArcaEx prior to the Company’s September 26,2005 acquisition of PCXH and its subsidiaries, including PCX.

 

(3)          A stockholder/former member of Holdings, LLC receives routing fees for tradesexecuted through ArcaEx, that ultimately route through to thestockholder/former member’s ECN.

 

(4)          Certain stockholders/former members of Holdings LLC provide routing servicesfor listed securities through the New York Stock Exchange, Inc. on behalfof the Company.

 

(5)          The Company clears certain of its transactions through a stockholder/formermember of Holdings LLC/clearing broker.

 

(6)          Under the terms of the facility services agreement, PCX provided certainregulatory services to the Company in return for regular payments (asnegotiated between the parties) and forwarded registered representative feesreceived from the NASD to the Company, prior to the Company’s September 26,2005 acquisition of PCXH and its subsidiaries, including PCX.

 

(7)          An affiliate provides software related services to the Company, a portion ofwhich is charged to the Company’s customers.

 

(8)          In 2004, the Company paid rental fees for the yacht that it leased for certainbusiness development functions, which is operated by the domestic partner of asister of a member of management. No such rental fees were incurred in 2005.

 

(9)        An affiliate provides software related services to the Company.

 

(10)        The Company signed an agreement on June 1, 2004 with a consulting firmwhose principal serves as a director of Archipelago.  The consultingagreement provides for a minimum fee of $150,000 per quarter. The Companyexpects this agreement to terminate as of December 31, 2005.

 

(11)         The Company entered into a letteragreement with a stockholder under which the stockholder agreed to performcertain services in relation to the proposed merger of the Company and theNYSE.

 

An affiliate providedsoftware development services to the Company in the amount of $1.5 million forthe nine months ended September 30, 2004.

 

On October 5, 2004,the Company entered into a financial advisory services engagement with astockholder affiliate, under which the affiliate agreed to perform financialadvisory services to the Company in relation to the acquisition of PCXH and itsaffiliates.  As of September 30,2005, the Company has not made any payments under this agreement.

 

In the opinion ofmanagement, transactions were made at customary rates or negotiated terms andconditions, and do not involve more than the normal risk of collectibility orpresent other unfavorable features.

 

**7. STOCK-BASED COMPENSATION**

 

The Company accounts forstock option grants to employees in accordance with Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and,accordingly, recognizes compensation expense using the intrinsic value method.Under the intrinsic value method, stock-based compensation, if any, is measuredas the excess of the estimated fair value of the Company’s stock over theoption exercise price.

 

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The Company adopted thedisclosure provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” and SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.   Had compensation expensefor the Company’s stock option plans been determined based upon fair valueconsistent with SFAS No. 123, the Company’s net income and earnings pershare would have been changed to the following pro forma amounts:

 
| ** **                                                                                                                                                                    | ** ** | **Three months ended**                    | ** ** | **Nine months ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **September 30,**                    | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                                                    | ** ** | **2005**                                  | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Net  income attributable to common stockholders, as reported                                                                                                                  |       | $                                         | 7,761      |                   | $          | 7,496 |   | $ | 23,962 |   | $ | 46,796 |   |
| Add:  Stock-based employee compensation cost included in net income                                                                                                           |       | 565                                       |       | 38                     |       | 1,321 |   | 114 |   |
| Deduct:  Stock-based employee compensation cost  determined under the fair value based method for all awards, net of related  tax effects of $659, $240, $1,679 and $509 |       | 949                                       |       | 339                    |       | 2,417 |   | 717 |   |
| Net  income attributable to common stockholders, pro forma                                                                                                                    |       | $                                         | 7,377      |                   | $          | 7,195 |   | $ | 22,866 |   | $ | 46,193 |   |
|                                                                                                                                                                          |       |                                      |       |                   |       |   |   |   |   |
|                                                                                                                                                                          |       |                                      |       |                   |       |   |   |   |   |
| Earnings  per share:                                                                                                                                                          |       |                                      |       |                   |       |   |   |   |   |
| Basic,  as reported                                                                                                                                                           |       | $                                         | 0.16       |                   | $          | 0.18 |   | $ | 0.51 |   | $ | 1.23 |   |
| Basic,  pro forma                                                                                                                                                             |       | $                                         | 0.16       |                   | $          | 0.17 |   | $ | 0.48 |   | $ | 1.22 |   |
| Diluted,  as reported                                                                                                                                                         |       | $                                         | 0.16       |                   | $          | 0.17 |   | $ | 0.50 |   | $ | 1.13 |   |
| Diluted,  pro forma                                                                                                                                                           |       | $                                         | 0.15       |                   | $          | 0.16 |   | $ | 0.48 |   | $ | 1.12 |   |

 

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 

| ** **                | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield            |       | —                 |       | —                 |       | — |   | — |   |
| Expected volatility       |       | 30.0                   | %          | 30.0                   | %          | 30.0 | % | 30.0 | % |
| Risk-free interest rate   |       | 4.5                    | %          | 4.0                    | %          | 4.5 | % | 4.0 | % |
| Expected life (in  years) |       | 7                      |       | 7                      |       | 7 |   | 7 |   |

 

The Black-Scholes optionpricing model was developed for use in estimating the value of traded optionsthat have no vesting restrictions and are fully transferable.  Inaddition, option pricing models require the input of highly subjectiveassumptions.  Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect theestimate, in management’s opinion, the existing valuation models may notprovide a reliable measure of the fair value of the Company’s employee stockoptions.

 

The above pro formainformation gives effect to the Company’s conversion into a Delawarecorporation as if it occurred at the beginning of the periods presented. In addition, the pro forma information was tax effected at combined federal,state and local rates of 41.0% for the three and nine months ended September 30,2005, and 41.5% for the three and nine months ended September 30, 2004,respectively.

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R)(revised 2004), “Share-Based Payment”, requiring that compensation costassociated with share-based payment transactions be recognized in financialstatements. This cost is to be measured at the fair value of the instrumentissued. SFAS No. 123(R) covers a wide range of share-based compensationarrangements including stock options, restricted stock plans, performance basedawards, share appreciation rights and employee stock purchase plans. Statement No. 123(R)replaces the former SFAS No. 123 and supersedes APB No. 25.  TheCompany plans to adopt SFAS No. 123(R) on January 1, 2006 using themodified-prospective method.  The Company is currently evaluating theoption pricing model to be utilized and the overall impact of the adoption ofSFAS No. 123(R).  The adoption of the fair value method will have animpact on the Company’s results of operations, although it will have no impacton the Company’s overall financial condition.

 

14

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**8. COMPUTATION OF EARNINGS PER SHARE**

 

The following is areconciliation of the basic and diluted earnings per share computations for therespective periods:

 
| ** **                                                | ** ** | **Three months ended**                    | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,**                    | ** ** | **September 30,** | ** ** |
| ** **                                                | ** ** | **2005**                                  | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                      |       |                                      |       |                   |       |   |   |   |   |
| Net  income attributable to common stockholders           |       | $                                         | 7,761      |                   | $          | 7,496 |   | $ | 23,962 |   | $ | 46,796 |   |
| Shares  of common stock and common stock equivalents:     |       |                                      |       |                   |       |   |   |   |   |
| Weighted  average shares used in basic computation        |       | 47,206                                    |       | 41,640                 |       | 47,192 |   | 38,006 |   |
| Dilutive  effect of:                                      |       |                                      |       |                   |       |   |   |   |   |
| Preferred  shares converted to common in August 2004 |       | —                                    |       | 1,704                  |       | — |   | 3,051 |   |
| Stock  options and restricted stock units                 |       | 1,086                                     |       | 650                    |       | 914 |   | 303 |   |
|                                                      |       |                                      |       |                   |       |   |   |   |   |
| Weighted  average shares used in diluted computation      |       | 48,292                                    |       | 43,994                 |       | 48,106 |   | 41,360 |   |
|                                                      |       |                                      |       |                   |       |   |   |   |   |
| Basic  earnings per share                                 |       | $                                         | 0.16       |                   | $          | 0.18 |   | $ | 0.51 |   | $ | 1.23 |   |
| Diluted  earnings per share                               |       | $                                         | 0.16       |                   | $          | 0.17 |   | $ | 0.50 |   | $ | 1.13 |   |

 

For the three and ninemonths ended September 30, 2004, approximately 1.4 million securities wereexcluded from the computation of diluted earnings per share because theireffect would have been antidilutive.

 

**9. SEGMENT REPORTING**

 

During the third quarterof 2005, the Company operated in two reportable segments: Transaction ExecutionServices and Agency Brokerage Services.

 

Transaction ExecutionServices consisted primarily of transaction execution services, market dataservices on a real-time or summary basis and, through the Company’s alliancewith PCX, a trading venue for issuers of equity securities, exchange tradedfunds and structured products. Under PCX rules, issuers are listed on PCX fortrading on ArcaEx. The customers in this segment are required to hold an ETP orbe a broker-dealer introduced to ArcaEx by an ETP. An ETP holder must be abroker-dealer.

 

Agency Brokerage Serviceswere provided through Wave and consisted of order execution services, on anagency basis, for orders received from institutions involving primarily Nasdaqand listed securities. This segment provides institutions that are not ETPholders or are not sponsored by ETP holders access to all U.S. Nasdaq andexchange-listed securities markets through ArcaEx. Because Wave’s agencybrokerage services are presented as discontinued, the Company is no longerrequired to disclose the information required by SFAS No. 131, Disclosuresabout Segments of an Enterprise and Related Information.

 

Following the acquisitionof PCXH on September 26, 2005, the Company operates in the following tworeportable segments: ArcaEx Equities and ArcaEx Options.

 

ArcaEx Equities consistprimarily of the reportable segment formerly described above as TransactionExecution Services.

 

ArcaEx Options consist primarilyof transaction execution services, as well as market data services on areal-time or summary basis and a trading venue for issuers of option products.The customers in this segment are required to hold an Option Trading Permit (“OTP”).An OTP holder must be a broker-dealer or associated with a broker dealer.

 

Revenues are generatedprimarily in the United States of America. Revenues derived from onestockholder/former member of Holdings LLC and its affiliates representedapproximately 10.9% and 10.3% for the three and nine months ended September 30,2004, and 7.9% and 8.8% for the three and nine months ended September 30,2005 of the revenues from continuing operations for each respective period.

 

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As of September 30,2005, the Company’s identifiable assets per segment were as follows (inthousands):

 
| ArcaEx  Equities                              |   | $       | 469,316 |   |
|-----------------------------------------------|--------|---------|---------|--------|
| ArcaEx Options                                |   | 74,142  |    |
| Eliminations                                  |   | (11,919 | )       |
| Identifiable assets of  continuing operations |   | 531,539 |    |
| Assets of discontinued  operations            |   | 20,227  |    |
| Identifiable assets                           |   | $       | 551,766 |   |

 

**10. COMMITMENTS AND CONTINGENCIES**

 

In the normal course ofconducting its business, the Company has been involved in various legalproceedings. In the opinion of management, after consultation with legalcounsel, the ultimate outcome of pending litigation matters, including thethree matters below, will not have a material adverse effect on the financialcondition or results of operations of the Company.

 

In January 2004, PCXwas named as defendant in the case entitled Last Atlantis Capital LLC et al. v.Chicago Board Options Exchange, Inc. et al., filed in the United StatesDistrict Court for the Northern District of Illinois. The complaint allegesthat the defendants, including four other options exchanges and a number ofsecurities brokers/dealers, engaged in certain actions in violation of theSherman and Clayton Acts. The complaint also alleges breach of contract andfiduciary duty, violations of the antifraud provisions of the federal securitieslaws, and common law fraud and fraud under Illinois state law by thedefendants. The complaint seeks an injunction and the award of damagesincluding punitive damages and treble damages under the relevant provisions ofthe federal antitrust laws. PCX filed a motion to dismiss on June 14,2004, which the court granted on March 20, 2005. Discovery had been stayedpending decision on the motion to dismiss. On April 13, 2005, plaintiffsmoved the court for reconsideration of the order granting defendants’ summaryjudgment, which PCX opposed. On May 9, 2005, the judge granted defendants’motion in part, allowing defendants until May 29, 2005 to re-plead thesecurities fraud claims. The plaintiffs have re-pleaded the securities lawsclaims, and the Company will defend against this matter.

 

On January 28, 2005,PCX was named as defendant in the case entitled Bryan Rule v. ChicagoBoard Options Exchange, Inc. et al., filed in the United States DistrictCourt for the Northern District of Illinois. The complaint alleges that thedefendants, including three other options exchanges and a number of securitiesbrokers/dealers, engaged in certain actions in violation of the Sherman andClayton Acts. The complaint also alleges breach of contract and fiduciary duty,violations of the antifraud provisions of the federal securities laws, commonlaw fraud and fraud under Illinois state law by the defendants, and tortuousinterference with plaintiff’s businesses. The complaint seeks an injunction andthe award of damages including punitive damages and treble damages under therelevant provisions of the federal antitrust laws. The Company intends todefend against this matter.

 

On September 30, 2005, PCX was named as defendant in the case entitledBrad Martin et al. v. Chicago Board Options Exchange, Inc. et al., filedin the United States District Court for the Northern District of Illinois. Thecomplaint alleges facts, causes of action and seeks relief substantiallysimilar to that asserted in the Last Atlantis Capital LLC and Brian Rulematters.

 

On October 28, 2005, pursuant to a previously filed motion, thedefendants in this matter, including PCX, appeared before federal districtcourt Judge Bucklo in the Northern District of Illinois, requesting that theirobligation to answer or otherwise plead to the pending complaints be postponeduntil the cases are reassigned and consolidated. In response, the Courtdirected the plaintiffs in the Last Atlantis Capital LLC, Brian Rule and BradMartin matters (collectively, “Plaintiffs”), to file a consolidated complaintwithin ten days.  Also, on October 28,the Plaintiffs filed a motion to reassign the pending cases to Judge Bucklo,based upon relatedness.

 

On November 7, 2005, the Plaintiffs filed a consolidated complaint inthe United States District Court for the Northern District of Illinois. Exceptfor claims relating to violation of the Sherman and Clayton Acts, the complaintalleges facts, causes of action and seeks relief substantially similar to thatasserted in the in the Last Atlantis Capital LLC,  Brian Rule and Brad Martin matters. OnNovember 10, 2005, the Court filed an order allowing the cases to bere-assigned to Judge Bucklo.  Thedefendants, including PCX, have thirty days to answer or otherwise plead to theconsolidated complaint.  The Companyintends to continue to defend against this matter.

 

The Company leases officespace under non-cancelable operating leases and certain computer equipmentunder capital leases. As of September 30, 2005, the future minimumcommitments under these non-cancelable leases, including those leases assumedas part of the PCXH acquisition, were as follows (in thousands):

 
| **Year  ending December 31,**                             | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
|                                                           |       |       |       |
| 2005 (for the period  from October 1 to December 31) |       | $          | 2,235      |   |
| 2006                                                           |       | 9,353      |       |
| 2007                                                           |       | 8,092      |       |
| 2008                                                           |       | 7,016      |       |
| 2009                                                           |       | 4,967      |       |
| Thereafter                                                     |       | 14,135     |       |
| Net minimum lease  payments                                    |       | $          | 45,798     |   |

 

**11. NET CAPITAL REQUIREMENTS**

 

Wave, ArchipelagoSecurities, L.L.C. (“ARCAS”) and Archipelago Trading Services, Inc. (“ATSI”)are registered broker-dealers and are subject to net capital requirements underSEC Rule 15c3-1. Wave and ATSI compute their net capital using the basicmethod. Under this method, these subsidiaries must maintain minimum net capital(as defined) and the ratio of aggregate indebtedness (as defined) to netcapital may not exceed 15 to 1. ARCAS computes its net capital under thealternative method. This method requires that minimum net capital not be lessthan the greater of $250,000 or 2% of aggregate debit items arising fromcustomer transactions.

 

16

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As of September 30,2005, these subsidiaries were in compliance with their respective net capitalrequirements and their net capital, net capital in excess of required netcapital, and ratio of aggregate indebtedness to net capital were as follows (inthousands, except ratios):

 
| Net  capital:                                    |   |      |   |
|--------------------------------------------------|--------|-----------|--------|
| Wave                                             |   | $         | 4,642  |   |
| ARCAS                                            |   | 12,418    |   |
| ATSI                                             |   | 4,776     |   |
|                                             |   |      |   |
| Net capital in excess  of required net capital:  |   |      |   |
| Wave                                             |   | $         | 3,746  |   |
| ARCAS                                            |   | 12,168    |   |
| ATSI                                             |   | 4,636     |   |
|                                             |   |      |   |
| Ratio of aggregate  indebtedness to net capital: |   |      |   |
| Wave                                             |   | 2.89 to 1 |   |
| ARCAS                                            |   | N/A       |   |
| ATSI                                             |   | .44 to 1  |   |

 

Advances to affiliates,dividend payments and other equity withdrawals are subject to certainnotification and other provisions of the net capital rule of the SEC andother regulatory bodies.

 

The Company’sinternational broker-dealer subsidiaries are subject to capital adequacyrequirements promulgated by authorities of the countries in which they operate.As of September 30, 2005, these subsidiaries had met their local capitaladequacy requirements.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

You should read thefollowing discussions together with the condensed consolidated financial statementsand related notes as well as the forward looking statements included elsewherein this report.

 

**Executive Overview**

 

We operate ArcaEx, thefirst open, all-electronic stock market in the United States for trading inNYSE-, Nasdaq-, AMEX- and PCX-listed equity securities, exchange-traded fundsand other exchange-listed securities. During the nine months ended September 30,2004 and 2005, our customers executed 304.4 million and 355.1 milliontransactions in U.S. equity securities through ArcaEx, respectively,representing 104.1 billion and 106.0 billion shares. Our trading platforms andservices have been designed to enhance the speed and quality of trade executionfor our customers. Our trading platforms provide our customers with fastelectronic execution and open, direct and anonymous market access. Thetechnological capabilities of our trading systems, together with our tradingrules, have allowed us to create a pool of liquidity that is available to ourcustomers internally on ArcaEx and externally through other market centers.

 

Through our wholly ownedsubsidiary PCX, we operate a marketplace for trading options on exchange-listedsecurities and securities listed on Nasdaq. The underlying securities arelisted and trade on PCX, ArcaEx, the NYSE, American Stock Exchange and Nasdaq.We provide options trading facilities, technology and systems as well asregulatory, surveillance and compliance services and list options on stocksthat meet certain minimum criteria. Our options business trades approximately500,000 contracts each day on more than 1,700 stocks. Our options business usesa technology platform and market structure that is designed to enhance thespeed and quality of trade execution for our customers and to attractadditional sources of liquidity by allowing market makers to have access to ourmarkets remotely and by integrating floor-based participants and remote marketmakers.

 

We also operate TheArcaEdge®, a broker-dealer sponsored trading platform designed to bring thebenefits of ArcaEx—fast electronic execution, transparency and open marketaccess—to the trading of small-cap equity securities.

 

We earn revenues andgenerate cash from transaction fees collected in connection with tradeexecution (whether matched internally or routed out) on ArcaEx and PCX. Inaddition, we receive market data fees, based on the level of trading activityon ArcaEx and PCX, for providing data to centralized aggregators that in turnsell the data to third-party consumers. We also collect listing fees from companiesand index providers that list on PCX as a trading venue for their equitysecurities, exchange-traded funds and other structured products.

 

Through our wholly-ownedsubsidiary, Wave, we offer and derive revenues from fees collected inconnection with agency brokerage services for institutional customers seekingto access ArcaEx and other U.S. market centers electronically. On September 22,2005, the SEC entered an order under which we undertook to divest WaveSecurities by December 31, 2005. The results of operations and financialposition of Wave are presented as discontinued operations in 

 

17

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our consolidatedfinancial statements. All historical periods presented have been restated toreflect such presentation.

 

Our equity transactionbusiness is dependent on the liquidity (i.e., the number and range of buyorders and sell orders posted on our system and available to our customers) ofArcaEx. As a result, our most significant cost of generating revenues is thecost of liquidity, which we pay for in one of two ways. First, to enhance theliquidity of our system, we pay a small fee per share (denominated in tenths ofa cent per share) to participants, referred to as “liquidity providers,” thatpost buy orders and sell orders on the Archipelago system, when the quote isexecuted against, or “hit,” by liquidity takers purchasing or sellingsecurities internally on our system. Second, as part of our best executionbusiness model, we incur routing charges when the Archipelago system does nothave the best buy or sell order in the market for a security that a customer istrying to buy or sell on our system. In that case, we will route the customer’sorder to the external market center that displays the best buy order or sellorder. The external market center will charge us a fee per share (denominatedin tenths of a cent per share) for routing to its system.

 

Making liquidity paymentsand incurring routing charges are part of the costs we incur to generate revenuesthrough increased liquidity on the Archipelago system. We seek to offset thesecosts by increased trade execution on the Archipelago system. Our cost ofliquidity generally fluctuates based on (i) trading volumes and (ii) theper share fee we pay liquidity providers for trades executed internally onArcaEx or the per share routing charge we pay to external market centers foroutbound trades.

 

We also incur clearance,brokerage and related transaction expenses, which primarily include transactionexpenses paid to clearing entities for clearing and settlement, service feespaid per trade to exchanges for trade execution. As a registered nationalsecurities exchange, we do not incur clearing charges for internally matchedtrades executed on ArcaEx by our customers. As a result, our clearing costs arelower for trades executed internally on ArcaEx. If we route a trade to anexternal market center, we bear clearing and settlement costs.

 

In addition to our directcost of revenues, we incur the following indirect expenses:

 

**•** employeecompensation and benefits expenses, which include salaries, incentivecompensation and related employee benefits and taxes as well as amortization ofstock-based compensation arrangements;

 

**•** depreciationand amortization expenses, which result primarily from the depreciation of thefixed assets we purchase, including computer software and hardware used in thedevelopment of our trading systems;

 

**•**communications expenses, which consist primarily of costs for our networkconnection with our customers and our data centers, as well as connectivity tovarious other market centers;

 

**•** marketing andpromotion expenses, which consist primarily of media, print and otheradvertising expenses as well as customer marketing expenses;

 

**•** legal andprofessional expenses, which consist primarily of legal and accountingexpenses;

 

**•** occupancyexpenses, which consist primarily of rental expenses; and

 

**•** general andadministrative expenses, which include insurance premiums, travel andentertainment expenses and other administrative expenses and general officecosts.

 

In connection with ourcontemplated merger with NYSE, we incurred substantial merger expensesconsisting primarily of legal, accounting and other advisory fees. As of September 30,2005, we had incurred aggregate merger costs of approximately $11.4 million.

 

For financial reportingpurposes, our business was divided into two reportable segments: TransactionExecution Services and Agency Brokerage Services. Our Transaction ExecutionServices business includes trade execution on the Archipelago system as well asfees we receive for market data and from issuers with equity securities listedon PCX for trading on ArcaEx. Our trade execution customers are required tohold an ETP or be a broker-dealer introduced to ArcaEx by an ETP holder inorder to trade on ArcaEx. An ETP holder must be a broker-dealer. Our AgencyBrokerage Services are provided through Wave, our broker-dealer subsidiary, andconsist of order execution services, on an agency basis, for orders receivedexclusively from institutions involving primarily Nasdaq and exchange-listedsecurities.  Because our Agency BrokerageServices are presented as discontinued, the Company is no longer required todisclose the information required by SFAS No. 131, Disclosures aboutSegments of an Enterprise and Related Information.  Following the PCXH acquisition, our businessis divided into two reportable segments: ArcaEx Equities and ArcaEx Options.The ArcaEx Equities business includes the reportable segment formerly namedTransaction Execution Services. The ArcaEx Options business consists primarilyof transaction execution services, market data services on a real-time orsummary basis and a trading venue for issuers of options contracts. The customersof ArcaEx Options are required to hold an Option Trading Permit.

 

18

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**Business Development**

 

***Acquisitionof PCX Holdings, Inc. and its subsidiaries***

 

On September 26,2005, we completed the acquisition of PCXH and all of its subsidiaries for atotal purchase price of approximately $93.9 million consisting of a $90.9million cash payment to PCXH shareholders and certain employees of PCXH and itssubsidiaries, and direct costs of acquisition of $3.0 million. The $90.9million cash payment represented the total dollar value of 1,645,415 shares ofArchipelago common stock held by PCX at the time of the closing, or $66.3million, plus $24.6 million.

 

Even though we completedthe acquisition of PCXH on September 26, 2005, for financial reportingpurposes management deemed the assets and liabilities of PCXH as of September 30,2005 to be the basis for allocation of the purchase price. The results ofoperations of PCXH for the four-day period ended September 30, 2005 werenot material. The results of operations of PCXH have been included in ourresults of operations since October 1, 2005.

 

After the completion ofour acquisition of PCXH, our continued ownership of certain of our subsidiariesthat are registered broker-dealers and ETP Holders of PCX would have causedthem to exceed the ownership and voting limitations contained in the PCXHcertificate of incorporation, absent specific approvals from the SEC.Consequently, in addition to the Wave divesture, in connection with approvingour ownership of PCXH, the SEC imposed a series of other limitations on theconduct of Archipelago’s business following the completion of its acquisitionof PCXH. These limitations are described below:

 

•   *Outbound Router Function.* Archipelago Securities, a whollyowned subsidiary of Archipelago, is a registered broker-dealer, a member of theNASD, and an ETP Holder of PCX. Archipelago Securities currently provides anoptional routing service for ArcaEx to route orders to other market centersfrom ArcaEx (we refer to this service as the “Outbound Router function”). TheSEC approved Archipelago Securities to be a facility of PCX, subject to certainconditions, including that Archipelago Securities will not engage in anybusiness other than its Outbound Router function (including, in that function,the self-clearing functions that it currently performs for trades with respectto orders routed to other market centers).

 

•   *Inbound Router Function*. Archipelago Trading Services, Inc.,a wholly owned subsidiary of Archipelago, is also a registered broker-dealer, amember of the NASD, and an ETP Holder of PCX Equities. Archipelago Trading actsas an introducing broker for non-ETP Holder broker-dealer customers forsecurities traded on ArcaEx (we refer to this service as the “Inbound Routerfunction”). In addition, Archipelago Securities provides clearing functions fortrades executed by the Inbound Router function. The SEC has granted temporaryapproval until the earlier of March 31, 2006 and the closing date of theproposed merger of the NYSE and Archipelago for Archipelago to continue to ownand operate the Inbound Router function of Archipelago Trading and the relatedclearing function of Archipelago Securities, provided that the revenues derivedby Archipelago from the Inbound Router function of Archipelago Trading do notexceed 7% of the consolidated revenues of Archipelago (determined on aquarterly basis), the Inbound Router function of Archipelago Trading does notaccept any new clients following the closing of the PCXH acquisition, andArchipelago continues to maintain and comply with its current information barriersbetween the Inbound Router function of Archipelago Trading, on the one hand,and PCX, PCX Equities and other subsidiaries of Archipelago that are facilitiesof PCX or PCX Equities, on the other hand.

 

•   *Terra Nova*. The SEC has also granted a temporary exceptionuntil December 31, 2005 for Gerald D. Putnam, chairman of the board ofdirectors and chief executive officer of Archipelago, to continue tobeneficially own, through TAL Financial Services, LLC (“TFS”), in excess of 5%of Terra Nova Trading, L.L.C. (“TNT”), a registered broker-dealer, a member ofthe NASD, and an ETP Holder of PCX Equities, and to serve on the managementcommittee of TFS, the owner of TNT.

 

•   *Alternative Trading System*. In addition to its InboundRouter function, Archipelago Trading operates an alternative trading system fortrading in over-the-counter bulletin board securities that are not traded onany securities exchange (the “ATS OTC function”). The SEC has permittedArchipelago to continue to own and operate the ATS OTC function of ArchipelagoTrading for a period of 60 days following the closing of the PCXH acquisition.Archipelago intends to apply for permanent approval of the ATS OTC functionprior to the expiration of this temporary pilot approval.

 

•   *DOT*. Archipelago Securities also engages in the business ofproviding broker-dealer clients with direct connectivity to the NYSE, throughthe NYSE’s Designated Order Turnaround system (the “DOT function”). The SEC haspermitted Archipelago to continue to own and operate the DOT function ofArchipelago Securities until the earlier of a period of 60 days following theclosing of the PCXH acquisition and the closing of the proposed mergers ofArchipelago and the NYSE. Archipelago intends to apply for permanent approvalof the DOT function of Archipelago Securities prior to the expiration of thistemporary pilot approval.

 

***Mergerwith New York Stock Exchange, Inc. (“NYSE”)***

 

On April 20, 2005,we entered into a definitive merger agreement with NYSE (which was amended andrestated on July 21, 2005 and amended on October 20, 2005 and November 2,2005) under which, each of Archipelago and NYSE will operate as a wholly-ownedsubsidiary under a newly-created, for-profit and publicly-traded holdingcompany, which the parties expect to be named the NYSE Group, Inc. Underthe terms of the merger agreement, as amended, we will be the surviving entityof a merger with a newly created for-profit Delaware corporation andwholly-owned subsidiary of NYSE Group. In this transaction, each share of theissued and outstanding

 

19

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shares of our commonstock will convert automatically into the right to receive one share of NYSEGroup common stock, with the aggregate amount of such shares of NYSE Groupcommon stock equaling 30% of the issued and outstanding shares of common stockof NYSE Group at the closing. See Note 2, Merger with New York Stock Exchange,Inc.

 

The parties expect thatthe combined businesses will bring together the strength of the NYSE’s auctionmarket and our speed and innovation.  Theparties believe this combination will create a strong and dynamic enterprisewith diverse products that will be well positioned to compete in the industryand possess enhanced growth potential.

 

The consummation of thetransaction is subject to the receipt of approval by the members of the NYSEand our stockholders as well as certain government approvals, including theSEC. We anticipate that our merger with NYSE will close in the first quarter of2006.

 

The merger agreementcontains customary termination provisions which, under certain circumstances inthe event of a termination under the merger agreement, may subject the partiesto liability for the payment of termination fees or reimbursement of expensesin an amount up to $40.0 million, and includes a provision which permits eitherparty to terminate the agreement if the transaction fails to close by February 1,2006. Either party may extend the term of the merger agreement without theconsent of the other party for two separate three-month periods (with the firstperiod ending on May 1, 2006 and the second ending on August 1,2006), provided that the only conditions that remain to be satisfied are thereceipt of the approvals of either the NYSE members, our stockholders or anyregulatory entity, and outstanding litigation.

 

On November 3,2005, Archipelago and the NYSE issued a joint press release announcing that thespecial meetings of their respective stockholders and members have been set forDecember 6, 2005.

 

***Bond Trading Platform***

 

**On October 21, 2005, Archipelago**announced that the Company intends tofile a proposal with the SEC to launch a corporate bond trading platform. Thisproposed bond trading platform would allow users of ArcaEx to trade certainbonds listed on, or issued by companies listed by markets and exchanges in theUnited States, through unlisted trading privileges. This proposed bond tradingplatform will initially focus on US exchange-listed corporate bonds.  Pending regulatory approvals, Archipelagoexpects to introduce its bond trading platform by the end of the fiscal yearending December 31, 2005.

 

***ArcaExTech 100 Index and ETF***

 

On November 2, 2005,Archipelago announced that, in conjunction with Ziegler Capital Management LLC,the Company filed documents with the SEC to create a new technology exchangetraded fund named the ArcaEx Tech 100 (“Arca ETF”) which is expected to launchin early 2006 under the ticker AXT, and will be listed exclusively on PCX fortrading on ArcaEx. The Arca ETF will be benchmarked to the ArcaEx Tech 100(SM)Index, formerly the PSE Tech 100 Index, which is owned an operated byArchipelago’s wholly owned subsidiary PCX. The ArcaEx Tech 100 Index has been in existence since 1982, and iscomprised of 100 listed and over-the-counter securities including computerhardware, software, semiconductors, telecommunications, data storage andprocessing, electronics and biotechnology.

 

***OtherIndustry Developments***

 

On August 25, 2005,the Boston Stock Exchange announced its intention to launch a new stock tradingnetwork called the Boston Equities Exchange, or BeX, in connection with a jointventure entered into with Fidelity Brokerage Co., Lehman Brothers HoldingsInc., Credit Suisse First Boston and Citigroup Inc.

 

In June and August 2005,the Philadelphia Stock Exchange announced that it had entered into strategicalliances with Merrill Lynch, Citadel Derivatives Group LLC, Citigroup, CreditSuisse First Boston, Morgan Stanley and UBS. According to the PhiladelphiaStock Exchange, these investments will advance its goal of growing its businessand technology.

 

In August 2005,Nasdaq announced its intention to allow customers to route options orders tomajor options exchanges by the first quarter of 2006.

 

The InternationalSecurities Exchange, Inc. (“ISE”), a U.S. equity options exchange,recently announced that it will explore becoming a participant in the CTA Planand the OTC/UTP Plan, which would allow ISE to enter into the equities tradingmarket and to trade exchange-listed and Nasdaq-listed securities.

 

**Key Statistical Information**

 

Our revenues and grossmargin are directly impacted by trading volumes of U.S. equity securities onthe Archipelago system. Our profitability depends to a significant extent onour ability to attract and retain trading volumes, both in absolute terms andrelative to other market centers. We derive revenues on both a per-share basisand a per-transaction basis, depending upon the source of revenue. Thetransaction fees we receive for trade execution and the payments we make toliquidity providers are determined on a per-share basis. Market data fees forexchange-listed securities are determined on a per-transaction basis, andmarket data fees for Nasdaq-listed securities are determined on a combinationof share volume and transaction volume.

 

20

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The following tablepresents unaudited key transaction volume information, as well as selectedoperating information, for the periods presented. A description of how wecalculate our market share, our trading volumes and other operating measures isset forth below.

 
| ** **                                                                | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Trading Days                                                              |       | 64                     |       | 64                     |       | 189 |   | 188 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Total U.S. market  volume (millions of shares)(1)                         |       | 252,130                |       | 221,085                |       | 773,602 |   | 730,466 |   |
| Our total U.S. market  volume (millions of shares)(1)                     |       | 34,589                 |       | 32,793                 |       | 106,040 |   | 104,138 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our share of total U.S.  market volume(1)(2)                              |       | 13.7                   | %          | 14.8                   | %          | 13.7 | % | 14.3 | % |
| % of  handled shares matched internally(3)                                |       | 11.0                   | %          | 11.5                   | %          | 11.0 | % | 10.9 | % |
| % of  handled shares routed out(3)                                        |       | 2.7                    | %          | 3.3                    | %          | 2.7 | % | 3.4 | % |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Total  volume of Nasdaq-listed securities (millions of shares)            |       | 105,797                |       | 99,937                 |       | 341,990 |   | 334,541 |   |
| Our  total volume of Nasdaq-listed securities (millions of shares)        |       | 24,288                 |       | 26,460                 |       | 79,416 |   | 86,326 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our share of total  volume of Nasdaq-listed securities(2)                 |       | 23.0                   | %          | 26.5                   | %          | 23.2 | % | 25.8 | % |
| % of  handled shares matched internally(3)                                |       | 18.4                   | %          | 20.2                   | %          | 18.5 | % | 19.5 | % |
| % of  handled shares routed out(3)                                        |       | 4.6                    | %          | 6.3                    | %          | 4.7 | % | 6.3 | % |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Total volume of  NYSE-listed securities (millions of shares)              |       | 128,241                |       | 104,025                |       | 381,179 |   | 339,646 |   |
| Our volume in  NYSE-listed securities (millions of shares)                |       | 4,721                  |       | 1,843                  |       | 12,087 |   | 5,547 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our share of total  volume of NYSE-listed securities(2)                   |       | 3.7                    | %          | 1.8                    | %          | 3.2 | % | 1.6 | % |
| % of  handled shares matched internally(3)                                |       | 2.8                    | %          | 1.2                    | %          | 2.4 | % | 1.0 | % |
| % of  handled shares routed out(3)                                        |       | 0.9                    | %          | 0.6                    | %          | 0.8 | % | 0.6 | % |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Total volume of  AMEX-listed securities (millions of shares)              |       | 18,092                 |       | 17,124                 |       | 50,432 |   | 56,279 |   |
| Our volume in  AMEX-listed securities (millions of shares)                |       | 5,580                  |       | 4,490                  |       | 14,536 |   | 12,265 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our share of total  volume on AMEX-listed secutities(2)                   |       | 30.8                   | %          | 26.2                   | %          | 28.8 | % | 21.8 | % |
| % of  handled shares matched internally(3)                                |       | 26.3                   | %          | 22.7                   | %          | 24.8 | % | 18.5 | % |
| % of  handled shares routed out(3)                                        |       | 4.5                    | %          | 3.5                    | %          | 4.0 | % | 3.3 | % |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our ETF volume  (millions of shares)                                      |       | 6,376                  |       | 4,190                  |       | 17,533 |   | 11,019 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our U.S. equity  transaction volume (thousands of transactions)           |       | 119,782                |       | 103,543                |       | 355,116 |   | 304,374 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our average U.S. equity  transaction size (shares per transaction)        |       | 289                    |       | 317                    |       | 299 |   | 342 |   |
| Our  average U.S. equity transactions per day (thousands of transactions) |       | 1,872                  |       | 1,618                  |       | 1,879 |   | 1,619 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| Our average  transaction-related revenue (per share)(4)              |       | $                      | 0.0029     |                   | $          | 0.0031 |   | $ | 0.0029 |   | $ | 0.0031 |   |
| Our average  transaction-related cost of revenue (per share)(5)      |       | $                      | 0.0019     |                   | $          | 0.0021 |   | $ | 0.0019 |   | $ | 0.0021 |   |
| Our average  transaction-related gross margin (per share)(6)         |       | $                      | 0.0010     |                   | $          | 0.0010 |   | $ | 0.0010 |   | $ | 0.0010 |   |
|                                                                      |       |                   |       |                   |       |   |   |   |   |
| % of customer order  volume matched internally(7)                         |       | 88.8                   | %          | 87.1                   | %          | 88.7 | % | 86.3 | % |
| % of customer order  volume routed out(7)                                 |       | 11.2                   | %          | 12.9                   | %          | 11.3 | % | 13.7 | % |

 

----

(1) U.S. marketvolume is calculated based on the number of shares of equity securities tradedon the NYSE, AMEX and Nasdaq, including exchange-traded funds, as reported inthe consolidated tape. The “consolidated tape” is the system that continuouslyprovides the last sale price and volume of securities transactions in listedsecurities to the public.

 

(2) Our market shareis calculated based on the number of shares handled on the Archipelago systemas a percentage of total volume.

 

21

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(3) Represents ourshare of the total volume of such securities handled on ArcaEx that was eithermatched internally on ArcaEx or routed out to an external market center.

 

(4) The per shareamount is calculated based on our total revenues derived from transaction feesof $101.6 million and $98.9 million for the three months ended September 30,2004 and 2005, respectively, and $324.5 million and $310.3 million for the ninemonths ended September 30, 2004 and 2005, respectively.

 

(5) The per shareamount is calculated based on our cost of revenues derived from transactionfees, which consist of routing charges and liquidity payments of $68.1 millionand $65.1 million for the three months ended September 30, 2004 and 2005,respectively, and $218.9 million and $203.9 million for the nine months ended September 30,2004 and 2005, respectively, and our total U.S. market volume for the relevantperiod. The cost of revenue from transaction fees used in the per sharecomputation does not include clearance, brokerage and other transactionexpenses.

 

(6) The per shareamount is calculated based on our net revenues received from transaction fees,and our total U.S. market volume for the relevant period.

 

(7) The percentageof customer order volume matched internally is calculated by dividing thevolume of customer orders executed within our internal liquidity pool (includingthe volume of both buy orders and sell orders) by the total volume of customerorders (again including the volume of both buy orders and sell orders when suchorders are matched internally). The percentage of customer orders routed out iscalculated by dividing the volume of customer orders routed to other marketcenters by the total volume of customer orders.

 

For purposes ofcalculating our volume, we include all shares that are “handled” on theArchipelago system. Handled shares include both shares that are bought or soldwithin our internal liquidity pool and shares that are routed to externalmarkets for execution. We count every transaction handled by the Archipelagosystem once; we do not count both sides of any transaction. For example, if a customer’s10,000 share buy order is matched with another customer’s 10,000 share sellorder in our internal liquidity pool, our handled volume will be 10,000 shares.As another example, if one of our customers sends us an order to buy 10,000shares and the best price for that order is displayed at another market center,we will route that order to the other market center for execution. The othermarket center will report a 10,000 share transaction in the consolidated tape,and our handled volume will be 10,000 shares. As a result, the 10,000 shares wereport as handled by us in this example are also handled by the external marketcenter.

 

In computing thepercentage of customer order volume matched internally and the percentage ofcustomer order volume routed out, we calculate the percentage based on thevolume of individual customer orders, not the volume of matched trades (i.e.,only counting one side of a matched transaction). For example, we calculate twocustomer orders matched internally on our system as two customer orders matchedinternally, and we include the volume of both the buy order and the sell orderin computing our percentages of customer order volume matched internally androuted out. We calculate one customer order routed to an external market center(which will be matched with an order at that other market center) as oneoutbound trade or one customer order. We calculate one customer order routed tous from an external market center and matched with an order on our system asone inbound trade or one customer order.

 

Transactions in Nasdaqand exchange-listed securities are reported in the consolidated tape, ahigh-speed system that continuously provides last sale price and volume inlisted securities. Our handled volume is higher than our volume reported to thecentralized aggregators for inclusion in the consolidated tape for two reasons.First, we do not report trades routed to another market center to thecentralized aggregators of this data. Instead, the destination market centerreports these trades. For example, if a customer’s 10,000 share buy order isrouted to another market center for execution, our handled volume will be10,000 shares, but we will not report the trade. Second, our handled volumeincludes odd lot transactions, generally defined as trades of fewer than 100shares, which, by rule, we do not report to the centralized aggregators forinclusion in the consolidated tape. For example, if one of our customers buys50 shares, our handled volume will be 50 shares but we will not report thistrade.

 

For purposes ofcalculating our market share, we use the volume of shares that are handled onthe Archipelago system (as described above) as the numerator, and the aggregatevolume of shares reported by all securities exchanges and associations in theconsolidated tape as the denominator. Our market share may be expressed as:

 

Number of shareshandled on the Archipelago system

Overall marketvolume as reported in the consolidated tape

 

As an alternative methodof calculating market share, we could include in the numerator of the aboveformula only transactions that we report in the consolidated tape. This wouldexclude shares routed to other market centers and odd-lot transactions from ourmarket share calculation.

 

For purposes of calculatingthe percentage of handled shares matched internally or routed out, we count allshares that are “handled” on the Archipelago system as described above. Wecount every transaction handled by the Archipelago system once; we do not count

 

22

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both sides of anytransaction. Therefore, if five trades are executed on ArcaEx for 10,000 shareseach, three of which are routed out, we will have handled 50,000 shares and ourpercentage of that share volume matched internally would be 40% and routed outwould be 60%.

 

Alternatively, for thepurpose of calculating the percentage of customer order volume matchedinternally or routed out, we count each customer order exactly once. If twocustomers’ orders are matched within our internal liquidity pool, we count thevolume of both the buy order and the matched sell order. On the other hand, ifa customer’s order is routed to another market center and matched with an orderposted at that other market center, we count only the volume of the orderrouted out.

 

**Results of Operations**

 

***ThreeMonths Ended September 30, 2005 versus Three Months Ended September 30,2004***

 

The following table setsforth our consolidated statements of operations data for the periods presented:

 
| ** **                                                     | ** ** | ** **                   | ** ** | ** **    | ** ** | **Amount**        | ** ** | **Percentage**             | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|---------------|------------|-------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                     | ** ** | **Three months**             | ** ** | **Change**    | ** ** | **Change**        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **ended September 30,** | ** ** | **Favorable** | ** ** | **Favorable**     | ** ** | **Percentage of Revenues** | ** ** |
| ** **                                                     | ** ** | **2005**                     | ** ** | **2004**      | ** ** | **(Unfavorable)** | ** ** | **(Unfavorable)**          | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| ** **                                                     | ** ** | **(In millions)**            | ** ** | ** **    | ** ** | ** **        | ** ** | ** **                 | ** ** |
| Revenues                                                       |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Transaction  fees                                              |       | $                            | 98.9       |          | $          | 101.6             |       | $                          | (2.7       | )          | (2.7       | )%         | 86.7       | % | 87.6 | % |
| Market  data fees                                              |       | 15.1                         |       | 14.3          |       | 0.8               |       | 5.6                        | %          | 13.2       | %          | 12.3       | %          |
| Listing  fees                                                  |       | 0.1                          |       | 0.1           |       | —            |       | —                     | %          | 0.1        | %          | 0.1        | %          |
| Total revenues                                                 |       | 114.1                        |       | 116.0         |       | (1.9              | )          | (1.6                       | )%         | 100.0      | %          | 100.0      | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Cost of revenues                                               |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Liquidity  payments                                            |       | 49.4                         |       | 48.1          |       | (1.3              | )          | (2.7                       | )%         | 43.3       | %          | 41.5       | %          |
| Routing  charges                                               |       | 15.7                         |       | 20.0          |       | 4.3               |       | 21.5                       | %          | 13.8       | %          | 17.2       | %          |
| Clearance,  brokerage and other transaction expenses           |       | 1.4                          |       | 3.2           |       | 1.8               |       | 56.3                       | %          | 1.2        | %          | 2.8        | %          |
| Total cost of revenues                                         |       | 66.5                         |       | 71.3          |       | 4.8               |       | 6.7                        | %          | 58.3       | %          | 61.5       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Gross margin                                                   |       | 47.6                         |       | 44.7          |       | 2.9               |       | 6.5                        | %          | 41.7       | %          | 38.5       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Indirect expenses                                              |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Employee  compensation and benefits                            |       | 12.1                         |       | 9.5           |       | (2.6              | )          | (27.4                      | )%         | 10.6       | %          | 8.2        | %          |
| Depreciation  and amortization                                 |       | 5.3                          |       | 4.1           |       | (1.2              | )          | (29.3                      | )%         | 4.6        | %          | 3.5        | %          |
| Communications                                                 |       | 4.8                          |       | 4.2           |       | (0.6              | )          | (14.3                      | )%         | 4.2        | %          | 3.6        | %          |
| Marketing  and promotion                                       |       | 4.7                          |       | 7.8           |       | 3.1               |       | 39.7                       | %          | 4.1        | %          | 6.7        | %          |
| Legal  and professional                                        |       | 3.1                          |       | 2.6           |       | (0.5              | )          | (19.2                      | )%         | 2.7        | %          | 2.2        | %          |
| NYSE  merger costs                                             |       | 3.0                          |       | —        |       | (3.0              | )          | (100.0                     | )%         | 2.6        | %          | —     | %          |
| Occupancy                                                      |       | 1.5                          |       | 1.1           |       | (0.4              | )          | (36.4                      | )%         | 1.3        | %          | 0.9        | %          |
| General  and administrative                                    |       | 3.4                          |       | 2.9           |       | (0.5              | )          | (17.2                      | )%         | 3.0        | %          | 2.5        | %          |
| Total indirect expenses                                        |       | 37.9                         |       | 32.2          |       | (5.7              | )          | (17.7                      | )%         | 33.1       | %          | 27.6       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Operating income                                               |       | 9.7                          |       | 12.5          |       | (2.8              | )          | (22.4                      | )%         | 8.6        | %          | 10.9       | %          |
| Interest and other, net                                        |       | 1.4                          |       | 0.7           |       | 0.7               |       | 100.0                      | %          | 1.2        | %          | 0.6        | %          |
| Income  from continuing operations before income tax provision |       | 11.1                         |       | 13.2          |       | (2.1              | )          | (15.9                      | )%         | 9.8        | %          | 11.5       | %          |
| Income tax provision  (benefit)                                |       | 4.5                          |       | (1.9          | )          | (6.4              | )          | 336.8                      | %          | 3.9        | %          | (1.6       | )%         |
| Income  from continuing operations                             |       | 6.6                          |       | 15.1          |       | (8.5              | )          | (56.3                      | )%         | 5.9        | %          | 13.1       | %          |
| Income  from discontinued operations                           |       | 1.2                          |       | 2.0           |       | (0.8              | )          | (40.0                      | )%         | 1.1        | %          | 1.7        | %          |
| Net income                                                     |       | 7.8                          |       | 17.1          |       | (9.3              | )          | (54.4                      | )%         | 7.0        | %          | 14.8       | %          |
| Deemed  dividend on convertible preferred shares               |       | —                       |       | (9.6          | )          | 9.6               |       | 100.0                      | %          | —     | %          | (8.3       | )%         |
| Net  income attributable to common stockholders                |       | $                            | 7.8        |          | $          | 7.5               |       | $                          | 0.3        |       | 4.0        | %          | 7.0        | % | 6.5 | % |

 

***Highlights***

 

Even though our totalrevenues decreased $1.9 million from $116.0 million for the three months ended September 30,2004 to $114.1 million for the three months ended September 30, 2005, ourgross margin for the three months ended September 30, 2005 increased $2.9million to $47.6 million compared to $44.7 million for the three months ended September 30,2004.  As a percentage of total revenues,our gross margin percentage increased to 41.7% from 38.5% for the respectiveperiods.  Despite this increase in ourgross margin, our income from continuing operations before income tax provisiondeclined $2.1 million from $13.2 million for the three months ended September 30,2004 to $11.1 million for the three months ended September 30, 2005.  Our results of operations for the periodprimarily reflect the following principal factors:

 

23

----

 

*More liquidity posted onArcaEx.*  For the three months ended September 30,2005, the percentage of customer orders matched internally increased to 88.8%as the percentage of orders routed to other market centers for executiondeclined to 11.2%.  This compares to aninternal match rate of 87.1% and 12.9% of customer orders routed out to othermarket centers for execution for the same period a year ago, resulting in achange in the amount and mix of our cost of revenues:

 

•                  Liquiditypayments increased to $49.4 million, or 43.3% of total revenues, for the threemonths ended September 30, 2005 from $48.1 million, or 41.5% of totalrevenues, for the three months ended September 30, 2004.

•                  Routingcharges declined to $15.7 million, or 13.8% of total revenues, from $20.0million, or 17.2% of total revenues.

•                  Clearance,brokerage and other transaction expenses declined to $1.4 million, or 1.2% oftotal revenues, from $3.2 million, or 2.8% of total revenues.

 

*Higherindirect expenses.*  Total indirect expenses increased $5.7million, or 17.7%, to $37.9 million for the three months ended September 30,2005 compared to $32.2 million for the same period a year ago.  For the three months ended September 30,2005, we incurred expenses in the amount of $3.0 million pertaining to ourannounced merger with the New York Stock Exchange, consisting primarily of banking, legal,and other advisory fees.  We didnot incur such expenses in the 2004 period.

 

***Revenues***

 

Our total revenuesdeclined $1.9 million, or 1.6%, to $114.1 million for the three months ended September 30,2005 compared to $116.0 million for the three months ended September 30,2004.  The decrease was the result of adecline in transaction fees that was partially offset by increased market datafees.  For thethree months ended September 30, 2005, transaction fees comprised 86.7% ofour total revenues, market data fees comprised 13.2%, and listing feescomprised 0.1%, compared to 87.6%, 12.3%, and 0.1%, respectively, for the threemonths ended September 30, 2004.

 

Transaction fees declined$2.7 million, or 2.7%, to $98.9 million for the three months ended September 30,2005 compared to $101.6 million for the same period a year ago.  We experienced a decline in transaction feerevenue despite the fact that the total share volume handled on ArcaExincreased 5.5% to 34.6 billion shares compared to 32.8 billion shares.  This primarily resulted from changes in ourinternal match rate and changes in the relative amounts of NYSE-listed,AMEX-listed, and Nasdaq-listed securities we handled on ArcaEx.

 

Thepercentage of customer orders matched internally increased to 88.8% for thethree months ended September 30, 2005 compared to an internal match rateof 87.1% for the three months ended September 30, 2004.  Our transaction fee pricing is structuredsuch that routed shares generate greater gross revenue per share than thosematched internally.  As the number ofshares routed out to other market centers declines relative to the overall sharevolume, our transaction revenue growth trails volume growth.  Our transaction fee pricing is alsostructured such that trades handled by ArcaEx in NYSE-listed securities arecharged lower fees than trades consisting of Nasdaq-listed and AMEX-listed securities.  Our trade mix has changed to include moreshares of NYSE-listed securities relative to our overall share volumehandled.  For the three ended September 30,2005, NYSE-listed securities comprised 13.6% of our total share volume handledcompared to 5.6% for the three months ended September 30, 2004.

 

Market data feesincreased $0.8 million, or 5.6%, to $15.1 million for the three months ended September 30,2005 compared to $14.3 million for the three months ended September 30,2004. This increase was consistent with the 5.5% growth of our total sharevolume handled.  Market data fees derivedfrom trading Nasdaq-listed securities were unchanged at $7.7 million.  Market data fees derived from tradingAmex-listed securities declined to $6.0 million compared to $6.1 million.  Market data fees derived from tradingNYSE-listed securities increased to $1.4 million compared to $0.5 million.

 

For the three monthsended September 30, 2005, revenues from listing fees were $0.1 million,unchanged from the listing fee revenues we generated during the comparativeperiod a year ago.

 

***Cost ofRevenues***

 

Our total cost ofrevenues declined $4.8 million, or 6.7%, to $66.5 million for the three monthsended September 30, 2005 compared to $71.3 million for the three monthsended September 30, 2004.  As apercentage of total revenues, our direct costs declined to 58.3% from 61.5% forthe respective periods.

 

Liquidity paymentsincreased $1.3 million, or 2.7%, to $49.4 million for the three months ended September 30,2005 compared to $48.1 million for the comparable period a year earlier. This increase is attributable to (i) a 5.5% increase in our total tradingvolume, (ii) an increase of our internal match rate to 88.8% (with 11.2% routedout to other market centers for execution) compared to 87.1% (with 12.9% routedout to other market centers for execution), which was partially offset by (iii) alarger proportion of shares of NYSE-listed securities compared to our overallshare volume traded. Based on our current pricing structure, we generally donot make liquidity payments for trades in NYSE-listed securities.

 

Routing charges declinedto $15.7 million for the three months ended September 30, 2005 compared to$20.0 million for the comparable period in 2004, a $4.3 million or 21.5%decrease.  This decline is primarily attributable to ourincreased internal match rate and the resulting reduction in routed volume aswell as lower routing costs per share as a result of certain cost management

 

24

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initiatives and changesin trade behavior and product mix. Although we experienced an increase of 5.5% in our total share volume handled,shares routed out to other market centers declined 8.1% to 6.8 billion sharesfor the three months ended September 30, 2005 compared to 7.4 billionshares for the three months ended September 30, 2004.

 

Clearance, brokerage andother transaction expenses declined $1.8 million, or 56.3%, to $1.4 million forthe three months ended September 30, 2005 compared to $3.2 million for thethree months ended September 30, 2004. Clearance, brokerage and other transaction expensesdeclined primarily due to the decrease in the number of trades subject toclearing costs due to the lower percentage of orders routed out to other marketcenters and the reduction of our clearing costs following the self-clearing ofour introducing broker and routing broker businesses.

 

***Gross Margin***

 

Gross margin increased$2.9 million, or 6.5%, to $47.6 million for the three months ended September 30,2005 compared to $44.7 million for the three months ended September 30,2004.  As a percentage of total revenues, our gross margin increased to41.7% compared to 38.5% for the respective periods.  Despite declining transaction fee revenues,our gross margin improved mainly as a result of the higher internal match rateof customer orders and the greater contribution of market data fees to ourtotal revenues.

 

***IndirectExpenses***

 

Total indirect expenses increased $5.7million, or 17.7%, to $37.9 million for the three months ended September 30,2005 compared to $32.2 million for the three months ended September 30, 2004. The increase was chiefly associated with the following:

 

•                  $3.0million of direct costs incurred during the three months ended September 30,2005 in relation to our announced merger with NYSE, consisting primarily ofbanking, legal, and other advisory fees; and

•                  a $2.6million increase in employee compensation and benefits as a result of increasedstaffing and the employee stock-based compensation expense recognized inrelation to restricted stock units granted in the 2005 period. In 2004,long-term incentive compensation consisted of stock options granted at the thenestimated fair value of our stock for which no compensation expense wasrecognized due to the absence of intrinsic value.

 

***Interest andOther***

 

Interest and other incomeincreased $0.7 million to $1.4 million for the three months ended September 30,2005 compared to $0.7 million for the three months ended September 30,2004.  The increase was primarily due toincreased average cash balances and higher interest rates on those balances.

 

***IncomeTax Provision***

 

For the three months ended September 30,2005, we provided for income taxes at a 41.0% combined federal, state and localtax rate. Since we were not a taxpayer prior to our initial public offering on August 12,2004 and due to a one-time deferred tax benefit recorded on August 11,2004, the date of our conversion from a limited liability company to a “C”Corporation, our income tax provision on income from continuing operations forthe three months ended September 30, 2004 was a $1.9 million benefit.

 

***Deemed Dividend on ConvertiblePreferred Shares***

 

Upon the conversion of redeemablepreferred shares into common shares as part of our August 2004 initialpublic offering, we issued approximately 717,000 additional shares of commonstock attributable to a beneficial conversion feature included in thepreviously issued redeemable preferred interest. The $9.6 million intrinsicvalue of such shares is a deemed dividend on convertible preferred shares,which was reported after net income to reach net income attributable to commonstockholders.

 

***Net IncomeAttributable to Common Stockholders***

 

As a result of theforegoing and including income from discontinued operations of $1.2 million and$2.0 million for the respective periods, we reported net income attributable tocommon stockholders in the amount of $7.8 million for the three months ended September 30,2005, or $0.16 per share on a diluted basis, compared to net incomeattributable to common stockholders in the amount of $7.5 million, or $0.17 pershare on a diluted basis, for the three months ended September 30, 2004.

 

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***NineMonths Ended September 30, 2005 versus Nine Months Ended September 30,2004***

 

The following table setsforth our consolidated statements of operations data for the periods presented:

 
| ** **                                                     | ** ** | ** **                   | ** ** | ** **    | ** ** | **Amount**        | ** ** | **Percentage**             | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|---------------|------------|-------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                     | ** ** | **Nine months**              | ** ** | **Change**    | ** ** | **Change**        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **ended September 30,** | ** ** | **Favorable** | ** ** | **Favorable**     | ** ** | **Percentage of Revenues** | ** ** |
| ** **                                                     | ** ** | **2005**                     | ** ** | **2004**      | ** ** | **(Unfavorable)** | ** ** | **(Unfavorable)**          | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| ** **                                                     | ** ** | **(In millions)**            | ** ** | ** **    | ** ** | ** **        | ** ** | ** **                 | ** ** |
| Revenues                                                       |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Transaction  fees                                              |       | $                            | 310.3      |          | $          | 324.5             |       | $                          | (14.2      | )          | (4.4       | )%         | 87.1       | % | 89.4 | % |
| Market  data fees                                              |       | 45.7                         |       | 38.3          |       | 7.4               |       | 19.3                       | %          | 12.8       | %          | 10.5       | %          |
| Listing  fees                                                  |       | 0.4                          |       | 0.3           |       | 0.1               |       | 33.3                       | %          | 0.1        | %          | 0.1        | %          |
| Total revenues                                                 |       | 356.4                        |       | 363.1         |       | (6.7              | )          | (1.8                       | )%         | 100.0      | %          | 100.0      | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Cost of revenues                                               |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Liquidity  payments                                            |       | 152.9                        |       | 151.2         |       | (1.7              | )          | (1.1                       | )%         | 42.9       | %          | 41.6       | %          |
| Routing  charges                                               |       | 51.0                         |       | 67.7          |       | 16.7              |       | 24.7                       | %          | 14.3       | %          | 18.6       | %          |
| Clearance,  brokerage and other transaction expenses           |       | 4.3                          |       | 11.8          |       | 7.5               |       | 63.6                       | %          | 1.2        | %          | 3.2        | %          |
| Total cost of revenues                                         |       | 208.2                        |       | 230.7         |       | 22.5              |       | 9.8                        | %          | 58.4       | %          | 63.4       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Gross margin                                                   |       | 148.2                        |       | 132.4         |       | 15.8              |       | 11.9                       | %          | 41.6       | %          | 36.6       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Indirect expenses                                              |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Employee  compensation and benefits                            |       | 35.7                         |       | 28.6          |       | (7.1              | )          | (24.8                      | )%         | 10.0       | %          | 7.9        | %          |
| Depreciation  and amortization                                 |       | 14.9                         |       | 18.3          |       | 3.4               |       | 18.6                       | %          | 4.2        | %          | 5.0        | %          |
| Communications                                                 |       | 14.3                         |       | 11.7          |       | (2.6              | )          | (22.2                      | )%         | 4.0        | %          | 3.2        | %          |
| Marketing  and promotion                                       |       | 17.9                         |       | 12.2          |       | (5.7              | )          | (46.7                      | )%         | 5.0        | %          | 3.4        | %          |
| Legal  and professional                                        |       | 8.5                          |       | 8.3           |       | (0.2              | )          | (2.4                       | )%         | 2.4        | %          | 2.3        | %          |
| NYSE  merger costs                                             |       | 11.4                         |       | —        |       | (11.4             | )          | (100.0                     | )%         | 3.2        | %          | —     | %          |
| Occupancy                                                      |       | 4.1                          |       | 2.9           |       | (1.2              | )          | (41.4                      | )%         | 1.2        | %          | 0.8        | %          |
| General  and administrative                                    |       | 9.6                          |       | 6.8           |       | (2.8              | )          | (41.2                      | )%         | 2.7        | %          | 1.9        | %          |
| Total indirect expenses                                        |       | 116.4                        |       | 88.8          |       | (27.6             | )          | (31.1                      | )%         | 32.7       | %          | 24.5       | %          |
|                                                           |       |                         |       |          |       |              |       |                       |       |       |       |       |       |
| Operating income                                               |       | 31.8                         |       | 43.6          |       | (11.8             | )          | (27.1                      | )%         | 8.9        | %          | 12.1       | %          |
| Interest and other, net                                        |       | 3.3                          |       | 0.9           |       | 2.4               |       | 266.7                      | %          | 0.9        | %          | 0.2        | %          |
| Income  from continuing operations before income tax provision |       | 35.1                         |       | 44.5          |       | (9.4              | )          | (21.1                      | )%         | 9.8        | %          | 12.3       | %          |
| Income tax provision  (benefit)                                |       | 14.2                         |       | (1.9          | )          | (16.1             | )          | 847.4                      | %          | 4.0        | %          | (0.5       | )%         |
| Income from continuing  operations                             |       | 20.9                         |       | 46.4          |       | (25.5             | )          | (55.0                      | )%         | 5.8        | %          | 12.8       | %          |
| Income  from discontinued operations                           |       | 3.0                          |       | 10.0          |       | (7.0              | )          | (70.0                      | )%         | 0.8        | %          | 2.8        | %          |
| Net income                                                     |       | 23.9                         |       | 56.4          |       | (32.5             | )          | (57.6                      | )%         | 6.6        | %          | 15.6       | %          |
| Deemed  dividend on convertible preferred shares               |       | —                       |       | (9.6          | )          | 9.6               |       | 100.0                      | %          | —     | %          | (2.6       | )%         |
| Net  income attributable to common stockholders                |       | $                            | 23.9       |          | $          | 46.8              |       | $                          | (22.9      | )          | (48.9      | )%         | 6.6        | % | 13.0 | % |

 

***Highlights***

 

Even though our totalrevenues decreased $6.7 million from $363.1 million for the nine months ended September 30,2004 to $356.4 million for the nine months ended September 30, 2005, ourgross margin for the nine months ended September 30, 2005 increased $15.8million to $148.2 million compared to $132.4 million for the nine months ended September 30,2004.  As a percentage of total revenues,our gross margin percentage increased to 41.6% from 36.6% for the respectiveperiods.  Despite this increase in ourgross margin, our income from continuing operations before income tax provisiondeclined $9.4 million from $44.5 million for the nine months ended September 30,2004 to $35.1 million for the nine months ended September 30, 2005.  Our results of operations for the period primarilyreflect the following principal factors:

 

*More liquidity posted on ArcaEx.*  For the nine months ended September 30,2005, the percentage of customer orders matched internally increased to 88.7%as the percentage of shares routed to other market centers for executiondeclined to 11.3%.  This compares to aninternal match rate of 86.3% and 13.7% of customer orders routed out to othermarket centers for execution for the same period a year ago, resulting in a changein the amount and mix of our cost of revenues:

 

•                  Liquiditypayments increased to $152.9 million, or 42.9% of total revenues, for the ninemonths ended September 30, 2005 from $151.2 million, or 41.6% of totalrevenues for the nine months ended September 30, 2004.

•                  Routingcharges declined to $51.0 million, or 14.3% of total revenues, from $67.7million, or 18.6% of total revenues.

•                  Clearance,brokerage and other transaction expenses declined to $4.3 million, or 1.2% oftotal revenues, from $11.8 million, or 3.2% of total revenues.

 

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*Higher indirect expenses.*  Total indirect expenses increased $27.6million, or 31.1%, to $116.4 million for the nine months ended September 30,2005 from $88.8 million for the comparative period a year earlier.  For the nine months ended September 30,2005, we incurred expenses in the amount of $11.4 million pertaining to ourannounced merger with the New York Stock Exchange, consisting primarily ofbanking, legal, and other advisory fees. We did not incur such expenses in the 2004 period. Also, for the ninemonths ended September 30, 2005, employee compensation and benefitsincreased $7.1 million to $35.7 million compared to $28.6 million for the sameperiod a year ago, as a result of increased staffing and the employee-stockbased compensation expense recognized in relation to restricted stock unitsgranted in the 2005 period. In addition, for the nine months ended September 30,2005, marketing and promotion expenses increased $5.7 million to $17.9 millioncompared to $12.2 million for the nine months ended September 30, 2004, asa result of management’s decision to accentuate our brand recognitionadvertising efforts.

 

***Revenues***

 

Our total revenuesdeclined $6.7 million, or 1.8%, to $356.4 million for the nine months ended September 30,2005 compared to $363.1 million for the nine months ended September 30,2004.  The decrease was the result of adecline in transaction fees that was partially offset by increased market datafees.  For the nine months ended September 30,2005, transaction fees comprised 87.1% of our total revenues, market data feescomprised 12.8%, and listing fees comprised 0.1%, compared to 89.4%, 10.5%, and0.1%, respectively, for the nine months ended September 30, 2004.

 

Transaction fees declined$14.2 million, or 4.4%, to $310.3 million for the nine months ended September 30,2005 compared to $324.5 million for the same period a year ago.  We experienced a decline in transaction feerevenue despite the fact that the total share volume handled on ArcaExincreased 1.8% to 106.0 billion shares compared to 104.1 billion shares.  This primarily resulted from changes in ourinternal match rate and changes in the relative amounts of NYSE-listed,AMEX-listed, and Nasdaq-listed securities we handled on ArcaEx.

 

The percentage ofcustomer orders matched internally increased to 88.7% for the nine months endedSeptember 30, 2005 compared to an internal match rate of 86.3% for thenine months ended September 30, 2004. Our transaction fee pricing is structured such that routed sharesgenerate greater gross revenue per share than those matched internally.  As the number of shares routed out to othermarket centers declines relative to overall share volume, our transactionrevenue growth trails volume growth.  Ourtransaction fee pricing is also structured such that trades handled by ArcaExin NYSE-listed securities are charged lower fees than trades consisting ofNasdaq-listed and AMEX-listed shares. Our trade mix has changed to include more shares of NYSE-listed securitiesrelative to our overall share volume handled. For the nine months ended September 30, 2005, NYSE-listed sharescomprised 11.4% of our total share volume handled compared to 5.3% for the ninemonths ended September 30, 2004.

 

Market data feesincreased $7.4 million, or 19.3%, to $45.7 million for the nine months ended September 30,2005 from $38.3 million for the nine months ended September 30, 2004.  Market data fees from trading Nasdaq-listedsecurities increased to $24.2 million from $22.4 million.  Market data fees from trading Amex-listedsecurities increased to $18.3 million from $14.5 million, and market data feesderived from trading NYSE-listed securities increased to $3.2 million from $1.4million.

 

For the nine months endedSeptember 30, 2005, revenues from listing fees were $0.4 million comparedto $0.3 million for the nine months ended September 30, 2004.

 

***Costof Revenues***

 

Our total cost ofrevenues declined $22.5 million, or 9.8%, to $208.2 million for the nine monthsended September 30, 2005 from $230.7 million for the nine months ended September 30,2004.  As a percentage of total revenues,our direct costs declined to 58.4% from 63.4% for the respective periods.

 

Liquidity paymentsincreased $1.7 million, or 1.1%, to $152.9 million for the nine months ended September 30,2005 compared to $151.2 million for the same period a year ago.  This increase is attributable to (1) a1.8% increase in our total trading volume, (ii) an increase of ourinternal match rate to 88.7% (with 11.3% routed out to other market centers forexecution) compared to 86.3% (with 13.7% routed out to other market centers forexecution), which was partially offset by (iii) a larger proportion ofshares of NYSE-listed securities compared to our overall share volume traded. Basedon our current pricing structure, we generally do not make liquidity paymentsfor trades in NYSE-listed securities.

 

Routing charges declined to$51.0 million for the nine months ended September 30, 2005 compared to$67.7 million for the comparable period last year, a $16.7 million or 24.7%decrease.  This decline is primarilyattributable to our increased internal match rate and the resulting reductionin routed volume as well as lower routing costs per share as a result ofcertain cost management initiatives and changes in trade behavior and productmix.  Although we experienced an increaseof 1.8% in our total share volume handled, shares routed out to other marketcenters declined 14.9% to 21.1 billion shares for the nine months ended September 30,2005 compared to 24.8 billion shares for the nine months ended September 30,2004.

 

Clearance, brokerage andother transaction expenses decreased $7.5 million, or 63.6%, to $4.3 millionfor the nine months ended September 30, 2005 from $11.8 million for thenine months ended September 30, 2004. Clearance, brokerage and other transaction

 

27

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expenses declined primarilydue to a decrease in the number of trades subject to clearing costs dueto the lower percentage of orders routed out to other market centers and thereduction of our clearing costs following the self-clearing of our introducingbroker and routing broker businesses.

 

***GrossMargin***

 

Gross margin increased $15.8million, or 11.9%, to $148.2 million for the nine months ended September 30,2005 from $132.4 million for the nine months ended September 30,2004.  As a percentage of total revenues,our gross margin increased to 41.6% compared to 36.6% for the respectiveperiods.  Despite declining transactionfee revenues, our gross margin improved as a result of the higher internalmatch rate of customer orders and the greater contribution of market data feesto our total revenues.

 

***IndirectExpenses***

 

Total indirect expensesincreased $27.6 million, or 31.1%, to $116.4 million for the nine months ended September 30,2005 compared to $88.8 million for the nine months ended September 30, 2004.  The increase was chiefly associated with thefollowing:

 

•                  $11.4million of direct costs incurred during the nine months ended September 30,2005 in relation to our announced merger with NYSE, consisting primarily ofbanking, legal, and other advisory fees;

•                  a$7.1 million increase in employee compensation and benefits as a resultof increased staffing and the employee stock-based compensation expenserecognized in relation to restricted stock units granted in the 2005 period. In2004, long-term incentive compensation consisted of stock options granted atthe then estimated fair value of our stock for which no compensation expensewas recognized due to the absence of intrinsic value;

•                  a  $5.7 million increase in marketing andpromotion expenses due primarily to increased advertising based on management’sdecision to accentuate our brand recognition efforts in the 2005 period;

•                  a$2.8 million increase in general and administrative expenses primarily inrelation to higher insurance premiums and additional expenses incurred as apublic company; and

•                  a$2.6 million increase in communications expense that is mainly the result ofour operation of a data center in New Jersey since the third quarter of 2004.

 

The aggregate $29.6million effect of these increases was partially offset by a $3.4 millionreduction of depreciation and amortization expenses.  In June 2003, we determined that certainsoftware and computer equipment would be retired by March 31, 2004 and,therefore, we accelerated depreciation on these assets. During the firstquarter of 2004, we recorded an additional $3.9 million in relation to suchacceleration.

 

***Interest andOther***

 

Interest and other incomeincreased $2.4 million to $3.3 million for the nine months ended September 30,2005 compared to $0.9 million for the nine months ended September 30,2004.  The increase was primarily due toincreased average cash balances and higher interest rates on those balances.

 

***IncomeTax Provision***

 

For the nine months ended September 30,2005, we provided for income taxes at a 41.0% combined federal, state and localtax rate. Since we were not a taxpayer prior to our initial public offering on August 12,2004 and due to a one-time deferred tax benefit recorded on August 11,2004, the date of our conversion from a limited liability company to a “C”Corporation, our income tax provision on income from continuing operations forthe nine months ended September 30, 2004 was a $1.9 million benefit.

 

***Deemed Dividend on ConvertiblePreferred Shares***

 

Upon the conversion of redeemablepreferred shares into common shares as part of our August 2004 initialpublic offering, we issued approximately 717,000 additional shares of commonstock attributable to a beneficial conversion feature included in thepreviously issued redeemable preferred interest. The $9.6 million intrinsicvalue of such shares is a deemed dividend on convertible preferred shares,which was reported after net income to reach net income attributable to commonstockholders.

 

***Net IncomeAttributable to Common Stockholders***

 

As a result of theforegoing and including income from discontinued operations of $3.0 million and$10.0 million for the respective periods, we reported net income attributableto common stockholders in the amount of $24.0 million for the nine months endedSeptember 30, 2005, or $0.50 per share on a diluted basis, compared to netincome attributable to common stockholders in the amount of $46.8 million, or$1.13 per share on a diluted basis, for the nine months ended September 30,2004.

 

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**Liquidity and Capital Resources**

 

Historically, our primarysources of liquidity have been cash provided by operations and proceedsgenerated from the sale of our common equity and preferred shares. On August 19,2004, we completed the sale of 6,325,000 shares of common stock at $11.50 pershare in our IPO, for which we received net proceeds of $67.6 million. Weincurred approximately $6.8 million in expenses related to our IPO. Certainformer members of Holdings LLC sold another 6,325,000 million shares to thepublic, for which we received no proceeds.

 

On September 26,2005, we completed the acquisition of PCXH for a total purchase price ofapproximately $93.9 million consisting of a $90.9 million cash payment to PCXHshareholders and certain employees of PCXH and its subsidiaries, and directcosts of acquisition of $3.0 million. The $90.9 million cash paymentrepresented the total dollar value of 1,645,415 shares of Archipelago commonstock held by PCX at the time of the closing, or $66.3 million, plus $24.6million.

 

In connection with ourcontemplated merger with NYSE, at closing, we will be expected to have at least$120.0 million in net cash. In addition, we anticipate that we will incursubstantial merger expenses consisting primarily of legal, accounting and otheradvisory fees. As of September 30, 2005, we had incurred aggregate mergercosts of approximately $11.4 million, including $3.5 million to be paid to astockholder upon consummation of our merger with NYSE for services performed inrelation to the proposed transaction.

 

Our principal liquidityrequirements are for working capital, capital expenditures and generalcorporate purposes. Our capital expenditures have historically relatedprimarily to developing our trading platforms, which included investments insoftware development and hardware, as well as building our data centers. Weestimate that our capital expenditures for 2005 will be approximately $23.0million for continued development of our trading platforms, and the developmentof new products and services, including market data products.

 

As of September 30,2005, we had $133.5 million of cash and cash equivalents (including cash fromdiscontinued operations of $17.2 million). For the nine months ended September 30,2005, we provided cash of $57.4 million from the operating activities of ourcontinuing operations, consisting of income from continuing operations of $20.9million and the $36.5 million net effect of non-cash items and changes in our workingcapital. We used $110.3 million in investing activities of our continuingoperations to acquire PCXH and its subsidiaries and to purchase fixed assetsand develop software. In addition, our continuing operations provided cash fromfinancing activities of $24.0 million primarily in relation to a capitalcontribution from the discontinued operations of Wave.

 

We believe that cashflows from operating activities, together with existing cash balances, shouldbe sufficient for us to fund our current operations for at least the nexttwelve months. If this proves insufficient, we intend to seek additionalfinancing in the capital markets, although we may be unsuccessful in obtainingadditional financing on acceptable terms or at all.

 

Our broker-dealersubsidiaries are subject to regulatory requirements intended to ensure theirrespective general financial soundness and liquidity, which require that theycomply with certain minimum capital requirements. These regulations, whichdiffer in the United States, the United Kingdom and Canada—the three countriesin which our broker-dealer subsidiaries do business—generally prohibit abroker-dealer subsidiary from repaying borrowings from us or our affiliates,paying cash dividends, making loans to us or our affiliates or otherwiseentering into transactions that would result in a significant reduction in itsregulatory net capital position without prior notification or approval of itsprincipal regulator. Our capital structure is designed to provide each of oursubsidiaries with capital and liquidity consistent with its business andregulatory requirements.

 

**Seasonality**

 

Our business experiencesseasonal fluctuations, reflecting reduced trading activity during summermonths, particularly in August.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

We provided a discussionof our market risk in Item 7A of our Annual Report on Form 10-K for theyear ended December 31, 2004. For the three and nine months ended September 30,2005, there was no substantive change in our market risk.

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controlsand Procedures**

 

As of the end of theperiod covered by this report, an evaluation was carried out under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the disclosure controls and procedures of Archipelagoand its subsidiaries. Based upon that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that, excluding PCXH and its subsidiaries,the design and operation of the disclosure controls and procedures ofArchipelago and its subsidiaries were effective as of the end of the periodcovered by this report.  No significant

 

29

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changes were made in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

On September 26,2005, we completed the acquisition of PCXH and subsidiaries as discussed inNote 3 to our condensed consolidated financial statements. PCXH and itssubsidiaries had a separate control environment that in the future will beintegrated with Archipelago and its subsidiaries. As of September 30,2005, management excluded PCXH and its subsidiaries from its assessment of theeffectiveness of the design and operation of the disclosure controls andprocedures of Archipelago and its subsidiaries as management did not havesufficient time to make such an assessment. However, nothing came to the attention of management to indicate thatthe design and operation of the disclosure controls and procedures of PCXH andits subsidiaries were ineffective as of the end of the period covered by thisreport.

 

**PART II – Other Information**

 

**Item 1. Legal Proceedings**

 

We provided a discussion of material pending litigationmatters relating to our Company and our Chairman and Chief Executive Officer inItem 3 of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2004 as well as in Item 1 of Part II of our QuarterlyReports on Form 10-Q for the periods ended March 31, 2005 and June 30,2005. For the three months ended September 30, 2005, there were nomaterial developments with regard to our previously reported matters and noother matters were reportable during the period with the exception of thefollowing matters relating to PCX which we acquired on September 26, 2005.

 

*Last Atlantis Capital LLC*.  In January 2004, PCX was named asdefendant in the case entitled Last Atlantis Capital LLC et al. v. ChicagoBoard Options Exchange, Inc. et al., filed in the United States DistrictCourt for the Northern District of Illinois. The complaint alleges that thedefendants, including four other options exchanges and a number of securitiesbrokers/dealers, engaged in certain actions in violation of the Sherman andClayton Acts. The complaint also alleges breach of contract and fiduciary duty,violations of the antifraud provisions of the federal securities laws, andcommon law fraud and fraud under Illinois state law by the defendants. The complaintseeks an injunction and the award of damages including punitive damages andtreble damages under the relevant provisions of the federal antitrust laws. PCXfiled a motion to dismiss on June 14, 2004, which the court granted on March 20,2005. Discovery had been stayed pending decision on the motion to dismiss. On April 13,2005, plaintiffs moved the court for reconsideration of the order grantingdefendants’ summary judgment, which PCX opposed. On May 9, 2005, the judgegranted defendants’ motion in part, allowing defendants until May 29, 2005to re-plead the securities fraud claims. The plaintiffs have re-pleaded thesecurities laws claims, and the Company intends to continue to defend againstthis matter.

 

*Bryan Rule*. On January 28,2005, PCX was named as defendant in the case entitled Bryan Rule v.Chicago Board Options Exchange, Inc. et al., filed in the United StatesDistrict Court for the Northern District of Illinois. The complaint allegesthat the defendants, including three other options exchanges and a number ofsecurities brokers/dealers, engaged in certain actions in violation of theSherman and Clayton Acts. The complaint also alleges breach of contract andfiduciary duty, violations of the antifraud provisions of the federalsecurities laws, common law fraud and fraud under Illinois state law by thedefendants, and tortuous interference with plaintiff’s businesses. Thecomplaint seeks an injunction and the award of damages including punitivedamages and treble damages under the relevant provisions of the federalantitrust laws. The Company intends to continue to defend against this matter.

 

*Brad Martin*. OnSeptember 30, 2005, PCX was named as defendant in the case entitled Brad Martinet al. v. Chicago Board Options Exchange, Inc. et al., filed in the UnitedStates District Court for the Northern District of Illinois. The complaintalleges facts, causes of action and seeks relief substantially similar to thatasserted in the Last Atlantis Capital LLC and Brian Rule matters.

 

On October 28, 2005, pursuant to a previously filed motion, thedefendants in this matter, including PCX, appeared before federal districtcourt Judge Bucklo in the Northern District of Illinois, requesting that theirobligation to answer or otherwise plead to the pending complaints be postponeduntil the cases are reassigned and consolidated. In response, the Courtdirected the plaintiffs in the Last Atlantis Capital LLC, Brian Rule and BradMartin matters (collectively, “Plaintiffs”), to file a consolidated complaintwithin ten days.  Also, on October 28,the Plaintiffs filed a motion to reassign the pending cases to Judge Bucklo,based upon relatedness.

 

On November 7, 2005, thePlaintiffs filed a consolidated complaint in the United States District Courtfor the Northern District of Illinois. Except for claims relating to violationof the Sherman and Clayton Acts, the complaint alleges facts, causes of actionand seeks relief substantially similar to that asserted in the in the LastAtlantis Capital LLC,  Brian Rule and BradMartin matters. On November 10, 2005, the Court filed an order allowing thecases to be re-assigned to Judge Bucklo. The defendants, including PCX, have thirty days to answer or otherwiseplead to the consolidated complaint.  TheCompany intends to continue to defend against this matter.

 

In addition to the matters described above and in ourAnnual Report on Form 10-K for the year ended December 31, 2004 and  Item 1 of Part II of our Quarterly Reportson Form 10-Q for the periods ended March 31, 2005 and June 30,2005, from time to time Archipelago or its subsidiaries, including PCX, areinvolved in various legal proceedings arising in the ordinary course of ourbusiness. We do not believe, based on currently available information, that theresults of any of these proceedings will have a material adverse effect on ouroperating results or financial condition.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

(a) UnregisteredSale of Equity Securities

 

Between July 1, 2005and September 30, 2005, we granted: (i) 19,676 restricted stock unitsto certain of our officers and key employees; and (ii) 6,577 restrictedstock units to our non-employee directors under our 2004 Stock Incentive Plan.These transactions were effected under Rule 701 of the Securities ExchangeAct of 1933, as amended, as transactions by an issuer under compensatorybenefit plans and contracts relating to compensation within the parametersrequired by Rule 701.

 

(b) Use of Proceeds

 

On September 26,2005, we completed the acquisition of PCXH for a total purchase price ofapproximately $93.9 million consisting of a $90.9 million cash payment to PCXH shareholdersand certain employees of PCXH and its subsidiaries, and direct costs of acquisitionof $3.0 million. The $90.9 million cash payment represented the total dollarvalue of 1,645,415 shares of Archipelago

 

30

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common stock held by PCXat the time of the closing, or $66.3 million, plus $24.6 million. Such paymentexceeded the $67.6 million net proceeds we received after the completion of ourAugust 2004 initial public offering.

 

(c) Purchases ofequity securities by the Issuer

 

The following tablessummarizes purchases of equity securities by the issuer during the quarter endedSeptember 30, 2005 which relates to our acquisition of PCXH and subsidiarieson September 26, 2005:

 
| **Period**              | ** ** | **(a) Total Number  of Shares (or  Units)  Purchased (1)** | ** ** | **(b) Average  Price Paid per  Share (or Unit)** | ** ** | **(c) Total Number of Shares  (or Units) Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **(d) Approximate Dollar Value  of Shares that May Yet Be  Purchased Under the Plans or  Programs (in millions)** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 26, 2005 |       | 1,645,415                                                            |       | $39.85                                                                    |       | None                                                                                                                             |       | Not applicable                                                                                                                        |       |

 

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(1) On January 3,2005, Archipelago, PCXH and a newly formed wholly-owned subsidiary ofArchipelago (“Newco”) entered into a definitive Agreement and Plan of Merger (“OriginalPCX Agreement”) under which Archipelago agreed to acquire PCXH and all of itswholly owned subsidiaries including PCX and PCX Equities by way of a merger ofPCXH with and into Newco which was reported on a Current Report on Form 8-Kfiled on January 4, 2005. On July 22, 2005, Archipelago, PCXH andNewco entered into a definitive Amended and Restated Agreement and Plan ofMerger (“Amended PCX Agreement”) that amended and restated the terms andconditions of the Original PCX Agreement which was reported on a Current Reporton Form 8-K filed on July 22, 2005. The acquisition wasconsummated on September 26, 2005 which was reported on a Current Reporton Form 8-K filed September 26, 2005. At the time of the consummation of the acquisition, PCX was the holderof 1,645,415 shares of common stock of Archipelago Holdings, Inc., $0.01par value per share. As a result, as of September 26, 2005, Archipelagoeffectively repurchased these shares.

 

**Item 5. Other Information**

 

The audit committee ofour Board of Directors approved all of the non-audit services performed byErnst & Young LLP, our independent registered public accountants,during the period covered by this report.

 

Effective as of September22, 2005, the Board of Directors of the Company amended and restated theBy-laws of the Company in accordance with the SEC order granting approval ofthe proposed rule change and Amendment No. 1 thereto, and notice of filing andorder granting accelerated approval to Amendment No. 2 to the proposed rulechange, to amend the certificate of incorporation of PCXH, PCX Rules, and theBy-laws of Archipelago in relation to the acquisition of PCXH by Archipelago.

 

Our business facessignificant risks. The risks described below update the risk factors describedin our 2004 Form 10-K as well as the registration statement on Form S-4filed by NYSE Group with the SEC containing a joint proxy statement/prospectusregarding the proposed merger between Archipelago Holdings, Inc. and theNew York Stock Exchange, Inc. which was originally filed on July 21,2005 and declared effective on November 3, 2005, and should be read inconjunction with those risk factors. The risk factors described in this Form 10-Q,our 2004 Form 10-K and the NYSE Group S-4 may not be the only risks weface. Additional risks that we do not yet know of or that we currently thinkare immaterial may also impair our business operations. If any of the followingrisks actually occur, our business, financial condition, results of operationsor prospects could be affected materially.

 

***There are significant risks anduncertainties associated with our proposed merger with the NYSE.***

 

On April 20,2005, Archipelago entered into a definitive merger agreement with the NYSE,pursuant to which Archipelago and the NYSE agreed to combine their businessesand become wholly-owned subsidiaries of NYSE Group, a newly-created, for-profitand publicly-traded holding company. There are significant risks anduncertainties associated with our proposed merger with the NYSE. For example,the acquisition may not be consummated, or may not be consummated during thefirst quarter of 2006 as currently anticipated, as a result of several factors,including but not limited to: (i) the inability to obtain regulatoryapprovals of the transaction, or to obtain such approvals on the proposedterms; (ii) the submission of alternative proposals; or (iii) thefailure of NYSE to receive member approval for the transaction or Archipelagoto receive shareholder approval for the transaction.

 

Furthermore,we may fail to realize the growth opportunities and the anticipated benefits tobe derived from the combined businesses. There can be no assurances that oursystems, policies or procedures will be implemented or integrated successfully withNYSE. There also can be no assurance that we will be able to successfully andtimely integrate the operations, products, services or technology of NYSE withour Company. There also may be delays, complications and expenses relating tosuch implementation and integration. If we are not able to successfully combineour businesses, the anticipated benefits from the transaction may not be realizedfully or at all or may take longer to realize than expected. It is possiblethat the integration process could result in the loss of key employees of theNYSE or Archipelago, or that the disruption of our business or the ongoingbusiness of the NYSE due to the transaction could adversely affect our abilityto maintain relationships with customers or compete effectively in the market.Finally, upon consummation of the acquisition, management’s presentexpectations of the future results of the transaction may be modified orrevised.

 

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Failureto manage our proposed merger with the NYSE could adversely affect our growthstrategy and our future profitability and subject us to the risks identifiedabove.   For more information regardingthe additional risks associated with our proposed merger with the NYSE, pleasesee the information under the section heading entitled “Risk Factors” in theNYSE Group registration statement on Form S-4.

 

***There are significant risks anduncertainties associated with our acquisition of PCXH and its subsidiaries.***

 

On September 26,2005, we completed our acquisition of PCXH and all of its subsidiaries,including PCX and PCX Equities which now operate as wholly owned subsidiariesof Archipelago.  There are significantrisks and uncertainties associated with this acquisition. We may fail torealize the growth opportunities and the anticipated benefits to be derivedfrom combining the businesses of the subsidiaries of PCXH with our own. Therecan be no assurances that the systems, policies, procedures, operations,products, services or technology of Archipelago and the PCX entities will beimplemented and integrated successfully or on a timely basis. There also may bedelays, complications and expenses relating to such implementation andintegration. If we are not able to successfully combine our businesses withthose of the PCX entities, the anticipated benefits from the acquisition maynot be realized fully or at all or may take longer to realize than expected. Itis possible that the integration process could result in the loss of keyemployees, or that the disruption of the businesses of Archipelago or the PCXentities due to the acquisition could adversely affect our ability to maintainrelationships with customers or compete effectively in the market.

 

Failureto manage effectively the integration of PCXH and its subsidiaries couldadversely affect our growth strategy and future profitability and subject us tosome or all of the risks identified above. Additionally, PCX and PCX Equitiesserve as Archipelago’s regulator. In the event that material conflicts ofinterest develop between us and these entities, our operations could beadversely affected.

 

***There are significant risks anduncertainties associated with our intended divestiture of Wave.***

 

We arein the process of divesting our wholly owned subsidiary, Wave, in response to arule recently adopted by PCX in connection with our acquisition of PCXHand its subsidiaries. The rule allows Archipelago to continue to own allof its ownership interest in Wave following the closing of its acquisition ofPCXH, but only until December 31, 2005.

 

Thereare significant risks and uncertainties associated with our intendeddivestiture of Wave. For example, there can be no guarantee that we will find apotential buyer for Wave, or find a potential buyer willing to purchase Wave onfavorable terms and conditions. Because the intended divestiture of Wave willbe subject to the negotiation of a definitive agreement, regulatory approvalsand potential unforeseen uncertainties and delays, we may be unable to sellWave, or sell Wave on favorable terms, prior to December 31, 2005. Thedivestiture of Wave also could involve substantial transaction costs, includinglegal, accounting and other transaction fees and costs.

 

If weare unable to sell Wave prior to December 31, 2005, we would need toobtain the SEC’s approval to continue to own and operate Wave. There can be noassurances, however, that such approval would be timely granted. If we areunable to sell Wave and are also unable to obtain SEC’s approval to continue toown and operate Wave prior to December 31, 2005, we would be in violationof the rule adopted to approve our indirect acquisition and ownership of PCX.

 

Thedivestiture of Wave also may be complex and time-consuming, and may temporarilydisrupt or distract the management and employees of Archipelago and Wave fromtheir focus on business operations. Realizing the benefits of this divestiturewill depend in part on our ability to transfer Wave in an efficient andeffective manner while maintaining adequate focus on its retained business.

 

***PCX has had discussions with SEC staffregarding a potential pilot program to trade and quote options in pennyincrements, but any proposal that PCX may make on this issue may be denied bythe SEC.***

 

PCXhas had discussions with SEC staff regarding a potential pilot program todisplay, rank, quote and execute option orders in penny increments. Currently,options are displayed, ranked, quoted and executed in nickel and dimeincrements, although the underlying equity security may be displayed, ranked,quoted and executed in penny increments (or, after the implementation ofRegulation NMS, sub-penny increments if the quote, order or indication ofinterest for the stock is less than $1.00). Any proposal that PCX may make onthis issue will require approval from the SEC.

 

Currently,only certain option market participants can execute orders for options in pennyincrements; however, these orders are not executed in a manner that istransparent to all option market participants. Although these marketparticipants are able to execute orders in penny increments, they still mustquote and display their orders in nickel or dime increments. PCX’s potentialpilot program would provide transparent option order display and execution toall market participants. It would also seek to provide improved and enhancedpricing opportunities for all market participants, as the fair value of optionsare often in part dependent upon the fair price of the underlying equitysecurity. Some industry participants oppose such a program under the beliefthat it would overwhelm the capacity limits of existing option quote processingsystems.

 

32

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In theevent that the SEC approves displaying, quoting and executing options in anyincrements under a nickel, we believe that PCX and Archipelago will be wellpositioned to adequately handle the process. Failure of the SEC to approve theability to display, rank, quote and execute orders for options in incrementsunder a nickel could limit to a material extent the ability of Archipelago togain options market share or realize the growth opportunities and the anticipatedbenefits to be derived from the acquisition of PCXH and its subsidiaries.

 

**Item 6. Exhibits**

 

(a)  Exhibits

 
| 2.1    |   | Exchange Agreement,  dated as of January 17, 2002, among Archipelago Holdings, L.L.C.,  REDIBook ECN L.L.C. and the parties named therein. Incorporated by reference  to the corresponding Exhibit to the Registrant’s registration statement  on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2    |   | Contribution Agreement,  dated as of November 12, 2003, between Archipelago Holdings, L.L.C.  and GAP Arca Holdings, Inc. Incorporated by reference to the  corresponding Exhibit to the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.3    |   | Agreement and Plan of  Merger, dated as of February 27, 2004, between Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc. Incorporated by  reference to the corresponding Exhibit to the Registrant’s registration  statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.4    |   | Letter Agreement, dated  February 27, 2004, among GAP-W, L.L.C., Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc. Incorporated by  reference to the corresponding Exhibit to the Registrant’s registration  statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.5    |   | Contribution Agreement,  dated July 12, 2000, among Archipelago Holdings, L.L.C., Pacific  Exchange, Inc. and PCX Equities, Inc. Incorporated by reference to  the corresponding Exhibit to the Registrant’s registration statement on Form    S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.6    |   | Agreement and Plan of  Merger, dated January 3, 2005, among Archipelago Holdings, Inc.,  New Apple Acquisitions Corporation and PCX Holdings, Inc.  Incorporated by reference to the corresponding Exhibit to the Registrant’s  Form 8-K filed with the SEC on January 4, 2005.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.7    |   | Agreement and Plan of  Merger dated as of April 20, 2005, by and among the New York Stock  Exchange, Inc., Archipelago Holdings, Inc., and such other parties  that become signatories thereto pursuant to the terms thereof. Incorporated  by reference to the corresponding Exhibit to the Registrant’s report on Form 8-K  filed with the SEC on April 26, 2005                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.8    |   | Amended and Restated  Agreement and Plan of Merger, dated July 22, 2005, among Archipelago  Holdings, Inc., New Apple Acquisitions Corporation and PCX Holdings, Inc.  Incorporated by reference from Exhibit 2.1 to the Registrant’s Form 8-K  filed with the SEC on July 22, 2005.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.9    |   | Amended and Restated  Agreement and Plan of Merger dated as of July 20, 2005 by and among New  York Stock Exchange, Inc., a New York Type A not-for-profit corporation,  Archipelago Holdings, Inc., a Delaware corporation, NYSE Group, Inc.,  a Delaware corporation, NYSE Merger Sub LLC, a New York limited liability  company, NYSE Merger Corporation Sub, Inc., a Delaware corporation, and  Archipelago Merger Sub, Inc., a Delaware corporation, filed as Exhibit 2.1  to Registration Statement No. 333-126780 of the NYSE Group, Inc. on  Form S-4 filed on July 21, 2005 which is incorporated herein by  reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.10   |   | Amendment No. 1,  dated as of October 20, 2005, to the Amended and Restated Agreement and  Plan of Merger, dated as of April 20, 2005 and amended and restated as  of July 20, 2005, by and among New York Stock Exchange, Inc.,  Archipelago Holdings, Inc., NYSE Group, Inc., NYSE Merger Sub LLC,  NYSE Merger Corporation Sub, Inc. and Archipelago Merger Sub, Inc.  filed as Exhibit 2.2 to Registration Statement No. 333-126780 of  the NYSE Group, Inc. on Form S-4 filed on July 21, 2005 which  is incorporated herein by reference.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.11   |   | Amendment No. 2  dated as of November 2, 2005, to the Amended and Restated Agreement and  Plan of Merger dated as of April 20, 2005 and amended and restated as of  July 20, 2005 and Amended October 20, 2005, by and Among New York  Stock Exchange, Inc., Archipelago Holdings, Inc., NYSE Group, Inc.,  NYSE Merger Sub LLC, NYSE Merger Corporation Sub, Inc. And Archipelago  Merger Sub, Inc. Incorporated by reference from Exhibit 2.1 to the  Registrant’s Form 8-K/A filed with the SEC on November 7, 2005.                                                                                           |

 

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| 3.1    |   | Form of  Certificate of Incorporation of Archipelago Holdings, Inc. Incorporated  by reference to the corresponding Exhibit to the Registrant’s  registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Amended and Restated  By-laws of Archipelago Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3    |   | Ninth Amended and Restated  Limited Liability Company Agreement of Archipelago Holdings, L.L.C.  Incorporated by reference to the corresponding Exhibit to the Registrant’s  registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.4    |   | Amendment No.1 to Ninth  Amended and Restated Limited Liability Company Agreement of Archipelago  Holdings, L.L.C. Incorporated by reference to the corresponding Exhibit to  the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Specimen Certificate of  Common Stock. Incorporated by reference to the corresponding Exhibit to  the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Registration Rights  Agreement, dated November 12, 2003, among Archipelago  Holdings, L.L.C., General Atlantic Partners 77, L.P., GAP Coinvestment  Partners II, L.P., GapStar, L.L.C., GAPCO GmbH & Co. KG, GAP-W,  L.L.C., GAP Archa Holdings, Inc., and the Class A Members of the  Archipelago Holdings, L.L.C. and the affiliates of certain of such Class A  Members. Incorporated by reference to the corresponding Exhibit to the  Registrant’s registration statement on Form S-1(No.333-113226). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Amended and Restated  Indemnity Agreement dated November 2, 2005 by and among The Options  Clearing Corporation and the Pacific Exchange. Incorporated by reference from  Exhibit 2.1 to the Registrant’s Form 8-K filed with the SEC on November 7,  2005.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Registration  Rights Agreement, dated as of October 20, 2005, by and among General  Atlantic Partners 77, L.P., GAP-W Holdings, L.P., GapStar, LLC, GAP Coinvestment  Partners II, L.P., and GAPCO GmbH & Co. KG., NYSE Group, Inc.,  and New York Stock Exchange, Inc., filed as Exhibit 10.15 to  Amendment No. 2 to the Registration Statement No. 333-126780 of the  NYSE Group, Inc. filed on Form S-4 which is incorporated herein by  reference.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Rule 13a-14(a) Certification  (CEO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Rule 13a-14(a) Certification  (CFO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Section 1350  Certifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |

 

 

**Signature**

 

Pursuant to therequirements of the Securities Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized, on November 14, 2005.

 

 
|   |   | ARCHIPELAGO HOLDINGS,  INC. |
|--------|--------|-----------------------------|
|   |   |                        |
|   |   | By:                         |
|   |   |                        |
|   |   | /s/ Nelson Chai             |   |
|   |   | Nelson Chai                 |
|   |   | Chief Financial Officer     |

 

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**ARCHIPELAGOHOLDINGS, INC.**

Exhibit Index for the Report on Form 10-Q

For the Quarter Ended September 30, 2005

 
| 2.1    |   | Exchange Agreement,  dated as of January 17, 2002, among Archipelago Holdings, L.L.C.,  REDIBook ECN L.L.C. and the parties named therein. Incorporated by reference  to the corresponding Exhibit to the Registrant’s registration statement  on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2    |   | Contribution Agreement,  dated as of November 12, 2003, between Archipelago Holdings, L.L.C.  and GAP Arca Holdings, Inc. Incorporated by reference to the  corresponding Exhibit to the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.3    |   | Agreement and Plan of  Merger, dated as of February 27, 2004, between Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc. Incorporated by  reference to the corresponding Exhibit to the Registrant’s registration  statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.4    |   | Letter Agreement, dated  February 27, 2004, among GAP-W, L.L.C., Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc. Incorporated by  reference to the corresponding Exhibit to the Registrant’s registration  statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.5    |   | Contribution Agreement,  dated July 12, 2000, among Archipelago Holdings, L.L.C., Pacific Exchange, Inc.  and PCX Equities, Inc. Incorporated by reference to the corresponding Exhibit to  the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.6    |   | Agreement and Plan of  Merger, dated January 3, 2005, among Archipelago Holdings, Inc.,  New Apple Acquisitions Corporation and PCX Holdings, Inc.  Incorporated by reference to the corresponding Exhibit to the Registrant’s  Form 8-K filed with the SEC on January 4, 2005.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.7    |   | Agreement and Plan of  Merger dated as of April 20, 2005, by and among the New York Stock  Exchange, Inc., Archipelago Holdings, Inc., and such other parties  that become signatories thereto pursuant to the terms thereof. Incorporated  by reference to the corresponding Exhibit to the Registrant’s report on Form 8-K  filed with the SEC on April 26, 2005                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.8    |   | Amended and Restated  Agreement and Plan of Merger, dated July 22, 2005, among Archipelago  Holdings, Inc., New Apple Acquisitions Corporation and PCX Holdings, Inc.  Incorporated by reference from Exhibit 2.1 to the Registrant’s Form 8-K  filed with the SEC on July 22, 2005.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.9    |   | Amended and Restated  Agreement and Plan of Merger dated as of July 20, 2005 by and among New  York Stock Exchange, Inc., a New York Type A not-for-profit corporation,  Archipelago Holdings, Inc., a Delaware corporation, NYSE Group, Inc.,  a Delaware corporation, NYSE Merger Sub LLC, a New York limited liability  company, NYSE Merger Corporation Sub, Inc., a Delaware corporation, and  Archipelago Merger Sub, Inc., a Delaware corporation, filed as Exhibit 2.1  to Registration Statement No. 333-126780 of the NYSE Group, Inc. on  Form S-4 filed on July 21, 2005 which is incorporated herein by  reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.10   |   | Amendment No. 1,  dated as of October 20, 2005, to the Amended and Restated Agreement and  Plan of Merger, dated as of April 20, 2005 and amended and restated as  of July 20, 2005, by and among New York Stock Exchange, Inc.,  Archipelago Holdings, Inc., NYSE Group, Inc., NYSE Merger Sub LLC,  NYSE Merger Corporation Sub, Inc. and Archipelago Merger Sub, Inc.  filed as Exhibit 2.2 to Registration Statement No. 333-126780 of  the NYSE Group, Inc. on Form S-4 filed on July 21, 2005 which  is incorporated herein by reference.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.11   |   | Amendment No. 2  dated as of November 2, 2005, to the Amended and Restated Agreement and  Plan of Merger dated as of April 20, 2005 and amended and restated as of  July 20, 2005 and Amended October 20, 2005, by and Among New York  Stock Exchange, Inc., Archipelago Holdings, Inc., NYSE Group, Inc.,  NYSE Merger Sub LLC, NYSE Merger Corporation Sub, Inc. And Archipelago  Merger Sub, Inc. Incorporated by reference from Exhibit 2.1 to the  Registrant’s Form 8-K/A filed with the SEC on November 7, 2005.                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1    |   | Form of  Certificate of Incorporation of Archipelago Holdings, Inc. Incorporated  by reference to the corresponding Exhibit to the Registrant’s  registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2    |   | Amended and Restated  By-laws of Archipelago Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.3    |   | Ninth Amended and  Restated Limited Liability Company Agreement of Archipelago  Holdings, L.L.C. Incorporated by                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   |   | reference to the  corresponding Exhibit to the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.4    |   | Amendment No.1 to Ninth  Amended and Restated Limited Liability Company Agreement of Archipelago  Holdings, L.L.C. Incorporated by reference to the corresponding Exhibit to  the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Specimen Certificate of  Common Stock. Incorporated by reference to the corresponding Exhibit to  the Registrant’s registration statement on Form S-1(No.333-113226).                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Registration Rights  Agreement, dated November 12, 2003, among Archipelago  Holdings, L.L.C., General Atlantic Partners 77, L.P., GAP Coinvestment  Partners II, L.P., GapStar, L.L.C., GAPCO GmbH & Co. KG, GAP-W,  L.L.C., GAP Archa Holdings, Inc., and the Class A Members of the  Archipelago Holdings, L.L.C. and the affiliates of certain of such Class A  Members. Incorporated by reference to the corresponding Exhibit to the  Registrant’s registration statement on Form S-1(No.333-113226). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Amended and Restated  Indemnity Agreement dated November 2, 2005 by and among The Options  Clearing Corporation and the Pacific Exchange. Incorporated by reference from  Exhibit 2.1 to the Registrant’s Form 8-K filed with the SEC on November 7,  2005.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Registration  Rights Agreement, dated as of October 20, 2005, by and among General  Atlantic Partners 77, L.P., GAP-W Holdings, L.P., GapStar, LLC, GAP  Coinvestment Partners II, L.P., and GAPCO GmbH & Co. KG., NYSE Group, Inc.,  and New York Stock Exchange, Inc., filed as Exhibit 10.15 to  Amendment No. 2 to the Registration Statement No. 333-126780 of the  NYSE Group, Inc. filed on Form S-4 which is incorporated herein by  reference.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Rule 13a-14(a) Certification  (CEO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Rule 13a-14(a) Certification  (CFO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Section 1350  Certifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |

 

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